TRANSACTION
PROCESSING AND
FINANCIAL REPORTING
SYSTEMS OVERVIEW
TRANSACTION CYCLES
Expenditure Conversion Revenue
Cycle Cycle Cycle
EXPENDITURE CYCLE
Focuses on acquiring materials, property, and labor.
It involves:
Purchases/Accounts Payable: Ordering goods, receiving them, and
recording liabilities.
Cash Disbursements: Paying vendors after goods/services are
received.
Payroll System: Processing employee compensation.
Fixed Asset System: Managing fixed assets like land and equipment.
CONVERSION CYCLE
Related to production activities, especially in manufacturing.
Includes:
Production System: Managing raw material use and production
scheduling.
Cost Accounting System: Tracks costs and supports decision-making
(e.g., budgeting, performance reporting).
REVENUE CYCLE
Involves selling goods/services and managing customer payments.
Key activities:
Sales Order Processing: Includes order taking, credit
checks, shipping, and billing.
Cash Receipts: Manages receipt and recording of payments
for credit sales.
ACCOUNTING RECORDS IN
MANUAL SYSTEMS
Documents Journals Ledgers
DOCUMENTS
Source Documents
Captures and formalizes transaction data at the start of a
process (e.g., sales order initiating a sale).
Product Documents
Created after processing a transaction (e.g., payroll check after
payroll processing).
Turnaround Documents
Product documents of one system used as source documents for
another system (e.g., customer bill with remittance advice for
payment).
JOURNALS
Chronologically records transactions after events are finalized, often
based on source documents.
Types of Journals:
Special Journals: Record high-volume, specific transactions
(e.g., sales journal, cash receipts journal).
General Journal: Records nonrecurring or infrequent
transactions (e.g., depreciation, adjusting entries).
Register: A log or record of specific items (e.g., payroll
register, receiving register).
LEDGERS
Purpose: Reflects the financial effects of transactions posted from
journals, showing activity by account type.
Types of Ledgers:
General Ledger: Contains summarized account information for
financial reporting (e.g., accounts payable, accounts receivable).
Subsidiary Ledgers: Contain detailed information for specific
accounts (e.g., customer details in AR subsidiary ledger), which
supports daily operations.
AUDIT TRAIL
Provides a traceable path to verify the accuracy and validity of
financial transactions, especially during year-end audits.
AUDIT PROCESS
Tracing Transactions
Source Documents
Confirmation Procedure
Computer-Based Systems
Audit trails in computer-based systems are less observable than in
traditional manual systems, but they still exist.
Types of Files
Master File
Generally contains account data. The general ledger and subsidiary
ledgers are examples of master files. Data values in master files are
updated from transactions
Transaction File
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.
Reference File
Stores data that are used as standards for processing transactions. Other
reference files include price lists used for preparing customer invoices, lists of
authorized suppliers, employee rosters, and customer credit files for
approving credit sales.
Archive File
Contains records of past transactions that are retained for future reference.
These transactions form an important part of the audit trail.
Documentation Techniques
Data Flow Diagrams
Uses symbols to represent the
entities, processes, data flows, and
data stores that pertain to a system.
Entities should always be labeled as
nouns on a DFD, such as customer
or supplier.
Entities should always be labeled as
nouns on a DFD, such as customer
or supplier.
Documentation Techniques
Entity Relationship Diagrams
A documentation technique used to
represent the relationship between
entities.
Documentation Techniques
Lay out the Physical Areas of
System Flowcharts
Activity.
The graphical representation of the
physical relationships among key
elements of a system.
System flowcharts also describe the
type of computer media being
employed in the system, such as
magnetic tape, magnetic disks, and
terminals.
Transcribe the Written Facts into
Visual Format
BATCH PROCESSING
permits the efficient management of a large volume of transactions
BATCH => group of similar transactions that are accumulated over time and
then processed together
TWO GENERAL ADVANTAGES:
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 transaction process
FLOWCHARING COMPUTER PROCESSES
Flowcharting techniques to represent a system that employs both
manual and computer processes.
It shows the
relationship between
computer programs,
the files they use,
and the outputs they
produce
Every program represented in a system flowchart should have
a supporting program flowchart that describes its logic.
Accountants sometimes use program flowcharts to verify the correctness of program logic.
used to reveal the internal structure of the records that
constitute a file or database table
This type of layout shows the content of a record. Each data attribute and key
field is shown in terms of its name and relative location.
COMPUTER-BASED ACCOUNTING
SYSTEMS
1. Batch Systems
2 classes
2. Real Time Systems
Differences according to:
batch real time
Resources Demand fewer organizational Use direct access files that require
resources (such as programming more expensive storage devices,
costs, computer time, and user such as magnetic disks.
training) than real-time systems.
Improves operational efficiency by Handle large volumes of
Operational Efficiency
eliminating unnecessary activities at transactions each day can create
critical points in the process. operational inefficiencies.
Efficiency vs When time lags in information have no When immediate access to current
detrimental effects on the user’s information is critical to the user’s
Effectiveness
performance and operational efficiencies
needs, real-time processing is the
can be achieved by processing data in
logical choice.
batches, batch processing is probably the
superior choice.
Legacy Systems Versus Modern Systems
Legacy systems tend to have the Modern systems tend to be
following distinguish ing features: client-server (network)–based and
they are mainframe-based process transactions in real time.
applications; they tend to be batch Although this is the trend in most
oriented; early legacy systems use organizations, please note that
flat files for data storage, but many modern systems are
hierarchical and network data mainframe-based and use batch
bases are often associated with processing.
later-era legacy systems.
Updating Master Files from Transactions
Whether batch or real-time processing is being used, updating a master file
record involves changing the value of one or more of its variable fields to reflect
the effects of a transaction.
Database Backup Procedures
Database Backup Procedures Each record in a database file is assigned a unique disk
location or address that is deter mined by its PK value. Because only a single valid
location exists for each record, updating the record must occur in place.
Database Backup Procedures
The destructive update approach leaves no backup copy of the original master file.
Only the current value is available to the user.
To preserve adequate accounting records in case the current master becomes
damaged or corrupted, separate backup procedures, such as those shown in Figure
below, must be implemented.
BATCH PROCESSING USING REAL-TIME DATA COLLECTION
This approach combines the benefits of
real-time data capture with the
efficiency of batch processing, leading
to more accurate and efficient data
management, especially in large-scale
operations.
REAL-TIME PROCESSING
Real-time systems process the entire transaction as it occurs.
CONTROLLING THE TPS
For example, while it is a basic tenet of internal control theory
that all material transactions be authorized, achieving this is
accomplished differently in a sales order system than in a
purchasing system. Also, manual, automated batch systems, and
real-time system require different control techniques to
accomplish the same control objective.
DATA CODING SCHEMES
it is a challenge of accurately processing large
A System without Codes
volumes of similar transactions and items
A System with Codes
NUMERIC AND ALPHABETIC CODING SCHEMES
sequential codes represent items in some
Sequential Codes
sequential order (ascending or descending)
Advantages:
Batch Reconciliation
Error Detection and Tracing
Disadvantages:
Lack of Informative Content
Difficulty in Modification
Lack of logical grouping
This approach can be used to represent whole
Block Codes classes of items by restricting each class to a
specific range within the coding scheme.
Advantages
Block coding allows for the
insertion of new codes within a
block without having to
reorganize the entire coding
structure.
Disadvantages
As with the sequential codes,
the information content of the
block code is not readily
apparent.
used to represent complex items or events
Group Codes involving two or more pieces of related data. The
code consists of zones or fields that possess
specific meaning
are used for many of the same purposes as
Alphabetic Codes numeric codes. Alphabetic characters may be
assigned sequentially (in alphabetical order) or
may be used in block and group coding
techniques.
are alphabetic characters in the form of
Mnemonic Codes acronyms and other combinations that convey
meaning
Advantages
Does not require the user to
memorize meaning; the code
itself conveys a high degree of
information about the item that
is being represented.
Disadvantages
Limited ability to represent
items within a class
THE GENERAL LEDGER SYSTEM
The Journal Voucher The GLS Database
The source of input to the General ledger master file
general ledger.
General ledger history file
Can be used to represent
summaries of similar Journal voucher file
transactions or a single unique Journal voucher history file
transaction, identifies the
Responsibility center file
financial amounts and affected
general ledger (GL) accounts Budget master file
THE FINANCIAL REPORTING SYSTEM
Management is legally required to provide financial information to
external parties (stockholders, creditors, etc.) through the Financial
Reporting System (FRS). This system generates standardized financial
statements for performance evaluation and comparison, ensuring
clarity and consistency.
SOPHISTICATED USERS WITH
HOMOGENEOUS INFORMATION
NEEDS
Because the community of external users 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
Financial reporting is the final step in the overall accounting
process that begins in the transaction cycles.
The process begins with a clean slate at the start 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:
FINANCIAL
REPORTING
PROCEDURES
FINANCIAL
REPORTING
PROCEDURES
XBRL—REENGINEERING FINANCIAL
REPORTING
Online reporting of financial data has become a
competitive necessity for publicly traded organizations.
Currently, most organizations accomplish this by placing
their financial statements and other financial reports on
their respective Web sites as hypertext markup language
(HTML) documents.
XBRL—REENGINEERING FINANCIAL
REPORTING
The HTML reports, however, cannot be conveniently processed through
IT automation. The solution to this problem is eXtensible business
reporting language (XBRL), which is the Internet standard specifically
designed for business reporting and information exchange. The
objective of XBRL is to facilitate the publication, exchange, and
processing of financial and business information. XBRL is a derivative of
another Internet standard called XML (eXtensible markup language).
XML
XML is a meta language for describing markup languages. The
term extensible means that any markup language can be
created using XML. This includes the creation of markup
languages capable of storing data in relational form in which
tags (or formatting commands) are mapped to data values.
Thus, XML can be used to model the data structure of an
organization’s internal database.
XML
XBRL
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.
XBRL
Based on XBRL
Taxonomy for
Financial Reporting
for Commercial and
Industrial
Companies, referred
to as CI taxonomy.
XBRL
The mapping
process is
accomplished using
a simple tool such
as Taxonomy
Mapper.
THE CURRENT STATE OF XBRL
REPORTING
Some of these developments are summarized here.
• Since October 2005, U.S. banking regulators have required
quarterly “call reports” to be filed in XBRL. This requirement
impacts more than 8,000 banks.
• In April 2005, the SEC began a voluntary financial reporting
program that allows
registrants to supplement their required filings with exhibits using
XBRL.
THE CURRENT STATE OF XBRL
REPORTING
• In September 2006, the SEC announced its new electronic reporting system to
receive XBRL filings. The new system is called interactive data electronic application (IDEA).
• In May 2008, the SEC issued rules requiring large publicly held companies to adopt XBRL by
December 15 to meet financial reporting requirements.
• Comparable developments to encourage or require XBRL have taken place interna-
tionally. Since early 2003, the Tokyo Stock Exchange has accepted XBRL information.
In 2007, the Canadian Securities Administrators (CSA) established a voluntary program to help
the Canadian marketplace gain practical knowledge in preparing, filing, and using XBRL
information. Regulators in China, Spain, the Netherlands, and the United Kingdom are
requiring certain companies to use XBRL.
CONTROLLING THE FRS
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
Transaction Authorization
Segregation of Duties
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 assets.
COSO INTERNAL CONTROL ISSUES
Access Controls
Accounting Records
Independent Verification
INTERNAL CONTROL IMPLICATIONS
OF XBRL
Taxonomy Creation
Taxonomy Mapping Error
Validation of Instance Documents
THANK YOU