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Accounting Information Systems

Fourteenth Edition

Chapter 2

Overview of Transaction Processing and Enterprise Resource Planning Systems

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Learning Objectives

Describe the data processing cycle used to process transactions, including how data is input, stored, and processed and how information is outputted.

Discuss how organizations use enterprise resource planning (ERP) systems to process transactions and provide information.

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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This chapter is a good overview of the details that will be forthcoming in the text. This is also a good opportunity to put the class in perspective and how it relates to the other financial accounting courses that the students are taking. For example, students taking financial accounting classes understand the transaction focusing only on the proper debit and credit accounts and how the financial statements are prepared. This chapter provides a good pathway to connect those concepts from the journal entries to understanding the flow of the accounting information in a system from the detailed level, data from source documents, to subledgers and the general ledger and then to the financial statements or management reports necessary to make business decisions.

Data Processing Cycle

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Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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The data processing cycle is a descriptive means of demonstrating the operations performed on data to make the information meaningful for decisions. Using the revenue cycle as an example, the data input would include the sales activity between the company and the customer involving the resources of inventory and cash (when money is ultimately collected from the customer).

Walking through the basic activities found on Table 2-1 in the text for the revenue cycle involves the sales order as the initial source document for the data input. This information is stored and often updated once other activities occur for this transaction in the revenue cycle such as an update to the sales record when the order is shipped from the warehouse. As seen in Table 2-1, the various activities that occur throughout the revenue cycle can impact the sales record and require updating of new information once that activity happens. The information that management can retrieve from the AIS can be in the form of reports such as Customer Sales Report.

Data Input

Steps in Processing Input are:

Capture transaction data triggered by a business activity (event).

Make sure captured data are accurate and complete.

Ensure company policies are followed (e.g., approval of transaction).

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Data Input—Accuracy and Control

Well-designed source documents can ensure that data captured is

Accurate

Provide instructions and prompts

Check boxes

Drop-down boxes

Complete

Internal control support

Pre-numbering documents will help to verify that all transaction have been recorded in a particular sequence

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Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Data Capture

Information collected for an activity includes:

Activity of interest (e.g., sale)

Resources affected (e.g., inventory and cash)

People who participated in the activity (e.g., customer and employee)

Information comes from source documents.

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Source Documents

Captures data at the source when the transaction takes place

Paper source documents

Turnaround documents

Source data automation (captured data from machines, e.g., Point of Sale scanners at grocery store)

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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It is important to emphasize Table 2-1 in the text as this sets the stage for understanding the transaction cycles and the source documents associated with those activities in the transaction cycle. A solid foundational understanding of:

Activities

Source documents associated with the activity

Information flows (i.e., debit and credit postings in the ledger)

This helps the students understand how to establish controls for this information in the subsequent chapters. For example, the text in Chapter 2 does mention that prenumbering documents is a good control. A good question to ask students is why do they think prenumbering of the source documents would be important to have in an organization? This gets them thinking more intuitively based on their own experiences as a consumer and it may not make learning controls seem like memorizing a list and seem more like something that a student can think about as they understand the details and fit it to a bigger picture.

Another good class discussion is thinking about all the data that is collected using sensors (e.g., RFID tags). How much of this data would be important for the organization to capture?

Data Storage

Important to understand how data is organized

Chart of accounts

Coding schemas that are well thought out to anticipate management needs are most efficient and effective

Transaction journals (e.g., Sales)

Subsidiary ledgers (e.g., Accounts receivable)

General ledger

Note: With the above, one can trace the path of the transaction (audit trail)

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Figure 2-2 on page 31 is a great example of showing students how to follow a transaction to the various subledgers and the general ledger. This helps them visualize the structure of how data is stored in an AIS.

General and subsidiary ledgers

The general ledger contains summary-level information about every asset, liability, equity, revenue, and expense account in an organization. The balances in general ledger accounts form the starting point for preparation of financial statements and various other financial reports.

A subsidiary ledger account provides support for any general ledger account for which individual detailed subaccounts (for example, accounts receivable, accounts payable, inventory, and fixed assets) are required. The subsidiary ledger records and maintains the detail-level information by having a separate record for each customer, vendor, inventory item, or fixed asset.

The sum of the subsidiary ledger balances should equal the balance in the general ledger account. A general ledger account that corresponds to a subsidiary ledger account is known as a control account.

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Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Audit Trail

An audit trail consists of company transactions records that can be traced through the AIS from where it originated to where they end up on the financial statements

The audit trail provides the means for locating and examining source documents.

The posting references and document numbers help provide the audit trail

An audit trail provides a means to check the accuracy and validity of postings to the ledger..

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Coding Techniques

Sequence codes—items numbered consecutively to account for all items (i.e., prenumbered forms)

Block code—blocks of numbers reserved for specific categories of data (i.e., product numbers that start with a 2 are refrigerators)

Group codes—two or more subgroups of digits used to code items (i.e., car vin #’s)

Mnemonic codes—letters and numbers interspersed to identify an item (i.e. Dry300W05 is low end (300), white (W) dryer (DRY) made by Sears (05))

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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The importance of data storage cannot be stressed enough. Many organizations change and evolve, but rarely do accountants have the luxury to really think ahead to organize how they want the information to be stored. Yet many AIS allow you to run special reports based on the coding schemas in the chart of accounts. For example, if your organization is expanding, is it important to have individual location financials as well as roll them up into regional financials? The coding schema of the chart of accounts, if not well thought out, can limit an organization and cause additional work; however, if the schema is well thought out, it can be more efficient to get the information to management.

Audit trail for Invoice #156 for $1,876.50 sold to KDR Builders

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Figure 2-2 from the text shows how the different ledgers and journals are used to trace the path of one transaction found in Table 2-3 (invoice # 156 from KDR Builders). This example, should also reinforce the accounting knowledge for the student as they may understand the debit and credit of a sale transaction but not necessarily understand how the AIS would store that transactional data.

A good question to ask the students is why are there transactional journals and subledgers and not just one big general ledger? As they may have learned in their introductory accounting class, this becomes a very large file and it is easier to parcel out the information that is specific to the transaction (e.g., sales or purchasing) and the associated subsidiary ledgers.

Computer-Based Storage

Data is stored in master files or transaction files.

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Its important to understand how the data aggregates as this will be useful in subsequent chapters for designing query (questions) of the data or reports.

Students should be thinking about what information is in master files and what would be in transaction files. It is helpful to refer to slide 2-5 such that master files usually include “resource” and “people” data (i.e., inventory master files store information of all items the company sells) and the transaction file is the activity or event data that is captured (i.e., sales transactions).

Thus, there is the following hierarchy:

Database includes

Files (master/transaction) which include

Records (entities) which include

Attributes (individual fields)

Databases include

Attributes (individual fields) stored in

Records (entities) stored in

Files (master/transaction)

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Coding Techniques

Sequence

Items numbered consecutively

Block

Specific range of numbers are associated with a category

10000–199999 = Electric Range

Group

Positioning of digits in code provide meaning

Mnemonic

Letters and numbers

Easy to memorize

Code derived from description of item

Chart of accounts

Type of block coding

2-15

Digit Position	Meaning
1–2	Product Line, size, and so on
3	Color
4–5	Year of Manufacture
6–7	Optional Features
1241000	12 = Dishwasher 4 = White 10 = 2010 00 = No Options

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Data Processing

Four types of processing (CRUD):

Creating new records (e.g., adding a customer)

Reading existing data

Updating previous record or data

Deleting data

Data processing can be batch processed (e.g., post records at the end of the business day) or in real-time (process as it occurs).

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Information Output

The data stored in the database files can be viewed

Online (soft copy)

Printed out (hard copy)

Document (e.g., sales invoice)

Report (e.g., monthly sales report)

Query (question for specific information in a database, e.g., Which division had the most sales for the month?)

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Queries are shown in Chapter 4 and are a very useful tool used in accounting to get specific information out of a database.

Enterprise Resource Planning (ERP) Systems

Integrates activities from the entire organization

Revenue Cycle

Expenditure Cycle

Production Cycle

H/R Payroll Cycle

General Ledger and Reporting System

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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This is a good place to emphasize that good internal controls are necessary as an integrated database has the benefit of inputting data once in the system, if that input is inaccurate, it will be useless. That is why most people only have access to certain portions of the system and that good data entry controls are necessary.

ERP Systems

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Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Advantages of ERP System

Integrated enterprise-wide single view of the organization’s data which streamlines the flow of information

Data captured once (i.e., no longer need sales to enter data about a customer and then accounting to enter same customer data for invoicing)

Greater visibility and monitoring capabilities for management

Improve access of control of the data through security settings

Standardization of procedures and reports

Improves customer service

Increases productivity through automation

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Disadvantages of ERP System

Costly

Significant amount of time to implement

Customizing or standardizing a business process

Complexity

User resistance (learning new things is sometimes hard for employees)

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Although there are many advantages of an ERP system and most companies small and large use some form of an ERP system, understanding the issues of implementation can determine a successful ERP implementation from a failed implementation.

Most notable, a business process will need to map to the ERP software, management will need to determine if they want to customize the ERP software or standardize their business process to fit the ERP system.

A good discussion question is to ask students why they think user resistance occurs and how can this be mitigated if they were a manager handling the ERP implementation? Although there will be many answers in this discussion, one important takeaway is to highlight that training and support as well as communication of the change that will occur will help employees understand the change and also feel supported. A great article to bring into the classroom is from Harvard Business Review on change management (Kanter September 25, 2012) access via https://hbr.org/2012/09/ten-reasons-people-resist-chang

Key Terms

Data processing cycle

Source documents

Turnaround documents

Source data automation

General ledger

Subsidiary ledger

Control account

Coding

Sequence code

Block code

Group code

Mnemonic code

Chart of accounts

Specialized journal

Audit trail

Entity

Attributes

Field

Record

Data value

File

Master file

Transaction file

Database

Batch processing

Online, real-time processing

Document

Report

Query

Enterprise resource planning (ERP) system

Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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Chapter 2: Overview of Transaction Processing and Enterprise Resource Planning Systems

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