Chapter 2 Transaction Processing in the AIS Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Outline Objectives Definition of accounting Accounting cycle Coding systems Role of human judgment and information technology 2-2

Objectives When you finish this chapter, you should be able to: –Differentiate “accounting” and “bookkeeping” –List, discuss and complete, in order, the steps in the accounting cycle –Identify common internal controls associated with the accounting cycle –Describe common chart of accounts coding systems –Explain how human judgment and information technology impact the accounting cycle 2-3

Definition of accounting According to the American Accounting Association, accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. 2-4

Definition of accounting Identifying Not all business events lead to recordable transactions in the AIS Measuring Accountants must follow GAAP in deciding what dollar amounts to record for transactions Communicating Financial accounting information is communicated primarily through the general purpose financial statements 2-5

Accounting cycle The process of identifying and measuring economic events that leads to communication and decision making Ten steps explained on the slides that follow 2-6

Accounting cycle Obtain information about external transactions from source documents. –Check stubs –Invoices –Receipts –Remittance advices Analyze transactions. –Accounts affected? –Increase or decrease? –Account type? –Debit or credit? –Debits equal credits? 2-7

Accounting cycle Record transactions in a journal. –General journal is the most common –Sometimes referred to as the “book of original entry” –Transactions recorded chronologically Post transactions to ledger. –Reorganizes information by account –Often handled with information technology today 2-8

Accounting cycle Prepare an unadjusted trial balance. –Verifies the equality of debits and credits in the ledger –Does not indicate an error-free AIS Record and post adjusting entries. –Account for timing differences between cash and accrual –Six types Accrued expenses & revenue Prepaid expenses & deferred revenue Bad debts & depreciation 2-9

Accounting cycle Prepare an adjusted trial balance. –Same purpose as unadjusted trial balance –Only difference is in the timing Prepare financial statements. –Income statement –Statement of changes in equity –Balance sheet –Statement of cash flows 2-10

Accounting cycle Close temporary accounts to retained earnings. –Year-end only –Also called “nominal” accounts –Revenues, expenses, gains & losses Prepare post-closing trial balance. –Same purpose as other trial balances –Difference, once again, is timing –Contains only balance sheet accounts 2-11

Coding systems Used for the chart of accounts Importance –efficiency of data capture, entry and analysis –frequency of use and familiarity –consistency and understanding of use –saving on computer resources –similar items can be related 2-12

Coding systems Sequential –Items are numbered in order –Checks in a checkbook Block coding –Items coded in blocks –All assets start with “1” Hierarchical coding –Specialized form of block coding –Groups of digits have meaning Mnemonic coding –Assist in memory –State abbreviations (e.g., CA for California) 2-13

Role of human judgment and information technology Human judgment –Design source documents –Recognize recordable transactions –Estimate amounts –Interpret accounting rules Information technology –Posting journal entries –Closing the accounts –Preparing trial balances –Producing financial statements 2-14

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