17/02/2025

INTRODUCTION TO
TRANSACTION PROCESSING
Rhodilet B. Valdez, CPA

TRANSACTION
PROCESSING
• It is an activity composed of three
major subsystems: Revenue, expenditure,
and conversion.
• Even though each cycle performs
different specific tasks and supports
different objectives, each shares
common goals and objectives:
• Capture financial transactions
• Record the effect of transactions
in accounting records
• Provide information about
transactions to users in support
of day-to-day activities.

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TRANSACTION PROCESSING
SYSTEM (TPS)

EXPENDITURE CYCLE CONVERSION CYCLE REVENUE CYCLE

Purchase System Cost Accounting Sales Processing

System System
Cash
Disbursement Production Cash Receipts
System Planning and System
Control System
Payroll Processing
System

Fixed Asset System

Expenditure Cycle
• Business activities begin with
acquiring materials and property in
exchange for cash.
• Most B2B transactions are based on a
credit relationship between trading
parties (actual cash disbursement
occurs at some point after the receipt
of goods/services).
• From a system’s perspective, a
separate subsystem processes each
component:
• Physical component (acquisition of goods,
fixed asset, and labor incurrence)
• Financial component (cash
disbursements)

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Conversion
Cycle
• Manufacturing firms convert raw
materials into finished products
through formal, physical, observable
conversion cycle operations.
• Production system – planning,
scheduling, and control of
physical products through the
manufacturing system.
• Cost accounting – monitors the flow of
cost information including labor,
material, and overhead into
production.

Revenue
Cycle
• Firms sell their goods and
services to customers through
a revenue cycle.
• Physical component (Sales order
processing)
• Financial component (Cash
receipts)

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Labor
Customers

Finished goods
Materials
Cash

Cash
Plant

EXPENDITURE CYCLE
CONVERSION CYCLE REVENUE CYCLE
Subsystems:
Subsystems: Subsystems:
Purchasing/Accounts Payable
Production Planning and Control Sales Order Processing
Cash Disbursements
Cost Accounting Cash Receipts
Fixed Assets

Finished
Goods
Cash

RELATIONSHIP BETWEEN TRANSACTION CYCLES

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Accounting Records
Manual (Traditional) Systems

• Documents– serve several purposes in

accounting – initiate transaction
processing, be the output of the process,
or provide auditors with evidence of
economic events.
• Source documents – Economic events
result in the creation of some docus
at the beginning (source of
transaction). It is used to capture and
formalize transaction data that the
transaction cycles used for
processing.

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Accounting Records
Manual (Traditional) Systems

• Product documents – result of the

transactions processing rather than
triggering mechanism for the process.
• Turnaround documents – product documents
of one system that become the source
documents for another system.

Accounting Records
Manual (Traditional) Systems
• Journal – a chronological record of financial
transactions. The primary source of data
entry into journals is documents.
• Each transaction results in a separate
journal entry, which identifies the accounts
affected and the amounts to be credited and
debited.
• Special journals – used to record specific
classes of transactions that occur in
high volume. Such transactions can be
grouped and processed more efficiently.
• Special journals use a specialized
format of recording.
• Register – often used to denote certain
types of special journals. Can also be
used to denote a log.

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Accounting Records
Manual (Traditional) Systems

• General journals – used to record

nonrecurring, infrequent, and dissimilar
transactions.
• As a practical matter, it is common to
replace traditional general journals with
collection journal vouchers.
• Journal vouchers – written authorizations
prepared for every transaction that meets
general journal requirements.

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Accounting Records
Manual (Traditional) Systems

• Ledgers – books of accounts that reflect the

financial effects of the firm’s transactions
after they are posted from the various
journals and journal vouchers.
• Ledgers show activity by account type and
indicate the increases, decreases, and
current balance of each account.

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Accounting Records
Manual (Traditional) Systems

• General Ledgers – summarizes the activity

for each of the organization’s financial
accounts. Contains the firm’s account
information in the form of highly
summarized control accounts.
• General ledger provides a single value for
each control account which is highly
summarized information is sufficient for
financial reporting.
• General ledger is a mechanism for
verifying the overall accuracy of
accounting data the separate accounting
departments have processed.

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Accounting Records
Manual (Traditional) Systems

• Subsidiary Ledger – contains detail that

supports control account.
• Subsidiary ledger provides information that
is useful for supporting daily business
operations. This separations provides better
control and support for operations.
• Not all accounts in the general ledger have
corresponding subsidiary accounts.

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FLOW OF ECONOMIC EVENTS TO THE GENERAL LEDGER

Sales order Sales General

Customer’s order
Journal Journal

Periodically reconciles
subsidiary ledger to general
ledger
AR Subsidiary
ledger

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Audit Trail
• Accounting records provide audit trail. It
provides utmost importance in the conduct
of financial audit.
• Tracing
– from economic events to source
documents to financial statements.
• Vouching – from financial statements back to
source documents and economic events
that created them.
• Accountants and auditors should be able to
trace in both directions.

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Accounting Records
Automated (Computerized) Systems
• 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 that are retained for
future reference and form an
important part of the audit trail.

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Digital Audit
Trail
 The audit trail is less
observable in computer-based
systems than in traditional
manual systems.

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FILE
STRUCTURE

FLAT-FILE MODEL
 Often associated with so-called
legacy (large mainframe) systems.
 Serves as an environment where
end-users own their data files
rather than share them with other
users.
 Stand-alone applications rather
than integrated systems perform
data processing.

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DATA REDUNDANCY
Dilemma with Flat-File Model
DATA CAPTURE AND STORAGE
 Problem with efficiency
 Data should be captured only once
 Incur additional cost of both multiple collection
and multiple storage procedures.
DATA UPDATING
 Multiple data updates to reflect changes
 Add significant rework and cost of data
management
CURRENCY OF INFORMATION
 If updated information is not properly
disseminated, changes will not be reflected in
some user’s data, resulting in actions and
decisions based on outdated information.

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DATA REDUNDANCY
Dilemma with Flat-File Model

TASK-DATA DEPENDENCY
 User’s inability to obtain additional information as
his or her needs change.
 New information needs tend to be satisfied by
procuring new data files.
DATA INTEGRATION LIMIT
 Flat-file approach is a single-user view model.
 Files are structured, formatted, and arranged to
suit the specific needs of the owner or primary
user of the data.
 Such structuring, prevents the successful
integration of data across the organization.

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FILE STRUCTURE
DATABASE MODEL
 An approach that centralizes the
organization’s data into a common
database that is shared by other
users.
 Data are stored in the most granular
format rather than being shaped and
configured to the needs of any single
user.
 Pooling of data into a common
database that all organizational user
share.

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TRUE OR FALSE
The salient point of using
the database model is
having a centralized and
common storage of data
for all users. This means
that all users can access
freely on all the data.

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DOCUMENTATION TECHNIQUES
“A picture is worth a thousand words”

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DOCUMENTATION
TECHNIQUES
DATA FLOW DIAGRAM
 Use symbols to represent the
processes, data resources, data
flows, and entities in a system.
 Represent the logical elements of the
system and not depict the physical
system.
 In other words, show what logical
tasks are being performed but not
how they are performed or who
(what) is performing them.

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DOCUMENTATION
TECHNIQUES

ENTITY RELATIONSHIP DIAGRAMS

 A documentation technique to
represent the relationship between
entities in a system.
 Entities applies to anything about
which the organization captures
data.

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Cardinalities
• Represents the numerical
mapping between entities.
• One-to-one
• One-to-many
• Many-to-many

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DOCUMENTATION
TECHNIQUES
SYSTEM FLOWCHARTS
 A graphical representation of the
physical relationships among key
elements of a system.
 Flowcharting is much an art form as
it is a technical skill, giving the author
great deal of license.
 Primary objective: provide an
unambiguous description of the
system.

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DOCUMENTATION
TECHNIQUES

PROGRAM FLOWCHARTS
 Provide operational details and the
correctness of the edit program logic.
 Every program presented in a
flowchart should have a supporting
program flowchart that describes its
logic.

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Transaction
Processing
Models
• Batch processing is the
gathering of transactions
into groups or batches
then processing the entire
batch as a single event.
• Real-time processing systems
process individual
transactions continuously
as they occur.

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BATCH VS. REAL-TIME PROCESSING

DATA PROCESSING METHODS
Distinguishing Feature Batch Real-time
Lag exists between the time
No time lag exists. Processing
when the economic event
Information Time Frame takes place when an economic
occurs and when it is
event occurs.
recorded.
Generally, fewer resources
More resources are required
Resources (e.g., hardware, programming,
than for batch processing
and training) are required
Operational delays are not an
Certain records are processed
issue. All records about the
Operational Efficiency after the event to avoid
event are processed
operational delays
immediately.

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