Chapter 2Chapter 2

Transaction Processing

in the AIS

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

OutlineOutline

• Objectives

• Definition of accounting

• Accounting cycle

• Coding systems

• Role of human judgment and information technology

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ObjectivesObjectives

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

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Definition of accountingDefinition 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.

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Definition of accountingDefinition of accounting

• IdentifyingNot all business events

lead to recordable transactions in the AIS

• MeasuringAccountants must follow

GAAP in deciding what dollar amounts to record for transactions

• CommunicatingFinancial accounting

information is communicated primarily through the general purpose financial statements

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Accounting cycleAccounting cycle

• The process of identifying and measuring

economic events that leads to

communication and decision making

• Ten steps explained on the slides that

follow

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Accounting cycleAccounting 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?

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Accounting cycleAccounting 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

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Accounting cycleAccounting 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

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Accounting cycleAccounting 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

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Accounting cycleAccounting 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

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Coding systemsCoding 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

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Coding systemsCoding 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)

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Role of human judgment and Role of human judgment and information technologyinformation 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

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