Study: Identify original transactions using source documents

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This topic focuses on the very first step of the accounting cycle, which is to identify economic transactions and the related source documents.

Company management is responsible to identify and capture the source document information that they will need in order to prepare reliable financial statements.

Some small business simply throw all of their bills, invoices Links to an external site., contracts, sales receipts, canceled checks, loan documents, etc. into a shoebox (Step 1), and then ask their hired accountant to carry out all of the remaining steps (Steps 2-5, for original transactions, for adjusting entries, including preparing the financial statements Links to an external site., and for closing entries)

In contrast, large multinational, multibillion dollar companies often spend millions of dollars implementing sophisticated, computerized accounting information systems and use up thousands of man (and woman and computer) hours to perform the full accounting cycle Links to an external site.. 

Imagine the amount of work that Walmart Links to an external site. must go through to ensure that  every one of its economic transactions, in every one of its more than 10,900 retail locations, in every one of its 27 different countries, is properly identified and captured for use in the accounting cycle.  The full accounting cycle is clearly no small task.

Common Transactions and Delivery Formats
The manual accounting information systems of the past were primarily designed to identify and capture paper documents.  In contrast, modern systems, such as Enterprise Resource Planning systems Links to an external site. (ERPs), often have a pure electronic flow of documents in which paper documentation is rarely, if ever, created.  Because modern ERPs often create no physical documents, they have the added burden of ensuring that all necessary transaction information is electronically captured and is reliably backed-up.  Both manual and computerized accounting information systems need to identify and capture the necessary transaction data and store it in some usable format so that, at a minimum, the company will be able to complete the full accounting cycle and produce its financial statements.  Key transaction data include:

1) the date of the transaction and/or its contract period.

2) a description of the transaction indicating what it is for, what obligations it entails, and what period it covers.

3) the amount of the transaction

ERP systems tend to capture much more data than noted above but for right now let's just focus on the data that will be needed to perform the accounting cycle and prepare the financial statements.  Although many modern computerized accounting systems perform Steps 2 (i.e. analyze) and 3 (i.e. record) instantaneously when transactions are identified, we will still take the time to fully discuss what the computer does for you when you hear the "Beep-beep" recording and posting at the cash register.

Summary
In summary, Step 1's job in the full accounting cycle is to identify economic transactions that impact the company and capture the source documents and related data.  Whether the source data is manual or electronic, it is essential that the accounting information system capture sufficient data so that it can be adequately analyzed and recorded in support of the preparation of the company's financial statements.  Let's now move on to steps 2 (i.e. analyze) and 3 (i.e. record).

Good luck on the quiz.