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Transaction Processing Systems

ACCOUNTING INFORMATION SYSTEMS (Liverpool John Moores University)

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Transaction Processing Systems

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Transaction Processing Systems

 A transaction processing system performs routine, day-to-day operation

of a business that helps a company add value to its products and
services.

 It requires a large amount of input data and produces a large amount of

output without requiring sophisticated or complex processing.

 Examples are, order entry, inventory control, payroll, accounts payable,

accounts receivable, and general ledger.

 An automated TPS consists of all the components of a CBIS such as

hardware, software, databases, telecommunication, people, and
procedures.

 A transaction processing system serves the foundation of other systems,

such as MIS, DSS, and AI/ES. These systems handle less input and
output, but more sophisticated and complex processing.

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Transactions Processing Methods

Transactions are commonly performed in batch or on-line.

Batch Processing

 With batch processing, business transactions are accumulated over a

period of time and prepared for processing as a single unit or batch.

 There is some delay between the occurrence of an event and the

processing of the event.

 Examples are, payroll processing, billing, accounts payable, and

accounts receivable.

On-Line/Real-Time Processing (OLTP)

 With this form of data processing, each transaction is processed

immediately, without the delay of accumulating transactions into a batch.

 As soon as the input data is available, a program performs the

necessary processing and updates the records affected by the
transaction.

 Data in an OLTP always reflect the current status.

On-Line Entry with Delayed Processing

 This type of transaction is a compromise between the batch and on-line

processing.

 With this type of transaction, orders or transactions are entered into the
computer system when they occur, but they are not processed
immediately.

 Example: A typical mail order system in which orders are accumulated

and then it is forwarded to a warehouse for shipment.

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Batch vs. On-Line Processing

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Integrated Transaction Processing System

 A firm may integrate all its business activities into a single transaction
processing system, as illustrated below.

 It involves inventory control, order entry, shipping, invoice processing,

accounts receivable, purchase orders, accounts payable, payroll
processing, general ledger, and budget.

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Objectives of Transaction Processing Systems

Because of the importance of the transaction processing system,
organizations expect their TPSs to accomplish a number of specific
objectives.
Process data generated by and about transactions
 The primary objective of any TPS is to capture, process, and store
transactions and to produce a variety of documents related to routine
business activities.
 Processing orders, purchasing materials, controlling inventory, billing
customers, and paying suppliers, result in transactions that are
processed by a TPS.

Ensure data and information integrity and accuracy

 One objective of any TPS is error-free data input and processing.
 Rules must be in placed and implemented in the programming to ensure
data accuracy before it is stored.
 Another of a TPS is to ensure that all data and information stored in the
file or database are accurate, current, and appropriate.

Produce timely documents and reports

 Transaction processing systems produce routine documents such as
order slip, shipping order, invoice, purchase order, inventory status
report, inventory on-hand report, customer list, paycheck, and so on.
 These documents need to be produced in timely manner to perform
routine business transactions.

Increase labor efficiency

 Transaction processing system can substantially reduce routine clerical
and other labor requirements.
 An automated scanning device in a retail store can substantially reduce
the item processing time. This not only increases checkout efficiency
but also a reduction of the manual workforce.

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Help provide increased and enhanced service

 TPSs can provide services faster than humans, thus increasing the
number and varieties of services it can offer to customers.
 Examples are, automated university registration system, automated
billing inquiries, automated bank account transfers, and so on.

Help build and maintain customer loyalty

 TPS can be used to build customer loyalty.
 Examples are, ease of use of the system, easy access of customer
account, timely reporting of information, automated telephone answering
and faxing, and web-based information processing, can help satisfy
customers.

Achieve competitive advantage

 A competitive advantage provides a significant and long-term benefit for
the organization.
 For example, UPS and FedEx systems keep track of a package at each
stage of its traversal. Customers can use a tracking number to find the
latest status of the package.
 Some of the ways that companies can achieve competitive advantage
are mentioned below.

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Transaction Processing Activities

All transaction processing systems performs a common set of basic data

processing activities. TPSs capture and process data that describe
fundamental business transactions. This data is used to update databases
and to produce a variety of reports.

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Transaction Processing Cycle

The business data goes through a transaction processing cycle that

includes:
 Data Collection
 Data Editing
 Data Correction
 Data Manipulation
 Data Storage
 Document Production
These are briefly described in the following.

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Data Collection
 The process of capturing and gathering all data necessary to complete
transactions is called data collection.
 It can be manual such as completing a purchase order by hand. It can
also be automated via special input device such as scanners and
terminals.
 Data collection begins with a transaction (such as customer order) and
results in the origination of data that is input to the transaction
processing system.
 Data should be captured at its source and it should be recorded
accurately, in a timely fashion, with minimal manual effort, and in a
manner that can be directly entered to the computer rather than entering
using keys.
 Automatic data collection is termed as source data automation. An
example is the use of scanning device at the grocery store to read UPC
code and hence the price of an item. Another example is an employee
badge used as a time card when going in and out of an office building.

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Data Editing
 An important step in processing data is to check for validity and
completeness of data. Controls must be placed in the data-entry form.
 For example, quantity and cost must be numeric and names must be
alphabetic.

Data Correction
 A data that is not entered properly needs to be entered correctly.
 Data correction involves reentering miskeyed or misscanned data in the
data entry point.
 For example, a UPC code not found in the retail store checkout, is given
a special code to complete the transaction for an item.

Data Manipulation
 The process of performing calculations and other data transformations is
termed data manipulation.
 Examples are, sorting data, summarizing data, finding price of five
items, calculating employee weekly pay, and so on.

Data Storage
 Involves updating one or more database tables or files with new
transactions.
 For example, inserting new customer information, updating customer
demographics, updating inventory transactions, creating new student
registration, and so on.

Document Production
 TPSs produce important business documents such as sales receipts,
order entry list, customer list, invoices, purchase orders, inventory on-
hand report, paychecks, and so on.
 Documents can be hard copy paper report or displayed on computer
screen.

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Control and Management Issues

Transaction processing systems are the backbone of any organization’s
information systems.

Business Resumption Planning

 It is the process of anticipating and providing for disasters. A disaster
can be a flood, fire, earthquake, intentional damage, labor unrest or
erasure of an important file.
 Focus on maintaining the integrity of the corporation information and
keeping the information system running until normal operations can
be resumed.
 Identify potential problems and prepare for the disaster.

Disaster Recovery
 The implementation of the business resumption plan.
 The primary tools are backups for hardware, software, databases,
telecommunication, and personnel.
 Keep a backup copy of software and database to a remote location in
a safe, secure, fireproof, and temperature and humidity controlled
environment.
 Always train backup personnel in case employees leave the
company.
Transaction Processing System Audit
 Auditing a TPS system, is an attempt to answer three basic
questions:
 Does the system meet the business need for which it is
developed?
 What procedures and controls have been established?
 Are the procedures and controls being properly used?
 An internal audit is conducted by employees of the organization and an
external audit is conducted by an outside firm.
 The auditors inspects all programs, documents, control techniques, the
disaster plan, insurance protection, fire protection, and other system
management concerns such as efficiency and effectiveness of the disk
and tape library.
 The audit trail allows the auditors to trace any out from the computer
system back to its source documents.

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Traditional Transaction Processing Systems

Traditional transaction processing systems include order processing,

purchasing, and accounting. Systems that support these processing are
mentioned in the table. We describe these systems in detail in the
following.

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Order Processing Systems

 Order processing systems include order entry, sales configuration,

shipment planning, shipment execution, inventory control, invoicing,
customer interaction, and routing and scheduling.
 Figure below is a system-level flowchart that shows various systems and
the information that flows between them.
 A rectangle represents a system, a line represents a flow of information
from one system to another, and a circle represents any entity outside
the system.
 The systems that support an order processing system are described in
the following.

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Order Entry
 The order entry system captures the basic data needed to process a
customer order.
 Figure below represents a data-flow diagram of a typical order entry
system.
 A single order-entry system as found by a rectangle in the system-level
flow-chart, is further expanded to include four processes.
 A data-flow diagram shows various business processes and the flow of
data between the processes.
 An arrow represents data flow (input, output), a rectangle with rounded
corner represents a process (computer program), and an open-sided
rectangle represents data storage (file or table).

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Sales Configuration

 Ensures that products and services ordered by a customer will work

together and are sufficient to accomplish customer’s objectives.
 Example: when buying a computer and other peripherals, make sure
the peripherals are compatible to the computer.

Shipment Planning

 A system that determines which open orders will be filled and from
which location they will be shipped.
 The output of this system is a plan that shows where each order is to
be filled and a precise schedule for shipping with a specific carrier on
specific date and time.
 The system also prepares a pick list for the warehouse personnel for
shipment of each order (containing item and quantity).

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Shipment Execution
 A system that coordinates the outflow of all products and goods from
the organization, with the objective of delivering quality products on time to
customers.
 Warehouse operators pack items in the box and item number and
quantity for each item is entered in the system.
 It also creates a packing document for each order, which is enclosed
with the shipping materials.
 The system passes shipped information (item number and quantity)
to the inventory control system to update the inventory.
 The shipped information is also passed onto the Invoicing system to
create an invoice.

Inventory Control
 A system that updates the inventory records to reflect the exact
quantity on hand of each stock keeping unit.
 When a shipment is made, the quantity of the item is deducted from
the current stock.
 It creates inventory status report to reflect current stock and the need
for ordering. See figure.

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Inventory Status Report

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Invoicing
 Generates customer invoices based on records received from the
shipment execution system.
 The knowledge of order number, which contains customer and item
information, helps creating the invoice.

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Routing
 A system that determines the best way to get goods and products
from one location to another.
 UPS and FedEx uses vans, trucks, and airplanes to physically deliver
their packages around the world. They also use information systems to
keep track of delivery status of each package using a tracking number for
each package.

Scheduling
 A system that determines the best time to deliver goods and services.

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Purchasing System

The purchasing transaction processing system is used when an item (such

as a chair or software) is ordered to a supplier from a company. It includes
inventory control, purchase order processing, receiving, and accounts
payable. These systems are described in the following.

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Inventory Control
 Maintains stock of items such as raw materials, packing materials,
spare parts, and supplies that are used regularly.
 As the items are used, the system updates the item quantity, and
produces reports.
Purchase Order Processing
 A system that helps purchasing department complete transactions
quickly and efficiently.
 From an employee request, a purchase order is created.
 It looks into company policies such as charged account number,
required signatures, order limit, and so on, before issuing a purchase order.
 Purchase order can be delivered electronically to the supplier.
 A copy of the purchase order is forwarded to the receiving system to
compare with the invoice when items will be received.

Receiving
 A system that creates a record of expected and actual received
items.
 A receiving system typically updates the inventory to keep the
inventory status current.
 Received items are checked and a receiving transaction is forwarded
to the accounts payable system.

Accounts Payable
 A system that increases an organization’s control over purchasing,
improves cash flow, increases profitability, and provides more effective
management of current liabilities.
 A bill from a supplier initiates the verification of received items and in
turn the system creates a check for the supplier.
 The system also prints purchase journal which itemizes all purchases
for a period.

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Accounting Systems

An accounting system includes budget, accounts receivable, payroll, asset

management, general ledger. These are described in the following.

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Accounts Receivable
 A system that manages the cash flow of the company by keeping track
of the money paid by the customers and other companies for goods and
services sold to them.
 The major output of the accounts receivable system is monthly bills or
statement sent to the customers. See below.
 Transactions created by accounts receivable system updates general
ledger accounts.
 It is also used to generate reports for “aged” accounts, for which
payments are overdue by 30, 60, or 90 days. Reminder notices are
created for these accounts.
 An important function of the accounting system is to identify bad credit
risks. Thus companies routinely checks customer credit before
accepting a new order.

Accounts Payable
 A system that manages the cash flow of the company by keeping track
of the money paid to the company on purchases and services received..

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Accounts Receivable Aging Report

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Payroll
• Generates payroll checks and stubs, as well as W-2 statements at
the end of the year for tax purposes.
• This can be outsourced to an external company. In this case, the
employee file (with weekly hours and pay rate) is sent to the company and
the company deliver the checks.
• In addition, payroll processing produces employee journal containing
various earning factors as shown in the figure.

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Paycheck stub details (top) and payroll journal (bottom)

General Ledger
 A system that produces a detailed list of business transactions designed
to automate financial reporting and data entry.

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