TOPIC 2

• Transaction processing system (TPS)


  An activity consisting of three major subsystems called cycles: the revenue cycle, the expenditure cycle, and the conversion cycle

  
• All three TPS cycles capture financial transactions, record the effects of transactions in accounting records, and provide information about transactions to users in support of their day-to-day activities
• Transaction cycles produce much of the raw data from which management reports and financial statements are derived

  
• Financial transaction


  An economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms
• Common financial transactions


  • Sale of goods or services
  • Purchase of inventory
  • Discharge of financial obligations
  • Receipt of cash on account from customers
  • Depreciation of fixed assets
  • Application of labor, raw materials, and overhead to the production process
  • Transfer of inventory from one department to another
• To deal efficiently with the volume of transactions, business firms group similar types of transactions into transaction cycles
• Three transaction cycles

  • Expenditure cycle
  • Conversion cycle
  • Revenue cycle

  
• Expenditure cycle


  • Acquisition of materials, property, and labor in exchange for cash
  • Most expenditure transactions are based on a credit relationship between the trading parties
  • Separate subsystems process the physical component (the acquisition of the goods) and the financial component (the cash disbursement to the supplier)

  
• Major subsystems of the expenditure cycle

  • Purchases/accounts payable system
  • Cash disbursements system
  • Payroll system
  • Fixed asset system

  
• Conversion cycle


  • Composed of the production system and the cost accounting system
  • Production system involves the planning, scheduling, and control of the physical product through the manufacturing process
  • Cost accounting system monitors the flow of cost information related to production

  
• The conversion cycle is not usually formal and observable in service and retailing establishments, but these firms still engage in conversion cycle activities that culminate in the development of a salable product or service
• Revenue cycle


  • Involves processing cash sales, credit sales, and the receipt of cash following a credit sale
  • Has a physical component (shipping products or rendering a service) and a financial component (billing customers and recording the transaction)
• Primary subsystems of the revenue cycle

  • Sales order processing
  • Cash receipts
• Source document


  Economic events result in some documents being created at the beginning (the source) of the transaction, which are used to capture and formalize transaction data that the transaction cycle needs for processing

  
• Product document


  Documents that are the result of transaction processing rather than the triggering mechanism for the process
• Turnaround document


  Product documents of one system that become source documents for another system
• Journal


  A record of a chronological entry, where transactions are recorded in chronological order

  
• Special journal


  Used to record specific classes of transactions that occur in high volume, such as the sales journal, cash receipts journal, cash disbursements journal, purchases journal, and the payroll journal

  
• General journal

  Used to record nonrecurring transactions that do not fit into a special journal
• Sales journal


  A special journal for recording sales transactions

  
• The sales journal provides a specialized format for recording only sales transactions

  
• At the end of the processing period, a clerk posts the amounts in the columns to the ledger accounts indicated
• Other special journals

  • Cash receipts journal
  • Cash disbursements journal
  • Purchases journal
  • Payroll journal
• Register


  A log of all receipts of raw materials or merchandise ordered from vendors, or a log that records all shipments to customers
• General journal


  Used to record nonrecurring, infrequent, and dissimilar transactions, such as periodic depreciation and closing entries

  
• Most organizations have replaced their general journal with a journal voucher system
• Journal voucher


  A special source document that contains a single journal entry specifying the general ledger accounts that are affected
• Journal vouchers are used to record summaries of routine transactions, nonroutine transactions, adjusting entries, and closing entries
• General ledger (GL)


  Summarizes the activity for each of the organization's accounts

  
• The general ledger provides a single value for each control account, such as accounts payable, accounts receivable, and inventory
• The general ledger's highly summarized information is sufficient for financial reporting, but it is not useful for supporting daily business operations
• Subsidiary ledgers

  Kept in various accounting departments of the firm, including inventory, accounts payable, payroll, and accounts receivable, to provide better control and support of operations

  
• The total of account balances in a subsidiary ledger should equal the balance in the corresponding general ledger control account

  
• Reconciling summary balances from subsidiary accounts, journals, and control accounts helps assess the completeness and accuracy of transaction processing
• Audit trail


  The accounting records that provide a way to trace transactions from source documents to the financial statements
• The audit trail plays an important role in the external auditor's process of evaluating the financial statements of publicly held business organizations
• In computer-based systems, accounting records are represented by four different types of magnetic files: master files, transaction files, reference files, and archive files

  
• Master file


  Generally contains account data, such as the general ledger and subsidiary ledgers, and is updated from transactions
• Transaction file


  A temporary file of transaction records used to change or update data in a master file
• Reference file


  Stores data used as standards for processing transactions, such as tax tables, price lists, and customer credit files