CHAPTER 2

Overview of Transaction
Processing and
Enterprise Resource
Planning (ERP) Systems

Instructor
ANTHONY M. TALLER
Transaction Processing:
The Data Processing Cycle
Accountants and other system users play a
significant role in the data processing cycle. They
interact with systems analysts to help answer
questions such as:

a. What data should be entered and stored by the

organization, and who should have access to
them?
b. How should data be organized, updated, stored,
accessed, and retrieved?
c. How can scheduled and unanticipated
information needs be met?
TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE

One important AIS function is to process company

transactions efficiently and effectively.

• In manual (non-computer-based) systems, data

are entered into journals and ledgers
maintained on paper.
• In computer-based systems, data are entered
into computers and stored in files and
databases.
 Data Processing Cycle
– the four operations (data input, data storage, data processing, and information
output) performed on data to generate meaningful and relevant information.
DATA INPUT
Step 1: The first step in processing input is to capture
transaction data and enter them into the system. The
data capture process is usually triggered by a business
activity. Data must be collected about three facets of
each business activity:
1. Each activity of interest
2. The resource(s) affected by each activity
3. The people who participate in each activity
Source Documents
– documents used to capture
transaction data at its source –
when the transaction takes place.
Source Documents
Turnaround documents
– records of company data sent to an
external party and then returned to the
system as an input.
- Are in machine readable form to
facilitate their subsequent processing as
input record.
Source data automation
– the collection of transaction data in
machine-readable form at the time and
place of origin
DATA INPUT
Step 2: 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.
DATA INPUT
Well-designed documents and screens improve
accuracy and completeness by:
a. providing instructions or prompts about what
data to collect,
b. grouping logically related pieces of information
close together,
c. using check-off boxes or pull-down menus to
present the available options, and
d. using appropriate shading and borders to
clearly separate data items
Control:
Users can improve control either by using prenumbered source
documents or by having the system automatically assign a
sequential number to each new transaction.

Prenumbering simplifies verifying that all transactions have been

recorded and none of the documents has been misplaced.
DATA INPUT
Step 3: The third step in processing input is to make
sure company policies are followed, such as approving
or verifying a transaction.
DATA STORAGE
Ledgers – cumulative accounting information is
stored in general and subsidiary ledgers.

General ledger – contains summary-level data

for every asset, liability, equity, revenue, and
expense account of the organization.
DATA STORAGE
Subsidiary ledger – a ledger used to record
detailed data for a general ledger account with
many individual sub accounts, such as accounts
receivable, inventory, and accounts payable.

Control account – a title given to a general

ledger account that summarizes the total
amounts recorded in a subsidiary ledger.
Coding Techniques
Data in ledgers is often organized logically using coding
techniques.

Coding – the systematic assignment of numbers or letters to

items to classify and organize them.

Sequence codes – items are numbered consecutively to

account for all items. Any missing items cause a gap in the
numerical sequence.

Example: prenumbered checks, invoices, and purchase

orders
Coding Techniques
Block code – blocks of numbers that are reserved for
specific categories of data, thereby helping to organize the
data

Examples:
✓ chart of accounts
✓ ledger account numbers (blocked by account type)
✓ employee numbers (blocked by department)
✓ customer numbers (blocked by region)
✓ product categories
Coding Techniques
Block code – blocks of numbers that are reserved for
specific categories of data, thereby helping to organize the
data
Coding Techniques
Group code – two or more sub group of
digits used to code items
- are often used in conjunction with
block codes
Coding Techniques
Mnemonic codes – letters and numbers are
interspersed to identify an item
- the mnemonic code is derived from
the description of the item and is
usually easy to memorize
Coding Techniques
Mnemonic codes – letters and numbers are
interspersed to identify an item
- the mnemonic code is derived from
the description of the item and is
usually easy to memorize
Guidelines for 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.

Example: don’t use a three-digit employee code for
a fast-growing company with 950 employees
Guidelines for a Better
Coding System
The code should:
• 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
CHART of ACCOUNTS

- A great example of coding

- 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 facilitate the preparation of financial
statements and reports, because data
stored in individual accounts can easily
be summed for presentation
CHART of ACCOUNTS

Chart of Accounts – a listing of all the numbers

assigned to balance sheet and income
statement accounts.

The account numbers allow transaction data to

be coded, classified, and entered into the
proper accounts. They also facilitate financial
statement and report preparation.
Chart of Accounts
• Data stored in summary accounts cannot be
easily analyzed and reported in more detail.
• It is important that the chart of accounts
contain sufficient detail to meet an
organization’s information needs.
• The accounts are assigned numbers to match
the order of their appearance in financial
statements (in order of decreasing liquidity)
Chart of Accounts
Example:
• Consider the consequences if a company were to use
only one general ledger account for all sales
transaction.
✓It would be easy to produce reports showing the
total amount of sales for a given time period but it
would be very difficult to prepare reports
separating cash and credit sales
✓The only way to produce these latter reports would
be to go back to original sales records to identify
the nature of each sales transaction
Chart of Accounts
Example:
• Consider the consequences if a company were
to use only one general ledger account for all
sales transaction.
✓If the company used separate general ledger
accounts for cash and credit sales, then
reports showing both types of sales could be
easily produced.
✓Total sales could also be easily reported by
summing each type of sale
Chart of Accounts
Considerations in Creating Chart of Accounts
• A chart of accounts is tailored to the nature
and purpose of an organization.
• It is necessary to leave gaps in the chart of
accounts to allow for additional accounts.
• Subsidiary accounts often have longer account
codes than general ledger accounts.
JOURNALS
Journal entry
– shows the accounts and amounts to be debited and
credited

General journal
– used to record infrequent or nonroutine transactions,
such as loan payments and end-of-period adjusting and
closing entries.

Specialized journal
– records large numbers of repetitive transactions such as
sales, cash receipts, and cash disbursements.
JOURNALS
AUDIT TRAIL
Audit trail
– a path that allows a transaction to be traced
through a data processing system from point of
origin to output or backwards from output to point
of origin.
- Used to check the accuracy and validity of
ledger postings and to trace changes in general
ledger accounts from their beginning balance to
their ending balance.
COMPUTER-BASED STORAGE
CONCEPTS
Data Storage Elements
Entity
– the item about which information is stored in a
record.
Example: employees, inventory items, customers
COMPUTER-BASED STORAGE
CONCEPTS
Data Storage Elements
Attributes
– the properties, identifying numbers, and
characteristics of interest of an entity that is stored
in a database
- Each type of entity possesses the same set of
attributes
- The specific values for those attributes will
differ
COMPUTER-BASED STORAGE
CONCEPTS
Data Storage Elements
Field
– the portion of a data record where the data value
for a particular attribute is stored.

Record
– a set of fields whose data values describe specific
attributes of an entity, such as all payroll data
relating to a single employee

Data value
– the actual value stored in a field. It describes a
particular attribute of an entity.
COMPUTER-BASED STORAGE
CONCEPTS
Data Storage Elements
File
– a set of logically related records, such as the
payroll records of all employees.

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.
COMPUTER-BASED STORAGE
CONCEPTS
Data Storage Elements
Database
– a set of interrelated, centrally controlled data files
that are stored with as little data redundancy as
possible.
DATA PROCESSING
Types of Data Processing Activities (CRUD)
1. Creating new data records, such as adding
newly hired employee to the payroll
database.
2. Reading, retrieving, or viewing existing data.
3. Updating previously stored data.
4. Deleting data, such as purging the vendor
master file of all vendors the company no
longer does business with
DATA 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 (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.
Online Batch processing
– a combination of the two approaches
INFORMATION OUTPUT
Document
– a record of a transaction or other company data
such as checks, invoices, receiving reports, and
purchase requisitions
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
Query Response
– a request for the database 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.
ENTERPRISE RESOURCE
PLANNING 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.

ERP systems are modular. This modular

design allows businesses to add or delete
modules as needed.
Typical ERP Modules

1. Financial (general ledger and reporting

system)
2. Human Resources and Payroll
3. Order to Cash (revenue cycle)
4. Purchase to Pay (disbursement cycle)
5. Manufacturing (production cycle)
6. Project Management
7. Customer Relationship Management
8. System Tools
Advantages of an ERP
System
• An ERP provides an integrated, enterprise-wide, single
view of the organization’s data and financial situation
• Data input is captured or keyed once,
• Management gains greater visibility into every area of
the enterprise and greater monitoring capabilities
• The organization gain better access control.
• Procedures and reports are standardized across
business units.
• Customer service improves
• Manufacturing plants receive new orders in real time, and
the automation of manufacturing processes lead to
increased productivity.
Disadvantages of an ERP
System
• Cost
• Amount of time required
• Changes to business processes
• Complexity
• Resistance
 THANK YOU!!

ANTHONY M. TALLER