Chapter 2

Introduction to
Transaction Processing

Accounting Information Systems, 7e

James A. Hall

Hall, Accounting Information Systems, 7e

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 Objectives for Chapter 2
 Understand the broad objectives of transaction cycles.
 Recognize the types of transactions processed by each of the
three transaction cycles
 Know the basic accounting records used in TPS.
 Understand the relationship between the traditional accounting
records and their magnetic equivalents.
 Be familiar with documentation techniques.
 Understand the differences between batch and real-time
processing and the impact of these technologies on transaction
processing.

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 A Financial Transaction is...

 an economic event that affects the assets and

equities of the firm, is reflected in its accounts,
and is measured in monetary terms.
 similar types of transactions are grouped
together into three transaction cycles:
 the expenditure cycle
 the conversion cycle
 the revenue cycle

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 Relationship between Transaction Cycles

Figure 2-1
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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 :
 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)
 Revenue Cycle: time lag between the two due to credit
relations with customers :
 physical component (sales order processing)
 financial component (cash receipts)

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 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 for another system

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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Manual System Accounting Records
 Journals - a record of chronological entry
 special journals - specific classes of transactions that
occur in high frequency
 general journal - nonrecurring, 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 activity by detail for each
account type
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 Flow of Information from Economic
Event Into the General Ledger

Figure 2-8

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 Audit Trail

Source General Financial

Journal Statements
Document Ledger

Financial General Source

Statements Journal Document
Ledger

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.
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 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account-General Ledger

Accounts Receivable Subsidiary Ledger

(sum of all customers’ receivables)

Physical Financial

Sales Journal Cash Receipts Journal

Sales Order Deposit Slip

Shipping Notice
Remittance Advice
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 Computer-Based Systems

 The audit trail is less observable in computer-

based systems than traditional manual systems.
 The data entry and computer programs are the
physical trail.
 The data are stored in magnetic files.

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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Computer 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
 Reference File - contains relatively constant
information used in processing (e.g., tax
tables, customer addresses)
 Archive File - contains past transactions for
reference purposes
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 Documentation Techniques
 Documentation in a CB environment is
necessary for many reasons.
 Five common documentation techniques:
 Entity Relationship Diagram
 Data Flow Diagrams
 Document Flowcharts
 System Flowcharts
 Program Flowcharts

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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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)

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 Cardinalities

 Represent the numerical mapping

between entities:
 one-to-one
 one-to-many
 many-to-many

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 Cardinalities
Entity Relationship Entity

Sales- 1 1 Car
Assigned Type
person

1 M
Customer Places Order

M M
Vendor Supply Inventory

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 Data Flow Diagrams (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

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 Data Flow Diagram Symbols

Entity Data Store

Name Name

N
Process
Description
Direction of
data flow

Figure 2-12

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 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

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 Symbol Set for Representing
Manual Procedures
Terminal showing source
or destination of documents
and reports Calculated batch total

Source document or
report On-page connector

Manual operation

Off-page connector
File for storing source
documents and
reports Description of process
or comments
Accounting records
(journals, registers,
Document flow line
logs, ledgers)
Figure 2-17
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 Flowchart Showing Stated Fact I Translated
into Visual Symbols

Sales Department Credit Department Warehouse Shipping Department

Customer

Customer
Order

Prepare
Sales
Orders

Sales
OrderSales
#1
Order #1
Sales
Order #1
Sales
Order #1

Figure 2-18

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 Flowchart Showing All Facts Translated
into Visual Symbols

Hall, Accounting Information Systems, 7e Figure 2-23 22

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 Computer-Based Accounting
Systems

 Two broad classes of systems:

 batch systems
 real-time systems

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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 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.

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 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.

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 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
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Hall, Accounting Information Systems, 7e 27
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