Chapter2 Transaction Processing in the AIS

Accounting

The process of

Identifying

Measuring

Communicating

Economic information to permit informed judgments and decisions

By users of the information.

Bookeeping

The elements of accounting associated with

Identifying

Measuring

It's part of accounting; not it's totality.

Steps completed each period to :

Identify recordable transactions;

Measure related dollar amounts;

Record transactions in the AIS;

Prepare general purpose financial statements.

Important steps

Throughout the fiscal year

Obtain transaction information from source documents

Analyze transactions

Record transactions in the journal

Post to the ledger

Prepare a trial balance

End of the fiscal year

Record and post adjusting entries

Prepare adjusted trial balance

Prepare financial statements

Record and post closing entries

Prepare post-closing trial balance

Adjusting entries

Purpose--To account for timing differences between cash flow and accrual basis revenue&expense

Types

Accruals--service first,cash second

Revenue

Debit Asset

Credit Revenue

Expense

Debit Expense

Credit Liability

Deferrals--cash first, service second

Revenue

Debit Liability

Credit Revenue

Prepaid Expense

Debit Expense

Credit Asset

Estimates

Depreciation

Debit Expense

Credit Contra asset

Uncolletible accounts

Debit Expense

Credit Contra asset

Financial Statements

Income statement--financial activity on the accrual basis for a specified period of time

Balance sheet--Financial position at a specific point in time

Statement of cash flows

Operating

Investing

Financing

Statement if changes in equity--same period of time as income statement

Closing entries

Prepare the AIS for a new fiscal year

Balances in temporary accounts transferred to Retained Earnings

Revenues

Expenses

Dividends

Transaction types

Internal transactions

Common source documents

Sequential numbering

Physical security

Transaction limits

Other internsl controls

Proper authorizations

Audits

Information technology controls

External treansactions

Types

Sequential coding--simply numbers items in sequence

Numbers in order

Often foe source documents

Block coding--quite common

Codes assigned in blocks

Often for chart of accounts

Hierarchical codes--more sophisticated

Specializws form of block coding

Used for complex chart of accounts

Mnemonic codes--by their nature

Memory aid

Used for inventory items

Commonly applied to

Source documents

Inventory items

Chart of accounts

Human Judgment

Used to

Designing source documents

Recognizing recordable transactions

Estimating ampunts and interpreting accounting rules

Essential in the accounting cycle

Information Technology

Useful and common

Not essential in the accounting cycle

used to

Post transactions

Close nominal accounts

General financial statements and other reports