Accounting Information System chapter 2

(1)

Accou

Accounting nting Information Systems,Information Systems, 66thth _edition_edition

James A. Hall

are trademarks used herein under license

(2)

Objectives for Chapter 2

y

y BBroad objectives of transaction croad objectives of transaction cyclesycles

y

y Types of transactions processed by each of theTypes of transactions processed by each of the

three transaction cycles three transaction cycles

y

y The basic accounting records used in TPSThe basic accounting records used in TPS

y

y The traditional accounting records and their The traditional accounting records and their

magnetic equivalents magnetic equivalents

y

y Documentation techniquesDocumentation techniques

y

y BBatch and real-time processing and the imatch and real-time processing and the impact of pact of

these technolo

(3)

A

Financial Transaction is...

y

y an economic an economic event that affects the assets and equitieevent that affects the assets and equitiess

of the f

of the firm, is refirm, is reflected in its aclected in its accounts, counts, and isand is measured in monetary terms.

measured in monetary terms. y

y similar types of similar types of transactiotransactions ns are grouped together intoare grouped together into

thr

threeee trtransacansaction cytion cycles:cles:

y

the expenditure cycle,

y

the con

the conversion cycle,

version cycle, and

and

y

(4)

E

Exxppeennddiittuurre e CCyycclle e CCoonnvveerrssiioon n CCyycclle e RReevveennuue e CCyyccllee

Cash Cash Subsystems Subsystems Purchasing/Accounts Payable Purchasing/Accounts Payable Cash Disbursements Cash Disbursements Payroll Payroll Fixed Assets Fixed Assets Subsystems Subsystems

Production Planning and Control Production Planning and Control Cost Accounting

Cost Accounting

Subsystems Subsystems

Sales Order Processing Sales Order Processing Cash Receipts Cash Receipts Labor Labor Physical Plant Physical Plant Materials Materials Finished Goods Finished Goods Customers Customers C C a a s s h h C C a a s s h h F F i i n n i i s s h h e e d d G G o o o o d d s s

Relationship between Transaction Cycles

(5)

E

ach Cycle has Two Subsystems

y

y EExpenditure Cycle: time lag xpenditure Cycle: time lag between the two between the two due to credit relationsdue to credit relations

with suppliers: with suppliers:

y

y pphysical comhysical compponentonent((acquisition of goods)acquisition of goods)

y

y f f inancial cominancial compponentonent((cash disbursements to the supplier)cash disbursements to the supplier)

y

y Conversion Cycle :Conversion Cycle : y

y thethepproduction systemroduction system ((planning, scheduling, and control of theplanning, scheduling, and control of the

physical product through the

physical product through the manufacturing process)manufacturing process)

y

y the cost accounting systemthe cost accounting system ((monitors the flmonitors the flow of costow of cost

information related to production) information related to production)

y

y Revenue CyRevenue Cycle: cle: time lag time lag between the two between the two due to credit relations withdue to credit relations with

customers : customers :

y

y pphysical comhysical compponentonent((sales order processing)sales order processing)

y

(6)

M

anual System

A

ccounting

Records

y

y SSource Documentsource Documents -- used to capture and formalizeused to capture and formalize

transaction data needed for transaction processing transaction data needed for transaction processing y

y PProduct Documentsroduct Documents -- the result the result of of transactiontransaction

processing processing y

y TTurnaround Documentsurnaround Documents -- a product document of a product document of

one system that become

one system that becomes s a source document fora source document for another system

(7)

M

anual System

A

ccounting

Records

y

y J J

ournals

--

a r

a record of chronological entr

ecord of chronological entry

y

y ssppecial journalsecial journals -- specific classes of transactions thatspecific classes of transactions that

occur in high frequency occur in high frequency

y

y general journalgeneral journal -- nonrecurring, infrequent, andnonrecurring, infrequent, and

dissimilar transactions dissimilar transactions

y

y LL

edger

--

a book of

a book of financial acc

financial accounts

ounts

y

y general ledgergeneral ledger -- shows activity for each accshows activity for each account liount listed onsted on

the chart of a

the chart of accccountsounts

y

y subsidiary ledgersubsidiary ledger -- shows activity by detail shows activity by detail for eachfor each

acc

(8)

F

low of Economic Events Into

the General Ledger

Customer's Customer's Order Order Sales Sales Order Order Sales Sales Journal Journal General General Ledger Ledger Accounts Receivable Accounts Receivable Subsidiary Subsidiary Ledger Ledger P P e e r r i i o o d

d i i c c a a l l l l y

y R R e e c c o

o n n c c i i l l e e S S u u b b s s i

i d d i i a a r r y y

L

L e e d d g g e e r

r t t o o G G e e n n e e r r a a l

l L L e e d d g g e e r r Post Post Journal Journal Entry

(9)

EXPLANA

EXPLANATIOTIONN OFOF ST

STEPEPS IS INNFIGURFIGURE:E: 1.

1.Compare the ARCompare the AR balance in the balance balance in the balance sheet with the master file sheet with the master file AR control account

AR control account balance.

balance. 2

2..Reconcile the ARReconcile the AR control figure with the AR control figure with the AR subsidiary account total. subsidiary account total. 3

3..Select a sample of Select a sample of update entries made to update entries made to accounts in the AR accounts in the AR subsidiary ledger subsidiary ledger and trace these to and trace these to

transactions in the sales transactions in the sales journal (archive file). journal (archive file).

4

4.. FFrom these journalrom these journal entries, identify source entries, identify source documents that can be documents that can be pulled from their files and pulled from their files and verified. If necessary, verified. If necessary, confirm these source confirm these source documents by contacting documents by contacting the customers.

the customers.

A

(10)

Source

Document

Document JournalJournal

General General Ledger Ledger F Financialinancial Statements Statements F Financialinancial Statements

Statements GeneralGeneral_Ledger_Ledger JournalJournal

Source

Document

Audit

Audit T

Trail

rail

Accountants should be able to trace in

Accountants should be able to trace in both directions.both directions. Sampling and confirmation are two common techniques. Sampling and confirmation are two common techniques.

(11)

Accounts Receivable

Accounts Receivable Control Account-GenerControl Account-General Ledger al Ledger

Accounts Receivable Subsidiary Ledger Accounts Receivable Subsidiary Ledger

(sum of all

(sum of all customers¶ receivcustomers¶ receivables)ables)

S

Saallees s JJoouurrnnaall CCaassh h RReecceeiipptts s JJoouurrnnaall

S

Saallees s OOrrddeerr DDeeppoossiit t SSlliipp

Remittance Advice Remittance Advice Shipping Notice

Shipping Notice

Example

Example of Tracing an Audit Trailof Tracing an Audit Trail

Verifying Accounts Receivable Verifying Accounts Receivable

(12)

Computer-Based

Sys

tems

y

y TThehe audit trail is less observableaudit trail is less observable in computerin computer--basedbased

systems than traditional manual systems. systems than traditional manual systems. y

y TThe data entry and computer programs he data entry and computer programs are theare the

physical trail. physical trail. y

(13)

Computer Files

y

y MM

aster File

--

generally contains account data

((

e.g.,

general ledger

general ledger and subsi

and subsidiary fil

diary file)

e)

y

y TT

ransaction File

--

a temporary file containing

transactions since the last update

y

y R R

e

f f

erence File

--

contains relatively constant

information used in processing

((

_{e.g., tax tables,}

customer addr

customer addresses

esses))

y

y A A

rchive File

--

contains past transacti

contains past transactions for reference

ons for reference

purposes

(14)

D

ocumentation Techniques

y

y DDocumentation in a CB environment is necessary ocumentation in a CB environment is necessary

for many reasons. for many reasons. y

y Five Five common documentaticommon documentation techniques:on techniques:

y

y EEntity Relationshipntity Relationship DDiagramiagram

y

y DData Flowata Flow DDiagramsiagrams

y

y DDocument Flowchartsocument Flowcharts

y

y System FlowchartsSystem Flowcharts

y

(15)

E

ntity Relationship

D

iagram (

E

R

D)

y

is a

is a documentat

documentation

ion technique to represent the

technique to represent the

relationship



between entities



in a system.

y

T

he R

E

A model version of

E

R

D

is widely used

in AIS. R

E

A uses 3 types of entities:

y

y resourcesresources ((cash, raw materials)cash, raw materials)

y

y eventsevents ((release of raw materials into the productionrelease of raw materials into the production

process) process)

y

y agentsagents ((inventinventory control ory control clerk, vendorclerk, vendor, produ, productionction

worker) worker)

(16)

Cardinalities



y

y represents the numerical mapping between entities:represents the numerical mapping between entities:

y

y oneone--toto--oneone

y

y oneone--toto--many many

y

(17)

Sales-person person Car Car Type Type Customer

Customer Order Order

V

Veennddoorr IInnvveennttoorryy

Assigned Assigned Places Places Supply Supply E

Ennttiittyy RReellaattiioonnsshhiipp EEntityntity

1 1 M M M M _M_M 1 1 1 1 C C

_ardinalities

(18)

D

ata Flow

D

iagrams (

D

F

D)

y

y use symbols to represent the processeuse symbols to represent the processes, data sources,s, data sources,

data f

data flows, and entities in a sylows, and entities in a systemstem y

y represent therepresent the logical elementslogical elements of of the systthe systemem

y

(19)

D

ata Flow

D

iagram Symbols

Entity Entity Name Name N N Process Process Description Description Data Store Data Store Name Name Direction of Direction of data flow data flow

(20)

D

ocuments Flowcharts



y

y illusillustrate trate the relationsthe relationship among processes and thehip among processes and the

documents th

documents that fat flow betwlow between themeen them y

y contain more details than data flow diagramscontain more details than data flow diagrams

y

(21)

Symbol Set for Document Flowcharts Symbol Set for Document Flowcharts

Terminal showing source Terminal showing source or destination of documents or destination of documents and reports

and reports

Source document or Source document or report

report

Manual operation Manual operation

F

File for storing sourceile for storing source documents and documents and reports reports Accounting records Accounting records (journals, registers, (journals, registers, logs, ledgers) logs, ledgers)

Calculated batch total Calculated batch total

On-page connector On-page connector Off-page connector Off-page connector Description of process Description of process or comments or comments Document flowline Document flowline

(22)

S

S_{ales Department}_{ales Department} CC_rreed_diit_{t D}_Deep_paarrttm_meen_ntt _W_Waarreeh_ho_ou_ussee SS_{hipping Department}_{hipping Department}

First

First SS_{tages in}_{tages in} CC_{onstructing Document Flowchart}_{onstructing Document Flowchart} SS_{howing Areas}_{howing Areas}

of Activity of Activity C C_ustomer_ustomer C C_ustomer_ustomer Order Order Prepare Prepare S S_ales_ales Orders Orders S S_ales_ales Order #1 Order #1SS_ales_ales

Order #1 Order #1SSalesales Order #1 Order #1SSalesales

Order #1 Order #1

(23)

S S_ales_ales Order 4 Order 4 C C_ustomer_ustomer Order Order S

S_{ales Department}_{ales Department} CC_rreed_diit_{t D}_Deep_paarrttm_meen_ntt _W_Waarreeh_ho_ou_ussee _S_S

hipping Department hipping Department

Finished Document Flowchart Finished Document Flowchart

S

S_{howing Ar}_{howing Areas}_{eas of Activity}_{of Activity}

C C_ustomer_ustomer C C_ustomer_ustomer Order Order Prepare Prepare S S_ales_ales Orders Orders S S_ales_ales Order #1 Order #1SS_ales_ales

Order #1 Order #1SSalesales Order #1 Order #1SSalesales

Order #1 Order #1 N N S S_ales_ales Order #1 Order #1 C C_hecks_hecks C

C_redit_redit CCreditredit

Records Records

S

S_igned_ignedSS_ales_ales

Order #1 Order #1

S

S_igned_ignedSS_ales_ales

Order #1 Order #1 Distribute Distribute S S_{O and}_{O and} File File N N C C_ustomer_ustomer Order

Order SS_igned_ignedSS_ales_ales

Order #1 Order #1 S S_ales_ales Order 4 Order 4_S_S ales ales Order3 Order3 S S_ales_ales Order2 Order2 S S_ales_ales Order2 Order2 S S_ales_ales Order 4 Order 4 S S_ales_ales Order3 Order3 Picks Picks Goods Goods S S_tock_tock Records Records A A A A S S_ales_ales Order2 Order2 Picks Picks Goods Goods N N S S_ales_ales Order3 Order3 C C_ustomer_ustomer S S_ales_ales Order2 Order2

(24)

System Flowcharts



y

y are used to represent the rare used to represent the relatielationship betonship between the kween the key ey

elements

elements----_input_{input sources,}_{sources, programs,}_{programs, and}_{and output}_output

products

products----_{of computer systems}_{of computer systems}

y

y depict the type depict the type of of media being usedmedia being used ((paper, magneticpaper, magnetic

tape, magnetic disks, and terminals) tape, magnetic disks, and terminals) y

y in practice, not much difference between documentin practice, not much difference between document

and system f

(25)

Systems

FF

lowchart Symbols

Hard copy Hard copy

Computer process Computer process

Direct access storage Direct access storage device

device

Magnetic tape Magnetic tape

T

Terminerminal inputal input// output device output device Process flow Process flow Real-time Real-time (online) (online) connection connection Video display Video display device device

(26)

S

S_{ales Department}_{ales Department} CC_o_om_mp_pu_utteer_{r O}_Op_peerraattiio_on_ns_{s D}_Deep_paarrttm_meen_ntt _W_Waarreeho_hou_ussee SS_{hipping Department}_{hipping Department}

First

First SS_{tages in}_{tages in} CC_onstructing_onstructing SS_{ystem Flowchart}_{ystem Flowchart} SS_howing_howing

Areas of Activity Areas of Activity C C_ustomer_ustomer Order Order C C_ustome_ustomer r Terminal Terminal Edit and Edit and C

C_redit_reditCC_heck_heck

AR File AR File Update Update Program Program S S_ales_ales Orders Orders Inventory Inventory C

(27)

S

S_{ales Department}_{ales Department} CC_o_om_mp_pu_utteer_{r O}_Op_peerraattiio_on_ns_{s D}_Deep_paarrttm_meen_ntt _W_Waarreeho_hou_ussee SS_{hipping Department}_{hipping Department}

Finished

Finished SS_{ystem Flowchart}_{ystem Flowchart} SS_{howing All Facts}_{howing All Facts}

T

Translated ranslated into Visualinto VisualSS_ymbols_ymbols

C C_ustomer_ustomer Order Order C C_ustome_ustomer r Terminal Terminal Edit and Edit and C

C_redit_reditCC_heck_heck

AR File AR File Update Update Program Program S S_ales_ales Orders Orders Inventory Inventory S S_ales_ales Order1 Order1 Picks Picks Goods Goods S S_tock_tock Records Records S S_ales_ales Order1 Order1 S S_ales_ales Order3 Order3 S S_ales_ales Order 3 Order 3 S S_ales_ales Order2 Order2 Picks Picks Goods Goods N N S S_ales_ales Order2 Order2 C C_ustomer_ustomer S S_ales_ales Order1 Order1 A A A A S S_ales_ales Order 3 Order 3_S_S ales ales Order2 Order2 S S_ales_ales Order1 Order1 C

C_{redit File}_{redit File}

N N C C_ustomer_ustomer Order Order

(28)

P

rogram Flowcharts



illustrate the logic used in programs illustrate the logic used in programs

P

Program Flowchart Symbolsrogram Flowchart Symbols

Logical process Logical process

Decision Decision

Terminal start or Terminal start or end operation end operation Input/output Input/output operation operation F

Flow of logicallow of logical process

(29)

M

odern Systems versus Legacy

Syst

ems

y

y MModern systems characteristics:odern systems characteristics:

y

y clientclient--server based and process transactions in real timeserver based and process transactions in real time

y

y use relational database tablesuse relational database tables

y

y have have high degree of prohigh degree of process integration and data sharingcess integration and data sharing

y

y some are mainframe based and use batch processingsome are mainframe based and use batch processing

y

y Some fSome firms employ legacy systems for certain aspects of irms employ legacy systems for certain aspects of

their data processing. their data processing.

y

y Accountants need to understand legacy systems. Accountants need to understand legacy systems.

y

y Legacy systems characteristics:Legacy systems characteristics:

y

y mainframemainframe--based applicationsbased applications

y

y batch orientedbatch oriented

y

y early legacy systems use flat files for data storageearly legacy systems use flat files for data storage

y

y later legacy systems use hierarchical and network databaseslater legacy systems use hierarchical and network databases

y

y data storage systems promote a singledata storage systems promote a single--user enuser environvironment thatment that

discourages information integration discourages information integration

(30)

U

pdating

M

aster Files:

PP

rimary Keys (

PP

K

)

and

Secondary Keys (SK

)

(SK)

(SK) Sales Orders Transaction FileSales Orders Transaction FileRecord Structure forRecord Structure for Inventory Inventory Number Number Quantity Quantity Sold Sold Unit Unit Price Price Invoice Invoice Amount Amount (SK) (SK) (PK) (PK) Sales Sales Order Order Number Number Account Account Number Number

((PPKK)) RReeccoorrd d SSttrruuccttuurre e ffoor r AAR R MMaasstteer r FFiillee Account

Account Number

Number AddressAddress

Current Current Balance Balance Credit Credit Limit Limit Last Last Payment Payment Date Date Billing Billing Date Date

Record Structure for Inventory Master File Record Structure for Inventory Master File (PK) (PK) Inventory Inventory Number Number Quantity Quantity on Hand on Hand Reorder Reorder Point

Point EOQEOQ

Vendor Vendor Number Number Standard Standard Cost Cost Total Total Cost Cost Name Name Description Description

(31)

D

atabase Backup

PP

rocedures

Backup Backup Master Master Backup Backup Program Program Master Master Transaction Transaction Update Update Program Program Recovery Recovery Program Program

Destructive updates leave no backup.Destructive updates leave no backup.

To preserve adequate records, backup procedures must beTo preserve adequate records, backup procedures must be implemented, as shown below:

implemented, as shown below:

The master file being updated is copied as a backup.The master file being updated is copied as a backup.

 A recovery program uses the backup to create a pre- A recovery program uses the backup to create a pre-update version of the master file.

(32)

Computer-Based

A

ccounting

Systems

y

y TT

wo broad classes of systems:

y

y batch systemsbatch systems

y

(33)

Batch

P

rocessing

y

y A A batchbatch is a group is a group of of similasimilar transactions that arer transactions that are

accumulated over time and t

accumulated over time and then proceshen processed togethersed together.. y

y TThe transactionshe transactions must be independent of one another must be independent of one another

during the time p

during the time period over which teriod over which the transactions arehe transactions are accumulated

accumulated in order for batch processing to bein order for batch processing to be appropriate.

appropriate. y

(34)

Sales Sales Orders

Orders KeyingKeying

Unedited Unedited Transactions Transactions Edit Edit Run Run Errors Errors Edited Edited Transactions Transactions Sort Sort Run Run Transactions Transactions Update Update Run Run Old Master Old Master (father) (father) AR AR AR AR New Master New Master (son) (son)

Transactions (eventually transferred to an archive file) Transactions (eventually transferred to an archive file) correct errors and

correct errors and

resubmit

catches clerical errors

rearranges the transaction data by

key field so that it is in the same

sequence as the master file

changes the values in the master file to

reflect the transactions that have occurred

Batch

(35)

Steps in Batch

PP

roces

sing/Sequential

File

y

y KK

eystroke

--

source documents are tr

source documents are transcrib

anscribed by

ed by

clerks to magnetic tape for processing la

clerks to magnetic tape for processing later

ter

y

y EE

dit

R R

un

--

identif

identifies

ies clerica

clerical errors in the batch

l errors in the batch and

and

places them into an error file

y

y SS

ort

R R

un

--

places the transaction fil

places the transaction file in the same or

e in the same order

der

as the master file using a primary key

y

y UpUp

date

R R

un

--

changes the

changes the value of appropriate fiel

value of appropriate fields in

ds in

the master

the master fi

file t

le to ref

o reflect the

lect the transaction

transaction

y

y BB

acku

pp PP

rocedure

_{- the original}

_-

the original master continues t

master continues to

o

exist and a new master fil

(36)

A

dvantages of Batch

P

rocessing

y

y OOrganizations canrganizations can increase eincrease eff ff iciency iciency by groupingby grouping

large numbers of transac

large numbers of transactions into batches rather thantions into batches rather than processing

processing each event each event separatelyseparately.. y

y Batch processingBatch processing pprovides controlrovides control over theover the