Chapter 2

Transaction Processing in the AIS

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Outline

Learning objectives
Accounting and bookkeeping
Accounting cycle
Internal controls
Coding systems
Human judgment and information
technology

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Learning objectives
1. Differentiate accounting and bookkeeping.
2. List, discuss and complete, in order, the steps
in the accounting cycle.
3. Identify common internal controls associated
with the accounting cycle.
4. Describe common coding systems and how
they are used in the AIS.
5. Explain how human judgment and information
technology affect the accounting cycle.
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Accounting and bookkeeping

Accounting
Accounting is the
process of identifying,
measuring, and
communicating economic
information to permit
informed judgments and
decisions by users of the
information.

Bookkeeping
The part of accounting
associated with
identifying and
measuring economic
information.

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Accounting and bookkeeping

Identifying
Recognizing events that
give rise to journal
entries vs. those that do
not

Measuring
Historical cost, such as
supplies
Present value, such as
long-term bonds payable
Market value, such as
certain investments in
marketable securities
Net realizable value,
such as accounts
receivable

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Accounting and bookkeeping

Certified Public Accountant
Certified Public Bookkeepers

(Tax Accountants ?)


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Accounting cycle
Accounting cycle10 steps

AIS elements5 items

Step1

Obtain information

Input

Step2

Analyze transaction

Step3

Record the transaction in a journal

Step4

Post from the journal to the general

ledger accounts

Step5

Prepare an unadjusted trail balance

Step6

Record adjusting entries and post to the

general ledger accounts

Step7

Prepare an adjusted trial balance

Step8

Prepare financial statement

Output

Step9

Close the temporary accounts to retained

earnings

process

step10

Prepare a post-closing trial balance

Process
Internal
control

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Accounting cycle
Ten steps used to
gather data, process
it and create general
purpose financial
statements

Two groups
Steps that occur
throughout the fiscal
year
Steps that occur at the
end of the fiscal year
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Accounting cycle
Steps that occur
throughout the fiscal
year
1) Obtain information
about external
transactions from
source documents.
2) Analyze transactions.
3) Record the
transactions in a
journal.

4) Post from the journal

to the general ledger
accounts.
5) Prepare an
unadjusted trial
balance.

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Accounting cycle
Steps that occur at
the end of the fiscal
year
6) Record adjusting
journal entries and
post to the ledger
accounts.
7) Prepare an adjusted
trial balance.

8) Prepare financial
statements.
9) Close the temporary
accounts to retained
earnings.
10)Prepare a postclosing trial balance.

Some organizations prepare adjusting

entries multiple times throughout the
year, such as at the end of each quarter.
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Accounting cycle

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Questions--Accounting documents
(accounting documents)

(original certificate / source
documents) 3 (
)

(Vouchers) 3
( )

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Questions--Accounting cycle
Which step would immediately follow each
item listed below?
a) Account for timing differences between cash
flow and accrual basis revenue / expense.
Prepare an adjusted trial balance.

b) Calculate the balance in each general ledger

account at the end of the second month in a
quarter.
Prepare an unadjusted trial balance.

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Questions-- Accounting cycle

Which step would immediately follow each
item listed below?
c) Debit Supplies and Credit Accounts Payable,
$500.
Post from the journal to the general ledger
accounts.

d) Generate a balance sheet and related

documents.
Close the temporary accounts to retained
earnings.
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Transaction and AIS

Transactions come in two types in most AIS
External transaction
Internal transaction

External transaction
Exchanging goods and services with other individuals
and business entities such as suppliers, shareholders,
government agencies, employees et al.

Internal transaction
Adjusting entries, closing entries, and reserving entries.

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How to connect external and internal

transactions?
Accountants become aware of external transactions
through the use of source documents.
Source documents include purchase orders,
remittance advices, and invoices.
Common internal controls in regard of those source
documents:
Internal control

contents

Sequential numbering

For example, the checkbook is numbered

sequentially.

Physical security

For example, company should not keep its

blank checks in an easy accessible location.

Transaction limits

For example, a new purchasing agent might

not issue orders over a certain amount.
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Transaction analysis
Identify the accounts affected by the transaction.
Identify the effect of the transaction on each account
(increase or decrease).
Determine the element of financial statements
represented by each account (most common:
assets liabilities equity revenues expense)
Based on the principles of debt and credit, determine
which kind of entry is required for each account.(such
as: deferred income tax asset/ liabilities)
Verify that, for each transaction, the total debits equal
to the total credits.
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Six common types of adjusting entries

Six types group into three parts (accrued,
deferral, estimates)
Type

Description

General format

Accrued
revenues

An organization provides services to

its customers before collecting cash

Debit an asset
Credit a revenue

Accrued
expenses

An organization receives service

before paying cash

Debit an expense
Credit a liability

Deferred
revenues

An organization receives cash before

providing service to customer

Debit a liability
Credit a revenue

Prepaid
expenses

An organization uses up assets that

have previously been paid for

Debit an expense
Credit an asset

Uncollected
accounts

Estimates of amounts clients will be

unable or unwilling to pay

Debit an expense
Credit a contra-asset

Depreciation

Periodic allocation of an assets cost

Debit an expense
to the periods that benefit from its use Credit a contra-asset
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Questions transactions
(Adjusting journal entries)
The general ledger showed a

None of the supplies purchased

balance in Supplies on 31 March

on account had been paid for.

2014 of $600. During April,

Calculate the amount of
supplies were purchased for cash
supplies used in April; prepare
($500) and on account ($400). At
the related journal entry.
the end of April, the cost of
supplies on hand was $300.

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Questions transactions
(Adjusting journal entries)
Computation
$600 + $900 - $300 = $1200

Journal entry
Supplies Expense $1200
Supplies
$1200

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Internal controls
Policies, processes &
procedures designed
to:
Safeguard assets.
Ensure reliable
financial reporting.
Promote operating
efficiency.
Encourage compliance
with management
directives.

Accounting cycle
controls
Numbering source
documents
sequentially
Enforcing transaction
limits
Using general ledger /
other appropriate
software for
transaction processing
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Coding systems
A system of signals used to represent letters or
numbers in transmitting messages
Methods for identifying source documents for
easier reference later
Four broad types
Sequential
Block
Hierarchical
Mnemonic
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Coding systems
Sequential

Block

Documents are
numbered in sequence

First digit specifies a

group

Example: checks in
your checkbook

Example: simple chart

of accounts

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Coding systems
Hierarchical

Mnemonic

Groups of digits have

meaning

Code is a reminder of
its meaning

Example: more
complex chart of
accounts

Example: accounting
certifications
CPA, Certified Public Accountant

department

CFE, Certified Fraud Examiner

03.514.101
geographic
location

account
number

EA, Enrolled Agent

CMA, Certified Management
Accountant
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Questions Coding systems

INT Corporation uses
block coding for its chart
of accounts, which
includes the following
account numbers:

Inventory, 105
Accounts payable, 303
Treasury stock, 507
Sales, 601
Salary expense, 708

Which of the following

properly pairs an account
name with an appropriate
account number?
a) Equipment, 180
b) Mortgage payable, 404
c) Cost of goods sold, 603
d) Estimated warranty
expense, 801

Ans b
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Coding system - example

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Human judgment & information

technology
Often incorporated in
accounting
information systems
Information
technology is not the
system; it is a tool
used in the system.

Human judgment
Determining which
events lead to journal
entries

Information
technology
Spreadsheets, relational
databases, general
ledger software, ERP
systems

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Excel application (p.38)

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