TRANSACTION

PROCESSING
AND FINANCIAL REPORTING
SYSTEMS OVERVIEW
GROUP 6

TRANSACTION CYCLE
Materials

FG

CASH

CASH

Customers

Labor

Physical Plant

EXPENDITURE CYCLE
Subsystems:
-Purchasing or A/P
-Cash Disbursements
-Payroll
-Fixed Assets

CASH

CONVERSION CYCLE
Subsystems:
-Production Planning and
Control
-Cost Accounting
Finished Goods

REVENUE CYCLE

Subsystems:
-Sales Order Purchasing
Cash Receipts

ACCOUNTING
RECORDS
Manual
Systems

ComputerBased
Systems

ACCOUNTING RECORDS
Manual Systems
Documents

Computer Based Systems

Master File

Source Documents

Transaction File

Product Documents

Reference File

Turnaround
Documents

Archive File

Journals
Ledgers

DOCUMENTATION
TECHNIQUES

DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts
Record Layout Diagrams

DFD and ER Diagrams

ENTITY
NAME

Data Store
Name

N
Process
Description

Direction of Data Flow

RELATIONSHIP BETWEEN ER
DIAGRAMS AND DATA FLOW
DIAGRAMS
The two diagrams are related through
data; each data store in the DFD
represents a corresponding data entity
in the ER diagram.

DOCUMENTATION
TECHNIQUES

DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts
Record Layout Diagrams

Systems Flowcharts
A system flowchart is the graphical
representation of the physical relationships
among key elements of a system.
o organizational departments
o manual activities
o computer programs
o hard-copy accounting records
o digital records

FLOWCHARTING MANUAL
ACTIVITIES
1. A clerk in the sales department receives a hard-copy customer
order by mail and manually prepares four hard copies of a sales
order.
2. The clerk sends Copy 1 of the sales order the credit department
for approval. The other three copies and the original customer
order are filed temporarily, pending credit approval.
3. The credit department clerk validates the customers order
against hard-copy credit records kept in the credit department.
The clerk signs Copy 1 to signify approval and returns it to the sales
clerk.

4. When the sales clerk receives credit approval, he or

she files Copy 1 and the customer order in the
department. The clerk sends Copy 2 to the warehouse
and Copies 3 and 4 to the shipping department.
5. The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the
shipping department.
6. The shipping department receives Copy 2 and the
goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer. Finally,
the clerk files Copies 3 and 4 in the shipping department

LAY OUT THE PHYSICAL AREAS OF

ACTIVITY
a flowchart reflects the physical system, which is represented as vertical
columns of events and actions separated by lines of demarcation.

TRANSCRIBE THE WRITTEN FACTS INTO VISUAL

FORMAT

The symbols used for this purpose will be selected from the set presented.

1. A clerk in the sales department receives hard-copy

customer order by mail and manually prepares four hard
copies of a sales order.

2. The clerk sends Copy 1 of the sales order to the

credit department for approval. The other three
copies and the original customer order are filed
temporarily, pending credit approval.
3. The credit department clerk validates the
customers order against hard-copy credit records
kept in the credit department. The clerk signs Copy 1
to signify approval and returns it to the sales clerk.

4. When the sales clerk receives credit approval, he or she files

Copy 1 and the customer order in the department. The clerk
sends Copy 2 to the warehouse and Copies 3 and 4 to the
shipping department.
5. The warehouse clerk picks the products from the shelves,
records the transfer in the hard-copy stock records, and sends
the products and Copy 2 to the shipping department.
6. The shipping department receives Copy 2 and the goods
from the warehouse, attaches Copy 2 as a packing slip, and
ships the goods to the customer. Finally, the clerk files Copies 3
and 4 in the shipping department.

BATCH PROCESSING
Batch processing permits the efficient
management of a large volume of transactions.
A batch is a group of similar transactions (such as
sales orders) that are accumulated over time
and then processed together

Our example is based on a sales order system with the following facts:
1. A clerk in the sales department receives a customer order by mail and
enters the information into a computer terminal that is networked to a
centralized computer program in the computer operations department.
The original customer order is filed in the sales department. Facts 2, 3,
and 4 relate to activities that occur in the computer operations
department.
2. A computer program edits the transactions, checks the customers
credit by referencing a credit history file, and produces a transaction file
of sales orders.
3. The sales order transaction file is then processed by an update
program that posts the transactions to corresponding records in AR and
inventory files.

 4. Finally, the update program produces three hard copies of the

sales order. Copy 1 is sent to the warehouse, and Copies 2 and 3 are
sent to the shipping department.
5. On receipt of Copy 1, the warehouse clerk picks the products from
the shelves. Using Copy 1 and the warehouse personal computer
(PC), the clerk records the inventory transfer in the digital stock
records that are kept on the PC. Next, the clerk sends the physical
inventory and Copy 1 to the shipping department.
6. The shipping department receives Copy 1 and the goods from the
warehouse. The clerk reconciles the goods with Copies 1, 2, and 3
and attaches Copy 1 as a packing slip. Next, the clerk ships the goods
(with Copy 1 attached) to the customer. Finally, the clerk records the
shipment in the hard-copy shipping log and files Copies 2 and 3 in the
shipping department.

DOCUMENTATION
TECHNIQUES

DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts
Record Layout Diagrams

Program Flowcharts

Accountants sometimes use

program flowcharts to verify the
correctness of program logic.

DOCUMENTATION
TECHNIQUES

DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts
Record Layout Diagrams

Record Layout Diagrams

Record layout diagrams are used to reveal the internal structure of the records that
constitute a file or database table.

COMPUTER-BASED
ACCOUNTING SYSTEMS

BATCH SYSTEMS VS. REAL-TIME

SYSTEMS

Distinguishing
Feature

BATCH

REAL TIME

Information
time frame

Lag exists between time when the

economic
event occurs and when it is
recorded.

Processing takes place

when the economic
event
occurs.

Resources

Generally, fewer resources (e.g.,

hardware,
programming, training) are
required.

More resources are

required than for batch
processing.

Operational
efficiency

Certain records are processed

after the
event to avoid operational delays.

All records pertaining to

the event are processed
immediately

ALTERNATIVE DATA
PROCESSING
APPROACHES

LEGACY SYSTEMS VS.

MODERN SYSTEMS
Legacy systems
mainframe-based applications;
tend to be batch oriented;
early legacy systems use flat files for
data storage, but hierarchical and
network databases are often
associated with later-era legacy
systems.

Modern systems
tend to be client-server (network)
based and process transactions in
real time.
Unlike their predecessors, modern
systems store transactions and
master files in relational database
tables. A major advantage of
database storage is the degree of
process integration and data
sharing that can be achieved.

UPDATING MASTER FILES FROM

TRANSACTIONS
Whether batch or real-time processing is being used, updating a master file record
involves changing the value of one or more of its variable fields to reflect the effects of
a transaction.
The update procedure in this example involves the following steps:
1.

A sales order record is read by the system.

2.

ACCOUNT NUMBER is used to search the AR master file and retrieve the
corresponding AR record.

3.

The AR update procedure calculates the new customer balance by adding the
value stored in the INVOICE AMOUNT field of the sales order record to the
CURRENTBALANCE field value in the AR master record.

4.

Next, INVENTORY NUMBER is used to search for the corresponding record in the
inventory master file.

5.

The inventory update program reduces inventory levels by deducting the QUAN-TITY
SOLD value in a transaction record from the QUANTITY ON HAND field value in the
inventory record.

6.

A new sales order record is read, and the process is repeated.

UPDATING MASTER FILES FROM TRANSACTIONS

DATABASE BACKUP PROCEDURES

DATABASE BACKUP PROCEDURES

BATCH PROCESSING USING REAL-TIME

DATA COLLECTION
Key steps in the process are:
1.

The sales department clerk captures customer sales data pertaining to the item(s)
being purchased and the customers account.

2.

The system then checks the customers credit limit from data in the customer record
(account receivable subsidiary file) and updates his or her account balance to
reflect the amount of the sale.

3.

Next, the system updates the quantity-on-hand field in the inventory record
(inventory subsidiary file) to reflect the reduction in inventory. This provides up-todate information to other clerks as to inventory availability.

4.

A record of the sale is then added to the sales order file (transaction file), which is
processed in batch mode at the end of the business day. This batch process records
each transaction in the sales journal and updates the affected general ledger
accounts.

BATCH PROCESSING USING REAL-TIME

DATA COLLECTION

REAL-TIME PROCESSING

Real-time systems process the entire transaction as it occurs. For

example, a sales order processed by the system in Figure 6.32
can be captured, filled, and shipped the same day. Such a
system has many potential benefits, including improved
productivity, reduced inventory, increased inventory turnover,
decreased lags in customer billing, and enhanced customer
satisfaction. Because transaction information is transmitted
digitally, physical source documents can be eliminated or greatly
reduced.

REAL-TIME PROCESSING

DATA CODING SCHEMES

Within the context of transaction
processing, data coding involves creating
simple numerical or alphabetical codes to
represent complex economic phenomena
that facilitate efficient data processing.

A SYSTEM WITHOUT CODES

The negative effects of this approach may be seen in many parts
of the organization:
1. Sales staff. Properly identifying the items sold requires the
transcription of large amounts of detail onto source documents.
Apart from the time and effort involved, this tends to promote
clerical errors and incorrect shipments.
2. Warehouse personnel. Locating and picking goods for shipment
are impeded and shipping errors will likely result.
3. Accounting personnel. Postings to ledger accounts will require
searching through the subsidiary files using lengthy descriptions
as the key. This will be painfully slow, and postings to the wrong
accounts will be common.

A SYSTEM WITH CODES

uses of data coding in AIS are to:
1. Concisely represent large amounts of complex
information that would otherwise be unmanageable.
2. Provide a means of accountability over the
completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective
audit trail.

SEQUENTIAL CODES
MEANING

ADVANTAGE(S)

DISADVANTAGE(S)

represent items in some

sequential order (prenumbering of source
documents.)

supports the
carry no information
reconciliation of a batch content beyond their
of transactions,
order in the sequence.
it alerts management to difficult to change.
the possibility of a
In applications where
missing or misplaced
record types must be
transaction.
grouped together
logically and where
additions and deletions
occur regularly, this
coding scheme is
inappropriate.

BLOCK CODES
MEANING

ADVANTAGE(S)

DISADVANTAGE(S)

a variation on sequential allows for the insertion of the information content

coding that partly
new codes within a
of the block code is not
remedies the
block with- out having to readily apparent.
disadvantages just
reorganize the entire
described
coding structure.
used to represent whole
classes of items by
restricting each class to
a specific range within
the coding scheme
the construction of a
chart of accounts.

GROUP CODES
MEANING

ADVANTAGE(S)

DISADVANTAGE(S)

are used to represent

complex items or events
involving two or more
pieces of related data.

facilitate the
representation of large
amounts of diverse
data.
allow complex data
structures to be
represented in a
hierarchical form

classification tool

The code consists of

zones or fields that
possess specific
meaning.

permit detailed analysis and

reporting both within an item
class and across different
classes of items.

ALPHABETIC CODES
MEANING

ADVANTAGE(S)

DISADVANTAGE(S)

may be assigned
sequentially (in
alphabetical order) or
may be used in block
and group coding
techniques.

capacity to represent
difficulty rationalizing the
large numbers of items is meaning of codes that
increased dramatically
have been sequentially
through the use of pure
as- signed
alphabetic codes or
users tend to have
alphabetic characters
difficulty sorting records
embedded within
that are coded
numeric codes
alphabetically.
(alphanumeric codes)

MNEMONIC CODES
MEANING

ADVANTAGE(S)

DISADVANTAGE(S)

alphabetic characters in does not require the

limited ability to
the form of acronyms
user to memorize
represent items within a
and other combinations
meaning; the code itself class.
that convey meaning.
conveys a high degree
of information about the
item that is being
represented.

GENERAL LEDGER
SYSTEM

GENERAL LEDGER SYSTEM

THE JOURNAL VOUCHER

The source of input to the general ledger is the journal voucher,
A journal voucher, which can be used to represent summaries of
similar transactions or a single unique transaction, identifies the
financial amounts and affected general ledger (GL) accounts.
Routine transactions, adjusting entries, and closing entries are all
entered into the GL via journal vouchers. Because a responsible
manager must approve journal vouchers, they offer a degree of
control against unauthorized GL entries.

THE JOURNAL VOUCHER

THE GENERAL
LEDGER SYSTEM
A HUB CONNECTED TO THE
OTHER SYSTEMS OF THE FIRM THROUGH SPOKES
OF INFORMATION FLOWS

THE GENERAL LEDGER SYSTEM

THE JOURNAL VOUCHER

The source of input to the general ledger

THE GLS DATABASE

General Ledger Master File
-the principle file in the GLS database
General Ledger History File
-has the same format as the GL master
Journal Voucher File
-the total collection of the journal vouchers processed in the
current period.

THE GLS DATABASE

Responsibility Center File
-contains the revenues, expenditures, and other
resource utilization data for each responsibility
center in the organization.
Budget Master File
-contains budgeted amounts for revenues,
expenditures, and other resources for
responsibility centers.

THE FINANCIAL
REPORTING SYSTEM
THE LAW DICTATES MANAGEMENTS
RESPONSIBILITY FOR PROVIDING STEWARDSHIP
INFORMATION TO EXTERNAL PARTIES. THIS
REPORTING OBLIGATION IS MET VIA THE FRS.

FINANCIAL REPORTING
PROCEDURES
1. Capture the transaction
2. Record in special journal
3. Post to subsidiary ledger
4. Post to general ledger
5. Prepare the unadjusted trial balance
6. Make adjusting entries

FINANCIAL REPORTING
PROCEDURES
7. Journalize and post adjusting entries.
8. Prepare the adjusted trial balance
9. Prepare the financial statements
10.Journalize and post the closing entries
11.Prepare the post-closing trial balance

XBRL
REENGINEERING
FINANCIAL REPORTING
THE INTERNET STANDARD
SPECIFICALLY DESIGNED FOR BUSINESS
REPORTING AND INFORMATION
EXCHANGE.

XML

metalanguage for describing markup languages

XBRL
an XML-based language that was
designed to provide the financial
community with a standardized method for
preparing, publishing, and automatically
exchanging financial information, including
financial statements of publicly held
companies.

1. SELECT AN XBRL TAXONOMY

Taxonomies are classification schemes that are
compliant with XBRL specifications to
accomplish a specific information exchange or
reporting objective such as filing with the SEC.

2. CROSS-REFERENCE EACH
ACCOUNT

3. MAPPING THE ORGANIZATIONS

INTERNAL
DATA TO XBRL TAXONOMY ELEMENTS

4. STORED TAG AS DEPICTED BY

THE TAXONOMY ELEMENT FIELD

THE CURRENT STATE OF XBRL

REPORTING
Since October 2005, U.S. banking regulators have required
quarterly call reports to be filed in XBRL. This requirement
impacts more than 8,000 banks.
In April 2005, the SEC began a voluntary financial reporting
program that allows registrants to supplement their required
filings with exhibits using XBRL.
In September 2006, the SEC announced its new electronic
reporting system to receive XBRL filings. The new system is
called IDEA, short for interactive data electronic application.

CONTROLLING THE FRS

The potential risks to the FRS include:
1. A defective audit trail.
2. Unauthorized access to the general ledger.
3. GL accounts that are out of balance with subsidiary
accounts.
4. Incorrect GL account balances because of
unauthorized or incorrect journal vouchers.

COSO INTERNAL CONTROL

ISSUES
Transaction Authorization
Segregation of Duties
1. Have record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
3. Have custody of physical assets

Access Controls
Accounting Records
Independent Verification

INTERNAL CONTROL IMPLICATIONS

OF XBRL
Taxonomy Creation
Taxonomy Mapping Error
Validation of Instance Documents

QUIZ

1. Data coding schemes

2. A System without Codes
3. A System with Codes
4. Sequential Codes
5. Block Codes
6. Group Codes
7. Alphabetic Codes
8. Mnemonic Codes

a. Represent items in some sequential order (prenumbering of source documents.)

b. Advantage is it does not require the user to memorize
meaning.
c. Concisely represent large amounts of complex
information that would otherwise be unmanageable.
d. A variation on sequential coding that partly remedies
the disadvantages just described
e. Creating simple numerical or alphabetical codes to
represent complex economic phenomena
f. used to represent complex items or events involving two
or more pieces of related data.
g. Disadvantages are: sales staff. Warehouse personnel
and accounting personnel.
h. may be assigned sequentially or may be used in block
and group coding techniques.