TOPIC 3
ACCOUNTING RECORDS & DOCUMENTATION TECHNIQUES
TOPIC 3
ACCOUNTING RECORDS &
DOCUMENTATION TECHNIQUES
Rina Md Anwar, Bong Kit Siang
INTRODUCTION
Traditionally in accounting world, accountants require pencils, papers and a basic
calculator. We record all accounting transactions on T-accounts that represents Debit and
Credits transaction. We use calculator to balance out the Debit side of our T-accounts to
the Credit side of the same account. As the result, we will post the difference (if any) to
indicate the imbalanced condition of the T-account. However, this traditional approach has
been gradually changed to computerized system, which eliminates most of manual record
keeping process done by human. However, the knowledge of how a manual system
should operate is very fundamental so that the computerized documentation techniques
will have minimal flaw after implemented.
The first section of this topic describes the relationship among accounting records in
forming an audit trail in both manual and computer based systems. Then, we will examine
the documentation techniques used to represent system. At the end, we will look at
documentation techniques for manual and computer-based systems.
OBJECTIVE
At the end of this chapter, you should be able to:
1.
describe the documents and procedures used in AIS to collect and process
transaction data;
2.
describe the relationship among accounting records in forming an audit trail in
both manual & computer-based systems;
3.
differentiate the THREE types of document used in AIS: Source, Product and
Turnaround Documents;
4.
compare the function of journal with ledgers;
5.
examine the documentation techniques used to represent systems; and
6.
develop flowcharts based on given scenario.
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MIND MAP
3.1
ACCOUNTING RECORDS IN MANUAL SYSTEMS
In a manual system, adequate documents and records are needed to
provide an audit trail of activities within a system. In computer systems,
documents might not be used to support the initiation, execution and
recording of some transactions. What is the effect of this on the internal
control of a company?
3.1.1 Documents
Previously, most organization uses paper based documents as a common way for data
collection. These data will then be transferred to the computer for the later use. Currently,
these data will be directly stored in the computers through the specific system.
Basically there are three types of documents; as mentioned in Figure 3.1.
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Figure 3.1: Documents in accounting systems
Source document is the initial input to the accounting process and normally serve as an
original record of a transaction. It is an early document in the accounting cycle and it
captures the key data of a transaction. The examples of source documents are Purchase
Orders, Time Cards, Cash Receipts and others.
Figure 3.2 shows the creation of a source document. It is a part of the revenue cycle.
When customers make an order, the sales clerk will prepare multiple copies of sales order.
These documents then will go into the sales system. The information in these documents
will be used by various departments or functions such as Credit, Billing and others. Thus, it
will cause other activities to start in those departments.
Example:
A copy of the Sales Order will be sent to the Credit Department. It will cause the
checking or approval process begins. The personnel in the department will use the
information in the sales order to verify the customer’s creditworthiness.
Figure 3.2: Creation of a source document (courtesy of Hall, 2001)
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Product documents are the document that is being prepared after a transaction had
happened. Product document can serve as an output for one system. Refer to Figure 3.3,
the source document act as an input for Sales System while the product document which
is customer’s bill will act as an output.
Figure 3.3: A product development (courtesy of Hall, 2001)
The final document is turnaround document. Turnaround document is a document which
acts as an output for one system and become an input for another system. Figure 3.4
shows the example of turnaround document. It is based on the previous example of source
and product document.
We can take other example like credit card monthly statement sent by the credit card
company to their customers. Most of the statements consist of two parts:
1.
2.
Statement of the account
Remittance Advice
The Remittance Advice contains the customer’s name, account number, the total credit
and also the minimum payment required for that particular month. Normally, the statement
is produced by the Billing Department. When customer makes payment, they will include
the Remittance Advice along with the cheque. The Remittance Advice will be received by
the Accounts Department. The information in Remittance Advice such as Account Holder
Name and Account Number will be used as an input to the Accounts Department.
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Figure 3.4: A turnaround document (courtesy of Hall, 2001)
Can a turnaround document contain information that is subsequently used
as a source document? Why or why not?
3.1.2 Journal
A journal is an initial record in which the effects of transactions on accounts are recorded.
When transactions happen, we record all relevant facts in chronological order. The data for
journals come from the documents such as Sales Order. The journal will keep all records
of transactions and will be posted to the specific account. Figure 3.5 shows the process of
recording the sales order to the sales journal.
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Figure 3.5: Sales order recorded in sales journal (courtesy of Hall, 2001)
There are TWO types of journal:
Figure 3.6: Types of journal
1.
Special Journal
This is used to record specific categories/classes of transactions. The specific
categories/classes will be grouped in a special journal, thus can be processed
efficiently. Figure 3.7 shows an example of special journal, specifically Sales
Journal.
The Sales Journal will only record the sales transactions. Each time processing
period ends, the sales clerk will post the amounts to the specified ledger account.
The frequency for processing could be either in daily, weekly or monthly basis.
From Figure 3.7, we can see that these amounts are posted to account number
401.
Another example of special journal includes cash receipts journal, where it will
record the cash receipts transaction such as cash and credit sales.
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Figure 3.7: Sales journal (courtesy of Hall, 2001)
2.
General journal
The general ledger is a journal which is used to record the infrequent and different
transactions. Figure 3.8 shows the example of the general ledger. Currently, most
of the organizations have been using journal voucher system to replace the general
journal. A journal voucher is a source document which contains a single entry of
each account specified in the general ledger. It is used to record summaries of
routine and non routine transactions. We also use this document to record the
summary of adjusted and closed entries.
For example, there are TWO accounts in the general ledger:
Accounts Receivable; and
Sales Account
Hence, in the journal voucher, there will be only TWO accounts stated along with
the amount in that journal voucher.
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Figure 3.8: A general journal (courtesy of Boockholdt, 1999)
Another document to be considered is the chart of accounts. Chart of accounts lists all
account name and number for an organization. During the process of recording event into
journals, accountant will refer to the chart of accounts. This is to make sure accounts
chosen by the accountant are listed in the Accounting Information Systems.
The chart of accounts is one of the most important documents we need to consider in
Accounting Information Systems. The chart provides complete reference for the accounts
in an organization. Hence, it is important to make sure the chart of accounts is well
designed.
The chart of accounts could be different within an organization since the functions and
business activities might vary from one organization to another.
Figure 3.9 shows a chart of accounts example. It shows the account name along with the
account number. The account number consists of three digits. This is one of the coding
techniques for AIS application, called Block Codes. This technique corresponds to the
entire class of items by restricting each class to a particular range within the coding
scheme.
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Figure 3.9: A chart of accounts (courtesy of Boockholdt, 1999)
Table 3.1 summarizes the Block Codes representation.
Table 3.1: Block Codes Representation
Digit
First
Representation
Example
Account Classification
100 = Current Assets
200 = Fixed Assets
500 = Revenue
Second
Third
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Primary financial
category.
sub-accounts
within
each
110 = petty cash
120 = petty cash
Numbers were assigned to accounts to match the
order of their appearance in financial statements
130 = accounts receivable
Specific account to which the transaction data will
be posted
611 = cash revenue
612 = credit revenue
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Another thing to be considered when building the chart of accounts is the scalability. The
chart of accounts should allow the insertion of new or additional accounts.
3.1.3
Ledgers
A ledger is sometimes called as a book of financial records. We use ledger to summarize
the financial status of an organization such as the current balance of accounts. Normally,
the various journals will post the financial transaction information to the ledgers. The
information will be used to prepare the financial statements, internal reports and also to
support the daily transactions. Figures 3.10 show the flow of financial information from the
source document and finally end at the General Ledger.
Figure 3.10: Flow of information from the economic event to the general ledger
(courtesy of Hall, 2001)
Basically, there are two types of ledgers:
Figure 3.11: Types of ledger
1.
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General ledgers have the summary of activities for each account in the
organization.
2.
Subsidiary Ledgers
Subsidiary ledger records the details for any account in the general ledger that
owns many subaccounts. For example, one of the accounts in the general ledger is
the Account Receivable. Subsidiary ledger for the Accounts Receivable could be
the separate account for each customer. The total of account balance in the
subsidiary ledger must be the same with the balance in the Accounts Receivable in
the general ledger.
3.2
ACCOUNTING RECORDS IN COMPUTER-BASED SYSTEMS
How about organizing an event without a planner? How about leading a
nation without a minister ? And, how about running a business without a
system ? Respond to the questions above by posting your answer in
myLMS.
Planning to record transactions in specific location may help organizing accounting
transaction better. In computer-based systems, the accounting records are represented by
four different types of magnetic files as summarizes by Table 3.2.
Table 3.2: Different Types of Magnetic Files
Type of Files
Description
Example
1
Master File
A master file contains all accounts data. When
transactions occur, the related data in the
master files will be updated.
General
and
Subsidiary Ledgers.
2
Transaction
File
A temporary file which contains transaction
records. These records will be used to change
and update data in the master file.
Sales Orders
Cash Receipts.
3
Reference File
A file which has a collection of data used as
standards or reference for processing the
transactions.
Product price lists
used for preparing the
customer invoices
4
Archive File
Files which have records of past transactions.
Lists
of
former
employees, lists of
preceding
sales
transactions.
These files will be used for future reference in
the organization.
and
Figure 3.12 illustrates the relationship of these files in forming an audit trail.
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Figure 3.12: Accounting records in a computer-based system (courtesy of Hall, 2001)
What is meant by “Audit Trail?”
The accounting records described in the manual system or computer-based system
provide an audit trail for tracing transactions from source documents to the financial
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statements. The audit trails in computer-based system is still exist, although it is less
noticeable than in traditional manual system.
Figure 3.12 shows how computer files can function as audit trail in an organization. It
begins by capturing the economic events. The sales are recorded manually using source
documents. Then the data in the source documents will be transferred to the magnetic
files, specifically the transaction files. However, this will depend on the organization
because some organizations are no longer using the physical source documents. Hence,
the transactions are directly captured on the magnetic media.
The next step is to update the related master file subsidiary and also the control accounts.
During this process, we may edit the account transactions. For example, the available
credit for each customer will be identified by the system by referring to the credit file. Any
credit problems will be rejected and stored in the error file. The remaining records will be
used to update the related master files. Hence, only these transactions are added as the
sales journal into the archive file.
The original transaction file is not required for audit trail purposes because the valid
transactions have been copied to the journal. The file then can be deleted and the system
is now ready for the next batch of the sales orders.
Dunn, C., Cherrington, J.O and Hollander, A.S, (2005), Enterprise
Information Systems: A Pattern-Based Approach, 3rd Edition. Mc Graw Hill.
Read Chapter 14: The Financing Business Process.
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3.3
TOPIC 3
DOCUMENTATION TECHNIQUES
How do you relate DFD to Activity Diagram in Unified Modeling Language?
You may go to the internet and locate the answers to this question.
3.3.1 Entity Relationship Diagram
ERD describe information needed and/or the type of information that is to be stored in the
database
Entity Relationship Diagram (ERD) is a documentation technique used to
construct conceptual data model and it describes the data needed and also
the type of data that is to be stored in the database. It acts as a data
modeling technique that creates a graphical representation of the entities,
and the relationships between entities, within an information system.
ERD can be used as a tool for communication during analysis phase in the system
development process. The THREE main components of an ERD and their functions are
summarized in the following Table 3.3:
Table 3.3: Main Components of ERD and Their Functions
Item
1.
Entity
Symbols
Descriptions
Entity is an object in the real world environment.
In AIS, an entity is a resource (cash), an event
(receiving cash) or an agent (customer).
2.
Relationship
A relationship captures how two or more entities
are related to one another.
3.
Attributes
Attributes are the properties or characteristics of
an entity.
Relationships may also have attributes.
Attributes are drawn as ovals connected to their
owning entity sets by a line.
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Figure 3.10 shows the symbols used for an ERD.
Figure 3.13: Entity relationship diagram symbols (courtesy of Hall, 2001)
The relationship between entities can also be described in terms of cardinality.
Cardinality specifies the number of instances of one entity that can be
associated with each instance of another entity. A relationship can be oneto-one (1:1), one-to-many (1: M) or many-to-many (M:N). Cardinality can
reflect the policy of an organization.
Explanations of examples in Figure 3.13 are explained in Table 3.4.
Table 3.4
Example
1
Relationship
Cardinality
Assigned
(1 : 1)
Each salesperson is
assigned to one
automobile.
Each
automobile
is
assigned to one
salesperson.
Places
(1: M)
Each
customer
placed more than
one
order
Each
order is placed by
one customer.
(Figure 3.13a)
Entities:
Salesperson, Automobile
2
(Figure 3.13b)
Entities:
Customer, Order
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Explanation
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3
Supply
(M: N)
(Figure 3.13c)
Entities:
Vendor, Inventory.
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Each
vendor
supplied more than
one items. Each item
is supplied by more
than one vendor.
3.3.2 Data Flow Diagrams
A Data Flow Diagram (DFD) is a graphical representation of the data flow through an
information system. We also use DFD to visualize the data processing or so called
structural design. It is a common practice for a system analyst/designer to firstly draw a
context-level DFD which shows the interaction between the system and outside entities.
This context-level DFD is then decomposed to show more detail of the system being
modeled.
A data flow diagram illustrates the processes, data stores, and external
entities in a business or other system and the data flows between these
things.
Four diagrammatical components are used to develop a DFD. Table 3.5 illustrates these
components:
Table 3.5: Diagrammatic Components Used to Develop a DFD
Item
Data Flow
Descriptions
x
x
x
x
x
x
x
x
The work or actions performed on data so that they are transformed, stored
or distributed.
Represents the transformation of data in the system. This represents
something that happens in the system.
Represented by a circle or rounded rectangle.
Should be named as a verb.
External
Entity
x
x
x
x
The origin and/or destination of data.
Also called a 'Source/Sink'.
Represented by a square or oval.
Should be named as a noun.
Data Store
x
x
x
Repository for data.
Represented by two parallel lines, sometimes connected by a vertical line.
Should be named as a noun.
Process
x
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Data in motion, moving from one place to another in a system.
Represent the results of a query to a database, the contents of a printed
report or data on a data entry computer display form.
Should only represent data, not control.
Represented by an arrow.
Should be named as a noun.
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Figure 3.14 shows the symbols used for DFD. Basic data flow diagram elements are
shown in Figure 3.15. The external entities are A, J and K, where A is the source and J, K
are the destination. The system starts at A where it generates data flow B which is then
goes to process C. The outputs for process C are data flows D and E. E then goes to J,
while D goes to process F. Process F uses data flow D and G and later on process the
data. The process then will produce output G and I. The data flow I is sent to the external
entity or data destination, K. Figure 3.16 shows the data flow diagram of customer
payment which is related to Figure 3.15.
Figure 3.14: Data flow diagram symbols (courtesy of Romney, 2003)
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Figure 3.15: Basic data flow diagram elements (courtesy of Romney, 2003)
Figure 3.16 Data flow diagram of customer payment process (courtesy of Romney, 2003)
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Data flow may consist of more than one data element. Therefore it is important to decide
on the number of line required for the data flow. For example, sometimes customer has
made payment and would like to query regarding their payment. So, here the different data
flow should be used because the payment and inquiries is different in terms of the
purposes. Refer to Figure 3.16.
Figure 3.17: Splitting customer payments and inquiries (courtesy of Romney, 2003)
Decomposition of DFD can be defined as the act of going from a single system to its
component processes or in other words from the highest level DFD to the lowest level. The
highest level view of the system is a context diagram.
A context diagram is a special DFD that is designed to show the system and
the external entities that send data to and/or receive data from the
information system. It contains only one process, no data stores, data flows
and the external entities (sources/sinks). The sources/sinks represent its
environmental boundaries.
Figure 3.18 shows the context diagram of a payroll processing procedure. The employee
data is received from the human resource department, while the time card received from
various departments. These data then will be processed and the system produces four
different data that are:
1.
2.
3.
4.
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Tax report and payment for government agencies.
Employee payment for employees.
Payroll account deposit at the bank.
Payroll report for the management.
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Figure 3.18: Context diagram for payroll processing (courtesy of Romney, 2003)
Table 3.6 shows the major processing activities and data flows involved in payroll
processing. Using the information in the table, the context diagram is decomposed into
lower level or we called it as Level 0 diagram as shown in Figure 3.19. The data coming
from the human resources department were grouped together and named as “employee
data”.
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Table 3.6: Activities and Data Flows in Payroll Processing (Courtesy of Romney, 2003)
Activities
Data Inputs
Data Outputs
Update employee/payroll
file
New employee form
Employee change form
Employee / payroll file
Updated employee / payroll file
Pay employees
Time cards
Employee / payroll file
Tax rates table
Employee checks
Payroll register
Updated employee / payroll file
Payroll check
Payroll
cash
disbursements
voucher
Prepare reports
Employee/payroll file
Payroll report
Pay taxes
Employee/payroll file
Tax report
Tax payment
Payroll tax cash disbursements
voucher
Updated employee / payroll file
Update general ledger
Payroll tax cash disbursements
voucher
Payroll cash disbursements
voucher
Updated General Ledger
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Figure 3.19: DFD for payroll processing (courtesy of Romney, 2003)
The level 1 for Process 2.0 (pay employees) is shown in Figure 3.18. It expands
employees pay process into more detail process. Each of the process in Figure 3.16 can
be decomposed into their own level 1 diagram to show the detail processes.
Figure 3.20: DFD for process 2.0 in payroll processing (courtesy of Romney, 2003)
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3.3.3 Flowcharts
A flowchart is a formalized graphic representation of a program logic sequence, work or
manufacturing process. It describes the physical relationship between the entities or
components.
Figure 3.21 shows the symbols used to create flowcharts. Each symbol represents
different processes or tasks. Besides flow charts use special connector symbols to jump
between positions on a same page and from other page to another page. This are very
useful to lessen the mess happened when the flow lines go across each other.
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Figure 3.21: Common flowcharting symbols (courtesy of Romney, 2003)
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Figure 3.21: Common flowcharting symbols (cont)
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Basically there are three types of flowchart that are:
1.
Document flowchart
Document flowchart shows the flow of documents through the system. It illustrates
the relationship among processes and the documents that flow between them. This
flowchart is much more details if compare to data flow diagrams. We can see the
separation of functions in one system. The flowchart is very useful to refer when
analyzing whether the control procedures are sufficient or not. It can disclose any
weaknesses in the system such as lack of communication flows. Figure 3.22 is the
example of flowchart which clearly shows the departments/functions involved in a
system.
Figure 3.22 Flowchart showing areas of activity (courtesy of Romney, 2003)
2.
System flowchart
System flowcharts are used to represent the relationship between parts of a
system that are the inputs, processes and outputs. It also shows the type of media
that is being used for a particular system such as magnetic disks and file.
Figure 3.23 shows the example of system flowchart for sales processing. Sales
terminal are used to capture sales. The terminals will edit the sales data and print
out receipt for customer. The sales data will be stored in the sales data file on a
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disk. At the end of each day, the sales data will be summarized and the batch
totals will be printed. Example of batch total is the total sales for all sales
transactions. The summarized data will be processed again and same goes to the
batch total that will be generated and printed once more. The amount of batch
totals then will be compared with the batch totals generated from the earlier
processing. All errors and exceptions will be reconciled. The accounts receivable,
inventory, sales marketing databases and the general ledger will be updated.
Users can use the inquiry processing system in order to know the account and
inventory status and also the sales analysis.
Figure 3.23 System flowcharts of sales processing (courtesy of Romney, 2003)
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Program flowchart
A program flowchart illustrates the logic used in programs. This flowchart shows
the detail of each process for each program that exists in a system flowchart.
Figure 3.24 shows the relationship between system and program flowchart.
Figure 3.24 Relationship between system and program flowcharts (courtesy of Romney, 2003)
Differentiate System Flowchart to Program’s Flowchart.
below for your comparison.
System’s Flowchart
Fill in the table
Program’s Flowchart
Exercise 3.1
1. Would the write down of obsolete inventory be recorded in a special
journal or the general journal? Why?
2. Discuss the relationship between the balances in the accounts payable
general ledger control account and what is found in the accounts
payable subsidiary ledger?
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SUMMARY
Previously, most businesses used paper source document to initially collect data about
their business activities and then transferred the data into the computer. However, it has
changed now where most of the data about business activities are recorded directly
through computer data entry screens. Documentation includes the narratives, flowcharts,
diagrams, and other written material that explain how a system works. Each one of the
documentation serves different functionality for the organization.
GLOSSARY
Archive File
Files which have records of past transactions.
Attributes
Properties or characteristics of an entity.
Batch
A group of similar transactions accumulated over time and then
processed together
Chart of accounts
Lists all account name and number for an organization.
Cardinality
Specifies the number of instances of one entity that can be
associated with each instance of another entity.
Data Flow
Diagram
Graphical representation of the data flow through an information
system.
Document
Flowcharts
The flow of documents through the system. It illustrates the
relationship among processes and the documents that flow
between them. This flowchart is much more details if compare to
data flow diagrams.
Entity
An object in the real world environment.
ERD
A documentation technique used to construct conceptual data
model and it describes the data needed and also the type of data
that is to be stored in the database.
Flowcharts
Formalized graphic representation of a program logic sequence,
work or manufacturing process.
General Ledgers
Summarize activities for each account in the organization
General Journal
A journal which is used to record the infrequent and different
transactions.
Journal
An initial record in which the effects of transactions on accounts
are recorded.
Master File
File containing all accounts data
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Product
Document
Document that is being prepared after a transaction had
happened. Product document can serve as an output for one
system.
Reference File
A file which has a collection of data used as standards or
reference for processing the transactions.
Special Journal
This is used to record specific categories/classes of transactions.
The specific categories/classes will be grouped in a special
journal, thus can be processed efficiently.
Sales Journal
Only recording sales transactions.
Subsidiary
Ledgers
Records the details for any account in the general ledger that
owns many sub accounts.
System
Flowcharts
System flowcharts are used to represent the relationship between
parts of a system that are the inputs, processes and outputs. It
also shows the type of media that is being used for a particular
system such as magnetic disks and file.
Source Document
Initial input to the accounting process and normally serve is an
original record of a transaction. It is an early document in the
accounting cycle and it captures the key data of a transaction.
Transaction File
A temporary file which contains transaction records. These
records will be used to change and update data in the master file.
TEST 1
Instruction: Answer all questions in 15 min.
1. Are large batch sizes preferable to small batch sizes? Explain.
(5 marks)
2. What form can source documents take in a computer-based system?
(5 marks)
TEST 2
Instruction: Answer all questions in 15 min.
1. Develop a flowchart for the process of paying hourly employees. Assume time-sheets
are used and the payroll department must total the hours. Each hour worked by an
employee must be charged to some account ( a cost center). Each week, the
manager of each cost center receives a report listing the employee’s name and the
number of hours charged to this center. The manager is required to verify that this
information is correct by signing the form and/noting any discrepancies and then
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sending this form back to payroll. Any discrepancies noted must be corrected by the
payroll department.
(10 marks)
2. Should an auditor wishing to access the adequacy of separation of functions examine
a data flow diagram, document flowchart or a system flowchart? Why?
(5 marks)
REFERENCE
Boockholdt J.L., (1999). Accounting Information Systems. Singapore: McGraw-Hill.
James A. Hall, (2001). Accounting Information Systems. Ohio: Thomson Learning.
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