Accounting Information Systems, 6 t h edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter
2
 Broad objectives of transaction cycles
 Types of transactions processed by each of the
three transaction cycles
 The basic accounting records used in TPS
 The traditional accounting records and their
magnetic equivalents
 Documentation techniques
 Batch and real-time processing and the impact of
these technologies on transaction processing
A Financial Transaction
is...
an economic event that affects the assets and equities
of the firm, is reflected in its accounts, and is
measured in monetary terms.
similar types of transactions are grouped together
into three transaction cycles:
the expenditure cycle,
the conversion cycle, and
the revenue cycle.
Relationship between Transaction Cycles
Each Cycle has Two
Subsystems
Expenditure Cycle: time lag between the two due to credit relations
with suppliers:
physical component (acquisition of goods)
financial component (cash disbursements to the supplier)
Conversion Cycle :
the production system (planning, scheduling, and control of the
physical product through the manufacturing process)
the cost accounting system (monitors the flow of cost
information related to production)
Revenue Cycle: time lag between the two due to credit relations with
customers :
physical component (sales order processing)
financial component (cash receipts)
Manual System
Accounting Records
Source Documents - used to capture and formalize
transaction data needed for transaction processing
Product Documents - the result of transaction
processing
Turnaround Documents - a product document of
one system that becomes a source document for
another system
Creation of a Source Document

7
A Product Document

8
A Turnaround Document

9
Manual System
Accounting Records
Journals - a record of chronological entry
1.special journals - specific classes of transactions
that occur in high frequency
2.general journal - nonrecurring, infrequent,
and dissimilar transactions
Ledger - a book of financial accounts
1.general ledger - shows activity for each account listed
on the chart of accounts
2.subsidiary ledger - shows activity by detail for
each account type
Flow of Economic Events Into
the General Ledger
Sales Journal

12
General Journal

13
General Ledger

14
General Ledger (continued)

15
Relationship between the Subsidiary Ledger
and the General Ledger

16
DIGITAL ACCOUNTING
RECORDS
Modern accounting systems store data in four types of
digital computer files:
• A master file contains account data. (e.g., general ledger and

subsidiary file)
• A transaction file is a temporary file that holds transaction records that will be
used to change or update data in a master file.
• A reference file is a file that stores the data used as standards for processing
transactions.
• An archive file is a file that contains records of past transactions that are
retained for future reference.
The Digital Audit Trail
17
THE AUDIT TRAIL

An audit trail is a set of accounting records that trace

transactions from their source documents to the
financial statements.
An audit trail is of utmost importance in the conduct of
a financial audit.
The external auditor’s responsibility involves, in part,
the review of selected accounts and transactions to
determine their validity, accuracy, and completeness.

18
 Audit Trail
Source General Financial
Journal Statements
Document Ledger

Financial General Source

Statements Journal
Ledger Document

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.
Accounting Records in a Computer-Based System

EXPLANATION OF
STEPS IN FIGURE:

1.Compare the AR
balance in the balance
sheet with the master file
AR control account
balance.
2.Reconcile the AR
control figure with the AR
subsidiary account total.
3.Select a sample of
update entries made to
accounts in the AR
subsidiary ledger
and trace these to
transactions in the sales
journal (archive file).
4.From these journal
entries, identify source
documents that can be
pulled from their files and
verified. If necessary,
confirm these source
documents by contacting
the customers.
 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account-General Ledger

Accounts Receivable Subsidiary Ledger

(sum of all customers’ receivables)

Sales Journal Cash Receipts Journal

Sales Order Deposit Slip

Shipping Notice
Remittance Advice
Computer-Based
Systems
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.
 Computer
FilesFile - generally contains account data (e.g.,
Master
general ledger and subsidiary file)
Transaction File - a temporary file containing
transactions since the last update
Reference File - contains relatively constant
information used in processing (e.g., tax
tables, customer addresses)
Archive File - contains past transactions for
reference purposes
Documentation
Techniques
Documentation in a CB environment is necessary
for many reasons.
Five common documentation techniques:
Entity Relationship Diagram
Data Flow Diagrams
Document Flowcharts
System Flowcharts
Program Flowcharts
 File Structures

Digital file structures and storage techniques vary

widely among transaction processing systems.
Some structures are effective at processing all records
in large master files.
Some file structures are better for directly locating and
processing a single record in a large file.
The legacy systems are large mainframe systems
implemented in the late 1960s through the 1980s.

25
 THE FLAT-FILE MODEL
The flat-file model is an environment in which
individual data files are not related to other files.
There are three significant problems in the flat-file
environment: data storage, data updating, and currency
of information.
Data Capture and Storage
Data storage is an efficient information system that captures
and stores data only once and makes this single source
available to all users who need it.
Data Updating
Data updating is the periodic updating of data stored in the
files of an organization.
26
THE FLAT-FILE MODEL (continued)

Currency of Information
Currency of information is a problem associated with the
flat-file model because of its failure to update all the user
files affected by a change in status; may result in decisions
based on outdated information.
Task-Data Dependency
Task-data dependency is a user’s inability to obtain
additional information as his or her needs change.
Flat Files Limit Data Integration

27
Flat-File Model

28
THE DATABASE MODEL
The database model is a symbolic model of the
structure of, and the associations between, an
organization’s data entities.
The database management system (DBMS) is a
software system that controls access to the data
resource.
The most striking difference between the database
model and the flat-file model is the pooling of data into
a common database that all organizational users share.

29
Database Model

30
 Documentation Techniques
Visual images convey vital system information more
effectively and efficiently than words.
Accountants use system documentation routinely, as
both systems designers and auditors.
Five basic documentation techniques are: data flow
diagrams, entity relationship diagrams, system
flowcharts, program flowcharts, and record layout
diagrams.

31
Entity Relationship Diagram (ERD)
…is a documentation technique to represent the
relationship  between entities  in a
system.
The REA model version of ERD is widely used
in AIS. REA uses 3 types of entities:
resources (cash, raw materials)
events (release of raw materials into the production
process)
agents (inventory control clerk, vendor, production
worker)
Cardinalities
…
represents the numerical mapping between entities:
one-to-one
one-to-many
many-to-many
 Cardinalities
Entity Relationship Entity

Sales- 1 1 Car
Assigned Type
person

1 M
Customer Places Order

M M
Vendor Supply Inventory
Data Flow Diagrams (DFD)
…
use symbols to represent the processes, data sources,
data flows, and entities in a system
represent the logical elements of the system
do not represent the physical system
Data Flow Diagram
Symbols
Entity Data Store
Name
Name

N
Process
Description Direction of
data flow
Documents
Flowcharts…
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
Symbol Set for Document Flowcharts

Terminal showing source Calculated batch total

or destination of documents
and reports

Source document or
report
On-page connector

Manual operation
Off-page connector

File for storing source

Description of process
documents and
or comments
reports

Accounting records
Document flowline
(journals,
registers, logs,
Sales Department Credit Department Warehouse Shipping Department

Customer

Customer
Order

Prepare
Sales
Orders

Sales
OrSdearl
e#s1
OrSdearle#s1
OrderS#a1l
es
Order
#1
First Stages in Constructing Document Flowchart Showing Areas
of Activity
Sales Department Credit Department Warehouse Shipping Department
Sales A
Customer
Order #1 Sales
Order2
Customer Sales
Checks
Order Credit Order 4
Records Sa
Credit Picks les
Prepare
Goods Or
Sales
Orders Stock der
Signed Sales
Order #1 Records 3
Customer Sales Picks
Order2
O rd Goods
OrSdea arlle
OrrSdeaSrle##a1les Sales
#ese1Order
s
s1 Order #1 Order 4
Sal
Signed Sales es
N Order #1 Ord
Sales er3
Order2 N
Distribute
SO and
File A
Customer
Sales Customer
OSrdigenred
Order #1 OrdSear
Sales Finished Document Flowchart
Order3
Showing Areas of Activity
N le4s Sales
Order2
System
Flowcharts…
are used to represent the relationship between the
key elements--input sources, programs, and
output products--of computer systems
depict the type of media being used (paper, magnetic
tape, magnetic disks, and terminals)
in practice, not much difference between document
and system flowcharts
Systems Flowchart Symbols
Terminal input/
Hard copy
output device

Computer process
Process flow

Real-time
Direct access storage (online)
device connection

Video display
device
Magnetic tape
Sales Department Computer Operations Department Warehouse Shipping Department

Customer
Edit and Credit File
Credit Check
Customer
Order
Sales
Orders

Terminal
AR File
Update
Program
Inventory

First Stages in Constructing System Flowchart Showing

Areas of Activity
Sales Department Computer Operations Department Warehouse Shipping Department

Customer Sales A
Edit and Credit File Order1
Credit Check
Customer Sales
Order Order 3
Picks Sa
Sales les
Goods
Orders Or
Stock der
Terminal Records 2
AR File
Update Sales Picks
Program Order1
Customer Goods Sales
Inventory
Order
SaOlerds
er2
N Order3
A
N
Sales Sales
Order1
OrdSear
Order2
le3s Sales
Order1
Customer

Finished System Flowchart Showing All Facts

Translated into Visual Symbols
Program Flowcharts…
illustrate the logic used in
programs
Program Flowchart Symbols

Terminal start or
Logical process
end operation

Input/output
operation
Decision
Flow of logical
process
Record Layout Diagram for
Customer File

46
Modern Systems versus Legacy
Systems
Modern systems characteristics:
• 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.
• Accountants need to understand legacy systems.
Legacy systems characteristics:
• mainframe-based applications
• batch oriented
• early legacy systems use flat files for data storage
• later legacy systems use hierarchical and network databases
• data storage systems promote a single-user environment
that discourages information integration
Updating Master Files: Primary Keys (PK)
and Secondary Keys (SK)
 Database Backup
•
Procedures
•Destructive updates leave no backup.
To preserve adequate records, backup procedures must be
implemented, as shown below:
The master file being updated is copied as a backup.

Arecovery program uses the backup to create a pre-

update version of the master file.
Computer-Based Accounting
Systems (CBAS)
Two broad classes of systems:
batch systems
real-time systems
 Batch
A batch is a group of similar transactions that are
Processing
accumulated over time and then processed together.
The transactions must be independent of one another
during the time period over which the transactions are
accumulated in order for batch processing to be
appropriate.
A time lag exists between the event and the processing.
Batch Processing/Sequential File
Unedited
Sales Keying Transactions
Orders

catches clerical errors

Errors Edit
correct errors and
Run
resubmit
Edited
Transactions

rearranges the transaction data by

Sort
key field so that it is in the same
Run sequence as the master file

Transactions

Old Master
(father)
AR

Update changes the values in the master file to

Run reflect the transactions that have occurred

AR

Transactions (eventually transferred to an archive file)

New Master
(son)
 Steps in Batch Processing/Sequential
File
Keystroke - source documents are transcribed by
clerks to magnetic tape for processing later
Edit Run - identifies clerical errors in the batch and
places them into an error file
Sort Run - places the transaction file in the same
order as the master file using a primary key
Update Run - changes the value of appropriate fields
in the master file to reflect the transaction
Backup Procedure - the original master continues to
exist and a new master file is created
 Advantages of Batch
Processing
Organizations can increase efficiency by grouping
large numbers of transactions into batches rather
than processing each event separately.
Batch processing provides control over the
transaction process via control figures.
 Real-Time
Systems…
process transactions individually at the
moment the economic event occurs
have no time lag between the economic event
and the processing
generally require greater resources than batch
processing since they require dedicated
processing capacity; however, these cost
differentials are decreasing
oftentimes have longer systems development
time
Why Do So Many AIS Use Batch
Processing?
AIS processing is characterized by high-volume,
independent transactions, such are recording cash
receipts checks received in the mail.
The processing of such high-volume checks can be
done during an off-peak computer time.
This is one reason why batch processing maybe
done using real-time data collection.
DIFFERENCES BETWEEN BATCH AND
REAL-TIME SYSTEMS

Information Time Frame

Batch systems are systems that assemble transactions into groups for
processing.
Real-time systems are systems that process transactions individually at the
moment the economic event occurs.
Resources
Operational Efficiency
Efficiency versus Effectiveness

58
UPDATING MASTER FILES FROM
TRANSACTIONS

Updating a master file record involves changing the

value of one or more of its variable fields to reflect the
effects of a transaction.
Master file backup procedures
If the current master file becomes corrupted or is
destroyed, corporate IT professionals can retrieve the
most current backed-up file from the archives.

59
Record Structures for Sales, Inventory, and
Accounting Receivable Files

60
BATCH PROCESSING USING REAL-TIME
DATA COLLECTION

A popular data processing approach, particularly for

large operations, is to digitally capture and process
aspects of the transaction at the source as they occur,
and process other aspects of the transaction in batch
mode.
Deadlock or “wait” is a state that occurs between sites
when data are locked by multiple sites that are waiting
for the removal of the locks from the other sites.

61
Batch Processing with Real-Time Data Collection

62
REAL-TIME PROCESSING

Real-time systems process the entire transaction as it

occurs.
Real-time processing is well suited to systems that
process lower transaction volumes and those that do
not share common records.
Terminals at distributed sites throughout the
organization are used for receiving, processing, and
sending information on the status of current
transactions.
63
Real-Time Processing of Sales Orders

64
 Data Coding Schemes

Data coding involves creating simple numeric or

alphabetic codes to represent complex economic
phenomena that facilitate efficient data processing.

65
A SYSTEM WITHOUT CODES

Business organizations process large volumes of

transactions that are similar in their basic attributes.
Uncoded entry takes a great deal of recording space, is
time-consuming to record, and is obviously prone to
many types of errors.

66
A SYSTEM WITH CODES

Advantages of data coding in AIS are:

Concisely representing large amounts of complex information that would
otherwise be unmanageable.
Providing a means of accountability over the completeness of the transactions
processed.
Identifying unique transactions and accounts within a file.
Supporting the audit function by providing an effective audit trail.

67
NUMERIC AND ALPHABETIC CODING
SCHEMES

Sequential Codes
Sequential codes are codes that represent items in some sequential order
(ascending or descending).
• ADVANTAGES
• DISADVANTAGES
Block Codes
A numeric block code is a coding scheme that assigns ranges of values to specific
attributes such as account classifications.
• A chart of accounts is a listing of an organization’s accounts showing the account
number and name.
• ADVANTAGES
• DISADVANTAGES

68
Chart of Accounts

69