Introduction to Transaction Processing

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 Computer-Based 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.
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

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.
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 Techniques
Documentation in a CB environment is necessary for many reasons.
Five common documentation techniques:

• Entity Relationship Diagram

• Data Flow Diagrams
• Document Flowcharts
• System Flowcharts
• Program Flowcharts
Entity Relationship Diagram (ERD)
A documentation technique to represent the relationship between entities
in a system.
The REA model version of ERD is widely used in AIS. REA uses 3 types
of entities:

• resources (cash, raw materials)

• events (release of raw materials into the production process)
• agents (inventory control clerk, vendor, production worker)
Cardinalities
Represent the numerical mapping
between entities:

• one-to-one
• one-to-many
• many-to-many

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
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

Flowchart Showing All Stated Facts Translated into Visual Symbols

System Flowcharts…
Are used to 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
Symbol Set for Representing Computer Processes

Flowchart Showing Translation of Facts 1, 2, and 3 into Visual Symbols

Flowchart Showing All Facts Translated into Visual Symbols

Program Flowcharts…
illustrate the logic used in programs

Modern Systems versus Legacy Systems

• Modern systems characteristics:

o client-server based and process transactions in real time
o use relational database tables
o have high degree of process integration and data sharing
o some are mainframe based and use batch processing
• Some firms employ legacy systems for certain aspects of their data
processing.
o Accountants need to understand legacy systems.
• Legacy systems characteristics:
o mainframe-based applications
o batch oriented
o early legacy systems use flat files for data storage
o later legacy systems use hierarchical and network databases
o data storage systems promote a single-user environment that
discourages information integration
Record Structures for Sales, Inventory, and Accounts Receivable
Files

Database Backup Procedures

• Destructive updates leave no backup.

• To preserve adequate records, backup procedures must be
implemented, as shown below:
o The master file being updated is copied as a backup.
o A recovery program uses the backup to create a pre-
update version of the master file.
Computer-Based Accounting Systems
Two broad classes of systems:

• batch systems
• real-time systems
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.
Batch Processing/Sequential File
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:
o arbitrary information
o 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
o The basis of the general ledger
• Allows for the easy insertion of new codes within a block
o Don’t have to reorganize the coding structure
• Disadvantage:
o 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:
o arbitrary information
o 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
o Can represents up to 26 variations per field
• Disadvantage:
o 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
o NY = New York
• Disadvantages:
o limited usability and availability