Chapter 2

Introduction to Transaction
Processing
 Introduction to Transaction
Processing
Financial Transaction
 An economic event that affects the assets and equities of the
firm.
 Three transaction cycles process most of the firm’s economic
activity
 the expenditure cycle,
 the conversion cycle, and
 the revenue cycle
Expenditure Cycle
 Business activities begin with the acquisition of materials,
property, and labor in exchange for cash—the expenditure
cycle
 Most expenditure transactions are based on a credit
relationship between the trading parties
 This transaction has two parts:
 physical component (acquisition of goods)
 financial component (cash disbursements to the
supplier)
Expenditure Cycle
Purchases/accounts payable system .
This system recognizes the need to acquire physical inventory (such as
raw materials) and places an order with the vendor. When the goods are
received, the purchases system records the event by increasing inventory
and establishing an account payable to be paid
at a later date.
Cash disbursements system.
When the obligation created in the purchases system is due, the cash
disbursements system authorizes the payment, disburses the funds to the
vendor, and records the transaction by reducing the cash and accounts
payable accounts
Fixed asset system.
A firm’s fixed asset system processes transactions pertaining to the
acquisition, maintenance, and disposal of its fixed assets
Conversion Cycle
 Conversion Cycle :
This transaction has two subsystems:
 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).

 This includes determining raw material requirements, authorizing the

work to be performed and the release of raw materials into production,
and directing the movement of the work-in-process through its various
stages of manufacturing.
Revenue Cycle
Revenue Cycle
This transaction has two parts:
 physical component (sales order processing)
 financial component (cash receipts)
Revenue Cycle
 Sales order processing, preparing sales orders, granting
credit, shipping products (or rendering of a service) to the
customer, billing customers, and recording the transaction
in the accounts (accounts receivable, inventory, expenses,
and sales).

 Cash receipts. For credit sales, some period of time (days

or weeks) passes between the point of sale and the receipt
of cash. Cash receipts processing includes collecting cash,
depositing cash in the bank, and recording these events in
the accounts (accounts receivable and cash)
Manual System Accounting Records

 A document provides evidence of an economic event and

may be used to initiate transaction processing Some
documents are a result of transaction processing.

 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 for another system
Manual System Accounting
Records
Manual System Accounting
Records
Manual System Accounting
Records
Manual System Accounting
Records
 Journals - a record of chronological entry
 special journals - specific classes of transactions that occur in
high frequency
 Such transactions can be grouped together in a special journal and
processed more efficiently than a general journal permits.
 At the end of the processing period (month, week, or day), a clerk
posts the amounts in the columns to the ledger accounts indicated
 general journal - nonrecurring, infrequent, and dissimilar
transactions.
 periodic depreciation and closing entries are recorded in the
general journal
 Journal vouchers are used to record summaries of routine
transactions, non-routine transactions, adjusting entries, and
closing entries
Manual System Accounting
Records
 Ledger - a book of financial accounts that reflects the
financial effects of the firm’s transactions after they are
posted from the various journals.

 general ledger - shows activity for each account listed on the chart
of accounts.

 subsidiary ledger - shows activity by detail for each account type

Relationship between the Subsidiary
Ledger and the General Ledger
Flow of Economic Events Into the
General Ledger
 Audit Trail
 tracing transactions from source documents to the financial
statements.
 auditor wishes to verify the accuracy of a client’s AR as
published in its annual financial statements.
 The auditor can trace the AR figure on the balance sheet to
the general ledger AR control account. This balance can then
be reconciled with the total for the accounts receivable
subsidiary ledger.
 the auditor can select a number of accounts from the AR
subsidiary ledger and trace these back to the sales journal.
 From the sales journal, the auditor can identify the specific
source documents that initiated the transactions and pull them
from the files to verify their validity and accuracy
Digital Accounting Records
 Accounting records in computer-based systems are
represented by four different types of magnetic files
Types of Files
 Master File - generally contains account data (e.g.,
general ledger and subsidiary file)
 Transaction File - a temporary file containing transactions
since the last update (sales orders, cash receipt, and
inventory receipt).
 Reference File - contains relatively constant information
(price list, lists of authorized supplier)
Computer-Based Systems
 Archive File. An archive file contains records of past
transactions that are retained for future reference (prior
period ledgers, lists of former employees, prior period
payroll information )
Documentation Techniques
 it is important for accountants to understand the
documentation that describes how processing
takes place.

 Documentation includes the flowcharts, narratives,

and other written communications that describe
the inputs, processing, and outputs of an AIS
Documentation Techniques
 Five common documentation techniques:
 Entity Relationship Diagram
 Data Flow Diagrams
 Document Flowcharts
 System Flowcharts
 Program Flowcharts
Data Flow Diagrams (DFD)
 Use symbols to represent the processes, data
sources, data flows, and entities in a system
 Entities represent the sources of Data.
 Entities may be external to the organization such
as customer or supplier.
 Data stores represent the accounting records used
in each process, and labeled arrows represent the
data flows between processes, data stores, and
entities
Data Flow Diagrams (DFD)
The people and organizations that
Data sources and send data to and receive data from
the system are represented by
destinations
square boxes

The processes that transform data

Transformation from inputs to outputs are
processes represented by circles

The storage of data is represented

Data
by two horizontal lines.
stores

The flow of the data into or out of a

Data flows process is represented by curved
or straight lines with arrows.
Data Flow Diagram Symbols
System Flowcharts
 A system flowchart is the graphical representation of the
physical relationships among key elements of a system.

 These elements may include organizational departments,

manual activities, computer programs, hard-copy
accounting records (documents, journals, ledgers, and
files), and digital records (reference files, transaction files,
archive files, and master files)
Symbol Set for Document Flowcharts/manuualy

Terminal showing source

or destination of documents Calculated batch total
and reports
Source document or
report
On-page connector

Manual operation
Off-page connector

File for storing source

documents and Description of process
reports or comments
Accounting records Document flowline
(journals, registers,
logs, ledgers)
 Sales Department Credit Department Warehouse Shipping Department
Sales A
Customer
Order #1 Sales
Order2
Customer Sales
Checks
Order Credit Order 4
Credit
Records Sales
Picks Stock
Prepare Records Order3
Goods
Sales
Orders Signed Sales
Order #1
Customer Sales Picks
Order Order2 Goods
Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1 Sales
Order #1 Order 4
Sales
Signed Sales Order3
N Order #1
Sales
Order2 N
Distribute
SO and
File A
Customer
Sales Customer
Order
Signed Sales
Order #1 Order 4
Sales Finished Document Flowchart
Order3
Sales Showing Areas of Activity
N
Order2
Systems Flowchart Symbols/computer
Terminal input/
Hard copy
output device

Computer process
Process flow

Real-time
Direct access storage (online)
device connection

Video display
device
Magnetic tape
Sales Department Computer Operations Department Warehouse Shipping Department

Customer Sales A
Edit and Credit File Order1
Credit Check
Customer Sales
Order Order 3
Picks Stock Sales
Sales Records Order2
Goods
Orders

Terminal
AR File
Update Sales Picks
Program Order1 Goods
Customer Inventory Sales
Order Order2
Sales
Order3

N A
N
Sales Sales
Order 3 Order1
Sales
Order2
Sales
Order1
Customer

Finished System Flowchart Showing All Facts

Translated into Visual Symbols
Flowcharting Computer Processes

1. A clerk in the sales department receives a customer order

by mail and enters the information into a computer
terminal that is networked to a centralized computer
program in the computer operations department. The
original customer order is filed in the sales department.
2. A computer program edits the transactions, checks the
customers’ credit by referencing a credit history file, and
produces a transaction file of sales orders.
3. The sales order transaction file is then processed by an
update program that posts the transactions to
corresponding records in AR and inventory files
Flowcharting Computer Processes

4. Finally, the update program produces three hard copies of

the sales order. Copy 1 is sent to the warehouse, and
Copies 2 and 3 are sent to the shipping department.
5. On receipt of Copy 1, the warehouse clerk picks the
products from the shelves. Using Copy 1 and the
warehouse personal computer (PC), the clerk records the
inventory transfer in the digital stock records that are kept
on the PC. Next, the clerk sends the physical inventory and
Copy 1 to the shipping department.
Flowcharting Computer Processes

6. The shipping department receives Copy 1 and the

goods from the warehouse. The clerk reconciles
the goods with Copies 1, 2, and 3 and attaches
Copy 1 as a packing slip. Next, the clerk ships
the goods (with Copy 1 attached) to the
customer. Finally, the clerk records the shipment
in the hardcopy shipping log and files Copies 2
and 3 in the shipping department
Computer-Based Accounting Systems

 Two broad classes of systems:

 batch systems: gather transactions into groups or
batches and processing the entire batch as a single
event.

 real-time systems: process transact ions individually

at the moment the event occurs.
 Differences Between Batch And Real-time
Systems
Information Time Frame
 Batch systems assemble transactions into groups for
processing
 There is always a time lag between the point at which an
economic event occurs and the point at which it is reflected
in the firm’s accounts.
 The amount of lag depends on the frequency of batch
processing
 A time lag exists between the event and the processing
 Payroll processing is an example of a typical batch system.
 At the end of the period, the paychecks for all employees
are prepared together as a batch
Differences Between Batch And Real-
time Systems
Information Time Frame
 Real-Time Systems Process transactions individually
at the moment the economic event occurs.
 Have no time lag between the economic event and the
processing.
 An example of real-time processing is an airline
reservations system, which processes requests for services
from one traveler at a time while he or she waits
 Differences Between Batch And
Real-time Systems
Resources
 batch systems demand fewer organizational resources than
real-time systems.

For example, batch systems can use sequential files stored on

magnetic tape. Real-time systems use direct access files that
require more expensive storage devices, such as magnetic
disks.
batch systems use computer capacity only when the program
is being run. When the batch job completes processing, the
freed capacity can be reallocated to other applications
Differences Between Batch And Real-
time Systems
Resources
 Real-time systems require dedicated processing
capacity.
 Real-time systems must deal with transactions as
they occur. Some types of systems must be
available 24 hours a day whether they are being
used or not.
 The computer capacity dedicated to such systems
cannot be used for other purposes.
 Differences Between Batch And Real-time
Systems
Operational Efficiency
Real-time processing in systems that handle large volumes of
transactions each day can create operational inefficiencies. A
single transaction may affect several different accounts. the
task of doing so takes time that, when multiplied by hundreds
or thousands of transactions, can cause significant processing
delays.
Batch processing of noncritical accounts, however, improves
operational efficiency by eliminating unnecessary activities at
critical points in the process
Efficiency Versus Effectiveness
 The designer must consider the trade-off between
efficiency and effectiveness.
For example,
 users of an airline reservations system cannot wait until
100 passengers (an efficient batch size) assemble in the
travel agent’s office before their transactions are
processed.
 When immediate access to current information is critical to
the user’s needs, real-time processing is the logical choice.
When time lags in information have no detrimental effects
on the user’s performance and operational efficiencies can
be achieved by processing data in batches, batch
processing is probably the superior choice.
Updating Master Files from Transactions
Updating Master Files from Transactions
The update procedure in this example involves the
following steps:
1. A sales order record is read by the system.
2. ACCOUNT NUMBER is used to search the AR master
file and retrieve the corresponding AR record.
3. The AR update procedure calculates the new customer
balance by adding the value stored in the INVOICE
AMOUNT field of the sales order record to the
CURRENT BALANCE field value in the AR master
record.
Updating Master Files from Transactions

4. Next, INVENTORY NUMBER is used to search for the

corresponding record in the inventory master file.

5. The inventory update program reduces inventory levels by

deducting the QUANTITY SOLD value in a transaction
record from the QUANTITY ON HAND field value in
the inventory record.

6. A new sales order record is read, and the process is

repeated.
Batch Processing Using Real-Time Data
Collection

 for large operation.

 By distributing data input capability to users, certain
transaction errors can be prevented or detected and
corrected at their source
 The result is a transaction file that is free from most of the
errors
 The transaction file is later processed in batch mode to
achieve operational efficiency
Batch Processing Using Real-Time Data
Collection
Batch Processing Using Real-Time Data
Collection
Batch Processing Using Real-Time Data
Collection
 The sales department clerk captures customer sales data
pertaining to the item(s) being purchased and the
customer’s account.
 The system then checks the customer’s credit limit from
data in the customer record (account receivable subsidiary
file) and updates his or her account balance to reflect the
amount of the sale.
 Next the system updates the quantity on hand field in the
inventory record (inventory subsidiary file) to reflect the
reduction in inventory. This provides up-to-date infor-
mation to other clerks as to inventory availability
Batch Processing Using Real-Time Data
Collection
 A record of the sale is then added to the sales order file
(transaction file), which is processed in batch mode at the
end of the business day. This batch process records each
transaction in the sales journal and updates the affected
general ledger accounts.
why the sales journal and general ledger accounts
are being processed in batch mode. Why not update them
in real time along with the subsidiary accounts?

The answer is to achieve operational efficiency

HOW?
Batch Processing Using Real-Time Data
Collection
Each customer sale affects the following six accounting
records:
 Customer account receivable (Subsidiary—unique)
 Inventory item (Subsidiary—almost unique)
 Inventory control (GL—common)
 Account receivable control (GL—common)
 Sales (GL—common)
 Cost of good sold (GL—common)
once a record has been accessed for processing, it is
locked by the system and made unavailable to other users
until its processing is complete.
Batch Processing Using Real-Time Data
Collection
 When processing a customer account receivable subsidiary
record, the rule has no implications for other users of the
system. Each user accesses only his or her unique record.
Batch Processing Using Real-Time Data
Collection
 Updating the inventory subsidiary record is almost unique.
 Since it is possible that both Mary Jones and John Smith
are independently purchasing the same item at the same
time.
 Mary Jones may be kept waiting a few seconds until John
Smith’s transaction releases the lock on the inventory
account.
 This will be a relatively rare event, and any such conflicts
will be of little inconvenience to customers.

 Therefore, master file records that are unique to a

transaction such as customer accounts and individual
inventory records can be updated in real time without
causing operational delays
Batch Processing Using Real-Time Data
Collection
 All general ledger accounts previously listed need to be
updated by every sales transaction.
 If the processing of John Smith’s transaction begins before
Mary Jones’s, then she must wait until all six records have
been updated before her transaction can proceed
 This problem becomes manifest as transaction volumes
increase.
 Each of the 500 customers must wait until the person
ahead of him or her in the queue has completed processing
their transaction
End of Chapter 1