Chapter 2

Transaction Processing System: an activity consisting of three major subsystems.

: the three exist in all types of business

3 Major Subsystem:

1 Expenditure Cycle: Incurs expenditures in exchange for resources

2 Revenue Cycle: receives revenue from outside sources
3 Conversion Cycle: provides value added through its products or services

1. Expenditure Cycle:
2 Transactions in the system perspective:
Physical Component: acquisition of the goods or services
Financial Component: the cash disbursement to the supplier

Purchases/accounts payable (AP) system. This system recognizes the need to acquire
physical inventory (such as raw materials) and places an order with the vendor. When
the goods are received, the purchases system records the event by increasing inventory
and establishing an account payable to be paid at a later date.

Cash disbursements system. When the obligation created in the purchases system
becomes 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.

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. Because of accounting
 complexities associated with payroll, most firms have a separate system for payroll
processing.

Fixed asset system. A firm’s fixed asset system processes transactions pertaining to the
acquisition, maintenance, and disposal of its fixed assets. These are relatively permanent
assets that collectively often represent the organization’s largest financial investment.
Examples of fixed assets are land, buildings, furniture, machinery, and motor vehicles.

2. Conversion Cycle

Two Major Subsystem:

Production System: involves the planning, scheduling, and control of the physical product
through the manufacturing process.

 determining raw material requirements, authorizing the work to be performed and

the release of raw materials into production, and directing the movement of the
work-in-process through its various stages of manufacturing.

Cost Accounting System: monitors the flow of cost information including labor, overhead, and
raw materials related to production.

 Information this system produces is used for inventory valuation, budgeting, cost
control, performance reporting, and management decisions, such as make-or-buy
decisions
3. The Revenue Cycle
 Firms sell their goods and services to customers.

Subsystems:

Sales order processing. The majority of business sales are made on 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 in the
accounts (accounts receivable, inventory, expenses, and sales).

Cash receipts. For credit sales, some period of time (days or weeks) passes between the
point of sale and the receipt of cash. Cash receipts processing includes collecting cash,
depositing cash in the bank, and recording these events in the accounts (accounts
receivable and cash).

MANUAL SYSTEMS
1. Documents: may initiate transaction processing or be the output of a process
4 Types:
A. source documents,
 Economic events result in the creation of some documents at the beginning (the
source) of the transaction
 Triggering mechanism
 used to capture and formalize transaction data that the transaction cycle uses for
processing.
B. product documents,
 result of transaction processing
C. turnaround documents.
  product documents of one system that become source documents for another
system.

2. Journals: chronological record of financial transactions

2 Classes:
Special Journals
 used to record specific classes of transactions that occur in high volume.
 sales journal provides a specialized format for recording only sales transactions.
General Journals
 to record nonrecurring, infrequent, and dissimilar transactions.
 columns are nonspecific, allowing any type of transaction to be recorded.

 journal vouchers: written authorizations prepared for every transaction that meets the
general journal requirements

(1) a unique voucher number,

(2)transaction date,

(3)transaction amount,

(4)ledger accounts to be updated, and

(5)signatures of individuals authorized to create or approve the journal voucher.

3. Ledgers: a book of accounts that reflects the financial effects of the firm’s transactions after they are
posted from the various journals and journal vouchers.
 show activity by account type

2 categories:

(1) general ledgers, which contain the firm’s account information in the form of highly
summarized control accounts,
 summarizes the activity for each of the organization’s financial accounts.
(2) subsidiary ledgers, which contain the details that support a particular control account.

AUDIT TRAIL: helps auditors in tracing the transactions to make sure that the amounts are fairly presented.

DIGITAL ACCOUNTING RECORDS

4 Types of Digital computer files where data are stored

1. master files. contains account data
2. transaction files. temporary file of transaction records used to update data in a master
file.
3. reference files. stores data that are used as standards for processing transactions.
4. archive files. contains records of past transactions that are retained for future reference
and form an important part of the audit trail.

Digital Audit Trail:  allows transaction tracing.

 An auditor attempting to evaluate the accuracy of the AR figure published in the balance sheet could do so via the
following steps, which are identified in Figure 2-11 with the dotted arrows.
 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 updated 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 specific source documents that can be pulled from their files and
verified. If necessary, the auditor can confirm the accuracy and propriety of these source documents by
contacting the customers in question.

File Structures

2 Broad classification of file structure:

(1) Flat files.

 Often associated with legacy systems (large mainframe systems that were commonplace
in the 1960s and 1970s but still exist today.)
(2) Database
 Employed by most modern system implementations 

FLAT FILE MODEL

 Data redundancy: contributes to three significant problems in the flat-file environment: data
storage, data updating, and currency of information.
  single-user-view model.
 Files are structured, formatted, and arranged to suit the specific needs of the owner or primary
user of the data.

Problems in Flat file model:

(1) Data Capture and Storage
 efficient information system captures and stores data only once and makes this single
source available to all users who need it
 Not possible in flat file
(2) Data Updating
 Organizations have stored data stored that require periodic updating to reflect changes.
 adds significantly to the task and the cost of data management.
(3) Currency of Information
 problem of failing to update all the user files affected by a change in status.
(4) Task Data Dependency
 user’s inability to obtain additional information as his or her needs change.
 user’s information set is constrained by the data that he or she possesses and controls.
 users act independently
 takes time, inhibits performance, adds further to data redundancy, and drives data
management costs even higher.
(5) Limit Data Integration

THE DATABASE MODEL

 this approach centralizes the organization’s data into a common database that is shared by other users.
 all users have access to the data they need to achieve their respective objectives.
 Access to the data resource is controlled by a database management system (DBMS)
 a software system that permits users to access authorized data only.
® organization’s procedures for assigning user authority is an important control issue for auditors to
consider.
Documentation techniques

 visual images convey vital system information more effectively and efficiently than words.
 ability to document systems in graphic form is therefore an important skill for accountants to master

entity relationship diagrams, system flowcharts, program flowcharts, and record layout diagrams.

1. Data flow diagrams (DFD)

 uses symbols to represent the entities, processes, data flows, and data stores that pertain to a
system.
 from very general to highly detailed.

 Entities: represent objects that lie outside the system being modeled.
: singular nouns
 Data Stores: represent the accounting files and records used in each process
  labeled arrows: represent data flows between processes, data stores, and entities.

2-5 TRANSACTION PROCESSING MODELS

1. Batch Processing:
 gathering transactions into groups or batches and then processing the entire batch as a single
event.
2. Real-time Processing
 process individual transactions continuously as they occur

Numeric and Alphabetic Coding

Schemes
Sequential Codes
Using the flowchart, answer the following questions:
What action does symbol 1 and symbol 2 represent?
What does the operation involving symbol 3 and symbol 4 depict
What does the operation involving symbol 4 and symbol 5 depict
What does the operation involving symbols 6, 8, and 9 depict