1. Key Learning Points
Understand different purposes and common characteristics of the revenue, expenditure and conversion cycles.
What is the role of the audit trail?
Understand documentation techniques utilized in business.
Discuss fundamental features of batch and real-time processing and the impact of these technologies on transaction processing 2

2. A Financial Transaction is ...
Introduction to Transaction Processing
A Financial Transaction is ...
an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms.
similar types of transactions are grouped together into three transaction cycles:
the expenditure cycle,
the conversion cycle,
the revenue cycle.
Expenditure – involves the acquisition of materials property and labor in exchange for cash. Disbursement of cash may occur at a different point after the receipt of the goods or services.
Subsystems of expenditure cycle – purchases/accounts payable system, cash disbursement system, payroll system, fixed asset system
Conversion – tracing the cost flows in transforamtion of raw materials into finsished goods - (primary concern of cost accounting courses)
Has two typical subsystems – prduction system (materials planning scheduling, releasing, controlling
Cost accountint system – flows of costs for inventory valuation, budgeting, decisions
Revenue cycle – involves tracing customer order though elivery (physical component) and payment (financial component_ which may occur at two points in time
Subsystems include – sales ordering processing (order, credit shipping billing)
Cash receipts (collecting, depositing, recording) 2

3. Relationship between Transaction Cycles
Each Cycle has Two Subsystems
Expenditure Cycle: time lag between the two due to credit relations with suppliers:
physical component (acquisition of goods)
financial component (cash disbursements to the supplier)
Conversion Cycle :
the production system (planning, scheduling, and control of the physical product through the manufacturing process)
the cost accounting system (monitors the flow of cost information related to production)
Revenue Cycle: time lag between the two due to credit relations with customers :
physical component (sales order processing)
financial component (cash receipts)

4. Manual System Accounting Records
Journals - a record of chronological entry
special journals - specific classes of transactions that occur in high frequency
general journal - nonrecurring, infrequent, and dissimilar transactions
Ledger - a book of financial accounts
general ledger - shows activity for each account listed on the chart of accounts
subsidiary ledger - shows activity by detail for each account type
source-docs used to capture and formalize transaction data needed for transaction processing – triggers created at beginning of the transaction to capture data
Product docs - the result of transaction processing (invoices, paychecks)
Turn around docs - a product document of one system that becomes a source document for another system, part of bill returned with payment from a customer
Special journals - group like types of transactions – periodic posting to GL and subsidiary ledgers required from special journals also registers such as payroll registers Common special journ – sales, purchasing, cash receipts and disburseents
In gen journ– events appear in chronological order - use journal voucher systems to keep transactions controlled.
Ledgers – by account type note totals of all activities – beginning current activity ending bal and control accounts ofr sub ledger totals
Subsid ledger – groups of similar indiv accoutns (cust for a/R, vendors for a/pay, specific inve ites for invent, specific machines for Fixed Assets 13

5. Audit Trail Accountants should be able to trace in both directions.
Source
Document
Financial
Statements
General
Ledger
Journal
Financial
Statements
General
Ledger
Source
Document
Journal
Follow audit trails of data through acc system.
Records kept properly – accountant should be able to trace forward from source doc to the journals to gl, etc and vi and then vouch backward from F/S to source document.
Forward – allows aauditors to verify completeness of recording of assets
Vouching bakcwards from recorded entry to source doc – auditors can better verify the existence of assets claimed to be owned
Confirmation refers to aud technique – ask indiv cust or suppliers to agree with recorded bal foir their a/c.
Accountants should be able to trace in both directions.
Sampling and confirmation are two common techniques. 16

6. Flow of Economic Events Into the General Ledger
Sales order – source doc 17

7. Accounting Records in a Computer-Based System
Explains digital audit trail and introduces flowcharting symbols
Numbers in blue circles refer to auditors steps in following trail backwards - this called vouching
EXPLANATION OF STEPS IN FIGURE:
1. Compare the AR balance in the balance sheet with the master file AR control account balance.
2. Reconcile the AR control figure with the AR subsidiary account total.
3. Select a sample of update entries made to accounts in the AR subsidiary ledger
and trace these to transactions in the sales journal (archive file).
4. From these journal entries, identify source documents that can be pulled from their files and verified. If necessary, confirm these source documents by contacting the customers.
Digital audit trail - illustrates flow of accounting info in comp based sys.
Master File - generally contains account data (e.g., general ledger and subsidiary file)
Transaction File - a temporary file containing transactions since the last update
Reference File - contains relatively constant information used in processing (e.g., tax tables, customer addresses)
Archive File - contains past transactions for reference purposes 17

8. Logical Data Flow Diagrams
Logical data flow diagrams address what participants do- what processing needs to be performed,
Logical data flow diagrams help designers decide what system resources to acquire, what activities employees must perform to run these systems, and how to protect and control these systems after installation. 23

9. Data Flow Diagram Symbols
Entity
Name
Data Store
Name N
Documentation in a CB environment is necessary – visual/ graphic descriptions can convey acc sys components and flows more effect and efficiently than words. We look at some techniques.
Documentation Techniques
Data Flow Diagrams GAne-sarson notation
Entity Relationship Diagram
Document Flowcharts
System Flowcharts (not going through example –very similar to document flowchart)
(Program flowchart (not going through) - Explains what a computer application does to the data. illustrate the logic used in programs )
DFD-represent the logical elements of the system
use symbols to represent the processes, data sources, data flows, and entities in a system
do not represent the physical system
Squares- entities; ovals/ rectangle with rounded corners – processing verbs, rectangles –data storage, arrows (data flows - indicate direction)
Process
Description
Direction of
data flow 25

10. Yourdon and Coad Notation

11. Context Diagrams
Data flow diagrams are usually drawn in levels that include increasing amounts of detail.
A top level (or high-level) DFD that provides an overall picture of an application or system is called a context diagram.
A context diagram is then decomposed, or exploded, into successively lower levels of detail.

12. for Payroll Processing
Data Flow Diagram
for Payroll Processing
Timekeeping
Process
Payroll
Data
Employees
Payroll Data
Paychecks
Payroll Details
Context level 0 one process NODE (we generalize function of entire system in relationship to external entitty) 27

13. Data flow diagrams are created in a hierarchy called the top-down approach to systems development. In this approach, developers create these diagrams in levels, beginning with the broadest, least-detailed level, and exploding (working towards increasing refinements of) each piece of the preceding level until the system is completely specified. The rationale behind this approach is to keep major system objectives in view at first, and to worry about details later after major system components are specified. However, the process is reiterative, revisions are common, and little is considered “final” until the lowest diagram levels have been specified and approved.
The broadest DFD is called a context diagram.. Lower levels are numbered “level-1", “level-2", and so forth, and are commonly termed logical data flow diagrams.

14. Decomposition
Decomposition is the act of exploding data flow diagrams to create more detail.
Level 0 data flow diagrams may be exploded into successive levels of detail. The next level of detail would be a level 1 data flow diagram.
The DFDs become linked together in a hierarchy, which would fully document the system. 24

15.
Logical data flow diagrams address what participants do.
Each bubble contains a verb that indicates a task the system performs.
Logical data flow diagrams help designers decide what system resources to acquire, what activities employees must perform to run these systems, and how to protect and control these systems after installation.
Case tools- automate documentation tasks Computer assisted software engineering
Visio, allclear smartdraw igrafx
Subsequent levels show more particulars - detailed processes of the application and inputs /outputs associated with each processing step.
Resembles document flow charts – focus on physical entities
Employees involved in system under study, as well as tangible documents reports and similar hard copy inputs/outputs that flow thru system
Characteristics of physical DFD (different form logical DFD) – physical does not give reader idea of wwhat particpants so – need to use logical DFDs
Each bubble contains a number as well as a title – incl numeber in bubble – easier to refernce later
Assists desginers in decomposition taks
2. includes same inputs and outputs as it predessessor context diagram
balanced context diagram and physical dfd.
If not balanced an error

16. Gane and Sarson

19. Dfd built in hierarchical levels- from broad system scope (level 0) to narrow subsystem scope (levels 1, 2, 3 and higher)
Broad scope – level 0 DFD for sales process –would describe approving credit sales, shipping product, billing customers, set up A/R. A higher DFD take- one of these subsystems ( check credit rating and explain substeps within subsystem).

20. Level 1 check credit rating

21. Guidelines for Drawing DFDs
Avoid detail in high level DFDs.
Each logical DFD should contain between five and seven processes.
Different data flows should have different names.
All data stores should have data flows both into them and out of them.
Temporary files are usually desirable to include in a DFD. 25

22. Entity Relationship Diagram Cardinalities
Sales-
person
Car
Type
Customer
Order
Vendor
Inventory
Assigned
Places
Supply
Entity
Relationship 1 M
Entity Relationship Diagram (ERD) - is a documentation technique to represent the relationship between entities in a system.
The REA model version of ERD is widely used in AIS. REA uses 3 types of entities: resources – autos, inventory, college major
Events – ordering inventory, receiveing cash payment, shipment, selecting a major
Agents – salesperson customer, student
resources (cash, raw materials)
events (release of raw materials into the production process)
agents (inventory control clerk, vendor, production worker)
Rectangles – entities
Diamonds – relationships verbs – have inherent cardinalities represents the numerical mapping between entities:
one-to-one 1:1 one salesperson is assigned to one auto
one-to-many 1:M one customer may have placed many orders
many-to-many M:M many inventory items are purchased from many vendors
DFD – model the processes of a system – each data store in DFD – corresponds to data entity in ER diagram
ER diagrams model the data that is used or affected by the system
(see fig 2-15 that illustrates ER diagram for the DFD illustrated in fig 2-13). 23

23. Documents Flowcharts…
illustrate the relationship among processes and the documents that flow between them
contain more details than data flow diagrams
clearly depict the separation of functions in a system
Flowcharts explain how, where and by whom processes are accomplished
Document flowcharts – created by following the hard copy of bus forms used by a company (purchase order, customer order) from beg to end.
Internal entities – that perform data process of some sort – presented as columns in a doc flowchart
See other symbols processing oval, source document, hardcopy file, accounting journals 26

24. Symbol Set for Document Flowcharts
Terminal showing source
or destination of documents
and reports
Calculated batch total
Source document or
report
On-page connector
Manual operation
Off-page connector
Other symbols – start/end process of oval
File for storing source
documents and
reports
Description of process
or comments
Accounting records
(journals, registers,
logs, ledgers)
Document flowline 27

25. Sales Department
Credit Department
Warehouse
Shipping Department
Customer
Customer
Order
Prepare
Sales
Orders
Sales
Order #1
Sales
Order #1
Sales
Order #1
Sales
Order #1
Source data?
Reference data?
Storage data?
Data flows?
First Stages in Constructing Document Flowchart Showing Areas of Activity

26. Finished Document Flowchart Showing Areas of Activity
Sales Department
Credit Department
Warehouse
Shipping Department A
Sales
Order #1
Customer
Sales
Order2
Customer
Order
Checks
Credit
Sales
Order 4
Credit
Records
Picks
Goods
Stock
Records
Sales
Order3
Prepare
Sales
Orders
Signed Sales
Order #1
Picks
Goods
Customer
Order
Sales
Order2
Sales
Order #1
Sales
Order #1
Sales
Order #1
Sales
Order #1
Sales
Order 4
Sales
Order3
Signed Sales
Order #1 N
Sales
Order2 N
Distribute
SO and
File A
Customer
Order
Customer
Sales
Order 4
Signed Sales
Order #1
Finished Document Flowchart Showing Areas of Activity
Sales
Order3
Sales
Order2 N

27. System Flowcharts…
are used to represent the relationship between the key elements--input sources, programs, and output products--of computer systems
depict the type of media being used (paper, magnetic tape, magnetic disks, and terminals)
in practice, not much difference between document and system flowcharts 28

28. Modern systems Legacy systems
client-server based and process transactions in real time
use relational database tables
have high degree of process integration and data sharing
some are mainframe based and use batch processing
Legacy systems
mainframe-based applications
batch oriented
early legacy systems use flat files for data storage
later legacy systems - hierarchical and network databases
data storage systems promote a single-user environment that discourages information integration

29. Updating Master Files: Primary Keys (PK) and Secondary Keys (SK)
Modern Systems versus Legacy Systems
Modern systems characteristics:
client-server based and process transactions in real time
use relational database tables
have high degree of process integration and data sharing
some are mainframe based and use batch processing
Legacy systems characteristics:
mainframe-based applications
batch oriented
early legacy systems use flat files for data storage
later legacy systems use hierarchical and network databases
data storage systems promote a single-user environment that discourages information integration
Some firms employ legacy systems for certain aspects of their data processing.
Accountants need to understand legacy systems.

30. Database Backup Procedures
Destructive updates leave no backup.
To preserve adequate records, backup procedures must be implemented, as shown below:
The master file being updated is copied as a backup.
A recovery program uses the backup to create a pre-update version of the master file.

31. Batch Processing
A batch is a group of similar transactions that are accumulated over time and then processed together.
The transactions must be independent of one another during the time period over which the transactions are accumulated in order for batch processing to be appropriate.
A time lag exists between the event and the processing.
Computer-Based Accounting Systems Two broad classes of systems:
batch systems
real-time systems
Batch size- function of volume of transactions, competitveness of industry, normal frequency of errors , financial implic of an undetected error and costs of processing.
Several sums are calculated at the initial transact grouping (i.e. total sales, total customer number) throughout process these totals checked and verified against initial totals – ensure no transaction lost, added, included erroneously 32

32. Batch Processing/Sequential File
Unedited
Transactions
Sales
Orders
Keying
catches clerical errors
Errors
Edit
Run
correct errors and
resubmit
Edited
Transactions
rearranges the transaction data by
key field so that it is in the same
sequence as the master file
Sort
Run
Transactions
Steps in Batch Processing/Sequential File
Keystroke - source documents are transcribed by clerks to magnetic tape for processing later
Edit Run - identifies clerical errors in the batch and places them into an error file
Sort Run - places the transaction file in the same order as the master file using a primary key
Update Run - changes the value of appropriate fields in the master file to reflect the transaction
Backup Procedure - the original master continues to exist and a new master file is created
Old Master
(father) AR
Update
Run
changes the values in the master file to
reflect the transactions that have occurred AR
Transactions (eventually transferred to an archive file)
New Master
(son) 42

33. Advantages of Batch Processing
Organizations can increase efficiency by grouping large numbers of transactions into batches rather than processing each event separately.
Batch processing provides control over the transaction process via control figures. 33

34. Real-Time Systems…
process transactions individually at the moment the economic event occurs
have no time lag between the economic event and the processing
generally require greater resources than batch processing since they require dedicated processing capacity; however, these cost differentials are decreasing
Often have longer systems development time 34

35. Why Do So Many AIS Use Batch Processing?
AIS processing is characterized by high-volume, independent transactions, such are recording cash receipts checks received in the mail.
The processing of such high-volume checks can be done during an off-peak computer time.
This is one reason why batch processing maybe done using real-time data collection.

37. Entity-Relationship (E-R) Modeling
Also known as conceptual modeling or semantic modeling
Four Basic Constructs: -Entity -Relationship -Attribute -Cardinality -(participation and connection)

38. ENTITY: Entities are named objects in the universe of discourse
Types of entities (REA:resources, events, agents)
Thing (truck, building)
Person (customer, employee)
Event
Instant duration (sale, purchase, cash receipt)
Extended duration (month-long use of a truck, a course offering that starts on JAN 3 & ends on 16 FEB)
Concept (category of customer, course)
SYMBOL -- Rectangle
Customer
Course offering

39. 2. RELATIONSHIP : Association between two (or more ?) entities
Examples:
employee “assigned to” building
customer “participates in” sale
professor “teaches” course-offering
SYMBOL -- Diamond
participates in
Customer
Sale

40. 3. ATTRIBUTE : Characteristics or elementary properties of entities or relationships. They are used for actual communication about the real world phenomena represented by entities or relationships
Example attributes for the entity INVENTORY:
stock#, color, price, cost, weight
A primary key is a special attribute used to represent an instance of an entity or relationship in a database
Must be unique and universal
Can be a concatenated (combined key)
“No representation without identification”
For this class, we assume that relationships are identified by the keys of their participating entities
SYMBOL – small connected circle (filled in for primary key)
Inventory
Stock# Color Price

41. 4. Participation CARDINALITY (min, max):
4. Participation CARDINALITY (min, max): These show the correspondence of entities and relationships A
rel B
(min, max)
Entity “A” participates in relationship “rel” at a maximum of
- “1” time (single time only)
- “n” times (many times)
Entity “A” participates in relationship “rel” at a minimum of
- “0” times (optional)
- “1” time (mandatory)

42. 4. Participation CARDINALITY (min, max): (other side of relationship)B A
rel
(min, max)
Entity “B” participates in relationship “rel” at a maximum of
- “1” time (single time only)
- “n” times (many times)
Entity “B” participates in relationship “rel” at a minimum of
- “0” times (optional)
- “1” time (mandatory)