millions of transactions daily. To efficiently process such a large volume of transac-
tions, most businesses group similar, repetitive transactions into transaction cycles.
The most common transaction cycles are the revenue cycle, the purchasing cycle, the
payroll cycle, the inventory cycle, and the treasury cycle.
Revenue cycletransactions involve providing services or selling products. They in-
clude collecting payments for the services or products. The purchasing cycletransac-
tions involve buying assets or services for use in the normal operations of the business.
Included in the purchasing cycle is the payment for the goods or services. Payroll cycle
transactions involve paying employees. Inventory cycletransactions involve buying ma-
terials or finished products that eventually will be sold. Manufacturing businesses con-
vert raw materials into finished products for sale. Merchandising businesses buy
finished products ready for sale. Treasury cycletransactions involve financing the op-
erations of the business. Examples of treasury cycle transactions include issuing capi-
tal stock or long-term debt. Paying dividends and redeeming long-term debt would
also be types of treasury cycle transactions.
Thefinancial reporting systemproduces financial statements and other reports
for external stakeholders. The financial reporting system is closely interrelated to the
transaction processing system in that the financial statements summarize the effects of
transactions on the financial condition and changes in financial condition of the busi-
ness. The financial reporting system also summarizes transactions for other stake-
holders in reports such as tax returns and other regulatory reports.
Our primary focus in this text is on the transaction processing and financial
reporting systems. In this chapter, we describe and illustrate the basic elements of
these two systems.TRANSACTION PROCESSING SYSTEMS
The basic elements of transaction processing systems have evolved over centuries, be-
ginning with the earliest known economic activity and ending with today’s highly
computerized and integrated information systems. These elements include accounts154 Chapter 4 Accounting Information Systems
Hub-and-Spoke or Point-to-Point?
HOW BUSINESSES MAKE MONEY
Southwest Airlinesuses a simple fare structure, featuring
low, unrestricted, unlimited, everyday coach fares. These fares
are made possible by Southwest’s use of a point-
to-point, rather than hub-and-spoke, business ap-
proach.United,Delta, and Americanemploy a
hub-and-spoke approach in which an airline estab-
lishes major hubs that serve as connecting links to
other cities. For example, Delta has established ma-
jor connecting hubs in Atlanta, Cincinnati, and Salt
Lake City. In contrast, Southwest focuses on point-
to-point service between selected cities with over
300 one-way, nonstop city pairs with an average length of
500 miles and average flying time of 1.5 hours. As a result,Southwest minimizes connections, delays, and total trip time.
Southwest also focuses on serving conveniently located satellite
or downtown airports, such as Dallas Love Field,
Houston Hobby, and Chicago Midway. Because
these airports are normally less congested than hub
airports, Southwest is better able to maintain high
employee productivity and reliable on-time perfor-
mance. This permits the company to achieve high
asset utilization of its fixed assets, such as its 737
aircraft. For example, aircraft are scheduled to spend
only 25 minutes at the gate, thereby reducing the
number of aircraft and gate facilities that would otherwise be
required.Describe and illustrate the
basic elements of transac-
tion processing systems.3
International Perspective
International Accounting
Standards rely on broad-
based principles, rather
than on detailed account-
ing rules. These rules pro-
vide general guidance on
how transactions should
be recorded, but they re-
quire the preparer to exer-
cise considerable
professional judgment in
recording and reporting
transactions.