Accounting Information Systems

Fourteenth Edition, Global Edition

Chapter 2
Overview of Transaction
Processing and Enterprise
Resource Planning Systems

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Learning Objectives
• Describe the data processing cycle used to process
transactions, including how data is input, stored, and
processed and how information is outputted.
• Discuss how organizations use enterprise resource
planning (ERP) systems to process transactions and
provide information.

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 Data Processing Cycle
data processing cycle - The four
operations (data input, data
storage, data processing, and
information output) performed
on data to generate meaningful
and relevant information.
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Data Processing Cycle

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- The data processing cycle is a
descriptive means of demonstrating the
operations performed on data to make
the information meaningful for decisions.
Using the revenue cycle as an example,
the data input would include the sales
activity between the company and the
customer involving the resources of
inventory and cash (when money is
ultimately collected from the customer).
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Data Input
Steps in Processing Input are:
• Capture transaction data triggered by
a business activity (event).
• Make sure captured data are accurate
and complete.
• Ensure company policies are followed
(e.g., approval of transaction).

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Data Capture
• Information collected for an activity includes:
– Activity of interest (e.g., sale)
– Resources affected (e.g., inventory and
cash)
– People who participated in the activity
(e.g., customer and employee)
• Information comes from source documents.

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Source Documents
• Captures data at the source when the
transaction takes place
– Paper source documents
– Turnaround documents
– Source data automation (captured data
from machines, e.g., Point of Sale
scanners at grocery store)

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 Source Documents
source documents – Documents used
to capture transaction data at its
source – when the transaction takes
place. Examples include sales orders,
purchase orders, and employee time
cards.

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 Turnaround Document
turnaround document – Records of
company data sent to an external party
and then returned to the system as
input. Turnaround documents are in
machine- readable form to facilitate
their subsequent processing as input
records. An example is a utility bill.

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Source Data Automation
source data automation - The
collection of transaction data in
machine-readable form at the
time and place of origin.
Examples are point-of-sale
terminals and ATMs.
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 Make sure captured data are accurate
and complete
• The second step in processing input is to make sure
captured data are accurate and complete.
• One way to do this is to use source data automation
or well-designed turnaround documents and data
entry screens. Well-designed documents and
screens improve accuracy and completeness by
providing instructions or prompts about what data to
collect, grouping logically related pieces of
information close together, using check-off boxes or
pull-down menus to present the available options,
and using appropriate shading and borders to
clearly separate data items.
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 Make sure company policies are
followed
• The third step in processing input
is to make sure company policies
are followed, such as approving or
verifying a transaction.

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For example, S&S would not want to
sell goods to a customer who was
not paying his bills or to sell an item
for immediate delivery that was out
of stock. These problems are
prevented by programming the
system to check a customer’s credit
limit and payment history, as well as
inventory status, before confirming a
customer sale.
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Data Storage
• Important to understand how data is organized
– Chart of accounts
 Coding schemas that are well thought out to
anticipate management needs are most
efficient and effective
– Transaction journals (e.g., Sales)
– Subsidiary ledgers (e.g., Accounts receivable)
– General ledger
Note: With the above, one can trace the path of
the transaction (audit trail)
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 Coding Techniques
• Coding Techniques Data in
ledgers is organized logically
using coding techniques.
• Coding is the systematic
assignment of numbers or
letters to items to classify and
organize them.
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Coding Techniques
• Sequence codes—items numbered consecutively
to account for all items (i.e., prenumbered forms)
• Block code—blocks of numbers reserved for
specific categories of data (i.e., product numbers
that start with a 2 are refrigerators)
• Group codes—two or more subgroups of digits
used to code items (i.e., car vin #’s)
• Mnemonic codes—letters and numbers
interspersed to identify an item (i.e. Dry300W05 is
low end (300), white (W) dryer (DRY) made by
Sears (05))
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- Sequence codes - Items are
numbered consecutively so that
gaps in the sequence code indicate
missing items that should be
investigated.
- Examples include pre-numbered
checks, invoices, and purchase
orders.

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- Block code - Blocks of numbers that are
reserved for specific categories of data,
thereby helping to organize the data.
An example is a chart of accounts.

- Group code - Two or more subgroups

of digits that are used to code an item. A
group code is often used in conjunction with a
block code.

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- Mnemonic code - Letters and
numbers that are interspersed to
identify an item. The mnemonic
code is derived from the description
of the item and is usually easy to
memorize.

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A Better Coding System
The following guidelines result in a better
coding system. The code should:
● Be consistent with its intended use, which
requires that the code designer determine
desired system outputs prior to selecting the
code.
● Allow for growth. For example, don’t use a
three-digit employee code for a fast-growing
company with 950 employees.
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A Better Coding System
● Be as simple as possible to minimize costs,
facilitate memorization and interpretation, and
ensure employee acceptance.
● Be consistent with the company’s
organizational structure and across the
company’s divisions.

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chart of accounts
Chart of Accounts A great example of coding
is the chart of accounts, which is a list of
the numbers assigned to each general ledger
account. These account numbers allow
transaction data to be coded, classified, and
entered into the proper accounts. They also
facilitate the preparation of financial
statements and reports, because data stored
in individual accounts can easily be summed
for presentation.
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However, data stored in summary
accounts cannot be easily analyzed and
reported in more detail. Consequently, it
is important that the chart of accounts
contain sufficient detail to meet an
organization’s information needs.

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The importance of data storage cannot be stressed
enough. Many organizations change and evolve,
but rarely do accountants have the luxury to really
think ahead to organize how they want the
information to be stored. Yet many AIS allow you to
run special reports based on the coding schemas in
the chart of accounts. For example, if your
organization is expanding, is it important to have
individual location financials as well as roll them up
into regional financials? The coding schema of the
chart of accounts, if not well thought out, can limit
an organization and cause additional work;
however, if the schema is well thought out, it can be
more efficient to get the information to management
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 Audit trail for
Invoice #156 for
$1,876.50 sold to
KDR Builders

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Computer-Based Storage
• Data is stored in master files or transaction files.

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• Its important to understand how the data aggregates as
this will be useful in subsequent chapters for designing
query (questions) of the data or reports.
• what information is in master files and what would be in
transaction files. It is helpful to refer to slide that master
files usually include ―resource‖ and ―people‖ data (i.e.,
inventory master files store information of all items the
company sells) and the transaction file is the activity or
event data that is captured (i.e., sales transactions).
Thus, there is the following hierarchy:
Database includes
Files (master/transaction) which include
Records (entities) which include
Attributes (individual fields)
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Entity - The item about which
information is stored in a record.
Examples include an employee, an
inventory item, and a customer.

Attributes - The properties, identifying

numbers, and characteristics of interest
of an entity that is stored in a database.
Examples are employee number, pay
rate, name, and address.
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Field - The portion of a data record
where the data value for a particular
attribute is stored.
For example, in a spreadsheet each row
might represent a customer and each
column is an attribute of the customer.
Each cell in a spreadsheet is a field.

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- Master file - A permanent file of records
that stores cumulative data about an
organization. As transactions take place,
individual records within a master file are
updated to keep them current.
- Transaction file - A file that contains
the individual business transactions that
occur during a specific fiscal period. A
transaction file is conceptually similar
to a journal in a manual AIS.
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Database - A set of interrelated,
centrally controlled data files that are
stored with as little data redundancy as
possible.

- A database consolidates records

previously stored in separate files into a
common pool and serves a variety of
users and data processing applications.

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Data Processing
Four types of processing (CRUD):
• Creating new records (e.g., adding a customer)
• Reading existing data
• Updating previous record or data
• Deleting data
Data processing can be batch processed (e.g.,
post records at the end of the business day) or in
real-time (process as it occurs).

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1. Creating new data records, such as adding a
newly hired employee to the payroll database.
2. Reading, retrieving, or viewing existing data.
3. Updating previously stored data. Figure 2-4
depicts the steps required to update an accounts
receivable record with a sales transaction. The two
records are matched using the
account number. The sale amount ($360) is added to
the account balance ($1,500) to get a
new current balance ($1,860).
4. Deleting data, such as purging the vendor master
file of all vendors the company no longer
does business with.
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Updating done periodically, such as daily, is
referred to as batch processing. Although
batch processing is cheaper and more
efficient, the data are current and accurate
only immediately after processing. For that
reason, batch processing is used only for
applications, such as payroll, that do not
need frequent updating and that naturally
occur or are processed at fixed time periods.

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Most companies update each transaction as
it occurs, referred to as online, real-time
processing because it ensures that stored
information is always current, thereby
increasing its decision-making usefulness. It
is also more accurate because data input
errors can be corrected in real time or
refused. It also provides significant
competitive advantages.

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 batch processing – online, real-time
processing
batch processing – Accumulating transaction
records into groups or batches for processing
at a regular interval such as daily or weekly.
The records are usually sorted into some
sequence (such as numerically or
alphabetically) before processing.
online, real-time processing - The computer
system processes data immediately after
capture and provides updated information to
users on a timely basis
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Information Output
The data stored in the database files can be
viewed
• Online (soft copy)
• Printed out (hard copy)
– Document (e.g., sales invoice)
– Report (e.g., monthly sales report)
– Query (question for specific information in a
database, e.g., Which division had the most
sales for the month?)

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Information Output - document
document - A record of a transaction or
other company data. Examples include
checks, invoices, receiving reports, and
purchase requisitions.

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Information Output - report
report - System output, organized in a
meaningful fashion, that is used by
employees to control operational activities,
by managers to make decisions and design
strategies, and by investors and creditors to
understand a company’s business activities.

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Information Output - query
query - A request for the data base to
provide the information needed to deal
with a problem or answer a question.
The information is retrieved, displayed
or printed, and/or analyzed as
requested.

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Enterprise Resource Planning (ERP) Systems
• Integrates activities from the entire
organization
– Revenue Cycle
– Expenditure Cycle
– Production Cycle
– H/R Payroll Cycle
– General Ledger and Reporting System

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Enterprise Resource Planning (ERP)
Systems
enterprise resource planning (ERP) system - A system
that integrates all aspects of an organization’s
activities—such as accounting, finance, marketing,
human resources, manufacturing, inventory
management— into one system. An ERP system is
modularized; companies can purchase the individual
modules that meet their specific needs.
An ERP facilitates information flow among the
company’s various business functions and manages
communications with outside stakeholders.
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• This is a good place to emphasize that good
internal controls are necessary as an
integrated database has the benefit of
inputting data once in the system, if that
input is inaccurate, it will be useless. That is
why most people only have access to
certain portions of the system and that good
data entry controls are necessary.

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 Advantages of ERP System
• Integrated enterprise-wide single view of the organization’s
data which streamlines the flow of information
• Data captured once (i.e., no longer need sales to enter
data about a customer and then accounting to enter same
customer data for invoicing)
• Greater visibility and monitoring capabilities for
management
• Improve access of control of the data through security
settings
• Standardization of procedures and reports
• Improves customer service
• Increases productivity through automation
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Disadvantages of ERP System
• Costly
• Significant amount of time to implement
• Customizing or standardizing a business process
• Complexity
• User resistance (learning new things is
sometimes hard for employees)

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• Although there are many advantages of an ERP
system and most companies small and large use
some form of an ERP system, understanding the
issues of implementation can determine a
successful ERP implementation from a failed
implementation.

• Most notable, a business process will need to map

to the ERP software, management will need to
determine if they want to customize the ERP
software or standardize their business process to
fit the ERP system.

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