o physical component (sales order processing)

o financial component (cash receipts)

Financial transaction was defined as an economic event that affects
the assets and equities of the firm, is reflected in its accounts, and is 1. Sales order processing. Most business sales are made on
measured in monetary terms. credit and involve tasks such as preparing sales orders,
granting credit, shipping products (or rendering of a service) to
the customer, billing customers, and recording the transaction
Three transaction cycles process most of the firm’s economic
in the accounts (accounts receivable, inventory, expenses, and
activity: the expenditure cycle, the conversion cycle, and the revenue
sales).
cycle.
2. Cash receipts. For credit sales, some period of time (days or
The Expenditure Cycle weeks) passes between the point of sale and the receipt of
➢ Business activities begin with the acquisition of materials, cash.
property, and labor in exchange for cash—the expenditure
cycle.
➢ Time lag between the two due to credit relations with
suppliers:
o physical component (acquisition of goods)
o financial component (cash disbursements to the
supplier)
1. Purchases/accounts payable system. This system
recognizes the need to acquire physical inventory (such as
raw materials) and places an order with the vendor.
2. Cash disbursements system. When the obligation created
in the purchases system is due, the cash disbursements
system authorizes the payment, disburses the funds to the
vendor, and records the transaction by reducing the cash and
accounts payable accounts.
a. Payroll system. The payroll system collects labor
usage data for each employee, computes the
payroll, and disburses paychecks to the employees.
Conceptually, payroll is a special-case purchases
and cash disbursements system.
b. Fixed asset system. A firm’s fixed asset system
processes transactions pertaining to the acquisition, 1) Documents - A document provides evidence of an economic
maintenance, and disposal of its fixed assets. event and may be used to initiate transaction processing.

The Conversion Cycle a. SOURCE DOCUMENTS. Source documents are used

The conversion cycle is composed of two major subsystems: the to capture and formalize transaction data that the
production system and the cost accounting system. transaction cycle needs for processing.
b. PRODUCT DOCUMENTS. Product documents are
 The production system involves the planning, scheduling, the result of transaction processing rather than the
and control of the physical product through the triggering mechanism for the process.
manufacturing process. c. TURNAROUND DOCUMENTS. Turnaround
 The cost accounting system monitors the flow of cost documents are product documents of one system
information related to production. that become source documents for another system.
The Revenue Cycle 2) Journals. A journal is a record of a chronological entry.
➢ Firms sell their finished goods to customers through the
revenue cycle, which involves processing cash sales, credit a. SPECIAL JOURNALS. Special journals are used to
sales, and the receipt of cash following a credit sale. record specific classes of transactions that occur in
➢ Time lag between the two due to credit relations with high volume.
customers.

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 b. REGISTER. The term register is often used to denote
certain types of special journals.
c. GENERAL JOURNALS. Firms use the general journal to a. MASTER FILE. A master file generally contains account data.
record nonrecurring, infrequent, and dissimilar The general ledger and subsidiary ledgers are examples of
transactions. master files. Data values in master files are updated from
transactions.
3.) Ledgers. A ledger is a book of accounts that reflects the b. TRANSACTION FILE. A transaction file is a temporary file of
financial effects of the firm’s transactions after they are posted transaction records used to change or update data in a
from the various journals. There are two basic types of ledgers: master file. Sales orders, inventory receipts, and cash
receipts are examples of transaction files.
a. GENERAL LEDGERS. The general ledger (GL)
c. REFERENCE FILE. A reference file stores data that are used
summarizes the activity for each of the organization’s
as standards for processing transactions.
accounts. It contains the firm’s account information in the
d. ARCHIVE FILE. An archive file contains records of past
form of highly summarized control accounts, and
transactions that are retained for future reference.
b. SUBSIDIARY LEDGERS. Subsidiary ledgers are kept in
various accounting departments of the firm, including
inventory, accounts payable, payroll, and accounts
receivable. It contains the details of the individual accounts
that constitute a particular control account.

The accounting records described previously provide an audit trail for

tracing transactions from source documents to the financial
statements. Of the many purposes of the audit trail, most important to
accountants is the year-end audit.

o Accountants should be able to trace in both directions.

o Sampling and confirmation are two common techniques.

The audit trail is less observable in computer-based systems

than traditional manual systems. The data entry and computer
programs are the physical trail. The data are stored in magnetic files.

The audit of AR often includes a procedure called confirmation. This

involves contacting selected customers to determine if the
transactions recorded in the accounts took place and that customers
agree with the recorded balance.

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 Two commonly used systems design and Five common documentation techniques:
documentation techniques are the entity relationship diagram
 Entity Relationship Diagram
and the data flow diagram.
 Data Flow Diagrams
 Document Flowcharts
The data flow diagram (DFD) uses symbols to represent the entities,  System Flowcharts
processes, data flows, and data stores that pertain to a system.  Program Flowcharts

 represent the logical elements of the system. This data model is the blueprint for what ultimately will become the
 do not represent the physical system. physical database.

A system flowchart is the graphical representation of the physical

relationships among key elements of a system.

 Illustrate the relationship among processes and the documents

that flow between them.
 Contain more details than data flow diagrams.
 Clearly depict the separation of functions in a system.
 Are used to represent the relationship between the key
An entity relationship (ER) diagram is a documentation technique used elements--input sources, programs, and output products--of
to represent the relationship between entities. computer systems.
 Depict the type of media being used (paper, magnetic tape,
 Entities are physical resources (automobiles, cash, or magnetic disks, and terminals)
inventory), events (ordering inventory, receiving cash,  In practice, not much difference between document and
shipping goods), and agents (salesperson, customer, or system flowcharts
vendor) about which the organization wishes to capture data.
 The degree of the relationship, called cardinality, is the The primary objective should be to provide an unambiguous description
numeric mapping between entity instances (e.g., one-to-one, of the system. Certain rules and conventions need to be observed:
one-to-many, many-to-many)
1. The flowchart should be labeled to clearly identify the system
 The REA model version of ERD is widely used in AIS. REA
that it represents.
uses 3 types of entities:
2. The correct symbols should be used to represent the various
o resources (cash, raw materials)
entities in the system.
o events (release of raw materials into the production
process)
o agents (inventory control clerk, vendor, production
worker)

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 3. All symbols on the flowchart should be labeled.
4. Lines should have arrowheads to clearly show the process flow
and sequence of events.
5. If complex processes need additional explanation for clarity, a
text description should be included on the flowchart or in an
attached document referenced by the flowchart.

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 - illustrate the logic used in programs.  Destructive updates leave no backup.
 To preserve adequate records, backup procedures must be
implemented, as shown below:
o The master file being updated is copied as a backup.
o A recovery program uses the backup to create a pre-
update version of the master file.

 client-server based and process transactions in real time.

 use relational database tables.
 have high degree of process integration and data sharing.
 some are mainframe based and use batch processing.

Some firms employ legacy systems for certain aspects of their data
processing. Two broad classes of systems: (1) batch systems (2) real-time systems.

 Accountants need to understand legacy systems.

Batch processing permits the efficient management of a large volume
of transactions.
 mainframe-based applications
 batch oriented  A batch is a group of similar transactions that are accumulated
 early legacy systems use flat files for data storage. over time and then processed together.
 later legacy systems use hierarchical and network data  The transactions must be independent of one another during
bases. the time period over which the transactions are accumulated in
 data storage systems promote a single-user environment order for batch processing to be appropriate.
that discourages information integration.  A time lag exists between the event and the processing.

Record layout diagrams are used to reveal the internal structure of

the records that constitute a file or database table.

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1. Keystroke - source documents are transcribed by clerks to - AIS processing is characterized by high-volume,
magnetic tape for processing later. independent transactions, such are recording cash receipts
checks received in the mail.
2. Edit Run - identifies clerical errors in the batch and places them
- The processing of such high-volume checks can be done
into an error file
during an off-peak computer time.
3. Sort Run - places the transaction file in the same order as the - This is one reason why batch processing may be done
master file using a primary key using real-time data collection.

4. Update Run - changes the value of appropriate fields in the master

file to reflect the transaction ✓ Concisely represent large amounts of complex information
that would otherwise be unmanageable.
5. Backup Procedure - the original master continues to exist, and a ✓ Provide a means of accountability over the completeness of
new master file is created. the transactions processed.
✓ Identify unique transactions and accounts within a file.
✓ Support the audit function by providing an effective audit
 Organizations can increase efficiency by grouping large trail.
numbers of transactions into batches rather than processing
each event separately.
 Batch processing provides control over the transaction  Represent items in sequential order.
process via control figures.  Used to prenumber source documents.
 Track each transaction processed.
 Identify any out-of-sequence documents.
- process transactions individually at the moment the  Disadvantages:
economic event occurs. o arbitrary information
- have no time lag between the economic event and the o hard to make changes and insertions
processing.
- generally, require greater resources than batch processing
since they require dedicated processing capacity; however,  Represent whole classes by assigning each class a specific
these cost differentials are decreasing. range within the coding scheme.
- oftentimes have longer systems development time.
 Used for chart of accounts.
o The basis of the general ledger
 Allows for the easy insertion of new codes within a block.
o Don’t have to reorganize the coding structure.
 Disadvantage:
o arbitrary information

 Represent complex items or events involving two or more

pieces of data using fields with specific meaning.
 For example, a coding scheme for tracking sales might be
04-09-476214-99, meaning:

 Disadvantages:
o arbitrary information
o overused

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  Used for many of the same purposes as numeric codes.
 Can be assigned sequentially or used in block and group
coding techniques.
 May be used to represent large numbers of items.
 Can represents up to 26 variations per field.
 Disadvantage: arbitrary information.

 Alphabetic characters used as abbreviations, acronyms, and

other types of combinations.
 Do not require users to memorize the meaning since the
code itself is informative – and not arbitrary.
o NY = New York
 Disadvantages:
o limited usability and availability