Chapter 2: INTRODUCTION TO TRANSACTION PROCESSING

Objectives
- Understand the borad objectives of transaction cycles.
- Recognize the types of transactions processed by each of the three transactions
- Know the basic accounting records used in TPS (transaction processing systems)
- 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 as AIS (Accounting information system)

A financial transaction is
- an economic event that afects 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 transactions
* The expenditure cycle
* The conversion cycle
* The revenue cycle

Each cycle has two primary subsystem

Expenditure Cycle:
* 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:
* Physical component (sales order processing)
* Financial component (cash receipts)
 MANUAL ACCOUNTING RECORDS
*use of papers
*physical items “ledgers”

Source Documents - used to capture a formalize transaction data needed for transaction processing
(Ex: receipt)
Product Documents - the result of transaction processing (Ex: paycheck)
Turnaround Documents - a product document of one system that becomes a source document for
another system (Ex: cash disbursment)

*Journals - a record of chronical entry

- special journal: specific classes of transactions that occurs in high frequecy
- general journal: nonrecurring, infrequent, and dissimilar transactions
*Ledger - a book of financial accounts
- general ledger: shows activity for each accounts listed on the chart of accounts
- subsidiary ledger: shows activity by detail for each account type
 Computer Based System

Types of Files
* The audit trail is less observable in computer-based systems than traditional manual system
* The data entry and computer programs are the physical trail
* The data stored in magnetic files

Computer Files
* Master File - generally contains account data (ex: general ledger and subsidiary file)
* Transaction File - a temporary file containing transaction since last update
* Reference File - contains relatively constant information used in processing (ex: tax tables, customer
addresses)
* Archive File - contains past transactions for reference purpose

Document techniques
* Documentation in a computer-based environment is necessary for many reasons
* Five common documentation techniques
- Data Flow Diagrams
- 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 physical system
- Entity Relationship Diagram
- A documentation technique to represent the relationship between entities in a
system.
- The REA model version ERD is widely used in AIS
- 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
- Document Flowchart
- System Flowchart
- Illustrate the relationship among processes and the documentation flow between
them
 - Contain more details than data flow diagrams
- clearly depict the separation of functions in a system
- are used to represent the relationship between the key elements-input source,
programs, and output products- of computer system
- depict the type of media being used (paper, magnetic tape, magnetic disks, and
terminals)
- in practice, not much difference between document and system flowchart.
- Program Flowchart
- illustrate the logic used in program

Cardinalities
 *ALTERNATIVE DATA PROCESSING APPROACHES*

Modern System vs Legacy Systems

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

Data Backup Procedures

- Destructive updates leaves no backup
- To preserve adequate records, backup procedures must be implemented, as shown bellow
- The master filing being updated is copied as a backup
- A recovery program uses the backup to create a pre-update version of the master
file
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 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 mater file to reflect the transaction
*Backup Procedure - the original master continues to exist and a new master file is created

Advantages of Batch Processing

*Organization 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 system development time
Why do so many AIS use batch processing?
*AIS processing is characterized by high volume independent transaction, 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
* Represents items in sequential order
*Uses to prenumber source documents
*Track each transaction processed
*Itendify any out-of-sequence documents
*Disadvantages:
- arbitrary information
- hard to make changes insertion
Block Codes
*Represent whole classes by assigning each class as 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 Code
*Represent complex items or events involving two or more pieces of data using fields with specific
meaning
*For example, a coding sheme for tracking sales might be 04-09-476214-99, meaning

*Disadvantage
- arbiotrary information
- overused
Alphabetic Codes
* Used for many of the same purposes as numeric codes
*Can be assigned sequentially or ysed 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 combination
*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