Chapter 2 Introduction to Transaction Processing

Objectives for Chapter 2

▪ Understand the broad objectives of transaction cycles.
▪ Recognize the types of transactions processed by each of the three transaction cycles
▪ Know the basic accounting records used in TPS.
▪ Understand the relationship between the traditional accounting records and their magnetic equivalents.
▪ Be familiar with documentation techniques.
▪ Understand the differences between batch and real-time processing and the impact of these technologies on transaction
processing.
▪ Be familiar with data coding schemes used in AIS.

A Financial Transaction is...

▪ an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in
monetary terms.
▪ similar types of transactions are grouped together into three transaction cycles:
▪ the expenditure cycle
▪ the conversion cycle
▪ the revenue cycle

Relationship between Transaction Cycles

Each Cycle has Two Primary Subsystems

▪ Expenditure Cycle: time lag between the two due to credit relations with suppliers
▪ physical component (acquisition of goods)
▪ financial component (cash disbursements to the supplier)
▪ Conversion Cycle:
▪ the production system (planning, scheduling, and control of the physical product through the manufacturing process)
▪ the cost accounting system (monitors the flow of cost information related to production)
▪ Revenue Cycle: time lag between the two due to credit relations with customers
▪ physical component (sales order processing)
 ▪ financial component (cash receipts)

Manual System Accounting Records

▪ Source Documents - used to capture and formalize transaction data needed for transaction processing
▪ Product Documents - the result of transaction processing
▪ Turnaround Documents - a product document of one system that becomes a source document for another system
▪ Journals - a record of chronological entry
▪ special journals - specific classes of transactions that occur in high frequency
▪ general journal - nonrecurring, infrequent, and dissimilar transactions
▪ Ledger - a book of financial accounts
▪ general ledger - shows activity for each account listed
on the chart of accounts
▪ subsidiary ledger - shows activity by detail for each
account type

Flow of Information from Economic Event Into the General Ledger

Accounting Records in a Digital

System
EXPLANATION OF STEPS IN FIGURE:
1. Compare the AR balance in the balance sheet with the
master file AR control account balance.
2. Reconcile the AR control figure with the AR subsidiary
account total.
3. Select a sample of update entries made to accounts in the
AR subsidiary ledger and trace these to transactions in the sales
journal (archive file).
4. From these journal entries, identify source documents that
can be pulled from their files and verified. If necessary, confirm
these source documents by contacting the customers.

Computer-Based Systems
▪ The audit trail is less observable in computer-based
systems than traditional manual systems.
▪ The data entry and computer programs are the physical trail.
▪ The data are stored in magnetic files.
 Audit Trail

Accountants should be able to trace in both directions. Sampling and confirmation are two common techniques.

Example of Tracing an Audit Trail

Verifying Accounts Receivable

Flat-File Model
Data Redundancy Problems
Data Storage
▪ excessive storage costs of paper documents and/or magnetic form
Data Updating
▪ changes or additions must be performed multiple times
Currency of Information
▪ potential problem of failing to update all affected files
Task-Data Dependency
▪ user’s inability to obtain additional information as needs change
Data Integration
▪ separate files are difficult to integrate across multiple users

Database Model
Computer Files

▪ Master File - generally contains account data (e.g., general ledger and subsidiary file)
▪ Transaction File - a temporary file containing transactions since the last update
▪ Reference File - contains relatively constant information used in processing (e.g., tax tables, customer addresses)
▪ Archive File - contains past transactions for reference purposes

▪ Documentation in a digital environment is necessary for many reasons.

▪ Five common documentation techniques:
▪ Entity Relationship Diagram
▪ Data Flow Diagrams
▪ Document Flowcharts
▪ System Flowcharts
▪ Program Flowcharts
1. Entity Relationship Diagram (ERD)
▪ A documentation technique to represent the relationship
between entities in a system.

2. Cardinalities
▪ Represent the numerical mapping between entities:
▪ one-to-one
▪ one-to-many
▪ many-to-many

3. Data Flow Diagrams (DFD)…

▪ use symbols to represent the processes, data sources, data flows, and entities in a system
▪ represent the logical elements of the system
▪ do not represent the physical system
 Data Flow Diagram Symbols

4. System Flowcharts…
▪ illustrate the relationship among processes and the documents that flow between them
▪ contain more details than data flow diagrams
▪ clearly depict the separation of functions in a system

Symbol Set for Representing Manual Procedures

System Flowcharts…
▪ represent the relationship between the key elements--input sources, programs, and output products--of computer systems
▪ depict the type of media being used (paper, magnetic tape, magnetic disks, and terminals)
▪ in practice, not much difference between document and system flowcharts
 Transaction Processing Models
Batch versus real time systems (differences)
▪ Information time frame
▪ Resources
▪ Operational efficiency
▪ Efficiency v. effectiveness
▪ Updating master files from transactions
▪ Master file backup procedures

Batch Processing
▪ A batch is a group of similar transactions that are accumulated over time and then processed together.
▪ The transactions must be independent of one another during the time period over which the
transactions are accumulated in order for batch processing to be appropriate.
▪ A time lag exists between the event and the processing.

Steps in Batch Processing/Sequential File

▪ Keystroke - source documents are transcribed by clerks to magnetic tape for processing later
 ▪ Edit Run - identifies clerical errors in the batch and places them into an error file
▪ Sort Run - places the transaction file in the same order as the master file using a primary key
▪ Update Run - changes the value of appropriate fields in the master file to reflect the transaction
▪ Backup Procedure - the original master continues to exist and a new master file is created

Advantages of Batch Processing

▪ Organizations can increase efficiency by grouping large numbers of transactions into

batches rather than processing each event separately.
▪ Batch processing provides control over the transaction process via control figures.

Real-Time Systems…
▪ process transactions individually at the moment the economic event occurs
▪ have no time lag between the economic event and the processing
▪ generally require greater resources than batch processing since they require dedicated
processing capacity; however, these cost differentials are decreasing
▪ oftentimes have longer systems development time

Why Do So Many AIS Use Batch Processing?

▪ AIS processing is characterized by high-volume, independent transactions, such are recording
cash receipts checks received in the mail.
▪ The processing of such high-volume checks can be done during an off-peak computer time.
▪ This is one reason why batch processing maybe done using real-time data collection.

Uses of Coding in AIS

▪ Concisely represent large amounts of complex information that would otherwise be

unmanageable
▪ Provide a means of accountability over the completeness of the transactions processed
▪ Identify unique transactions and accounts within a file
▪ Support the audit function by providing an effective audit trail

Sequential Codes
▪ Represent items in sequential order
▪ Used to prenumber source documents
 ▪ Track each transaction processed
▪ Identify any out-of-sequence documents
▪ Disadvantages:
▪ arbitrary information
▪ hard to make changes and insertions

Block Codes
▪ Represent whole classes by assigning each class a specific range within the coding scheme
▪ Used for chart of accounts
▪ The basis of the general ledger
▪ Allows for the easy insertion of new codes within a block
▪ Don’t have to reorganize the coding structure
▪ Disadvantage:
▪ arbitrary information

Group Codes
▪ Represent complex items or events involving two or more pieces of data using fields with
specific meaning
▪ For example, a coding scheme for tracking sales might be 04-09-476214-99, meaning:

• Disadvantages:
– arbitrary information
– overused

Alphabetic Codes

▪ Used for many of the same purposes as numeric codes

▪ Can be assigned sequentially or used in block and group coding techniques
▪ May be used to represent large numbers of items
▪ Can represents up to 26 variations per field
▪ Disadvantage:
▪ arbitrary information

Mnemonic Codes

▪ Alphabetic characters used as abbreviations, acronyms, and other types of combinations

▪ Do not require users to memorize the meaning since the code itself is informative – and not arbitrary
▪ NY = New York
▪ Disadvantages:
▪ limited usability and availability