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

• Objectives
• Definition of accounting
• Accounting cycle
• Coding systems
• Role of human judgment and information technology
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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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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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• 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
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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• Types of coding
1. Sequential
2. Block
3. Significant digit
4. Hierarchical
5. Mnemonic
• Discussed in the following slides
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• Assigns numbers in chronological sequence
• Limited flexibility
– Additions can be made only at the end of a sequence
– Deletions result in unused numbers unless the numbers are recycled
– Codes tell nothing about the object’s attributes
• Examples include
– Student ID numbers
– “Wait” ticket at Post Office
• Example based on employee ID codes:
001 - 1st hired
002 - 2nd hired
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• Groups of numbers are dedicated to particular characteristics of the objects being identified
• Universal product code example:
73805 80248
Mfg Product
Code Code
• Employee ID code example:
001-100 fabrication department
101-200 assembly department

Within the department block, codes are assigned to individual employees
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• Assigns meanings to specific digits
• Significant digit coding works well for inventory items
• Also works well for employee ID codes
• The following slide shows examples using inventory and employee ID codes
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Example based on an Inventory item
16 2 17 4389
Product group
Part or subassembly
Warehouse Unique item identifier
Example based on employee ID codes
2 0 4 623
Work center
Exempt or nonexempt
Pay rate code
Unique employee identifier
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• Like significant digit codes, hierarchical codes also attach specific meaning to particular character positions
• Items are ordered in descending order where each successive rank order is a subset of the rank above it
• Reading from left to right in a hierarchical code, each digit is a subcategory of the digit to its left
• A 5 digit postal code is an example of hierarchical data coding
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Example based on Postal zip code
0
Section of country
18
Region within section
90
Locality (town within region)
Example based on employee ID codes
01
Company division
3
Plant
9
Department
623
Unique employer ID
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College course numbering:
AC340 - Accounting Information Systems
EN101 - English Composition
Example Based on Employee ID Codes:
F M C 623
Female Married Caucasian Unique employee ID
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• SELF-CHECKING DIGIT CODE-
– FOR EXAMPLE, 4362-3214-5
– WHERE, (4+3+6+2) = 15 MINUS (3+2+1+4)
=10 = 5 IS THE LAST DIGIT
• COLOUR CODING
– PINK COPY TO THE BILLING
DEPARTMENT
– WHITE COPY TO THE SALES
DEPARTMENT
– YELLOW COPY TO THE CUSTOMER
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• Information systems that assist managers with unstructured decisions by retrieving data and generating information
• Possesses interactive capabilities
• Can answer ad-hoc inquires
• Provide data modeling facilities such as spreadsheets
• Supports non-recurring, relatively unstructured decision making
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• Information systems often considered a subset of DSS, that combine information from the organization and the environment
• Organize and analyze the information
• In a form suitable for managers to make decisions
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• Computer based systems that support collaborative intellectual work such as
– Idea generation
– Elaboration
– Analysis
– Synthesis
– Decision making
• GSS use technology to solve the time and place dimension problems associated with group work
• Also known as GDSS or Group Decision Support
Systems
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• An information system that emulates the problem solving techniques of human experts
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Knowledge engineer
Knowledge base
Inference engine
User interface
(includes explanation facility)
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Knowledge acquisition facility
User
Human expert

Human expert - possesses relevant knowledge
Knowledge engineer - has skill to extract knowledge and encode in knowledge base
Knowledge base - contains relevant expertise, in the form of rules
Inference engine - executes line of reasoning based on facts and rules
User interface - provides for user input to system and displays output. Contains explanation facility to let user ask Why?
How? etc.
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• FILE MANAGEMENT COMPRISES THE
FUNCTIONS THAT COLLECT,
ORGANIZE, STORE, RETRIEVE, AND
MANIPULATE DATA MAINTAINED IN
TRADITIONAL DATA FILE-ORIENTED
ENVIRONMENTS
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 CHARACTER IS A BASIC UNIT OF DATA SUCH AS
LETTER, NUMBER, OR SPECIAL CHARACTER
 FIELD IS A COLLECTION OF RELATED
CHARACTERS, SUCH AS A CUSTOMER NAME OR
CUSTOMER NUMBER
 RECORD IS A COLLECTION OF RELATED DATA
FIELDS PERTAINING TO A PARTICULAR ENTITY
(PERSON, PLACE, OR THING, SUCH AS A
CUSTOMER RECORD)
 FILE IS A COLLECTION OF RELATED RECORDS,
SUCH AS A CUSTOMER FILE OR SALES BUSINESS
EVENT DATA FILE
 RECORD LAYOUT DEPICTS THE FIELDS
COMPRISING A RECORD
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• DATA WAREHOUSING IS THE USE OF
INFORMATION SYSTEM FACILITIES TO FOCUS ON
THE COLLECTION , ORGANIZATION, INTEGRATION,
AND LONG-TERM STORAGE OF ENTITY-WIDE
DATA.
• PROVIDES USERS WITH EASY ACCESS TO LARGE
QUANTITIES OF VARIED DATA FROM ACROSS THE
ORGANIZATION  LEADS TO ENHANCED DECISION-
MAKING CAPABILITIES
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• DATA MINING IS THE ABILITY TO EXPLORE,
AGGREGATE, AND ANALYZE LARGE QUANTITIES
OF VARIED DATA FROM ACROSS THE
ORGANIZATION
• COMPLEMENTARY TO DATA WAREHOUSING
• BETTER UNDERSTANDING OF ORGANIZATION’S
– BUSINESS PROCESSES
– TRENDS
– POTENTIAL OPPORTUNITIES TO IMPROVE THE
EFFICIENCY OF THE ORGANIZATION
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 A SOFTWARE COMPONENT
INTEGRATED INTO A DSS OR OTHER
SOFTWARE TOOL (E.G., WORD, EXCEL)
THAT PROVIDES AUTOMATED
ASSISTANCE AND/OR ADVICE ON THE
USE OF THE SOFTWARE.
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 PROCESS OF CAPTURING, STORING,
RETRIEVING, AND DISTRIBUTING
THE KNOWLEDGE OF THE
INDIVIDUALS IN AN ORGANIZATION
FOR USE BY OTHERS TO IMPROVE
THE QUALITY AND / OR EFFICIENCY
OF DECISION MAKING.
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 Computer-based systems of hardware and software.
 Mimic human brain’s ability to recognize patterns, predict outcomes with incomplete information.
 Derive knowledge from data; must be
“trained”.
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• 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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