CHAPTER 6

TRANSACTION PROCESSING & FINANCIAL REPORTING

SYSTEMS OVERVIEW
XAUDCIS
HOLY ANGEL UNIVERSITY
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
Manual System Accounting Records
 Journals - a record of chronological entry
 special journals - specific classes of transactions that
occur in high frequency
 general journal - nonrecurring, infrequent, and
dissimilar transactions
 Ledger - a book of financial accounts
 general ledger - shows activity for each account listed
on the chart of accounts
 subsidiary ledger - shows activity by detail for each
account type
Flow of Economic Events Into the General
Ledger
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.
 Audit Trail
Source General Financial
Journal
Document Ledger Statements

Financial General Source

Statements Journal Document
Ledger

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.

 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 Files
 Master File - generally contains account data (e.g.,
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
Entity Relationship Diagram (ERD)…
 isa 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…
 illustratethe 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, ledgers)
Sales Department Credit Department Warehouse Shipping Department

Customer

Customer
Order

Prepare
Sales
Orders

Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1
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
Credit
Records Sales
Picks Stock
Prepare Records Order3
Goods
Sales
Orders Signed Sales
Order #1
Customer Sales Picks
Order Order2 Goods
Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1 Sales
Order #1 Order 4
Sales
Signed Sales Order3
N Order #1
Sales
Order2 N
Distribute
SO and
File A
Customer
Sales Customer
Order
Signed Sales
Order #1 Order 4
Sales Finished Document Flowchart
Order3
Sales Showing Areas of Activity
N
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 Hist
Credit Check File
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 Stock Sales
Sales Records Order2
Goods
Orders

Terminal
AR File
Update Sales Picks
Program Order1 Goods
Customer Inventory Sales
Order Order2
Sales
Order3

N A
N
Sales Sales
Order 3 Order1
Sales
Order2
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
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.
 A recovery program uses the backup to create a pre-update version of the
master file.
Computer-Based Accounting
Systems
 Two broad classes of systems:
 batch systems
 real-time systems
 Batch Processing
A batch is a group of similar transactions that are
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
Run
correct errors and
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 maste

Run reflect the transactions that hav

AR

New Master Transactions (eventually transferred to an archive file)

(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.
DATA CODING SCHEMES
 SEQUENTIAL CODES
 BLOCK CODES
 GROUP CODES
 ALPHABETIC CODES
 MNEMONIC CODES
 GENERAL LEDGER SYSTEMS
 General Ledger Systems acts as a hub connected to
other systems.
 Becomes sources of input for other systems
 Flows as a feedback into the GLS.
 GLS provide data to MRS & FRS
 41

IS Functions of GLS
 General ledger systems should:
Input  collect transaction data promptly and
accurately.
 classify/code data and accounts.
 validate collected transactions/ maintain
accounting controls (e.g., equal debits
and credits).
Process
 process transaction data.
 post transactions to proper accounts
 update general ledger accounts and
transaction files
Output  record adjustments to accounts
 store transaction data.
 generate timely financial reports.
 42
Relationship of GLS to Other Information
Subsystems

Figure 8-1
 43

GLS Database
 General ledger master file
 principal FRS file based on chart of accounts
 General ledger history file
 used for comparative financial support
 Journal voucher file
 all journal vouchers of the current period
 Journal voucher history file
 journal vouchers of past periods for audit trail
 Responsibility center file
 financial data by responsibility centers for MRS
 Budget master file
 budget data by responsibility centers for MRS
 44

Journal Voucher Layout for a

General Ledger Master File

Figure 8-2
 45

Financial Reporting Process

1. Capture Transactions.
2. Record the Special Journal.
3. Post to Subsidiary Ledger.
4. Post to General Ledger.
5. Prepare the unadjusted trial
balance.
6. Make Adjusting Entries.
7. Journalize & post adjusting
entries.
8. Prepare the trial balance.
9. Prepare the FS.
10. Journalize & post closing
entries.
11. Prepare the post-closing trial
balance.

Figure 8-4

TPS – Daily Procedures GLS-Periodic FRS – End of Period

 46

GLS Reports
 General ledger analysis:
 listing of transactions
 allocation of expenses to cost centers
 comparison of account balances from prior periods
 trial balances
 Financial statements:
 balance sheet
 income statement
 statement of cash flows
 Managerial reports:
 analysis of sales
 analysis of cash
 analysis of receivables
 Chart of accounts: coded listing of accounts
 47

Potential Risks in the GL/FRS

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 of unauthorized
or incorrect journal vouchers.
 48

Other Potential Risks in the GL/FRS

 Improperly prepared journal entries
 Unposted journal entries
 Debits not equal to credits
 Subsidiary not equal to G/L control accounts
 Inappropriate access to the G/L
 Poor audit trail
 Lost or damaged data
 Account balances that are wrong because of
unauthorized or incorrect journal vouchers
 49

GL/FRS Control Issues

Transaction authorization - journal
vouchers must be authorized by a
manager at the source dept
Segregation of duties – G/L clerks
should not:
 have recordkeeping responsibility for special
journals or subsidiary ledgers
 prepare journal vouchers
 have custody of physical assets
 50

GL/FRS Control Issues

Access controls:
 Unauthorized access to G/L can result in errors,
fraud, and misrepresentations in financial
statements.
 Sarbanes-Oxley requires controls that limit
database access to only authorized individuals.
Accounting records - trace source
documents from inception to financial
statements and vice versa
 51

GL/FRS Control Issues

Independent verification
 G/L
dept. reconciles journal vouchers and
summaries.
Two important operational reports used:
 journal voucher listing – details of each
journal voucher posted to the G/L
 general ledger change report – the effects
of journal voucher postings on G/L
accounts
 52

GL/FRS Using Database Technology

Figure 8-5
 53

GL/FRS Using Database Technology

 Advantages:
 immediate update and reconciliation
 timely, if not real-time, information
 Removes separation of transaction authorization and
processing
 Detailed journal voucher listing and account activity
reports are a compensating control
 Centralized access to accounting records
 Passwords and authorization tables as controls
 54

HTML: Hyper Text Markup Language

 Format used to produce Web pages
 defines the page layout, fonts, and graphic elements
 used to lay out information for display in an appealing
manner like one sees in magazines and newspapers
 using both text and graphics (including pictures)
appeals to users
 Hypertext links to other documents on the Web
 Even more pertinent is HTML’s support for hypertext
links in text and graphics that enable the reader to
‘jump’ to another document located anywhere on the
World Wide Web.
 55

XML: eXtensible Markup Language

 XML is a meta-language for describing markup
languages.
 Extensible means that any markup language can be
created using XML.
 includes the creation of markup languages capable of
storing data in relational form, where tags (formatting
commands) are mapped to data values
 can be used to model the data structure of an
organization’s internal database
 56

Comparison of HTML and XML

Documents

Figure 8-6
 57

XBRL: eXtensible Business Reporting

Language
 XBRL is an XML-based language for standardizing
methods for preparing, publishing, and exchanging
financial information, e.g., financial statements.
 XBRL taxonomies are classification schemes.
 Advantages:
 Business offer expanded financial information to all
interested parties virtually instantaneously.
 Companies that use XBRL database technology can further
speed the process of reporting.
 Consumers import XBRL documents into internal
databases and analysis tools to greatly facilitate their
decision-making processes.
 58

Implications for Accounting

Audit implication for XBRL
 taxonomy creation: incorrect taxonomy results in
invalid mapping that may cause material
misrepresentation of financial data
 validation of instance documents: ensure that
appropriate taxonomy and tags have been applied
 audit scope and timeframe: impact on auditor
responsibility as a consequence of real-time
distribution of financial statements
THE END
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