TRANSACTION PROCESSING

I. The Data Processing Cycle

 The four operations (input, storage, processing and output) performed on data to generate meaningful and relevant information
 Accountants interact with systems analyst to help answer questions such as:
o What data should be entered and stored by the organization, and who should have access to them?
o How should data be organized, updated, stored, accessed, and retrieved?
o How can scheduled and unanticipated information requirements be met?
 One important AIS function is to process company transactions efficiently and effectively
o In manual (non-computer-based) systems, data are entered into journals and ledgers maintained on paper.
o In computer-based systems, data are entered into computers and stored in files and databases.

1. DATA INPUT

 First step in processing input is to capture transaction data and enter them into the system.
o The data capture process is usually triggered by a business activity (financial transaction).
o Data must be collected in about three (3) aspects of each business activity:
 Each activity of interest
 Sales Activity
 Expenditure
 Resources affected by each activity
 Inventory sold
 Cash received/ paid
 The people who participated in each activity
 Employee who made the sale
 The clerk who processed the checkout of the item
 The cashier who received the payment
o Source Documents
 A source document is the original record containing the details to substantiate a transaction entered in an
accounting system.
 Historically, most business used paper source documents to collect data about their business activity; and then
transferred the data collected to a computer
 Source documents are used to capture and formalize transaction data that the transaction cycle uses for
processing.
 Form of documentary evidence which provide detailed written proof of financial transactions.
 Helpful for Audit purposes (serves as an audit trail).
 Common Business Activities and Source Documents:

BUSINESS ACTIVITIES SOURCE DOCUMENT

Take customer order Sales order
Deliver/ ship order Delivery ticket/ bill of lading
Receive cash payment Remittance advice/ remittance list
Deposit cash receipts in bank Deposit slip
Adjust customer account Credit memo
Request items Purchase requisition
Order items Purchase order
Receive items Receiving report
Pay for items purchased Check/ fund transfers
Collect employee data Employee detail form
Record time worked per employee Time cards/ reports from biometrics
Record time spent per specific jobs Job tickets/ time sheet

 Common contents of source documents are:

 A brief description of business transaction/ activity
 Date of the transaction
 Amount
 Authorizing signature(s)
 Control number
 Names of the buyer and seller
 The second step in processing input is to make sure captured data are accurate and complete.
o One way to do this is to use source data automation and data entry screens.
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 o A well-designed documents and screens improve accuracy and completeness by providing instructions or prompts
about what data to collect, grouping logically related pieces of information close together, using checkoff boxes or pull-
down menus to present the available options, and using appropriate shading and borders to clearly separate data items.
o Data input screens usually list all the data the user needs to enter; sometimes these screens resemble source documents,
and users fill out the screen the same way they would a paper source document.
o Users can improve control either by using prenumbered source documents or by having the system automatically assign
a sequential number to each new transaction.
o Prenumbering simplifies verifying that all transactions have been recorded and that none of the documents has been
misplaced.
 The third step in processing input is to make sure company policies are followed, such as:
o Transaction approval
o Verifying a transaction
o Checking credit limit

2. DATA STORAGE

 A company’s data are one of its most important resources; however, the mere existence of relevant data does not guarantee that
they are useful.
 To function properly, an organization must have ready and easy access to its data, therefore, accountants need to understand
how data are organized and stored in an AIS and how they can be accessed.
 Accountants needs to know how to manage data for maximum corporate use.
 Data storage used in Accounting
o Journals
 Transaction data are often recorded in a journal before they are entered into a ledger; it shows the amount and
accounts to be debited and credited.
 When all relevant facts about the transaction are known, the event is recorded in a journal in chronological
order.
 Each transaction requires a separate journal entry, reflecting the accounts affected and the amounts to be
debited and credited.
 There are two primary types of journals:
 Special Journals – journal used to record a large number of repetitive transactions such as credit sales,
cash receipts, purchases, and cash disbursements.
o Purchase Journal
o Sales Journal
o Cash Receipt Journal
o Cash Disbursement Journal
 General Journals – firms used general journals to record nonrecurring, infrequent and dissimilar
transactions.
o Depreciation and Amortization
o Adjusting and Closing Entries
o Ledgers
 A book of accounts that reflects the financial effects of the firm’s transactions after they are posted from the
various journals.
 A ledger indicates the increases, decreases and current balance of each account.
 Organizations use this information to prepare financial statements, support daily operations and prepare
internal reports.
 Two types of ledger:
 General Ledger – Contains summary- level data for each Asset, Liability, Equity, Revenue and
Expense account. It shows a specific account’s beginning balances, the changes and the ending
balances as of a particular date
 Subsidiary Ledger – contain the details of the individual accounts that constitute a particular control
account in the general ledger
 Control Account is a title given to a general ledger account that summarizes the total amounts recorded in a
subsidiary ledger.
 Coding Techniques
o Data in ledgers is organized logically using coding techniques; coding is the systematic assignment of numbers or
letters to items to classify and organize them.
o Sequence Codes
 Items are numbered consecutively to account for all items.
 Any missing items cause a gap in the numerical sequence.
o Block Code
 Blocks of numbers are reserved for specific categories of data.
 Example:
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 Account Codes Account Type
1000-1999 Assets
2000-2999 Liabilities
3000-3999 Equity
4000-4999 Revenue
5000-5999 Expense
o Group Codes
 Two or more subgroups of digits used to code items, are often used in conjunction with the block codes.
 Example:
Digit Position Meaning
1-2 Product Line
3 Color
4-5 Year of Manufacture
o Mnemonic Code
 Letters and numbers are interspersed to identify an item.
o Guidelines in implementing a coding system:
 Be consistent with its intended use
 Allowance for growth
 Be simple as possible
 Be consistent with company’s structure
 Chart of Accounts
o The chart of accounts is a listing of all accounts used in the general ledger of an organization
o These account numbers allow transaction data to be coded, classified, and entered into the proper accounts; they also
facilitate the preparation of financial statements and reports, because data stored in individual accounts can easily be
summed for presentation.
o The chart is used by the accounting software to aggregate information into an entity's financial statements.
o The chart is usually sorted in order by account number, to ease the task of locating specific accounts.
o The accounts follow a Coding Technique depends on the nature of the business organization.
o Example:

 Computer Based Storage Concepts

o Entity
 The item about which information is stored in a record. Examples include an employee, an inventory item,
and a customer.
o Attributes
 The properties, identifying numbers, and characteristics of interest of an entity that is stored in a database.
Examples are employee number, pay rate, name, and address.
o 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.
o 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.
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 o 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.
o Files
 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.

3. DATA PROCESSING

 Once business activity data have been entered into the system, they must be processed to keep the data base current.
 The FOUR different types of data processing activities are as follows:
o Creating – new data records
o Reading – retrieving or viewing existing data
o Updating – updates previously stored data
o Deleting
 Processing Models
o Batch Processing
 Involves gathering transactions into groups or batches and then processing the entire batch as a single event.
 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.
o Online, Real Time Processing
 Process individual transactions continuously as they occur.
 The computer system processes data immediately after capture and provides updated information to users on
a timely basis.
o Online Batch Processing
 A combination of batch and online, real time processing, where transaction data are entered and edited as they
occur and stored for later processing.

4. INFORMATION OUTPUT

 Final step in the data processing cycle.

 When displayed on a monitor, it is referred as Soft Copy. When printed on paper, it is referred to as Hard Copy.
 Information is usually presented in one of three forms:
o Document
 Records of transactions or other company data.
 Some are transmitted to external parties (checks, invoices), and some are used internally (receiving reports,
purchase requisition)
o Reports
 Used by employees to control operational activities.
 Used by managers to make decisions and to formulate business strategies.
 External users need reports to evaluate company profitability, judge creditworthiness or comply with
regulatory requirements.
 Some reports are produced on a regular basis (Financial Statements), and some are produced on an exception
basis to call attention to unusual conditions. Reports can also be produced on demands.
o Database query
 A request for the data base to provide the information needed to deal with a problem or answer a question.
 Used to provide the information needed to deal with problems and questions that need rapid action or answers.
 The information is retrieved, displayed or printed, and/or analyzed as requested.

II. Transaction Processing Cycles

 Transaction Processing System (TPS) processes financial transactions, which is defined as, an economic event that affects assets
and equities of the firm, is reflected in its accounts, and is measured in monetary terms.
 The most common (most frequent) financial transactions are exchanges with external parties, which include the sale of goods
or services, purchase of inventory, payment of financial obligations and receipt of cash from customers.
 Financial transactions also include internal events such as depreciation of assets, application of labor, materials and overhead to
the production process, and transfer of inventory from one department to another.
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  To deal efficiently with the volume of financial transactions which occur regularly, business firms group similar type of
transactions into transaction cycles
 Three transaction cycles process most of the firm’s economic activity: revenue cycle, expenditure cycle and conversion cycle
(for manufacturing firms)

1. REVENUE CYCLE

 Firms sell their goods and/ or services to customers through the revenue cycle, which involves processing:
o Processing cash sales
o Processing credit sales
o Cash receipts from credit sales
 Primary subsystems of Revenue Cycle
o Sales Processing System
 Receiving order
 Checking of credit
 Pick goods from the warehouse
 Ship goods to customers
 Billing of customers
 Recording of transaction
o Cash Receipt System
 Receive payments from customers
 Deposit check
 Recording of transaction
 Perform bank reconciliation

2. EXPENDITURE CYCLE

 Business activity begin with the acquisition of raw materials, property and labor in exchange for cash.
 Primary subsystems of Expenditure Cycle
o Purchase System
 Monitoring of inventory records
 Preparation of purchase order
 Receive goods purchased
 Recording of transaction
o Cash Disbursement System
 Identify liabilities due
 Prepare cash disbursement
 Recording of transaction
 Perform bank reconciliation
o Payroll Processing System
 Collection of labor usage data for each employee
 Compute payroll
 Disbursement of cash to employees
 Recording of transaction
o Fixed Asset System
 Asset acquisition
 Asset maintenance
 Asset disposal

3. CONVERSION CYCLE

 Manufacturing firms convert raw materials into finished products through formal conversion cycle operations.
 Conversion cycle for merchandising and service type of establishments is not usually formal and observable; nevertheless, these
firms still engage in conversion cycle activities that culminate in the development of their products and/or service.
 Primary subsystems of Conversion Cycle
o Production System
 Determining raw materials requirement
 Authorizing work to be performed
 Releasing of raw materials into production
 Directing the movement of work in process through its various stages of manufacturing
o Cost Accounting System

END
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Prepared by:
EUREZE LHOED G. TABAR
CPA,MBA,CrFA

Sources:
 Accounting Information System Ninth Edition by James A. Hall
 Accounting Information System Thirteenth Edition by Marshall Romney, Paul John Steinbart
 Various Websites
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