Computer-Based Accounting Systems

We can view technological innovation in AIS as a continuum with automation at one end and
reengineering
at the other. Automation involves using technology to improve the efficiency and effectiveness of
a task. Too often, however, the automated system simply replicates the traditional (manual) process that
it replaces. Reengineering, on the other hand, involves radically rethinking the business process and
the work flow. The objective of reengineering is to improve operational performance and reduce costs
by identifying and eliminating non–value-added tasks. This involves replacing traditional procedures
with procedures that are innovative and often very different from those that previously existed.
In this section we review automation and reengineering techniques applied to both sales order processing
and cash receipts systems. We also review the key features of point-of-sale (POS) systems. Next, we
examine electronic data interchange (EDI) and the Internet as alternative techniques for reengineering
the
revenue cycle. Finally, we look at some issues related to PC-based accounting systems.
AUTOMATING SALES ORDER PROCESSING
WITH BATCH TECHNOLOGY
The file structures used to illustrate the following automated system are presented in Figure 4-15. The
relationship
between key data in the transaction files and master files that it updates is represented with arrows.
Notice also that the sales order file has three key fields—SALES ORDER NUMBER, ACCOUNT
NUMBER,
and INVENTORY NUMBER. SALES ORDER NUMBER is the primary key (PK) because it is the

only field that uniquely identifies each record in the file. This is the preprinted number on the physical
source
document that is transcribed during the keystroke operation. In systems that do not use physical source
documents,
the system automatically assigns this unique number. The PK is critical in preserving the audit trail. It
provides the link between digital records stored on a computer disk and the physical source documents.
ACCOUNT NUMBER and INVENTORY NUMBER are both secondary keys (SK) as neither of
these keys uniquely identifies sales order records. For instance, there may be more than one sales order
for a particular customer. Similarly, the same inventory item type may be sold to more than one customer.
Hence, the values for these keys are not unique. Their purpose is to locate the corresponding records in
the AR subsidiary and inventory master files.
A simplifying assumption in this hypothetical system is that each sales order record is for a single item
of inventory. This one-to-one relationship is unrealistic because in reality one sales order could include
many different inventory items. In Chapter 9, we will examine more complex file structures that permit
the representation of one-to-many (1:M) and many-to-many (M:M) relationships that are frequently found
in business transactions. At this point, however, avoiding this complicating factor will facilitate
understanding
of both automated and reengineered systems.
Figure 4-16 illustrates an automated sales order system that employs batch processing. 1 The greatest
impact from this low-end technology is seen in billing, inventory control, accounts receivable, and general
ledger. These previously manual bookkeeping tasks have been automated. The two principal advantages
of this are cost savings and error reduction. By automating accounting tasks, a firm can reduce its
clerical staff and its exposure to many forms of errors. Other clerical and operational tasks including sales
order taking, credit checking, warehousing, and shipping are performed manually in this system. The
tasks presented in Figure 4-16 are described in the following sections.
Sales Department
The sales process begins with a customer contacting the sales department and placing an order. The
sales
clerk records the essential details and prepares multiple copies of a sales order, which are held pending
credit approval.
Credit Department Approval
When credit is approved, the sales department releases copies of the sales order to the billing,
warehouse,
and shipping departments. The customer order and credit approval are then placed in the open order file.
Warehouse Procedures
Next the warehouse clerk receives the stock release copy of the sales order and uses this to pick the
goods. The inventory and stock release are then sent to the shipping department.
The Shipping Department
The shipping clerk reconciles the products received from the warehouse with the shipping notice.
Assuming
no discrepancies exist, a bill of lading is prepared, and the products are packaged and shipped via
common carrier to the customer. The clerk then sends the shipping notice to the computer department.
KEYSTROKE
The automated element of the system begins with the arrival of batches of shipping notices from the
shipping
department. These documents are verified copies of the sales orders that contain information about the
customer
and the items shipped. The keystroke clerk converts the hard-copy shipping notices to digital form to
produce a transaction file of sales orders. This is a continuous process. Several times throughout the day,
the
keystroke clerk transcribes batches of shipping notices. The resulting transaction file will thus contain
many
separate batches of records. For each batch stored on the file, batch control totals are automatically
calculated.2
1 A variant on this system, which uses sequential flat files, is discussed in this chapter’s Appendix.
2 Batch controls are designed to manage the flow of large numbers of records through the system. They consist of summary figures
pertaining to the number of records in the batch, total dollar amount of the batch, and a hash total of a nonfinancial field. See
Chapter 17 for a detailed discussion.

EDIT RUN
Periodically, the sales order system is executed. Depending on transaction volume and the need for
current
information, this could be a single end-of-day task or performed several times per day. The system is
composed
of a series of program runs. The edit program first validates all transaction records in the batch by
performing clerical and logical tests on the data. Typical tests include field checks, limit tests, range tests,
and price-times-quantity extensions.3 Recall from Chapter 2 that detected errors are removed from the
batch
and copied to a separate error file (not shown in Figure 4-16), which are later corrected and resubmitted
for
processing with the next day’s business. The edit program recalculates the batch control totals to reflect
any
changes due to the removal of error records. The edited sales order file is then passed to the file update
run.
UPDATE PROCEDURES
Figure 4-17 illustrates the direct access update process using sample data. Starting at the top of the
edited
sales order file, the update program posts the first transaction to the corresponding inventory and AR
subsidiary
records using the secondary keys (INVENTORY NUMBER and ACCOUNT NUMBER) to
locate the records directly. This transaction is then recorded in the journal, and the program moves to the
next transaction record and repeats the process. This continues until all records in the transaction file
have
been posted. The general ledger accounts are typically updated after each batch. When the program
reaches the end of the transaction file, it terminates.
This system generates a number of management reports, including sales summaries, inventory status
reports, transaction listings, journal voucher listings, and budget and performance reports. Quality
management
reports play a key role in helping management monitor operations to ensure that controls are in
place and functioning properly. In Chapter 8, we examine management information needs and
management
reporting techniques in detail.
REENGINEERING SALES ORDER PROCESSING
WITH REAL-TIME TECHNOLOGY
Figure 4-18 illustrates a real-time sales order system. Interactive computer terminals replace many of the
manual procedures and physical documents of the previous system. This interactive system provides
realtime
input and output with batch updating of only some master files.
TRANSACTION PROCESSING PROCEDURES
Sales Procedures
Under real-time processing, sales clerks receiving orders from customers process each transaction
separately
as it is received. Using a computer terminal connected to a sales order system, the clerk performs
the following tasks in real-time mode:
1. The system accesses the inventory subsidiary file and checks the availability of the inventory. It then
performs a credit check by retrieving the customer credit data in the customer’s (AR) file. This file
contains
information such as the customer’s credit limit, current balance, date of last payment, and current
credit status. Based on programmed criteria, the customer’s request for credit is approved or denied.
2. If credit is approved, the system updates the customer’s current balance to reflect the sale and reduces
inventory by the quantities of items sold to present an accurate and current picture of inventory on
hand and available for sale.
3. The system automatically transmits a digital stock release document to the warehouse, a digital
shipping
notice to the shipping department, and records the sale in the open sales order file. The structure
of this file includes a CLOSED field that contains either the value N or Y to indicate the status of the
order. Closed records (those containing the value Y) have been shipped, so the customer can now be
billed. This field is used later to identify closed records to the batch procedure. The default value in
this field when the record is created is N. It is changed to Y when the goods are shipped to the

Warehouse Procedures
The warehouse clerk’s terminal immediately produces a hard-copy printout of the electronically
transmitted
stock release document. The clerk then picks the goods and sends them, along with a copy of the
stock release document, to the shipping department.
Shipping Department
A shipping clerk reconciles the goods, the stock release document, and the hard-copy packing slip
produced
on the terminal. The clerk then selects a carrier and prepares the goods for shipment. From the terminal,
the clerk transmits a shipping notice containing shipping date and freight charges. The system
updates the open sales order record in real time and places a Y value in the CLOSED field, thus closing
the sales order.
GENERAL LEDGER UPDATE PROCEDURES
At the end of the day, the batch update program searches the open sales order file for records marked
closed and updates the following general ledger accounts: Inventory—Control, Sales, AR—Control, and
Cost of Goods Sold. The inventory subsidiary and AR subsidiary records were updated previously during
the real-time procedures. Recall from Chapter 2 that batch updating of general ledger records is done to
achieve operational efficiency in high-volume transaction processing systems. An alternative approach is

to update the general ledger accounts in real time, if doing so poses no significant operational delays.
Finally, the batch program prepares and mails customer bills and transfers the closed sales records to the
closed sales order file (sales journal).
ADVANTAGES OF REAL-TIME PROCESSING
Reengineering the sales order processes to include real-time technology can significantly reduce
operating
costs while increasing revenues. The following advantages make this approach an attractive option
for many organizations:
1. Real-time processing greatly shortens the cash cycle of the firm. Lags inherent in batch systems can
cause delays of several days between taking an order and billing the customer. A real-time system
with remote terminals reduces or eliminates these lags. An order received in the morning may be
shipped by early afternoon, thus permitting same-day billing of the customer.
2. Real-time processing can give the firm a competitive advantage in the marketplace. By maintaining
current inventory information, sales staff can determine immediately whether the inventories are on
hand. This enhances the firm’s ability to maximize customer satisfaction, which translates into
increased sales. In contrast, batch systems do not provide salespeople with current information. As a
result, a portion of the order must sometimes be back-ordered, causing uncertainty for the customer.
3. Manual procedures tend to produce clerical errors, such as incorrect account numbers, invalid
inventory
numbers, and price–quantity extension miscalculations. These errors may go undetected in batch
systems until the source documents reach data processing, by which time the damage may have already
been done. For example, the firm may find that it has shipped goods to the wrong address,
shipped the wrong goods, or promised goods to a customer at the wrong price. Real-time editing permits
the identification of many kinds of errors as they occur and greatly improves the efficiency and
the effectiveness of operations.
4. Finally, real-time processing reduces the amount of paper documents in a system. Hard-copy
documents
are expensive to produce and clutter the system. The permanent storage of these documents
can become a financial and operational burden. Documents in digital form are efficient, effective,
and adequate for audit trail purposes.
AUTOMATED CASH RECEIPTS PROCEDURES
Cash receipts procedures are natural batch systems. Unlike sales transactions, which tend to occur
continuously
throughout the day, cash receipts are discrete events. Checks and remittance advices arrive from
the postal service in batches. Likewise, the deposit of cash receipts in the bank usually happens as a
single
event at the end of the business day. The cash receipts system in Figure 4-19 uses technology that
automates
manual procedures. The following discussion outlines the main points of this system.
Mail Room
The mail room clerk separates the checks and remittance advices and prepares a remittance list. These
checks and a copy of the remittance list are sent to the cash receipts department. The remittance advices
and a copy of the remittance list are sent to the AR department.
Cash Receipts Department
The cash receipts clerk reconciles the checks and the remittance list and prepares the deposit slips. Via
terminal, the clerk creates a journal voucher record of total cash received. The clerk files the remittance
list and one copy of the deposit slip. At the end of the day, the clerk deposits the cash in the bank.
Accounts Receivable Department
The AR clerk receives and reconciles the remittance advices and remittance list. Via terminal, the clerk
creates the cash receipts transaction file based on the individual remittance advices. The clerk then files
the remittance advices and the remittance list.

Data Processing Department