Chapter 2

Overview of Transaction Processing and

Transaction Processing: The Data Processing Cycle

Data Input
Data must be collected about three facets of each business activity:

1. Each activity of interest

Source documents – Documents used to capture transaction data at its source – when the
transaction takes place. Examples include sales orders, purchase orders, and employee time cards.

Turnaround documents – Records of company data sent to an external party and then returned to
the system as input. Turnaround documents are in machine- readable form to facilitate their
subsequent processing as input records. An example is a utility bill.

Source data automation – The collection of transaction data in machine-readable form at the time
and place of origin. Examples are point-of-sale terminals and ATMs.

Data Storage
LEDGERS

General ledger - A ledger that contains summary-level data for every asset, liability, equity, revenue,
and expense account of the organization.

Subsidiary ledger - A ledger used to record detailed data for a general ledger account with many
individual subaccounts, such as accounts receivable, inventory, and accounts payable.

Control account - A title given to a general ledger account thatsummarizes the total amounts
recorded in a subsidiary ledger. For example, the accounts receivable control account in the general
ledger representsthe total amount owed by all customers. The balances in the accounts receivable
subsidiary ledger indicate the amount owed by each specific customer.

CODING TECHNIQUES

Coding -The systematic assignment of numbers or letters to items to classify and organize them.

Sequence codes - items are numbered consecutively to account for all items. Any missing items
cause a gap in the numerical sequence. Examples include prenumbered checks, invoices, and
purchase orders.
Block code - Blocks of numbers that are reserved for specific categories of data, thereby helping to
organize the data. An example is a chart of accounts.

Group codes - Two or more subgroups of digits that are used to code an item. A group code is often
used in conjunction with a block code.

Mnemonic code - Letters and numbers that are interspersed to identify an item. The mnemonic
code is derived from the description of the item and is usually easy to memorize.

The following guidelines result in a better coding system. The code should:

- Be consistent with its intended use, which requires that the code designer determine
desired system outputs prior to selecting the code.
- Allow for growth. For example, don’t use a three-digit employee code for a fast-growing
company with 950 employees.
- Be as simple as possible to minimize costs, facilitate memorization and interpretation, and
ensure employee acceptance.
- Be consistent with the company’s organizational structure and across the company’s
divisions.

CHART OF ACCOUNTS

Chart of accounts - A listing ofCall the numbers assigned to balance sheet and income statement
accounts. The account numbers allow transaction data to be coded, classified, and entered into the
proper accounts. They also facilitate financial statement and report preparation.

JOURNAL

General journal - A journal used to record infrequent or nonroutine transactions, such as loan
payments and end-of-period adjusting and closing entries.

Specialized journal - A journal used to record a large number of repetitive transactions such as credit
sales, cash receipts, purchases, and cash disbursements.

AUDIT TRAIL

Audit trail - A path that allows a transaction to be traced through a data processing system from
point of origin to output or backwards from output to point of origin. It is used to check the accuracy
and validity of ledger postings and to trace changes in general ledger accounts from their beginning
balance to their ending balance.

COMPUTER-BASED STORAGE CONCEPT

Entity - The item about which information is stored in a record. Examples include an employee, an
inventory item, and a customer.

Attributes - The properties, identifying numbers, and characteristics of interest of an entity that is
stored in a database. Examples are employee number,bpay rate, name, and address.
Field - The portion of a data record where the data value for a particular attribute is stored. For
example, in a spreadsheet each row might represent a customer and each column is an attribute of
the customer. Each cell in a spreadsheet is a field.

Record - A set of fields whose data values describe specific attributes of an entity, such as all payroll
data relating to a single employee. An example is a row in a spreadsheet.

Data value - The actual value stored in a field. It describes a particular attribute of an entity. For
example, the customer name field would contain “ZYX Company” if that company was a customer.

File - A set of logically related records, such as the payroll records of all employees.

Master file - A permanent file of records that stores cumulative data about an organization. As
transactions take place, individual records within a master file are updated to keep them current.

Transaction file - A file that contains the individual business transactions that occur during a specific
fiscal period. A transaction file is conceptually similar to a journal in a manual AIS.

Database - A set of interrelated, centrally controlled data files that are stored with as little data
redundancy as possible. A database consolidates records previously stored in separate files into a
common pool and serves a variety of users and data processing applications.

DATA PROCESSING

The four different types of data processing activities, referred to as CRUD, are as follows:

1. Creating new data records, such as adding a newly hired employee to the payroll database.
2. Reading, retrieving, or viewing existing data.
3. Updating previously stored data.
4. Deleting data, such as purging the vendor master file of all vendors the company no longer
does business with.

Batch processing – Accumulating transaction records into groups or batches for processing at a
regular interval such as daily or weekly. The records are usually sorted into some sequence (such as
numerically or alphabetically) before processing.

Online, real-time processing - The computer system processes data immediately after capture and
provides updated information to users on a timely basis.

INFORMATION OUTPUT

Document - A record of a transaction or other company data. Examples include checks, invoices,
receiving reports, and purchase requisitions.

Reports - System output, organized in a meaningful fashion, that is used by employees to control
operational activities, by managers to make decisions and design strategies, and by investors and
creditors to understand a company’s business activities.

Query - A request for the database to provide the information needed to deal with a problem or
answer a question. The information is retrieved, displayed or printed, and/or analyzed as requested.
Enterprise Resource Planning (ERP) Systems
Enterprise resource planning (ERP) system - A system that integrates all aspects of an organization’s
activities—such as accounting, finance, marketing, human resources, manufacturing, inventory
management—into one system. An ERP system is modularized; companies can purchase the
individual modules that meet their specific needs. An ERP facilitates information flow among the
company’s various business functions and manages communications with outside stakeholders.

An ERP system, with its centralized database, provides significant advantages:

- An ERP provides an integrated, enterprise-wide, single view of the organization’s data and
financial situation. Storing all corporate information in a single database breaks down
barriers between departments and streamlines the flow of information.
- Data input is captured or keyed once, rather than multiple times, as it is entered into
different systems. Downloading data from one system to another is no longer needed.
- Management gains greater visibility into every area of the enterprise and greater monitoring
capabilities. Employees are more productive and efficient because they can quickly gather
data from both inside and outside their own department.
- The organization gains better access control. An ERP can consolidate multiple permissions
and security models into a single data access structure.
- Procedures and reports are standardized across business units. This standardization can be
especially valuable with mergers and acquisitions because an ERP system can replace the
different systems with a single, unified system.
- Customer service improves because employees can quickly access orders, available inventory
shipping information, and past customer transaction details.
- Manufacturing plants receive new orders in real time, and the automation of manufacturing
processes leads to increased productivity.

ERP systems also have significant disadvantages:

- Cost. ERP hardware, software, and consulting costs range from $50 to $500 million for a
Fortune 500 company and upgrades can cost $50 million to $100 million. Midsized
companies spend between $10 and $20 million.
- Amount of time required. It can take years to select and fully implement an ERP system,
depending on business size, number of modules to be implemented, degree of
customization, the scope of the change, and how well the customer takes ownership of the
project  high risk of project failure.
- Changes to business processes. Unless a company wants to spend time and money
customizing modules, they must adapt to standardized business processes as opposed to
adapting the ERP package to existing company processes.
- Complexity. This comes from integrating many different business activities and systems,
each having different processes, business rules, data semantics, authorization hierarchies,
and decision centers.
- Resistance  It also takes considerable training and experience to use an ERP system
effectively, and employee resistance is a major reason why many ERP implementations do
not succeed. It is not easy to convince employees to change how they do their jobs, train
them in new procedures, master the new system, and persuade them to share sensitive
information.