1

Chapter 5

Transaction Cycles and Accounting

Applications
 Organizing Accounting Applications
2

 An accounting application is an integral part of the

computerized accounting system.
 It describes a type of application software that
records and processes accounting transactions.
 It functions as an AIS.
 Application of computers in Accounting:
 Recording of all business transactions
 Preparation of various ledger accounts
 Processing the payroll information
 Preparation of trial balance
 Preparation of final accounts
 Processing Modes
3

 Transactions are processed either by

 Real-time, or Batch system

Batch processing
 Jobs are gathered and stored until a suitable quantity

is available or specific time period.

 Example; All the orders in a batch are processed

(usually in a large volume) at the same time

 At a convenient time/off peak period
 In a similar way
 Usually without the need for human supervision
 Validation by control/batch total is used
 Cont’d………
4

 It is stored on a transaction file.

 The data is verified by being entered a second time

by a different operator.
 Any discrepancies are corrected.
 The transaction file is transferred to the main

computer.
 This may be physically or electronically between

computers.
 Processing begins at a scheduled time – maybe

overnight when the network is not busy dealing with

on-line users.
 Cont’d………
5

 Transaction file may be sorted into same sequence as

master file to speed up the processing of the data
 The master file is updated
 Any required reports are produced
 Cont’d…………
6

Real-time Processing
 Transactions are processed immediately they occur

using an on-line computer system.

 Each transaction influences the next transaction

 Each transaction must be completed in full before the

next transaction is processed

 For example, ATM transactions use real-time

processing because a cash withdrawal must be

applied to the balance before another withdrawal
can be made
 Cont’d……….
7

 Transactions will involve changing master files.

 Example; inserting/modifying/deleting records

 Bank withdrawals, goods returned, money sent

 Transactions are processed as soon as they are
received by the computer system, without delay.
 Data files are updated immediately so that the
transaction can influence any further transactions.
 The state of the system/data is always up-to-date.
 The output can influence the next input (feedback).
 Cont’d………..
8

Choice of processing mode

 Many applications use a combination of batch and

interactive processing. Choosing between modes

depends on:
 Does information obtained from the system need to
be up-to-date at all times?
 The scale of the operation - Batch systems well
suited to very high volumes of data, when
economical to have an off-line key-to-disk system
for data entry.
 Cont’d……….
9

 Cost - Real-time system is generally more

expensive because of more complex backup and
recovery procedures required to cope with power
failures or breakdowns.
 Computer usage - Batch system can make use of
spare computer capacity overnight or when
computer would otherwise be idle.
 The Revenue Cycle
10

S a le s O rd e r
1
C re d it / C u s to m e r
S e rv ic e R E V E N U E C Y C L E
2 (S U B S Y S T E M )
C a s h R e c e ip ts /
C o lle c tio n s
6

S h ip p in g
3

B illin g / A c c o u n ts
R e c e iv a b le
4 /5
 Cont’d………
11

Manual Sales Order Processing

 Begins with a customer placing an order

 The sales department captures the essential details

on a sales order form.
 The transaction is authorized by obtaining credit

approval by the credit department.

 Sales information is released to:

 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)
 Cont’d………
12

 The merchandise is picked from the Warehouse and

sent to Shipping.
 Stock records are adjusted.

 The merchandise, packing slip, and bill of lading are

prepared by Shipping and sent to the customer.
 Shipping reconciles the merchandise received from

the Warehouse with the sales information on the

packing slip.
 Shipping information is sent to Billing. Billing
compiles and reconciles the relevant facts and issues
an invoice to the customer and updates the sales
 Cont’d……….
13

 Information is transferred to:

 Accounts Receivable (A/R)
 Inventory Control

 Billing, A/R, and Inventory Control submits

summary information to the General Ledger dept.,
which then reconciles this data and posts to the
control accounts in the G/L.
 Cont’d……….
14

Manual Cash Receipts Processes

 Customer cheques and remittance advices are
received in the Mail Room.
 Cash Receipts:
 verifies the accuracy & completeness of the

cheques
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal voucher to send to G/L

 A/R posts from the remittance advices to the

accounts receivable subsidiary ledger.

 Periodically, a summary of the postings is sent to
 Cont’d……….
15

 G/L department:
 Reconciles the journal voucher from Cash Receipts

with the summaries from A/R

 Updates the general ledger control accounts

 The Controller reconciles the bank accounts.

 Cont’d……….
16

Automating the Revenue Cycle

 Authorizations and data access can be performed

through computer screens.

 There is a decrease in the amount of paper.

 The manual journals and ledgers are changed to disk

or tape transaction and master files.

 Input is still typically from a hard copy document and

goes through one or more computerized processes.

 Processes store data in electronic files (the tape or

disk) or prepare data in the form of a hardcopy report.

 Cont’d……….
17

 Revenue cycle programs can include:

 Formatted screens for collecting data
 Edit checks on the data entered
 Instructions for processing and storing the data
 Security procedures (passwords or user IDs)
 Steps for generating and displaying output
 The documents and the files used as input sources
must contain the data necessary to generate the
output reports.
 Cont’d………..
18

Reengineering Sales Order Processing Using Real-

Time Technology
 Manual procedures and physical documents are

replaced by interactive computer terminals.

 Real time input and output occurs, with some master

files still being updated using batches.

 Real-time - entry of customer order, printout of

stock release, packing slip & bill of lading; update

of credit file, inventory file, and open sales orders
file
 Batch - printout of invoice, update of closed sales
 The Expenditure Cycle
19

P u rc h a s e R e q u is itio n P u rc h a s in g
1 2

PR O C U R E M E N T C Y C LE
(S U B S Y S T E M )
R e c e iv in g /
C a s h D is b u rs e m e n ts In s p e c tio n
3
5

A c c o u n ts P a y a b le
4
 Cont’d……….
20

Manual Purchases System

 Begins in Inventory Control when inventory levels
drop to reorder levels
 A purchase requisition (PR) is prepared and copies to
sent to Purchasing and Accounts Payable (A/P)
 Purchasing prepares a purchase order (PO) for each
vendor and sends copies to Inventory Control, A/P,
and Receiving
 Upon receipt, Receiving counts and inspects the
goods.
 A receiving report is prepared and copies sent to the
raw materials storeroom, Purchasing, Inventory
Control, and A/P.
 A/P eventually receives copies of the PR, PO,
 Cont’d………
21

 A/P reconciles these documents, posts to the

purchases journal, and records the liability in the
accounts payable subsidiary ledger.
 A/P periodically summarizes the entries in the
purchases journal as a journal voucher which is sent
to the General Ledger (G/L) department.
 A/P also prepares a cash disbursements voucher and
posts it in the voucher register.
 G/L department:
 Posts from the accounts payable journal voucher
to the general ledger
 Reconciles the inventory amount with the account
summary received from inventory control
 Cont’d………
22

Manual Cash Disbursements System

 Periodically, A/P searches the open vouchers payable

file for items with payments due:

 A/P sends the voucher and supporting documents

to Cash Disbursements
 A/P updates the accounts payable subsidiary ledger
 Cash Disbursements:
 Prepares the cheque
 Records the information in a cheque register (cash

disbursements journal)
 Returns paid vouchers to A/P, mails the cheque to

the supplier
 Cont’d……….
23

 G/L department receives:

 The journal voucher from cash disbursements
 A summary of the accounts payable subsidiary
ledger from A/P
 The journal voucher is used to update the general
ledger.
 The accounts payable control account is reconciled
with the subsidiary summary.
 Cont’d………
24

Computer-Based Accounting Systems

 CBAS technology can be viewed as a continuum

with two extremes:

 Automation - use technology to improve
efficiency and effectiveness
 Reengineering – use technology to restructure

business processes and firm organization

 Cont’d……….
25

Levels of Automating and Reengineering Ordering

 Computer generates PR

 Purchases manually generates PO

 Computer generates PO (no PR needed)

 PO not sent until manually reviewed

 Computer-generated PO is automatically sent without

manual review
 Electronic Data Interchange (EDI)

 Computer-to-computer communication without PO

 Cont’d………
26

Expenditure Cycle Database

 Master Files

 Supplier (vendor) master file

 Accounts payable master file
 Merchandise inventory master file
 Transaction and Open Document Files

 Purchase order file

 Open purchase order file
 Supplier’s invoice file
 Open vouchers file
 Cash disbursements file
 Cont’d………
27

Computer-Based Purchases
 A Data Processing dept. performs routine accounting
tasks.
 Purchasing - a computer program identifies inventory
requirements
 The following methods are used for authorizing and
ordering inventories:
 ALT1: the system prepares POs and sends them to
Purchases for review, signing, and distributing
 ALT2: the system distributes POs directly to the
vendors and internal users, bypassing Purchases
 ALT3: the system uses electronic data interchange
(EDI) & electronically places the order without
 Cont’d……….
28

 Other tasks performed automatically by the

computer:
 Updates the inventory subsidiary file from the
receiving report
 Calculates batch totals for general ledger update
 Closes the corresponding records in the open PO
file to the closed PO file
 Validates the voucher records against valid vendor
files
 Cont’d………
29

Computer-Based Cash Disbursements

 Tasks performed automatically by the computer:

 The system scans for vouchers currently due

 Prints cheques for these vouchers
 Records these cheques in the cheque register
 Batch totals are prepared for the general ledger
update procedure
 Cont’d………
30

Manual Computer-Based Authorization

Authorization Controls
Controls  Authorizations are automated.

 Purchases of
 Fixed Programmed decision rules
inventory should be
 Automating inventory in EDI
authorized by the and JIT
 Faulty inventory model can lead to
Inventory Control
over or under purchasing
department not by  Cash disbursements automate
purchasing agents cheque printing and signing.
 A/P authorizes the  Programming logic must be
payments of bills, not flawless
the cash  Automated signing only below a
 Cont’d……..
31

Manual Segregation of Computer-Based

Functions Segregation of Functions
 Custody of the inventory,  Extensive consolidation by

by the Warehouse must the computer of tasks

be separate from record traditionally segregated
keeping for the assets.  Computer programs
 Custody of the asset, authorize and process
cash, by Cash purchase orders
Disbursements must be  Computer programs
kept separate from authorize and issue
recordkeeping for the cheques to vendors
asset by A/P.
 Cont’d……….
32

Manual Supervision Computer-Based Supervision

 Supervision is of  Automation leads to collapsing
highest importance in of the traditional segregation
the Receiving of duties.
 Requires greater
department, where the
inventory arrives and is supervision
logged in by a  Supervision takes on new
receiving clerk. Need aspects as technology
to minimize: advances.
 Electronic monitoring
 Failures to properly
 Supervision becomes more
inspect the assets
 Theft of the assets difficult as the workplace
 General Ledger and Reporting System
33

 The general ledger and reporting system (GLARS)

includes the processes in place to update general
ledger accounts and prepare reports that summarize
results of the organization’s activities.
 The information must be organized to meet the needs
of internal and external users.
 The basic activities in the GLARS are:
 Update the general ledger
 Post adjusting entries
 Prepare financial statements
 Produce managerial reports
 Cont’d……….
34

 One of the primary functions of GLARS is to collect

and organize data from:
 Each of the accounting cycle subsystems, which

provide summary entries related to the routine

activities in those cycles.
 The treasurer, who provides entries with respect to

non-routine activities such as transactions with

creditors and investors.
 The budget department, which provides budget

numbers.
 The controller, who provides adjusting entries.
35

Questions?

Thank you!