CHAPTER 2 - Introduction to Transaction Processing

FINANCIAL TRANSACTION
● Economic event that affects the assets and equities of the firm, and is reflected in its
accounts and is measured in monetary terms
● Types of transactions into three transaction cycles:
○ Expenditure Cycle
■ Expenses
■ Disbursements (cash-out flow)
○ Conversion Cycle
■ Conversion cost
■ Prime cost
○ Revenue Cycle
■ Main revenue of the firm
● Sales, retail,
● Service income
● Professional fee
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
○ Production System
■ Planning, scheduling, and control of the physical product through the
manufacturing process
○ 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 fro
another system
● Journals
○ A record of chronological entry
■ Special Journal
● Specific classes of transactions that occur in high frequency
■ General Journal
● Non-recurring, 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 the activity by detail for each account type
AUDIT TRAIL
● Accounting Process
○ Source Document ➨ Journal ➨ General Ledger ➨ Financial
Statements
● Auditing Process
○ Financial Statements ➨ General Ledger ➨ Journal ➨ Source
Document
● Accountants should be able to trace in both directions. Sampling and confirmation
are two common techniques.

COMPUTER-BASED SYSTEMS
● Audit Trail is less observable in computer-based systems than traditional manual
systems
● Data entry and computer programs are the physical trail
● Data are stored in magnetic files (cloud-based already)

COMPUTER FILES
● Master File
○ Generally contains account data
■ General ledger and subsidiary file
● Transaction File
○ Temporary file containing transactions since the last update
● Reference File
○ Contains relatively constant information used in processing
■ Tax tables
■ Customer addresses
● Archive File
○ Contains past transactions for references purposes
DOCUMENTATION TECHNIQUES

● Documentation in a computer-based environment is necessary

● 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 Diagram (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

● 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

Terminal showing Calculated batch

source or destination total
of documents
and reports

Source document or On-page connector

report
 Manual operation Off-page connector

File for storing Description of

source documents process or
and reports comments

Accounting records Document flowline

(journals, registers,
logs, ledgers)
● 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

Hard copy Terminal input/

output device

Computer process Process flow

 Direct access Real-time
storage device (online)
connection

Magnetic tape Video display

device
 ● Program Flowcharts
○ Illustrate the logic used in programs

PROGRAM FLOWCHART SYMBOLS

Logical process Terminal start or

end operation

Decision Input/output
operation

Flow of logical
process

MODERN SYSTEM VS LEGACY SYSTEM

● 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
● Some firms employ legacy systems for certain aspects of their data processing
○ Accountants need to understand legacy systems.
● Legacy System Characteristics
○ mainframe-based applications
○ 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
DATABASE BACKUP PROCEDURES
● Destructive updates leave no backup.
● To preserve adequate records, backup procedures must be implemented, as shown
below:
○ The master file being updated is copied as a backup.
○ 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.
 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 and 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:
■
Store Number Dept. Number Item Number Salesperson

04 09 476214 99

○ 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