Topic 3

Introduction to
Transaction
Processing

James A. Hall, Accounting Information Systems, 10th Edition. © 2019

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Learning Objectives
• 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 transaction processing
systems.
• Understand the relationship between traditional accounting records
and their digital equivalents in computer-based systems.
• Understand the differences between batch and real-time processing
and the impact of these technologies on transaction processing.

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 An Overview of Transaction Processing

• The most common financial transactions are economic

exchanges with external parties.
• These include the sale of goods or services, the purchase
of inventory, the discharge of financial obligations, and the
receipt of cash on account from customers.
• Financial transactions are common business events that
occur regularly.

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Nature of Transaction Cycles
• Transaction cycle – a set of transactions that occur in a related
sequence
• Different nature of business gives effect to transaction cycle
involved in business

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TRANSACTION CYCLES
• The Expenditure Cycle
• The expenditure cycle is the acquisition of materials,
property, and labor in exchange for cash.
• The Conversion Cycle
• The conversion cycle is the cycle composed of the
production system and the cost accounting system.
• The Revenue Cycle
• The revenue cycle is the cycle composed of sales order
processing and cash receipts.

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Relationship Between Transaction Cycles

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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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Accounting Records
• Accounting records are documents, journals, or ledgers
used in transaction cycles.

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Manual Systems Accounting Records

• Documents
• Source documents are documents that capture and formalize
transaction data needed for processing by their respective
transaction cycles - Initiation of transaction
• Product documents are documents that result from
transaction processing - Payroll check, bill
• Turnaround documents are product documents of one
system that become source documents for another system.

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Accounting Records: Manual Systems

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
Accounting Records: Manual Systems

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11
Accounting Records: Manual Systems

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Manual System Accounting Records
(continued)

• Journals
• A journal is a record of a chronological entry.
• SPECIAL JOURNALS -specific classes of transactions that occur
in high frequency
• REGISTER: A register is often used to denote certain types of
special journals. For example, the payroll journal is often called
the payroll register.
• GENERAL JOURNALS: specific classes of transactions that
occur in high frequency
• Journal vouchers are accounting journal entries into an
accounting system for the purposes of making corrections or
adjustments to the accounting data. For control purposes, all JVs
should be approved by the appropriate designated authority.

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Manual System Accounting Records
(continued)

• Ledgers
• A ledger is a book of accounts that reflects the financial effects of
the firm’s transactions after they are posted from the various
journals.
• GENERAL LEDGERS - shows activity for each account listed on
the chart of accounts
• SUBSIDIARY LEDGERS - shows activity by detail for each
account type

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 Accounting Records: Manual Systems

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15
 Accounting Records: Manual Systems

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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16
 Accounting Records: Manual Systems

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Flow of Information from the Economic Event to
the General Ledger

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 Accounting Records: Manual Systems

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Accounting Records: Manual Systems
(continued)

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Relationship between the Subsidiary Ledger
and the General Ledger

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THE AUDIT TRAIL
• An audit trail is a set of accounting records that trace
transactions from their source documents to the financial
statements.
• An audit trail is of utmost importance in the conduct of a
financial audit.
• The external auditor’s responsibility involves, in part, the
review of selected accounts and transactions to determine
their validity, accuracy, and completeness.

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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.

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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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DIGITAL ACCOUNTING RECORDS
• Modern accounting systems store data in four types of
digital computer files:
• A master file contains account data (e.g., general ledger and
subsidiary file)
• A transaction file is a temporary file that holds transaction
records that will be used to change or update data in a master
file.
• A reference file is a file that stores the data used as standards
for processing transactions (e.g., tax tables, customer
addresses)
• An archive file is a file that contains records of past
transactions that are retained for future reference.
• The Digital Audit Trail - less observable - The data entry
and computer programs are the physical trail.

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Digital Accounting Records in a Computer-
Based System

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File Structures
• Digital file structures and storage techniques vary widely
among transaction processing systems.
• Some structures are effective at processing all records in
large master files.
• Some file structures are better for directly locating and
processing a single record in a large file.
• The legacy systems are large mainframe systems
implemented in the late 1960s through the 1980s.

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THE FLAT-FILE MODEL
• The flat-file model is an environment in which individual data
files are not related to other files.
• There are three significant problems in the flat-file environment:
data storage, data updating, and currency of information.
• Data Capture and Storage
• Data storage is an efficient information system that captures
and stores data only once and makes this single source
available to all users who need it.
• Data Updating
• Data updating is the periodic updating of data stored in the
files of an organization.

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THE FLAT-FILE MODEL (continued)
• Currency of Information
• Currency of information is a problem associated with the flat-
file model because of its failure to update all the user files
affected by a change in status; may result in decisions based
on outdated information.
• Task-Data Dependency
• Task-data dependency is a user’s inability to obtain additional
information as his or her needs change.
• Flat Files Limit Data Integration

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 Flat-File Model

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
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THE DATABASE MODEL
• The database model is a symbolic model of the structure
of, and the associations between, an organization’s data
entities.
• The database management system (DBMS) is a
software system that controls access to the data resource.
• The most striking difference between the database model
and the flat-file model is the pooling of data into a
common database that all organizational users share.

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Database Model

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Transaction Processing Models
• Alternative transaction processing models fall broadly into
two types: (1) batch processing and (2) real-time
processing.
• Batch processing involves gathering transactions into
groups or batches and then processing the entire batch as
a single event.
• Real-time processing systems process individual
transactions continuously as they occur.
• Many systems incorporate both real-time and batch
processing features.

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 Batch Processing

Group source documents into batches.

Enter batches at Process all
Group source predetermined time or Master batches. Update
documents into batch sizes. Sort file
batches. and edit data as
file old master files
with transaction
Generate control appropriate data, creating new
totals
master file

Store data
Print desired
in temporary file
output
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 Real-Time Processing

Enter transactions data into system as they occur.

Process transactions
as they occur. Update
Master master files with
Enter
transactions into
file transaction data
system as they
occur

Print desired
output
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Characteristic Differences between Batch and
Real-Time Processing

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DIFFERENCES BETWEEN BATCH AND
REAL-TIME SYSTEMS
• Information Time Frame
• Batch systems are systems that assemble transactions into
groups for processing.
• Real-time systems are systems that process transactions
individually at the moment the economic event occurs.
• Resources
• Operational Efficiency
• Efficiency versus Effectiveness

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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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UPDATING MASTER FILES FROM
TRANSACTIONS
• Updating a master file record involves changing the value
of one or more of its variable fields to reflect the effects of
a transaction.
• Master file backup procedures
• If the current master file becomes corrupted or is
destroyed, corporate IT professionals can retrieve the
most current backed-up file from the archives.

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 Record Structures for Sales, Inventory, and
Accounting Receivable Files

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BATCH PROCESSING USING REAL-TIME
DATA COLLECTION
• A popular data processing approach, particularly for large
operations, is to digitally capture and process aspects of
the transaction at the source as they occur, and process
other aspects of the transaction in batch mode.
• Deadlock or “wait” is a state that occurs between sites
when data are locked by multiple sites that are waiting for
the removal of the locks from the other sites.

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Batch Processing with Real-Time Data Collection

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REAL-TIME PROCESSING
• Real-time systems process the entire transaction as it
occurs.
• Real-time processing is well suited to systems that
process lower transaction volumes and those that do not
share common records.
• Terminals at distributed sites throughout the organization
are used for receiving, processing, and sending
information on the status of current transactions.

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 Real-Time Processing of Sales Orders

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 Advantages of Real-time Processing

• Have no time lag between the economic event and the

processing
• Ensures that the information in master files is always
current.

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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.