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CHAPTER 6

TRANSACTION
PROCESSING
REPORTING SYSTEMS OVERVIEW

AND

FINANCIAL

AN OVERVIEW OF TRANSACTION PROCESSING


TPS applications process financial transactions. A
financial transaction is defined as an economic event that
affects the assets and equities of the firm, is reflected in
itsaccounts, and is measured in monetary terms.
Transaction Cycles
Three transaction cycles process most of the firms economic
activity:
1.) The Expenditure Cycle
Business activities begin with the acquisition of materials,
property, and labor in exchangefor cashthe expenditure
cycle
Thus, transaction has two parts: aphysical component (the
acquisition of the goods) and a financial component (the
cashdisbursement to the supplier).
The major subsystems of the expenditure cycle are:
a. Purchases/accounts payable system. This system
recognizes the need to acquirephysical inventory and
places an order with the vendor.
b. Cashdisbursements system. When the obligation
created in the purchases systemis due, the cash
disbursements system authorizes the payment,
disburses the fundsto the vendor, and records the
transaction by reducing the cash and accounts
payableaccounts.
c. 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.
d. Fixed asset system. A firms fixed asset system
processes transactions pertaining tothe acquisition,
maintenance, and disposal of its fixed assets.
2. )The Conversion Cycle
The conversion
subsystems:

cycle

is

composed

of

two

major

a. production
system
involves
the
planning,
scheduling,and control of the physical product through
the manufacturing process.
b. cost accounting systemmonitors the flow of cost
information related to production.
3.) The Revenue Cycle
Firms sell their finished goods to customers through the
revenue cycle, which involvesprocessing cash sales, credit
sales, and the receipt of cash following a credit sale.
The primary subsystems of the revenue cycle are
a. Sales order processing. The majority of business sales
are made on credit andinvolve tasks such as preparing
sales orders, granting credit, shipping products
(orrendering of a service) to the customer, billing
customers, and recording the transactionin the
accounts (accounts receivable [AR], inventory,
expenses, and sales).
b. Cash receipts. For credit sales, some period of time
(days or weeks) passes betweenthe point of sale and
the receipt of cash. Cash receipts processing
includescollecting cash, depositing cash in the bank,
and recording these events in the accounts(AR and
cash).

ACCOUNTING RECORDS
Manual Systems
A. Documents
A document provides evidence of an economic event and
may be used to initiate transactionprocessing. Some
documents are a result of transaction processing.
1. Source Documentsare used to capture and formalize
transaction data that the transaction cycleneeds for
processing.
2. Product Documentsare the result of transaction
processingrather than the triggering mechanism for
the process. For example, a payroll check toan
employee is a product document of the payroll system.
3. Turnaround Documentsare product documents of
onesystem that become source documents for another
system.
B. Journals
A journal is a record of a chronological entry. The journal
holds acomplete record of transactions and thus provides a
means for posting to accounts.
There are two primary types of journals:
1. Special Journals. Special journals are used to record
specific classes of transactionsthat occur in high
volume.
a. sales journal
b. cash receipts journal
c. cash disbursements journal
d. purchases journal
e. payroll journal.
Registeris often used to denote certain types of special
journals.

2. General Journals. Firms use the general journal to


record
nonrecurring,
infrequent,and
dissimilar
transactions. For example, we usually record periodic
depreciation andclosing entries in the general journal.
Figure 6.7 shows one page from a general journal.
A journal voucher is actually a special source document
thatcontains a single journal entry specifying the general
ledger accounts that are affected.Journal vouchers are used
to
record
summaries
of
routine
transactions,
nonroutinetransactions, adjusting entries, and closing
entries.
C. Ledgers
A ledger is a book of accounts that reflects the financial
effects of the firms transactionsafter they are posted from
the various journals.
There are two basic types of ledgers:
1. General Ledgers summarizes the activity for each of
the organizationsaccounts. The general ledger
department
updates
these
records
from
journalvouchers prepared from special journals and
other sources located throughout the organization.
2. Subsidiary Ledgers contain the details of the
individual accounts that constitute a particular control
account.
The Audit Trail
The accounting records described previously provide an
audit trail for tracing transactions from source documents
to the financial statements. Of the many purposes of the
audit trail, most important to accountants is the year-end
audit.
Computer-Based Systems
Types of Files

Audit trails in computer-based systems are less observable


than in traditional manual systems, but they still exist.
Four different types of magnetic files:
1. Master Filegenerally contains account data. The general
ledger and subsidiary ledgers are examples of master files.
Data values in master files are updated from transactions.
2. Transaction Fileis a temporary file of transaction records
used to change or update data in a master file. Sales orders,
inventory receipts, and cash receipts are examples of
transaction files.
3. Reference File stores data that are used as standards
for processing transactions. For example, the payroll program
may refer to a tax table to calculate the proper amount of
withholding taxes for payroll transactions.
4. Archive Filecontains records of past transactions that are
retained for future reference. These transactions form an
important part of the audit trail.
The Digital Audit Trail
Figure 6.11

FFIGURE 6.11 Accounting Records in a ComputerBased System


4
2
3
DOCUMENTATION TECHNIQUES
Five basic documentation techniques are:
1. Data flow diagram (DFD) uses symbols to represent the
entities, processes, data flows, and data stores that pertain
to a system. DFDs are used to represent systems at different
levels of detail from very general to highly detailed.
Figure6.12

2. Entity relationship (ER) diagram is a documentation


technique used to represent the relationship between
entities. Entities are physical resources, events, and agents
about which the organization wishes to capture data.

Figure6.13

cardinality degree of the relationship


mapping between entity instances

and

numerical

data model is the blueprint for what ultimately will become


the physical database.
Relationship Between ER Diagrams and Data Flow
Diagrams
DFDs and ER diagrams depict different aspects of the same
system, but they are related and can be reconciled. A DFD is
a model of system processes, and the ER diagram models the

data used in or affected by the system. The two diagrams are


related through data; each data store in the DFD represents a
corresponding data entity in the ER diagram.
Figure 6.14

department. The clerk signs Copy 1 to signify approval and


returns it to the sales clerk.
4. When the sales clerk receives credit approval, he or she
files Copy 1 and the customerorder in the department. The
clerk sends Copy 2 to the warehouse and Copies3 and 4 to
the shipping department.
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.
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.

3. System Flowcharts is the graphical representation of the


physical relationships amongkey elements of a system.
These elements may include organizational departments,
manualactivities, computer programs, hard-copy accounting
records, and digital records. System flowcharts also describe
the type of computer media being employedin the system,
such as magnetic tape, magnetic disks, and terminals.
Flowcharting Manual Activities
1. A clerk in the sales department receives a hard-copy
customer order by mail and manually prepares four hard
copies of a sales order.
2. The clerk sends Copy 1 of the sales order the credit
department for approval. The other three copies and the
original customer order are filed temporarily, pending credit
approval.
3. The credit department clerk validates the customers
order against hard-copy credit records kept in the credit

The primary objective should be to provide an unambiguous


description of the system. With this in mind, certain rules and
conventions need to be observed:
1. The flowchart should be labeled to clearly identify the
system that it represents.
2. The correct symbols should be used to represent the
various entities in the system.
3. All symbols on the flowchart should be labeled.
4. Lines should have arrowheads to clearly show the process
flow and sequence of events.
5. If complex processes need additional explanation for
clarity, a text description should be included on the flowchart
or in an attached document referenced by the flowchart.
Steps in preparing Flowchart
a. Lay out the Physical Areas of Activity.

b. Transcribe the Written Facts into Visual Format.

Figure 6.17FISymbol
Procedures

Set

for

Representing

Manual
Figure 6. 20

To signify the filing system used, the file symbol will usually
contain an N for numeric (invoice number), C for
chronological (date), or A for alphabetical order (customer
name).
Typically, a system flowchart shows only the flow of
documents, not physical assets. Finally, for visual clarity,
system flowcharts show the processing of a single
transaction only. You should keep in mind, however, that
transactions usually pass through manual procedures in
batches (groups).

Batch Processing
Batch processing permits the efficient management of a
large volume of transactions. A batch is a group of similar
transactions that are accumulated over time and then
processed together. Batch processing offers two general
advantages.

1. 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.
2. Batch processing provides control over the transaction
process. The accuracy of the process is established by
periodically reconciling the batch against the control figure.
Both of these advantages have implications for designing
batch systems.
A.First implication isthat economies are derived by
making transaction batches as large as possible.
B. The second implication is that finding an error in a
very large batch may prove difficult. When a batch is small,
error identification is much easier.
Flowcharting Computer Processes
We now examine flowcharting techniques to represent a
system that employs both manual and computer processes.
GURE 6.21
1. A clerk 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. Facts 2, 3, and 4 relate
to
activities
that
occur
in
the
computer
operationsdepartment.
2. A computer program edits the transactions, checks the
customers credit by referencing a credit history file, and
produces a transaction file of sales orders.

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.
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.
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.
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 hardcopy shipping log and files Copies 2 and 3 in the shipping
department.
Steps in preparing Flowchart
a. Lay out the Physical Areas of Activity.
b. Transcribe the Written Facts into Visual Format.
FIGURE 6.21

Program Flowcharts
The system flowchart shows the relationship between
computer programs, the files they use, and the outputs they
produce. This high level of documentation, however, does not
provide the operational details that are sometimes needed.
For example, an auditor wishing to assess the correctness of
the edit programs logic cannot do so from the system
flowchart. This requires a program flowchart.

Figure 6.23

Figure 6.24

Program performs the following logical steps in the order


listed:
1. The program retrieves a single record from the unedited
transaction file and stores it in memory.

2. The first logical test is to see if the program has reached


the end-of-file (EOF) condition for the transaction file. Most
file structures use a special record or marker to indicate an
EOF condition. When EOF is reached, the edit program will
terminate and the next program in the system (in this case,
the update program) will be executed. As long as there is a
record in the unedited transaction file, the result of the EOF
test will be no and process control is passed to the next
logical step in the edit program.
3. Processing involves a series of tests to identify certain
clerical and logical errors. Each test, represented by a
decision symbol, evaluates the presence or absence of a
condition.
4. Error-free records are sent to the edited transaction file.
5. Records containing errors are sent to the error file.
6. The program loops back to Step 1, and the process is
repeated until the EOFcondition is reached.
Figure 6.25

5. Record layout diagrams are used to reveal the internal


structure of the records that constitute a file or database
table. The layout diagram usually shows the name, data
type, and length of each attribute (or field) in the record.
Detailed data structure information is needed for such tasks
as identifying certain types of system failures, analyzing error
reports, and designing tests of computer logic for debugging
and auditing purposes.
Figure6. 27

COMPUTER-BASED ACCOUNTING SYSTEMS


Two broad classes:

Batch Systems
Real time systems

In selecting a data processing mode, the designer must


consider the trade-off between efficiency and effectiveness.
When immediate access to current information is critical to
the users needs, real-time processing is the logical choice.
When time lags in information have no detrimental effects on
the users performance and operational efficiencies can be
achieved by processing data in batches, batch processing is
probably the superior choice.

Alternative Data Processing Approaches


Information Time Frame
Batch systems assemble transactions into groups for
processing. Under this approach, there is always a
time lag between the point at which an economic
event occurs and the point at which it is reflected in
the firms accounts.
Real time systems process transactions individually at
the moment event occurs. Because records are not
grouped into batches, there are no time lags between
occurrence and recording.
Resources
Batch systems are generally simpler than their realtime counterparts, they tend to have shorter
development periods and are easier for programmers
to maintain.
Real time systems must be friendly, forgiving, and
easy to work with. Pop-up menus, online tutorials, and
special help features require additional programming
and add greatly to the cost of the system.
Operational Efficiency
Real-time processing in systems that handle large
volumes of transactions each day can create
operational inefficiencies.
Batch processing of noncritical accounts, however,
improves operational efficiency by eliminating
unnecessary activities at critical points in the process.

1. Legacy Systems
they are mainframe-based applications
they tend to be batch oriented
uses flat files for data storage
2. Modern Systems
Tend to be client-server-based and process
transactions in real time but many modern
systems are mainframe-based and use batch
processing
Stores transactions and master files in relational
database tables
Updating Master Files from Transactions

Data Backup Procedures

Destructive Update Approach

Leaves no backup copy of the original master file.


Only the current value is available to the user.

Stages of reconstruction:
1. A special recovery program uses the backup file to
create a pre-update version of the master file.
2. The file update process is repeated using the previous
batch of transactions to restore the master to its
current condition.
Batch Processing using Real-Time Data Collection

Real Time Processing


Real time system process the entire transaction as it
occurs.
Benefits: improved productivity, reduced inventory,
increased inventory turnover, decreased lags in
customer billings, and enhanced customer satisfaction.
Well suited to systems that process lower transaction
volumes and those that do not share common records.
Data Coding Schemes
Data Coding involves creating simple numerical or
alphabetical codes to represent complex economic
phenomena that facilitate efficient data processing.

System without codes

This uncoded entry takes a great deal of recording space, is


time-consuming to record, and is obviously prone to many
types of errors. The negative effects of this approach may be
seen in many parts of the organization:
1. Sales staf. Properly identifying the items sold requires the
transcription of large amounts of detail onto source
documents. Apart from the time and effort involved, this
tends to promote clerical errors and incorrect shipments.
2. Warehouse personnel. Locating and picking goods for
shipment are impeded and shipping errors will likely result.
3. Accounting personnel. Postings to ledger accounts will
require searching through the subsidiary files using lengthy
descriptions as the key. This will be painfully slow, and
postings to the wrong accounts will be common.

1. Sequential Codes- represents items in some sequential


order (ascending or descending).
2. Block Codes- is a variation on sequential coding that
partly remedies its disadvantages. This approach can
be used to represent whole classes of items by
restricting each class to a specific range within the
coding scheme. (e.g. chart of accounts)
3. Group Codes- are used to represent complex items or
events involving two or more pieces of related data.
The code consists of zones or fields that process
specific meaning.
4. Alphabetic Codes- are used for many of the same
purposes as numeric codes. Alphabetic characters may
be assigned sequentially or may be used in block and
group coding techniques.
5. Mnemonic Codes- are alphabetical characters in the
form of acronyms and other combination that convey
meaning.
The General Ledger System

System with Codes

Other uses of data coding in AIS are to:


1. Concisely represent large amounts of complex information
that would otherwise be unmanageable.
2. Provide a means of accountability over the completeness
of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective audit
trail.
Numeric and Alphabetic Coding Schemes

Journal Voucher

The source of input to the general ledger


Used to represent summaries of similar transactions or
a single unique transaction, identifies the financial
amounts and affected general ledger accounts.

these data for input in the preparation of responsibility


reports for management.
Budget master file -contains budgeted amounts for
revenues, expenditures, and other resources for
responsibility centers. These data, in conjunction with the
responsibility center file, are the basis for responsibility
accounting.
FINANCIAL REPORTING SYSTEM
SOPHISTICATED USERS WITH HOMOGENEOUS
INFORMATION NEEDS

The GLS Database

Because the community is vast and their individual


information needs may vary, financial statements are
targeted at a general audience. They are prepared on the
proposition that the audience comprises sophisticated users
with relatively homogeneous information needs.
FINANCIAL REPORTING PROCEDURES

General ledger master file- is the principle file in the GLS


database. This file is based on the organizations published
chart of accounts
General ledger history file- has the same format as the GL
master. Its primary purpose is to provide historical financial
data for comparative financial reports.
Journal voucher file- is the total collection of the journal
vouchers processed in the current period. This file provides a
record of all general ledger transactions and replaces the
traditional general journal.
Journal voucher history file -contains journal vouchers for
past periods. This historical information supports
managements stewardship responsibility to account for
resource utilization.
Responsibility center file -contains the revenues,
expenditures, and other resource utilization data for each
responsibility center in the organization. The MRS draws upon

Financial reporting is the final step in the overall


process that begins in the transaction cycles.
The process begins with a clean slate at the star of a
new fiscal year. Only the balance sheet (permanent)
accounts are carried forward from the previous year. From
this point, the following steps occur.
1. Capture the transaction.
2. Record in special journal.
3. Post to subsidiary ledger.
4. Post to general ledger.
5. Prepare the unadjusted trial balance.
6. Make adjusting entries.
7. Journalize and post adjusting entries.
8. Prepare the adjusted trial balance.
9. Prepare the financial statements.
10.Journalize and post the closing entries.
11.Prepare the post-closing trial balance.

XBRL-REENGINEERING FINANCIAL REPORTING

THE CURRENT STATE OF XBRL REPORTING

eXtensible business reporting language (XBRL) is the


Internet standard specifically designed for business reporting
and information exchange.

Is a derivative of another Internet standard called XML


(eXtensible markup language) .

XML (eXtensible markup language) is a metalanguage


for describing markup languages.
The term extensible means that any markup language
capable of storing data in relational form in which tags (or
formatting commands) are mapped to data values.
eXtensible business reporting language (XBRL)
- is an XML-based language that was designed to
provide the financial community with a standardized method
for preparing, publishing, and automatically exchanging
financial information, including financial statements of
publicly held companies.
- Is typically used for reporting aggregated financial
data, but can also be applied to communicating information
pertaining to individual transactions.
STEPS IN XBRL REPORTING PROCESS
1. Select an XBRL Taxonomy
2. Cross-reference each account
3. Mapping process or Data mapping
XBRL instance documents the actual financia reports.

Can be readily import if the XBRL reporting process is


finished.
Can now be published and made available to users.

October 2005, U.S banking regulators have required


quarterly call reports to be filed in XBRL.
April 2005, the SEC began a voluntary financial reporting
program.
September 2006, the SEC announced its new electronic
reporting system to receive XBRL filings.
May 2008, the SEC issued rules requiring large publicly
held companies to adopt XBRL.
Since early 2003, the Tokyo Stock Exchange has accepted
XBRL information
In 2007, the Canadian Marketplace gain practical
knowledge in preparing, filing and using XBRL.

CONTROLLING THE FRS


SOX legislation requires that management design and
implement controls over the financial reporting process.
The potential risks to the FRS include:
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 because of unauthorized
or incorrect journal vouchers.
COSO INTERNAL CONTROL ISSUES
This discussion of FRS physical controls will follow the
COSO framework for control activities.
TRANSACTION AUTHORIZATION
The journal voucher is the document that authorizes
an entry to the general ledger. Journal vouchers have

numerous sources, such as the cash receipts processing ,


sales order processing, and financial reporting group.
SEGREGATION OF DUTIES
The general ledger provides verification control for the
accounting process. Therefore, individuals with access
authority to GL accounts should not:
1. Have record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
3. Have custody of physical issues.
ACCESS CONTROLS
Unauthorized access to the GL accounts can result in
errors, fraud and misrepresentation in financial statements.

ACCOUNTING RECORDS
An audit trail facilitates error preventionand correction
when the data files are conveniently and logically organized.
Also, the general ledger and other files that constitute the
audit trail should be detailed and rich enough to:
1. Provide the ability to answer inquiries.
2. Be able to reconstruct files if they are completely or
partially destroyed.
3. Provide historical data required by auditors
4. Fulfill government regulations; and

5. Provide a means for preventing, detecting, and correcting


errors.
INDEPENDENT VERIFICATION
The general ledger function serves as an independent
verification step within the accounting information system.
TWO OPERATIONAL REPOTS
1. Journal Voucher Listing - provides relevant details
about each journal voucher listing and the GL change
report.
2. General Ledger Report presents the effects of journal
voucher postings to the GL accounts.
INTERNAL CONTROL IMPLICATION OF XBRL
TAXONOMY CREATION Taxonomy may be generated
incorrectly, which results in an incorrect mapping between
data and taxonomy elements that could result in material
misrepresentation of financial data.
TAXONOMY MAPPING ERROR the process of mapping
the internal database accounts to the taxonomy tags needs
to be controlled.
VALIDATION OF INSTANCE DOCUMENTS- once the
mapping is complete and tags have been stored in the
internal database, XBRL instance documents (reports) can
be generated.