chapter

Business activities and 2

transaction processing

Learning objectives
–To understand the various business activities and business
decisions that are made.
–To decide on the information that is needed for various
decisions.
–To review the steps in the accounting cycle.
–To understand the principles of internal control.

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-1
Kaye Watson.
 key terms
• account • field
• account code • file
• adjustment note • financial statements
• assets • gross loss
• chart of accounts • gross profit
• control account • internal control
• current assets • invoice
• current liabilities • journal
• expenses • ledger

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-2
Kaye Watson.
 key terms
• liabilities • reserves
• master file • retained profit
• net loss • revenues
• net profit • source document
• non-current assets • transaction file
• non-current liabilities • transaction processing
• owner’s equity
• posting
• record

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-3
Kaye Watson.
 key terms
• Account

A detailed record of the changes that have

taken place in a particular asset, liability, or
the owner’s equity of a business in a
particular period of time

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-4
Kaye Watson.
 key terms
• Account code

An identifying number for an account

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-5
Kaye Watson.
 key terms
• Adjustment note

Document used to notify a customer of adjustments

to a transaction after it has occurred

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-6
Kaye Watson.
 key terms
• Assets

Economic resources that a business owns

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-7
Kaye Watson.
 key terms
• Chart of accounts

A list of all the accounts and their account

codes

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-8
Kaye Watson.
 key terms
• Control account

An account in the general ledger whose

balance at any time equals the sum of the
balances of a group of related accounts in a
subsidiary ledger

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-9
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 key terms
• Current assets

Assets of the business expected to be

converted to cash within a year

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-10
Kaye Watson.
 key terms
• Current liabilities

Debts of a business to be paid within a year

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-11
Kaye Watson.
 key terms
• Expenses

Decreases in owner’s equity that occur due to

a business’s transactions during a period

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-12
Kaye Watson.
 key terms
• Field

A collection of related characters

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-13
Kaye Watson.
 key terms
• File

A collection of related records

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-14
Kaye Watson.
 key terms
• Financial statements

Documents that report financial information

about a business to stakeholders

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-15
Kaye Watson.
 key terms
• Gross loss

Excess of cost of goods sold over sales

revenue

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-16
Kaye Watson.
 key terms
• Gross profit

Excess of sales revenue over cost of goods

sold

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-17
Kaye Watson.
 key terms
• Internal control

Policies and procedures followed by a

business to safeguard its assets

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-18
Kaye Watson.
 key terms
• Invoice

A document from a seller to a purchaser that

details the quantity and value of goods or
services provided to request payment for
them

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-19
Kaye Watson.
 key terms
• Journal

A book of prime entry of a business’s

transactions shown in chronological order

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-20
Kaye Watson.
 key terms
• Ledger

The book of accounts

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-21
Kaye Watson.
 key terms
• Liabilities

Economic obligations of a business payable

to outsiders

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-22
Kaye Watson.
 key terms
• Master file

A file containing the complete accounting

data

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-23
Kaye Watson.
 key terms
• Net loss

Excess of total expenses over total revenue

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-24
Kaye Watson.
 key terms
• Net profit

Excess of total revenue over total expenses

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-25
Kaye Watson.
 key terms
• Non-current assets

Assets other than current assets

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-26
Kaye Watson.
 key terms
• Non-current liabilities

Liabilities other than current liabilities

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-27
Kaye Watson.
 key terms
• Owner’s equity

The claim of the owner on a business’s

assets

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-28
Kaye Watson.
 key terms
• Posting

Transferring of amounts from the journal to

the ledger

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-29
Kaye Watson.
 key terms
• Record

A collection of related fields

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-30
Kaye Watson.
 key terms
• Reserves

Part of the retained profit of a business set

aside for a particular purpose

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-31
Kaye Watson.
 key terms
• Retained profit

A portion of the net profit for a period not

withdrawn by the owners but left in the
business as additional capital investment

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-32
Kaye Watson.
 key terms
• Revenues

Increases in owner’s equity that occur due to

business transactions during a period

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-33
Kaye Watson.
 key terms
• Source document

A document that initially either initiates a

transaction or records a transaction

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-34
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 key terms
• Transaction file

A temporary file that holds transaction

records that will be used to change or update
data in a master file

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-35
Kaye Watson.
 key terms
• Transaction processing

Accounting procedures for a transaction

completed manually or using computers

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-36
Kaye Watson.
 Structure and characteristics of
businesses
• Most common forms of ownership are:
– sole proprietorship
– partnership
– company
• Capital:
– an investment of cash or other assets required to
establish a business

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-37
Kaye Watson.
 Structure and characteristics of
businesses
• Liability:
– amount owed by a business to others
• Equity:
– amount owed by a business to owners
• Retained profit:
– amount of profit not distributed

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-38
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 Structure and characteristics of
businesses
• Liabilities of a business:
– capital contributions by owners
– retained profit
– loans
– accounts payable
– bank overdraft

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-39
Kaye Watson.
 Structure and characteristics of
businesses
• Assets of a business:
– land and buildings
– plant and equipment
– motor vehicles
– furniture
– cash at bank
– accounts receivable
– inventory
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-40
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 Business activities
• Organising capital • Paying amounts owing to
• Acquisition of premises vendors
and equipment • Paying amounts owing to
• Recruiting employees loans
• Acquiring inventory • Paying amounts owing to
• Manufacturing products employees
• Marketing and selling • Paying amounts owing to
product/service Australian Taxation Office
• Collecting amounts owing
from customers

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-41
Kaye Watson.
 Transaction processing
procedures
• Consists of the following:
– capturing transaction data on forms called source documents
– recording transaction data in books called journals
– posting data from journals to books of accounts called ledgers

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-42
Kaye Watson.
 Capturing transaction data
• Business transactions are recorded on
standardised forms that become the source
documents
• Source documents require only variable
information to be completed
• Source documents are prenumbered so it is
easy to detect missing documents

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-43
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 Capturing transaction data -
examples
• When orders are received the details of the order
are recorded on sales order documents
• When the sale takes place the details are recorded
on an invoice
• When purchases are made the details and
authorisations are recorded on purchases order
documents
• Source documents provide an audit trail so
transactions can be traced to the journals and
ledgers

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-44
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 Recording transactions
• Recording is made in a journal
• Journals can be either specialised or general
• Specialised:
– used for repetitive transactions and simplify the process
of recording large numbers of transactions (e.g. sales
journal, cash receipts journal, cash payments journal)
• General:
– records the transactions that cannot be categorised and
recorded in specialised journals

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-45
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 Posting transactions
• Information in journals is transferred or posted to
ledgers where a number of accounts are maintained
• Ledgers can be divided into general or subsidiary
ledgers
• General:
– where many accounts are recorded at summary level for
assets, liabilities, expenses and revenue
• Subsidiary:
– where individual details of these accounts are recorded

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-46
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 Chart of accounts
• The list of all account names and codes in an
organisation is called a chart of accounts
• A well-designed chart of accounts should
accomplish the following:
– adequate description of each account
– distinction between account titles
– assistance in the preparation of required reports

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-47
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 Financial statements
• There are three main financial statements:
– Statement of financial performance
• profit and loss statement
– Statement of financial position (balance sheet)
• statement of the assets, liabilities and owner’s equity
of a business at any point in time
– Statement of cash flows
• shows the changes in an organisation’s cash situation
between the beginning and end of an accounting
period

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-48
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 Management reports
• Specialised reports for management control
purposes. For example:
– inventory levels
– profitability of each product
– performance of each salesperson
– daily cash balances and commitments
– extent of back orders

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-49
Kaye Watson.
 Internal control issues
• Adequate internal controls are required to:
– facilitate the capture of reliable business data
– safeguard assets and business data
– enable the execution of management objectives
• Internal control principals include:
– documented procedures
– quality of personnel
– authority
– recording of transactions
– internal verification

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-50
Kaye Watson.
 Computer accounting systems
• Now used by most organisations
• Most computer accounting packages may have
modules for:
– general ledger
– cash book
– accounts receivable
– accounts payable
– inventory
– payroll
– asset register

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-51
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• Now let’s moving on to discussing some computer-based storage
concepts, including:
– Entity
– Attribute
– Record
– Data Value
– Field
– File
– Master File
– Transaction File
– Database

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-52
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• An entity is something about which
information is stored.
• In university’s student information system,
one entity is the student. The student
information system stores information about
students.

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-53
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• Attributes are characteristics of interest with respect
to the entity.
• Some attributes that a student information system
typically stores about the student entity are:
– Student ID number
– Phone number
– Address

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-54
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A field is the physical space where an
attribute is stored.
• The space where the student ID number is
stored is the student ID field.

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-55
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A record is the set of attributes stored for a
particular instance of an entity.
• The combination of attributes stored for Barry
Andrews is Barry’s record.

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-56
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A data value is the intersection of the row and
column.
• The data value for Barry Andrews’ phone
number is 405-744-0236

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-57
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A file is a group of related records.
• The collection of records about all students at
the university might be called the student file.
If there were only three students and four
attributes stored for each student, the file
might appear as shown below:
Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50
328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-58
Kaye Watson.
COMPUTER-BASED STORAGE
CONCEPTS
• A master file is a file that stores cumulative
information about an organization’s entities.
• It is conceptually similar to a ledger in a
manual AIS in that:
– The file is permanent
– The file exists across fiscal periods
– Changes are made to the file to reflect the effects
of new transactions.
•
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-59
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A transaction file is a file that contains
records of individual transactions (events)
that occur during a fiscal period.
• It is conceptually similar to a journal in a
manual AIS in that:
– The files are temporary
– The files are usually maintained for one fiscal
period

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-60
Kaye Watson.
 COMPUTER-BASED STORAGE
CONCEPTS
• A database is a set of interrelated, centrally-
coordinated files.
• When files about students are integrated with
files about classes and files about instructors,
we have a database.
Student Class
File File

Instructor
File

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-61
Kaye Watson.
 DATA PROCESSING
• Once data about a business activity has been collected and entered into
a system, it must be processed.
• There are four different types of file processing:
– Updating data to record the occurrence of an event, the
resources affected by the event, and the agents who
participated, e.g., recording a sale to a customer.
– Changing data, e.g., a customer address
– Adding data, e.g., a new customer.
– Deleting data, e.g., removing an old customer that has
not purchased anything in 5 years.

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-62
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DATA PROCESSING
Updating can be done through several approaches
• Batch processing:
– Source documents are grouped into batches, and
control totals are calculated.
– Periodically, the batches are entered into the
computer system, edited, sorted, and stored in a
temporary file.
– The temporary transaction file is run against the
master file to update the master file.
– Output is printed or displayed, along with error
reports, transaction reports, and control totals

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-63
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 DATA PROCESSING
• On-line batch processing:
– Transactions are entered into a computer system
as they occur and stored in a temporary file.
– Periodically, the temporary transaction file is run
against the master file to update the master file.
– The output is printed or displayed.

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Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-64
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 DATA PROCESSING
• On-line, Real-time Processing
– Transactions are entered into a computer system
as they occur.
– The master file is immediately updated with the
data from the transaction.
– Output is printed or displayed.

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-65
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 DATA PROCESSING
• Updating can be done through several approaches:
– Batch processing
– On-line Batch Processing
– On-line, Real-time Processing

© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by 2-66
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