Chapter 6

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Chapter 6

Transaction Processing and

Financial Reporting Systems Overview

Summary of Chapter 6Chapter 6

Transaction ProcessingTransaction Processing

Financial Reporting Systems


Summary of Chapter 6

Financial Reporting SystemsGeneral Ledger System

The Financial Reporting System

XBRL-Reengineering Financial Reporting

Controlling the FRS

Transaction ProcessingOverview of Transaction

Processing

Accounting Records

Documentation Techniques

.Computer-Based Accounting Systems

Data Coding Schemes

An Overview of Transaction Processing

An Overview of Transaction ProcessingTransaction Cycles


The Expenditure Cycle


The Conversion Cycle


The Revenue Cycle

Expenditure Cycle

Subsystems

Purchasing/ Accounts Payable

Cash DisbursementsPayroll

Fixed Assets

Conversion Cycle

Subsystems

Production Planning and Control

Cost Accounting

Revenue Cycle

Subsystems

Sales Order, ProcessingCash Receipts

Physical Plant

Materials

LaborCustomers

Customers

Cash

Cas

h

Fin

ishe

d G

oods

Figure 6.1 Relationship Between Transaction Cycles

Accounting Records

Computer-Based SystemsComputer-Based SystemsManual SystemsManual Systems

Types of Files Master File Transaction File Reference File Archive File

The Digital Audit Trail

Types of Files Master File Transaction File Reference File Archive File

The Digital Audit Trail

Documents Source Documents Product Documents Turnaround Documents

Journals Special Journals Register General Journals

Ledgers General Ledgers Subsidiary Ledgers

The Audit Trail

Documents Source Documents Product Documents Turnaround Documents

Journals Special Journals Register General Journals

Ledgers General Ledgers Subsidiary Ledgers

The Audit Trail

Accounting RecordsManual Systems

Figure 6.2 Creation of a Source Document

Customer’s Order Data

Collection 32

Source 1 Document

Sales Order

Sales System

Figure 6.3 A Product Document

Customer

Customer’s

Order

Data Collection

32

Source 1 Document

Sales Order

Sales SystemBill--------------------------Remittance Advice

Product Document

2

Remittance Advice

Figure 6.4 A Turnaround Document

Customer

Customer’s

Order

Data Collection

32

Source 1 Document

Sales Order

Sales SystemBill--------------------------Remittance Advice

Product Document

1 Check

Cash Receipts System

Figure 6.5 Sales Order Recorded in Sales Journal

Customer’s Order

1

Sales Order

Sales Journal

Economic Event Capture Event Record Event

Figure 6.6 Sales Journal

Figure 6.7 General Journal

Figure 6.8 Flow of Information from the Economic Event to the General Ledger

Customer’s Order

Sales Order

Sales Journal

GeneralJournal

Journal Entry Post

Accounts Receivable Subsidiary

Ledger

Post

Periodically Reconcile Subsidiary

Ledger to G

eneral Ledger

Figure 6.9 General Ledger

Figure 6.10 Relationship Between the Subsidiary Ledger and the General Ledger

Accounts Receivable Subsidiary Ledger

General Ledger

Total AR=14,205,800

Accounts Receivable

14,205,800

Hobbs

XX

Johnson

XX

Smith

XX

Ray

XXHoward

XX

Cash

9,845,260

Inventory

126,389,538

Accounting RecordsComputer-Based Systems

Figure 6.11 Accounting Records in a Computer-Based System

Sales Orders

Source Document

Keying

Sales Orders

Journal

Update Program

Credit File

Reference File

Transaction File

Error File

ARSubsidiary

General LedgerControl Accounts

•Accounts Receivable•Inventory•Cost of Goods Sold•Sales

Audit TrailBalance Sheet

AR xxx

Inventory Subsidiary

Archive File

Master File

1

2

3

4

Documentation TechniquesEntity

RelationshipDiagrams

RecordLayout

Diagrams

Data Flow Diagrams

ProgramFlowcharts

SystemFlowcharts

Data Flow Diagrams

Figure 6.12 Data Flow Diagram Symbol Set

Data Flow Diagrams

Symbol DescriptionInput source or output destination of data

A process that is triggered or supported by data

A store of data such as a transaction file, a master file, or a reference file

Direction of data flow

Entity Name

Process Description

Data Store Name

Figure 6.13 Data Flow Diagram of Sales Order Processing System

Data Flow Diagrams

CustomerApprove

Sales

Credit Records

Approve Sales

Sales Order

Stock Release

Packing Slip

Carrier

Credit Records

Approve Sales

Customer AR Records

Prepare Accounts

Receivable

Sales Order

Approved SOCustomer Bill Shipping Notice

Posting Data

Data Flow Diagrams

EntityRelationship

Diagrams

EntityRelationship

Diagrams

Figure 6.14 Entity Relationship Diagram Symbols

SalespersonCompany

Car

Assigned1 1

Customer Sales Order

Places1 M

Vendor Inventory

SupplyM M

EntityRelationship

Diagrams

Figure 6.15 Data Model

Sales Order Shipping Log

1

Credit Record

Customer AR Record

Places1

1

M

Assigned

M

1

Data Flow Diagrams

EntityRelationship

Diagrams

Data Flow Diagrams

A model of system processes

Entity Relationship Diagrams

Models the data used in or affected by the system

EntityRelationship

Diagrams

EntityRelationship

Diagrams

SystemFlowcharts

SystemFlowcharts

Flowcharting Manual Activities

SystemFlowcharts

Flowcharting Manual Activities

1

The flowchart should be labeled to clearly identify the system that it represents.

The correct symbols should be used to represent the various entities in the system.

If complex processes need additional explanation for clarity, a text description should be included on the flowchart or in an attached document refernced by the flowchart.

Lines should have arrowheads to clearly show the process flow and sequence of events.

All symbols on the flowchart should be labeled.

2345

SystemFlowchartsFigure 6.17 Symbol Set for Representing Manual

Procedures

Terminal showing source or destination of documents and reports

Source document or report

Manual operation

File for storing source documents and reports

Accounting records (journals, registers, logs, ledgers

Terminal showing source or destination of documents and reports

Source document or report

Manual operation

File for storing source documents and reports

Accounting records (journals, registers, logs, ledgers

Sales Department

Credit Department

Warehouse Shipping Department

Figure 6.18 Flowchart Showing Stated Fact 1 Translated into Visual Symbols

SystemFlowcharts

FACT 1

A clerk in the in the sales department receives a hard-copy customer order by mail and manually prepares four hard copies of a sales order.

Customer

Customer Order

Prepare Sales Order

Sales Order 4

Sales Order 3

Sales Order 2

Sales Order 1

Sales Department

Credit Department


Figure 6.19 Flowchart Showing Stated Fact 1, 2 and 3 Translated into Visual Symbols

SystemFlowcharts

Customer

Customer Order

Prepare Sales Order

Customer Order

Sales Order 4

Sales Order 3

Sales Order 2

NSales Order 1

Signed Sales Order 1

Sales Order 1

Check Credit

Credit Records


FACT 2

The clerk sends Copy 1 of the sales order to the credit department for approval. The other three copies and the original customer order are filed temporarily pending credit approval.

FACT 3

The credit department clerk validates the customer’s order against hard-copy credit records kept in the credit department. The clerk signs copy 1 to signify approval and returns it to the sales clerk.

Sales Department

Credit Department


Figure 6.20 Flowchart Showing All Stated FactsTranslated into Visual Symbols

SystemFlowcharts

Distribute SO and

file

Sales Order 4

Sales Order 3

Sales Order 2

Customer Order


N

Customer

Customer Order

Prepare Sales Order

Customer Order

Sales Order 4

Sales Order 3

Sales Order 2

NSales Order 1


Sales Order 1

Check Credit

Credit Records


A

Sales Order 2

Pick Goods

Stock records

Sales Order 2

A

Sales Order 4

Sales Order 3

Pick Goods

Sales Order 2

Sales Order 4

Sales Order 3

NCustomer

FACT 4

When the sales clerk receives credit approval, he or she files Copy 1 and the customer order in the department. The clerk sends Copy 2 to the warehouse and copies 3 and 4 to the shipping department.

FACT 5

The warehouse clerk picks the products from the shelves, records the transfer in the hard-copy stock records, and sends the products and Copy 2 to the shipping department.

FACT 6

The shipping department receives Copy 2 and the goods from the warehouse, attaches Copy 2 as a packing slip, and ships the goods to the customer. Finally, the clerk files Copies 3 and 4 in the shipping department.

Batch Processing

SystemFlowcharts

First

Second• Organizations improve operational efficiency by grouping together large numbers of transactions into batches, and processing them as a unit of work rather than processing each event separately.

• Batch Processing provides control over the transactions process. The accuracy of the process is established by periodically reconciling the batch against the control figure.

Batch ProcessingAdvantages

SystemFlowcharts

Finding an error in a very large batch may prove difficult. When a batch is small, error identification is much easier.

Economies are derived by making transaction batches as large as possible. The average transaction cost is thus reduced when the processing fixed cost associated with the batch is allocated across a large number of transactions.

Economies are derived by making transaction batches as large as possible. The average transaction cost is thus reduced when the processing fixed cost associated with the batch is allocated across a large number of transactions.

First

Second

Batch ProcessingImplications

SystemFlowcharts

Flowcharting Computer Processes

SystemFlowchartsFigure 6.21 Symbol Set for Representing Computer

Processes

Hard copy (source documents and output)

Computer process (program run)

Direct access storage device (disk pack)

Magnetic tape (sequential storage device)

Terminal input/ output device

Process flow

Real-time (online) connection

Video display device

Sales Department

Computer Operations Department


Figure 6.22 Flowchart Showing the Translation of Facts 1, 2, and 3 into Visual Symbols

SystemFlowcharts

Customer

Customer Order

Input Order

Customer Order

N

Edit and Credit Check

Sales Orders

Update Program

Credit History File

AR File

Inventory

FACT 1

A clerk in the in the sales department receives a customer order by mail and enters the information into a computer terminal that is networked to a centralized computer program in the computer operations department. The original customer order is filed in the sales department.

FACT 2

A computer program edits the transactions, checks the customer’s credit by referencing a credit history file, and produces a transaction file of sales orders.

FACT 3

The sales order transaction file is then processed by an update program that posts the transactions to corresponding records in AR and inventory files.

Sales Department

Computer Operations Department


Figure 6.22 Flowchart Showing All Facts Translatedinto Visual Symbols

SystemFlowcharts

Customer

Customer Order

Input Order

Customer Order

N

Edit and Credit Check

Sales Orders

Update Program

Credit History File

AR File

Inventory

FACT 4

Finally, the update program produces three hard copies of the sales order. Copy 1 is sent to the warehouse, and Copies 2 and 3 are sent to the shipping department.

Sales Order 3

Sales Order 2

Sales Order 1

Sales Order 1

A

FACT 5

On receipt of Copy 1, the warehouse clerk picks the products from the shelves. Using Copy 1 and the warehouse personal computer (PC), the clerk records the inventory transfer in the digital stock records that are kept on the PC. Next, the clerk sends the physical inventory and Copy 1 to the shipping department.

Pick Goods

Sales Order 1

Update Stock

Records

Stock Records

Sales Order 1

Ship Goods

A

Sales Order 3

Sales Order 2 Shipping Log

Sales Order 3

Sales Order 2

N

Sales Order 1

Customer

FACT 6

The shipping department receives Copy 1 and the goods from the warehouse. The clerk reconciles the goods with Copies 1,2, and 3 and attaches Copy 1 as a packing slip. Next, the clerk ships the goods (with Copy 1 attached) to the customer. Finally, the clerk records the shipment in the hard-copy shipping log and files Copy 2 and 3 in the shipping department.

SystemFlowcharts

ProgramFlowcharts

ProgramFlowcharts

Figure 6.24 Program Flowchart Symbols

Logical process

Decision

Logical process

Input/ Output operation (read and write records)

Flow of logical process

ProgramFlowcharts

ProgramFlowcharts

Figure 6.26 System Flowchart

Sales Orders

EDIT

Edited Transactions

Edited Transactions

Update

Update

Errors

Master Files

Docs

Reports

Unedited Transactions

Customer

Read Record

EOF

Error

Error

Error

Bad Record

Stop

Mark Record

Bad

Mark Record

Bad

Mark Record

Bad

Yes

Yes

Yes

Yes

No

No

No

No

Write to Error File

Write to Edited

FileYes No

Figure 6.25 Program Flowchart for Edit Program

ProgramFlowcharts

RecordLayout

Diagrams

RecordLayout

Diagrams

Figure 6.27 Record Layout Diagram for Customer File

Customer Number

Customer Name

Street Address

City State Zip Code Credit Limit

Customer File

Key

Computer-Based Accounting Systems

Real-Time Systems

Two Broad Classes of Computer-Based

Accounting Systems

Batch Systems



123

Information Time Frame

Resources

Operational Efficiency

Differences Between Batch and Real-Time Systems



Division 2

Resources

Division 1

CBAS

Information Time

Frame

Division 3


Information Time FrameInformation Time Frame

Batch Systems Lag exists between time when the economic

event occurs and when it is recorded Amount of lag depends on the frequent batch

processing – can range from minutes to weeks An example is the payroll processing

Real-Time Systems Processing takes place when the economic

event occurs There are no time lags between occurrence and

recording An example is the airline reservations system

Batch Systems Lag exists between time when the economic

event occurs and when it is recorded Amount of lag depends on the frequent batch

processing – can range from minutes to weeks An example is the payroll processing

Real-Time Systems Processing takes place when the economic

event occurs There are no time lags between occurrence and

recording An example is the airline reservations system

CBAS



ResourcesResources

Batch Systems Generally, fewer resources (e.g., hardware,

programming, training) are required Can use sequential files stored on magnetic

tape – less expensive than magnetic disks In practice, however, these cost differentials are

disappearing

Real-Time Systems More resources are required than for batch

systems May require either the time of a dedicated

computer or an investment in additional computer capacity

Batch Systems Generally, fewer resources (e.g., hardware,

programming, training) are required Can use sequential files stored on magnetic

tape – less expensive than magnetic disks In practice, however, these cost differentials are

disappearing

Real-Time Systems More resources are required than for batch

systems May require either the time of a dedicated

computer or an investment in additional computer capacity

CBAS



Operational EfficiencyOperational Efficiency

Batch Systems Certain records are processed after the event to

avoid operational delays Improves operational efficiency by eliminating

unnecessary activities at critical points in the process

Real-Time Systems Records pertaining to the event are processed

separately The task of doing so takes time that, when

multiplied by hundreds or thousands of transactions, can cause significant processing delays

Batch Systems Certain records are processed after the event to

avoid operational delays Improves operational efficiency by eliminating

unnecessary activities at critical points in the process

Real-Time Systems Records pertaining to the event are processed

separately The task of doing so takes time that, when

multiplied by hundreds or thousands of transactions, can cause significant processing delays

CBAS




Alternative Data Processing Approaches


Alternative Data Processing Approaches

Figure 6.28 Record Structure for Sales, Inventory andAccounts Receivable Files

Sales Order Number

Account Number

Inventory Number

Quantity Sold

Unit Price Invoice Amount

Record Structure for Sales Order Transaction File

Account Number Name

Address Current Balance

Credit Limit

Last Payment Date

Billing Date

Inventory Number

Description Quantity on Hand

Reorder Point

EOQ Vendor Number

Standard Cost

Total Cost

Record Structure for AR Master File

Record Structure for Inventory Master File

(PK) (SK) (SK)

(PK)

(PK)


Database Backup Procedures

Figure 6.29 Destructive Update Approach

Sale = $50

Update Program$100 + $50 = $150

Current Balance = $100

Transaction File

AR Master File

Read $50

Read $150

Write $150


Database Backup Procedures

Figure 6.30 Backup and Recovery Procedures for Database Files

Transaction

Update Program

MasterBackup Program

Backup Master

RecoveryProgram


Batch Processing Using Real-Time Data Collection

Sales Department Computer Operations Other Departments

Customer

Real-Time Process

Sales Order Data Input Terminal

Invoice

Customer

Figure 6.31 Batch Processing with Real-Time Data Collection

AR Sub

Data Input and Edit Program

Sales Orders

Inventory Sub

Sales Journal

Batch Process

General Ledger Accounts

Update and Report Program

User Documents


Real-Time Processing

Improved Productivity

Reduced Inventory

Increased Inventory Turnover

Elimination/Reduction of Source Documents

Enhanced Customer Satisfaction

Decreased Lags in Customer Billing

Advantages

Customer Sales Computer Operations

Warehouse Shipping

Figure 6.32 Real-Time Processing of Sales Orders

Real-Time Process

Credit File Inventory

Credit and Inventory Check

Terminal PrinterTerminal Printer

Stock Release

Packing Slip

Terminal Printer

Closed Sales Orders

Subsidiary and Control Accounts

Open Sales Orders

Ship Goods to Customers

BOL

Packing Slip

Invoice

Customer Order

Data Input Terminal

Bill Customer

Reconcile Goods with

Packing SlipPrepare Bill of

Lading

BOL

Packing Slip

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Data Coding Schemes

Data Coding SchemesA System without Codes

Data Coding SchemesA System without Codes

DR CR

Inventory – nut, ½ inch, case-hardened steel, standard thread

1,000

AP – Industrial Parts Manufacturer, Cleveland Ohio

1,000

To record receipt of $1,000 worth half-inch, case-hardened steel nuts with standard threads supplied by Industrial Parts Manufacturer Cleveland, Ohio

Data Coding SchemesA System with Codes

Data Coding SchemesNumeric and Alphabetic Coding Schemes

• Supports the reconciliation of a batch of transactions

• Carry no information content beyond their order in the sequence

• Are difficult to change

Advantages Disadvantages


• Allows for the insertion of new codes within a block without having to reorganize the entire coding structure

• The information content of the block code is not readily apparent



Figure 6.33 Chart of Accounts


• They facilitate the presentation of large amounts of diverse data

• They allow complex structures to be represented in a hierarchical form that is logical and more easily remembered

• They permit detail analysis and reporting both within an item class and across different classes of items

• Tend to be overused – unrelated data may be linked simply because it can be done

• Overuse can increase storage costs, promote clerical errors, and increase processing time and effort


Store Number Dept. Number Item Number Salesperson

04 09 476214 99


• The capacity to represent large numbers of items increased dramatically through the use of alphanumeric codes

• As with numeric codes, there is difficulty rationalizing the meaning of codes that have been sequentially assigned

• Users tend to have difficulty sorting records that are coded alphabetically



• Does not require the user to memorize meaning: the code itself conveys a high degree of information about the item that is being represented

• Limited ability to represent items within a class



Course Type Course Number

Acctg 101

Psyc 110

Mgt 270

Mktg 300

Code Meaning

NY New York

CA California

OK Oklahoma

Cost Accounting

Management Reporting System

General Ledger System (GLS)


Inventory Control

Cash Disburse-

ments

Billings

Payroll

Accounts Payable

Cash Receipts

Sales The General Ledger System

Figure 6.34 Relationship of GLS to Other Information Subsystems

The General Ledger SystemThe Journal Voucher

The General Ledger SystemThe Journal Voucher

Figure 6.35 Journal Voucher Record Layout

The General Ledger SystemThe GLS Database

General Ledger Master

File

General Ledger History

File

Journal Voucher File

Journal Voucher

History File

Responsibility Center File

Budget Master File

Figure 6.36 Record Layout for a General Ledger Master File

Account Number

Account Description

Acct Class

A=AssetL=LiabR=RevE=ExpenseOE=Equity

Normal Balance

D=DebitC=Credit

Beginning Balance

Total Debits This Period

Total Credits This Period

Current Balance


The Financial Reporting System

Sophisticated Users with Homogenous Information Needs

Users are

Sophisticated Have Homogenous

Informatio

n Needs

TPS, Daily Procedures GLS, Periodic ( Hourly, Daily, Etc.)

FRS, End of Period

Figure 6.37 Financial Reporting Process

Post

Economic Event

Capture Transaction

Transactions

Post

Journals, Ledgers

Prepare Journal Voucher

Journal Voucher

Journal Voucher

Post

Journal Voucher

General Ledger

Obtain Account

Balances for Worksheet

Worksheet

Prepare Trial

Balance

Trial Balance

Analyze Account

Balances, Prepare Entries

and Adjusted Trial Balance

Adjusted Trial Balance

Prepare FS

Financial statements

Stakehol-ders

Prepare Closing

Entries & Post to GL

Journal Voucher

General Ledger

Journal Voucher

Prepare Post-Closing Trial

Balance

Post-Closing TB

JV File

Journal Voucher

Post

Journal Voucher

General Ledger

FACT 1

Capture the transaction

1

2

3

4

5

6

8

7

9

10

11

FACT 2

Record in special journal

FACT 3

Post to subsidiary ledgerFACT 4

Post to general ledgerFACT 5

Prepare the unadjusted trial balance

FACT 6

Make adjusting entries

FACT 7

Journalize and post adjusting entries

FACT 8

Prepare the adjusted trial balance

FACT 9

Prepare the financial statements

FACT 10

Journalize and post the closing entries

FACT 11

Prepare the post-closing trial balance

Data Processing Department Financial Reporting

Group

General Ledger Dept.

Figure 6.38 GL/FRS Using Database Technology

Daily Procedures

Sales System

Cash Rec Systemc

Purchases System

Other TPS

GL Master

JV Trans File

JV Trans File

Update GL

Other FilesGL HistoryGL Master

GL Update and Period-End Financial Reporting Prepare

Adjusting and Closing Entries

Adjusted Trial Bal

Financial Statements

Post-Closing TB

Adjusted Trial Bal

Review

Adjusted Trial Bal

File

Update GL and prepare Adjusted Trial Balance, Financial Statements, and post-Closing Trial Balance

XBRL – Reengineering Financial Reporting

XBRL – Reengineering FinancialReporting

XML


XML

Figure 6.39 Comparison of HTML and XML Documents

<H1>Book Order</H1><BOLD>Understanding XML</BOLD><H2>Doe, John</H2><ITALIC>1</ITALIC><BOLD>9.95</BOLD><H2>Standard UPS</H2>

Partial HTML Book Order

<ORDERTYPE>Book Order</ORDERTYPE><TITLE>Understanding XML</TITLE><AUTHOR>Doe</AUTHOR><QUANTITY>1</QUANTITY><PRICE>9.95</PRICE><SHIPPING>Standard UPS</SHIPPING>

Partial XML Book Order

End-user computer cannot process HTML and can only display the format.

End-user computer can recognize XML and process accordingly, relieving some of the burden currently placed on web servers.


XBRL


XBRL

Figure 6.40 Overview of XBRL Reporting Process

Information-Reporting Organization

XBRL Taxonomy Taxonomy Mapper

Reporting Organization’s

Financial Database with Embedded

Tags

Reporting Organization’s

Financial Database

XBRL Instance Document

(Financial Report)

Reporting Organizations Web

Site

Download Financial Report to

User’s System

Information-Reporting Organization

Analyze Financial Information


XBRL


XBRL

Figure 6.44 XBRL Instance Document


The Current State of XBRL Reporting

Potential Risks to the FRS

A defective audit trail

Unauthorized access to the

general ledger

GL accounts that are out of balance

with subsidiary accounts

Incorrect GL account balances because of

unauthorized or incorrect journal

vouchers

Controlling the FRS

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COSO Internal Control Issues

• Transaction Authorization• Segregation of Duties• Access Controls• Accounting Records• Independent Verification



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Taxonomy Creation

Taxonomy Mapping Error

Validation of Instance Documents

Controlling the FRSInternal Control Implications of XBRL

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Chapter 6

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