Bsa201 CH02 WR

POLY TECHNIC U NIVERSITY OF THE PHILIPPINES
CHAPTER 2
INTRODUCTION TO TRANSACTION PROCESSING
A Written Report Submitted to
Prof. Leandro C. Fua

College of Accountancy and Finance
In Partial Fulfillment of the Requirement in
Accounting Information System

ACCO 20153
Submitted by:
Apulog, Airah Mae M.
Edora, Christine B.
Reyes Jr., Arnel A.
Vergara, Queen Ernna F.
BSA 2 – 1
June 7, 2020
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
The Transaction Processing System: An Overview

An accounting information system, which consist of different major parts, produces
financial reports used by management and other end users. The part where most of the
transactions are being processed lies on the transaction processing system. It involves not just
transactions, but more of financial ones. As defined by James Hall (2011), 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.
It is a common knowledge of accountants that in the manual process which would
otherwise be computer-based, it is a rule of thumb that only economic events should be recorded
on the books of accounts. Meaning to say, it affects the accounting equation and its elements:
assets, liabilities, and equity. It is the same thing towards the recording process of the system
being talk about. As an example, purchasing of inventory on account needed in the
manufacturing department would enter the system’s record of its purchases/inventory and
accounts payable with the corresponding amount and account number. Those financial
transactions are the input of the transaction processing system as you can see on figure 1.
Figure 1: The Transaction Processing System
What are the Three Transaction Cycles?

The three main activities that a business organization is undertaking are the three cycles
in the transaction processing system namely: expenditure cycle, conversion cycle and revenue
cycle. They happen from time to time and even day to day. Every type of business organization
(manufacturing, merchandising, and service types) takes these activities inevitably. Even in a
trading business, it still undergo conversion process in some other appropriate way to add value
to the products that they sell.
As can be seen on figure 2, the three cycles may have different tasks which it is focused
with, but they are connected as it can simplify that operational activities of a common business
undertaking. Each subpart contains accounts where the necessary transactions are being
entered.
Figure 2: The Three Primary Transaction Cycles
As can be seen on figure 2, the cycle starts with the acquisition of the resources needed
for production (expenditure cycle), which will be needed to yield finished goods/desired
product for customers (conversion cycle) who ordered or who will order them through cash or
on account and will be shipped to its proper location and buyer (revenue cycle).
The Expenditure Cycle

Most of the expenditure transactions are based on a credit relationship between the trading
parties. The actual disbursement of cash takes place at some point after the receipt of the goods
or services. Days or even weeks may pass between these two events. The system then interpret
it as having two components: a physical component (acquisition of goods) and financial
component (the cash payment to the supplier).
For a comprehensive definition of each of the subsystem of the expenditure cycle, here is
the one provided by James Hall (2011) in his book Accounting Information System:
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.
Payroll system. The payroll system collects labor usage data for each employee, computes the
payroll, and disburses paychecks to the employees. Conceptually, payroll is a special-case
purchases and cash disbursements system. Because of accounting complexities associated with
payroll, most firms have a separate system for payroll processing.
Fixed asset system. A firm’s fixed asset system processes transactions pertaining to the acquisition,
maintenance, and disposal of its fixed assets. These are relatively permanent items that collectively
often represent the organization’s largest financial investment. Examples of fixed assets include
land, buildings, furniture, machinery, and motor vehicles.
The Conversion Cycle

This is composed of two subsystems: the production subsystem and the cost accounting
system. The production system involves the planning, scheduling, and control of the physical
product through the manufacturing process. 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. On the other hand, the cost accounting system is where the technical calculation
of costs of product at different levels of production is being inputted. They are then crucial to
the development of performance reports, variance reports, and others that can be the basis for
setting the selling prices and evaluation by management.
The Revenue Cycle

Revenue cycle transactions also have a physical and a financial component, which are
processed separately. Most of the sales order that a business receives are on account and
followed by weeks before a cash payment from customers is being acknowledged. Here again
are the definitions of James Hall (2011) in his book Accounting Information System of the
subsystems composing the revenue cycle:
Sales order processing. It involve tasks such as 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).
Accounting Records
 refer to all the documentation and books involved in the preparation of financial
statements or records needed for audit and financial reviews (Kenton, 2020).
 these records may be presented into two systems: manual and computer-based.
Manual Systems
1. DOCUMENTS – these are written proof or evidence of a transaction or information.
a. Source Document is the first document that exists in a transaction, it captures and
formalizes transaction data necessary for processing. Generally, a source document
contain: business name and logo; date of the transaction; description of the transaction;
and specific value of the transaction.
Some Examples of Source Documents:
 Sales Order – prepared when customer

places an order.
Source of the photo:
https://www.ecosia.org/images?q=sales+order#id=4103E3A
2667CF97403ABF90088094BA48E144397
 Payroll Record – documentation of hours

worked and absences of the employees as
well as their salary deductions, if any.
https://www.ecosia.org/images?q=payroll+records#i
d=07AA9303E3698F26DD109FE66369B8C8796A351E
 Purchase Order – it is a documentation given

by a buyer to a seller indicating the types,
quantities, and prices for products or
services ordered.
https://www.ecosia.org/images?q=purchase+order#id=B
91EB80650F8C2EC0C9A190C2D9383AFFAAB0F46
b. Product Document – this document is the result of transaction processing rather than
the triggering mechanism for the process.
Some Examples of Source Documents:
 Payroll Check – product of payroll system

where payment to employees are indicated

https://www.ecosia.org/images?q=payroll+check#id=DA’
 Receipts – a document used as a proof

of payment and receipt of cash
https://www.ecosia.org/images?q=receipts+philippines
+pictures#id=A18E1FAA8A9692DADEF8D87B0B037
A5E68C5FA65
c. Turnaround Document – it is a product document that becomes a source document for

another system.
Example of Turnaround Document:
 Invoices – listing of goods provided and

services rendered together with their prices.
https://www.ecosia.org/images?q=invoices+philippines+pictu
res#id=04F875E2222423B46F8679DA716D13643588F301
Sample Illustration of a Transaction and how Documents discussed above can be made:
Product
Document
Figure 3. Documents
Source: Accounting Information Systems by James A. Hall, p.46 figure 2-4
2. JOURNAL – is a detailed account of chronological entry that records all the financial
transactions of a business evidenced by documents. There are two types of journal: special
and general.
a. Special Journal is a journal that records specific classes of transactions that occur in
high volume or those that are frequent to encounter. It can help accountants to track the
error immediately and make efficient work because transactions are classified and
segregated. The four most used special journals are:
 Sales journal – it is where the

entity records all its sales on
account
Source of the photo: Figure 4. Sales Journal
https://www.ecosia.org/images?q=sales+journal#id=0E3F00FAEE196BE4D20C798936C0CA52005D372B
 Purchases Journal – it is where the

entity records its purchases on
account
Source of the photo: Figure 5. Purchase Journal
https://www.ecosia.org/images?q=purchases+journal#id=3BF0CF7B3171B15A8D1E580855A91B0FDE05E8C1
 Cash Disbursement Journal – this

journal present any payment made by
the entity to its creditors or suppliers
in the form of cash.
Source of the photo: Figure 6. Cash Disbursement Journal
https://www.ecosia.org/images?q=cash+disbursement+journal#id=DEE9CBA26E087C252B47DC0AC044EACB1501BD
88
 Cash Receipts Journal – this journal

records cash sales, receipt of payment
from sales on account, interest,
dividends and other receipts.
Source of the photo: Figure 7. Cash Receipt Journal
https://www.ecosia.org/images?q=cash+receipts+journal#id=9C14FE838AC806B167BE99BD7CCAFD352
385499C
b. General Journal is a journal for non-recurring transactions, those that are dissimilar,
infrequent or small in volume. Transactions recorded in this journal is in chronological
entry as well. Some entries that can be presented here are the records for depreciation,
payroll (if not using a separate payroll journal) and closing entries.
 Journal Voucher System – a special source document that contains a single journal
entry specifying the general ledger accounts affected; it is used to record summaries
of routine and non-routine transactions, and adjusting and closing entries.
Figure 8. General Journal Figure 9. Journal Voucher
Sources of the photos:
Accounting Information Systems by James A. Hall, p.48 figure 2-7 (left)
https://www.ecosia.org/images?q=journal+voucher+system#id=98343DD05F95150E62466E474333A466FBC90600
(right)
3. LEDGER – a book of accounts that reflects the financial effects of the transactions entered
into by the entity after being posted from different journals presented above. It shows the
decrease or increase and the balance of every account in its chart of accounts. There are two
types of ledgers and they are:
a. General Ledger summarizes the enterprise’s account information by only recording the
total amount of each into a control account.
b. Subsidiary Ledger reflects the detailed information that comprises a corresponding

control account. It is used mostly in accounts receivable, accounts payable, inventory
and payroll.
Figure 10. General and Subsidiary Ledger
https://www.ecosia.org/images?q=subsidiary+ledger#id=C70B617893AA407941678C7E6EC2E7FBAE5211BA
Flow of Economic Events into General Ledger
Figure 11. Flow of Economic Events into General Ledger

Taking a sales order will result to recording an entry by using the sales journal to be posted
eventually in the general ledger. Accountants using subsidiary ledger records this sales order
upon occurrence of the transaction and do not need another entry in sales journal. Subsidiary
ledgers and general ledger must be reconciled periodically to ensure that the balances are equal
and the transaction process is complete and accurate.
Source Journal General Financial

Document Ledger Statements
Figure 12. Audit Process

Auditing is very important to be performed in publicly traded corporations to protect

the interest of their shareholders, creditors and other interested parties. Audit Trail is a step-
by-step process in tracing the source of a certain financial information presented by the financial
statements to verify the information’s accuracy and reliability. Two common techniques used
by auditors in the process of verifying the financial information are sampling and confirmation.
For example, accounts receivable is to be audited, sampling is selecting number of

accounts from the accounts receivable subsidiary ledger and trace back to sales journal. After
sampling, the auditor can now confirm to the customers who initiated the transaction and were
selected if the transaction really took place and they agree with the recorded amount.
Computer-Based Systems
Audit trail is less observable in this system than with the manual system but there are still
ways on how to do this in the digital setting. Accounting applications have audit trail inside its
processes, an example is QuickBooks. In this system, there are four types of files:
1. Master File – it generally contains account data such as general ledger and subsidiary
ledger. Its data values are updated from transactions.
2. Transaction File – a temporary file used to update the master file such as cash receipts,
sales order and inventory receipts.
3. Reference File – it is treated as standards, transaction processing must be aligned with
this file, examples of this file are price lists, payroll program, customer credit files, etc.
4. Archive File – it contains the records of past transactions used for future reference and
checking, it also take an important part in audit trail and these files are journals, lists of
former employees, prior-period ledgers, records of accounts written-off, etc.
The Digital Audit Trail
Accounting Records in a Computer-Based System

Steps in Evaluating the Accuracy of the Accounts Receivable
1. Compare the accounts receivable balance in the balance sheet with the master file
Accounts Receivable (AR) control account balance.
2. Reconcile the AR control figure with the AR subsidiary account total.
3. Select a sample of update entries made to accounts in the AR subsidiary ledger and trace
these to transaction in the sales journal (archive file).
4. From these journal entries, identify specific source documents that can be pulled from
their files and verified. If necessary, the auditor can confirm the accuracy and
proprietary of the source documents by contacting the customer in question.
Figure 13. Accounting Records in a Computer-Based System

Documentation Techniques
Documentation is an important tool to understand how systems work. A system interacts
with various business processes in an organization and its inputs, processes, and outputs.
Documentation covers who, what, when, where, why, and how of data entry, processing, output
and controls.
Accountants need documentation to understand how processes work in a systemic

context, it helps accountants in evaluating the strengths and weaknesses of an entity’s internal
controls. Accountants pursue documentation to determine if a proposed system meets the needs
of its users in the organization.
Documentation includes various types of tools, mainly; narratives, flowcharts, and data
flow diagrams. The greatest amount of skill is needed to prepare documentation. For this part,
we will focus on the five basic documentation techniques: Data Flow Diagram, Entity
Relationship Diagram, System Flowcharts, Program Flowcharts, and Record Layout Diagrams.
Data Flow Diagram

a. Definition
According to James Hall, Data Flow Diagrams, or DFDs, use symbols to represent the
processes, data sources, data flows, and entities in a system. Data Flow Diagrams (DFDs) are
the most common documentation tool for accountants to show the data flow. DFDs are
graphical descriptions of sources and destinations of data and shows where data comes from
and how it flows, the processes performed on it and ultimately where the data goes. A data flow
diagram maps out the flow of information for any process or system. It uses defined symbols
like rectangles, circles and arrows, plus short text labels, to show data inputs, outputs, storage
points and the routes between each destination.
Data flowcharts can range from simple, even hand-drawn process overviews, to in-depth,
multi-level DFDs that dig progressively deeper into how the data is handled. They can be used
to analyze an existing system or model a new one. Like all the best diagrams and charts, a DFD
can often visually “say” things that would be hard to explain in words, and they work for both
technical and nontechnical audiences, from developer to CEO. That’s why DFDs remain so
popular after all these years. While they work well for data flow software and systems, they are
less applicable nowadays to visualizing interactive, real-time or database-oriented software or
systems.
b. History
Data flow diagrams were popularized in the late 1970s, arising from the book Structured
Design, by computing pioneers Ed Yourdon and Larry Constantine. They based it on the “data
flow graph” computation models by David Martin and Gerald Estrin. The structured design
concept took off in the software engineering field, and the DFD method took off with it. It
became more popular in business circles, as it was applied to business analysis, than in
academic circles.
Also contributing were two related concepts:
Object Oriented Analysis and Design (OOAD), put forth by Yourdon and Peter Coad to
analyze and design an application or system.
Structured Systems Analysis and Design Method (SSADM), a waterfall method to
analyze and design information systems. This rigorous documentation approach contrasts with
modern agile approaches such as Scrum and Dynamic Systems Development Method (DSDM.)
Three other experts contributing to this rise in DFD methodology were Tom DeMarco,
Chris Gane and Trish Sarson. They teamed up in different combinations to be the main definers
of the symbols and notations used for a data flow diagram.
c. Components
i. Entity
An outside system that sends or receives data,
communicating with the system being diagrammed. They are
the sources and destinations of information entering or leaving Entity
the system. They might be an outside organization or person, a
computer system or a business system. They are also known as Name
terminators, sources and sinks or actors. They are typically
drawn on the edges of the diagram. Entity should always be
labeled as nouns.
ii. Processes
Any process that changes the data, producing an output. It might perform computations,
or sort data based on logic, or direct the data flow based on business rules. A short label is used
to describe the process, such as “Submit payment.” Processes should be labeled using
descriptive verb.
N The “N” represents the number

and order of the process done.
Process
Description
iii. Data Store

Files or repositories that hold information for later use, such as a database table or a
membership form. Each data store receives a simple label, such as “Orders.” It represents the
accounting records used in each process.
Data Store
Name
iv. Data Flow

The route that data takes between the external entities, processes and data stores. It
portrays the interface between the other components and is shown with arrows, typically labeled
with a short data name, like “Billing details.”
d. Symbols
Notation Yourdon and Coad Gane and Sarson
Entity
Processes
Data Store
Data Flow
Figure 14. Symbols
* The reference book uses the Gane and Sarson model. One main difference in their symbols is
that Yourdon-Coad and Yourdon-DeMarco use circles for processes, while Gane and Sarson
use rectangles with rounded corners, sometimes called lozenges. There are other symbol
variations in use as well, so the important thing to keep in mind is to be clear and consistent in
the shapes and notations you use to communicate and collaborate with others.
e. DFD Levels and Layers
A data flow diagram can dive into progressively more detail by using levels and layers,
zeroing in on a particular piece. DFD levels are numbered 0, 1 or 2, and occasionally go to even
Level 3 or beyond. The necessary level of detail depends on the scope of what you are trying
to accomplish.
DFD Level 0 is also called a Context Diagram. It’s a basic overview of the whole system
or process being analyzed or modeled. It’s designed to be an at-a-glance view, showing the
system as a single high-level process, with its relationship to external entities.
It should be easily understood by a wide audience, including stakeholders, business

analysts, data analysts and developers.
Figure 15. DFD
DFD Level 1 provides a more detailed breakout of pieces of the Context Level Diagram.
You will highlight the main functions carried out by the system, as you break down the high-
level process of the Context Diagram into its sub-processes.
Figure 16. DFD Level 1

DFD Level 2 then goes one step deeper into parts of Level 1. It may require more text to
reach the necessary level of detail about the system’s functioning.
Figure 17. DFD Level 2
Progression to Levels 3, 4 and beyond is possible, but going beyond Level 3 is

uncommon. Doing so can create complexity that makes it difficult to communicate, compare
or model effectively.
Using DFD layers, the cascading levels can be nested directly in the diagram, providing
a cleaner look with easy access to the deeper dive.
By becoming sufficiently detailed in the DFD, developers and designers can use it to write
pseudocode, which is a combination of English and the coding language. Pseudocode facilitates
the development of the actual code.
f. DFD rules and tips
 Each process should have at least one input and an output.
 Each data store should have at least one data flow in and one data flow out.
 Data stored in a system must go through a process.
 All processes in a DFD go to another process or a data store.
g. Examples of Uses of DFDs

Data flow diagrams are well suited for analysis or modeling of various types of systems
in different fields.
DFD in software engineering: This is where data flow diagrams got their main start in the
1970s. DFDs can provide a focused approached to technical development, in which more
research is done up front to get to coding.
DFD in business analysis: Business analysts use DFDs to analyze existing systems and find
inefficiencies. Diagramming the process can uncover steps that might otherwise be missed or
not fully understood.
DFD in business process re-engineering: DFDs can be used to model a better, more efficient
flow of data through a business process. BPR was pioneered in the 1990s to help organizations
cut operational costs, improve customer service and better compete in the market.
DFD in agile development: DFDs can be used to visualize and understand business and
technical requirements and plan the next steps. They can be a simple yet powerful tool for
communication and collaboration to focus rapid development.
DFD in system structures: Any system or process can be analyzed in progressive detail to
improve it, on both a technical and non-technical basis.
Entity Relationship Diagram

a. Definition
An Entity Relationship (ER) Diagram is a type of flowchart that illustrates how
“entities” such as people, objects or concepts relate to each other within a system. ER Diagrams
are most often used to design or debug relational databases in the fields of software engineering,
business information systems, education and research. Also known as ERDs or ER Models,
they use a defined set of symbols such as rectangles, diamonds, ovals and connecting lines to
depict the interconnectedness of entities, relationships and their attributes. They mirror
grammatical structure, with entities as nouns and relationships as verbs.
ER diagrams are related to data structure diagrams (DSDs), which focus on the
relationships of elements within entities instead of relationships between entities themselves.
ER diagrams also are often used in conjunction with data flow diagrams (DFDs), which map
out the flow of information for processes or systems.
b. History
Peter Chen (a.k.a. Peter Pin-Shan Chen), currently a
faculty member at Carnegie-Mellon University in Pittsburgh, is
credited with developing ER modeling for database design in the
1970s. While serving as an assistant professor at MIT’s Sloan
School of Management, he published a seminal paper in 1976
titled “The Entity-Relationship Model: Toward a Unified View
of Data.”
(Peter Chen)
In a broader sense, the depiction of the interconnectedness

of things dates back to least ancient Greece, with the works of
Aristotle, Socrates and Plato. It’s seen more recently in the 19th
and 20th Century works of philosopher-logicians like Charles
Sanders Peirce and Gottlob Frege.
By the 1960s and 1970s, Charles Bachman (above) and A.P.G. Brown were working
with close predecessors of Chen’s approach. Bachman developed a type of Data Structure
Diagram, named after him as the Bachman Diagram. Brown published works on real-world
systems modeling. James Martin added ERD refinements. The work of Chen, Bachman,
Brown, Martin and others also contributed to the development of Unified Modeling Language
(UML), widely used in software design.
c. Components and features

ER Diagrams are composed of entities, relationships and attributes. They also depict
cardinality, which defines relationships in terms of numbers.
i. Entity
A definable thing—such as a person,
object, concept or event—that can have data
stored about it. Think of entities as nouns.
Examples: a customer, student, car or
product. Typically shown as a rectangle.
Entity type: A group of definable things, such as students or athletes, whereas the entity would
be the specific student or athlete. Other examples: customers, cars or products.
Entity set: Same as an entity type, but defined at a particular point in time, such as students
enrolled in a class on the first day. Other examples: Customers who purchased last month, cars
currently registered in Florida. A related term is instance, in which the specific person or car
would be an instance of the entity set.
Entity categories: Entities are categorized as strong, weak or associative. A strong entity can
be defined solely by its own attributes, while a weak entity cannot. An associative entity
associates entities (or elements) within an entity set.
Entity keys: Refers to an attribute that uniquely defines an entity in an entity set. Entity keys
can be super, candidate or primary. Super key: A set of attributes (one or more) that together
define an entity in an entity set. Candidate key: A minimal super key, meaning it has the least
possible number of attributes to still be a super key. An entity set may have more than one
candidate key. Primary key: A candidate key chosen by the database designer to uniquely
identify the entity set. Foreign key: Identifies the relationship between entities.
ii. Relationship
How entities act upon each other or are associated with each other. Think of relationships
as verbs. For example, the named student might register for a course. The two entities would
be the student and the course, and the relationship depicted is the act of enrolling, connecting
the two entities in that way. Relationships are typically shown as diamonds or labels directly
on the connecting lines.
Recursive relationship: The same entity participates more than once in the relationship.
iii. Attribute
A property or characteristic of an entity. Often shown as an oval or circle.
Descriptive attribute: A property or characteristic of a relationship (versus of an entity.)

Attribute categories: Attributes are categorized as simple,
composite, derived, as well as single-value or multi-value.
Simple: Means the attribute value is atomic and can’t be further
divided, such as a phone number. Composite: Sub-attributes
spring from an attribute. Derived: Attributed is calculated or
otherwise derived from another attribute, such as age from a
birthdate
Multi-value: More than one attribute value is denoted, such as

multiple phone numbers for a person
Single-value: Just one attribute value. The types can be combined, such as: simple single-
value attributes or composite multi-value attributes.
d. Cardinality
Defines the numerical attributes of the relationship between two entities or entity sets.
The three main cardinal relationships are:
 one-to-one
 one-to-many
 many-many
Figure 18. Cardinal Relationships
e. Uses and Limitations of ER Diagram

Database design: ER diagrams are used to model and design relational databases, in terms of
logic and business rules (in a logical data model) and in terms of the specific technology to be
implemented (in a physical data model.) In software engineering, an ER diagram is often an
initial step in determining requirements for an information systems project. It’s also later used
to model a particular database or databases. A relational database has an equivalent relational
table and can potentially be expressed that way as needed.
Database troubleshooting: ER diagrams are used to analyze existing databases to find and
resolve problems in logic or deployment. Drawing the diagram should reveal where it’s going
wrong.
Business information systems: The diagrams are used to design or analyze relational
databases used in business processes. Any business process that uses fielded data involving
entities, actions and interplay can potentially benefit from a relational database. It can
streamline processes, uncover information more easily and improve results.
Business process re-engineering (BPR): ER diagrams help in analyzing databases used in
business process re-engineering and in modeling a new database setup.
Education: Databases are today’s method of storing relational information for educational
purposes and later retrieval, so ER Diagrams can be valuable in planning those data structures.
Research: Since so much research focuses on structured data, ER diagrams can play a key role
in setting up useful databases to analyze the data.
Only for relational data: Understand that the purpose is to show relationships. ER diagrams
show only that relational structure.
Not for unstructured data: Unless the data is cleanly delineated into different fields, rows or
columns, ER diagrams are probably of limited use. The same is true of semi-structured data,
because only some of the data will be useful.
Difficulty integrating with an existing database: Using ER Models to integrate with an

existing database can be a challenge because of the different architectures
System Flowchart
a. Definition
A system flowchart is the graphical representative of the physical relationship among
key elements of a system. These elements may include organizational departments, manual
activities, computer programs, hard-copy accounting records, and digital records. System
flowcharts also describe the type of computer media being employed in the system, such as
magnetic tape, magnetic disks and terminals.
b. Symbols
i. Manual Accounting Process
Symbol Use
Terminal showing source
or destination of documents
and reports
Source document or
report
Manual operation
File for storing source

documents and
reports
Accounting records
(journals, registers, logs, ledgers)
Calculated batch total
On-page connector
Off-page connector
Description of process
or comments
Document flowline
ii. Computer-based Process
Symbols Uses
Hard copy
Computer process
Direct access storage

device
Magnetic tape
Terminal input/
output device
Process flow
Real-time (online)
connection
Video display
device
Figure 19. Manual Accounting Process
Program Flowchart
a. Definition
The system flowchart shows the relationship between computer programs, the files they
use, and the output they produce. This high level of documentation, however, does not provide
the operational details that are sometimes needed. Thus, program flowchart is what needed.
Every program represented in a system flowchart should have a supporting program

flowchart that describes its logic. A separate symbol represents each step of the program’s
logic, and each symbol represents one or more lines of compute program code. The connector
lines between the symbols establish the logical order of executions.
Accountants sometimes use program flowcharts to verify the correctness of program
logic. They compare flowcharts to the actual program code to determine whether the program
is actually doing what the documentation describes. Program flowcharts provide essential
details for conducting information technology audits.
b. Steps
Tracing the flowchart downward from the start symbol, we see that the program performs
the following logical steps in the order listed:
1. The programs retrieves a single record from the unedited transaction file and stores in
memory.
2. The first logical test is to see if the program has reached the end-of-file (EOF) condition
for the transaction file. Most of the file structures use a special record or marker to
indicate an EOF condition. When EOF is reached, the edit program will terminate and
the next program in the system will be executed. As long as there is a record in the
unedited transaction file, the result of the EOF test will be “no: and process control is
passed to the next logical step in the edit program.
3. Processing involves a series of tests to identify certain clerical and logical errors. Each
test, represented by decision symbol, evaluates the presence or absence of a condition
For example, an edit test could be to detect the presence of alphabetic data in a field that
should contain only numeric data.
4. Error-free records are sent to the edited transaction file.
5. Records containing errors are sent to the error file.
6. The program loops back to Step 1, and the process is repeated until the EOF condition is
reached.
c. Symbols
Symbols Uses
Logical process
Decision
Terminal start or
end operation
Input/output
operation
Flow of logical
process
Figure 20. Symbols
Record Layout Diagrams

Record Layout Diagrams are used to reveal the internal structure of the records that
constitute a file or database table. The layout diagram usually shows the names, data, type, and
length of each attribute in the record. Detailed data structure information is needed for such
tasks as identifying certain types of system failures, analyzing error reports, and designing test
of computer logic for debugging and auditing purposes. The examples below is a type of layout
showing the content of a record. Each data attribute and key field is shown in terms of its names
and relative location.
Figure 21.Customer File
Importance of Documentation Techniques in AIS

Documentation is important to any system implementation, and an accounting system is
no exception. Documenting is usually done on paper or online with explanations as why a
certain decision was made over others. Documentation is usually standard within a firm and is
done the same way each time a new system is implemented, making it easy to read and research
any issue.
a. Troubleshooting
The importance of an accounting system documentation is clearly visible when
something goes wrong and people need to figure out how to fix it. For example: An accounts
payable system is adding a weird tax to certain vendors. The easiest way to find out the cause
of this issue is to review documentation to see how the system was set up and why. This is
crucial when a system is first put to use and people are finding unexpected issues. Maybe a
report is asking for information that doesn't exist. Looking into the documentation would help
in fixing the problem by showing where this information is set up within the system.
b. Decisions
Documentation of an accounting system should present decisions as a system is
implemented. Many systems allow for lots of flexibility and, along with the flexibility, come
decisions. For example, documentation would show who decided how many digits an account
should have, and the reasons why that decision was made. This is quite important when a firm
undergoes major changes and new management wants to understand decisions made by people
no longer there. Maybe those decisions were wise; maybe not. But at least there is some
documentation of decisions made for the firm.
c. Changes
When a system needs to be updated with a new version or a new module, having proper
documentation can help in making this process go faster. This is crucial if an accounting
program was designed specifically for a company. Any technical details are very important
when considering compatibility with other software and any changes needed to the program.
For example, you may need a fixed asset module and you want that module to transfer
information to the general ledger. The documentation should give you clues as to whether you
can do that, and if so, what needs to be done. Usually, information technology (IT) folks use
documentation for technical information.
d. Format
Good documentation for accounting systems are usually a combination of flowcharts and
text. Many times, a data diagram shows how a system was developed and implemented better
than text. These can be a bit complicated to understand, so make sure your documentation has
a legend so you can follow the concepts.
Other formats for documentation are in the form of questionnaires, where specific
questions are asked and answers are documented. Based on answers, reports and other
accounting system issues are resolved. Many times documentation has both flowcharts and
questionnaires.
e. Considerations
Many firms document how and why a certain accounting system was selected instead of
others. That can give users a really good idea of what the thinking was then, even if none of
the decision makers are around for questions. Since a system implementation can be expensive,
minutes of meetings are usually available to document the decision process. Maybe free
training was offered by one vendor that was more attractive than another. So, even before a
system implementation is under way, documentation should be available as well.
*** The steps on how to create documentation techniques is presented through the following
videos, included in the ppt:
Data Flow Diagram: https://www.youtube.com/watch?v=6VGTvgaJllM
Entity Relationship Diagram: https://www.youtube.com/watch?v=QpdhBUYk7Kk
Flowchart: https://www.youtube.com/watch?v=iJmcgQRk048
Flowchart: https://www.youtube.com/watch?v=2De4hO3lu14
Computer-Based Accounting Systems

Computer-based accounting systems fall into two broad classes: batch systems and
real-time systems.
Batch System
Batch system or batch processing permits the efficient management of a large volume of
transactions. A batch is a group of similar transactions (such as sales orders) that are
accumulated over time and then processed together. Batch processing offers two general
advantages.
1. Improved operational efficiency
By grouping together large numbers of transactions into batches and processing
them as a unit of work rather than processing each event separately, organizations
improve operational efficiency.
2. Greater control
Batch processing provides tight auditing control over the transaction process. The
accuracy of the process is established by periodically reconciling the batch against
control figure. There is an opportunity to review data entry work prior to posting to the
books of record. Many software systems check a batch for out of balance errors—which
will be later mentioned—before it is posted, and the authorized staff gets the chance to
catch and fix any errors in the batch prior to its posting (Brown, 2019).
Both of these advantages have implications for designing batch systems. The first is that
economies are derived by making transaction batches large as possible as this could reduce
average transaction cost as the processing fixed cost associated with the batch is allocated
across a large number of transactions.
The second implication is about the difficulty of finding an error in a very large batch.
The decision on determining the size of a batch is based on a number of operational, business,
and economic factors. Among these are the volume of transactions, the competitiveness of the
industry, the normal frequency of errors, the financial implications of an undetected error and
the cost of processing.
Real-Time System
Real-time systems work in an instantaneous nature. When saving an item, the data is
immediately transferred to ledgers and financial statements. Every transaction that is entered
and saved affects the entire system immediately—in real time. While it has its benefits such as
minimized process complexity and up-to-date reports, this system lacks accountability and
transparency of batch system because the data is immediately posted without first being
reviewed. When there is no data scrubbing (review and corrections), incorrect or misleading
information can be made available to program managers and other executive staff 1.
Differences between Batch and Real-Time Systems

The table below summarizes three (3) of the distinguishing characteristics of batch and
real-time processing (or you may want to visit https://youtu.be/2VJLWot9T7Y2 for a three-
minute discussion).
Information Time Frame
Batch systems collect and store data, for processing at a scheduled time when a
sufficient amount of data has been accumulated hence, there is 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.
Payroll processing is an example of a typical batch system. The economic events—the
1
(Brown, 2019)
2
(Kalodikis, 2016)
application of employee labor—occur continuously then at the end of the period, the paychecks
for all employees are prepared together as a batch. Other examples include cheque clearing,
generation of bills, and printing shipping labels.
On the other hand, real-time systems process transactions individually at the moment the
event occurs therefore, there are no time lags between the occurrence and recording. 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. This is also evident in Point of Sale
(POS) Systems to update inventory history, and sales of a particular item, as well as radar
systems, customer services and bank ATMs where action within seconds or minutes is
significant (Walker, 2013).
Here is a representation comparing the two computer-based accounting systems’
information time frame.
Figure 22. Hadoop (Batch) vs. Spark (Real-Time)3
3
(DataFlair, 2018)
Resources
Generally, batch systems demand fewer organizational resources than real-time systems.
Computer Time
Real-time systems require dedicated processing capacity; the system must deal with the
transactions as they occur. Meanwhile, batch systems can be used offline and gives managers
complete control as to when to start the processing, whether it be overnight or at the end of a
week or pay period (Shiff, 2020).
Systems Development (Programming) Costs and User Training

For instance, batch systems can use sequential files stored on magnetic tape i. Real-time
systems use direct access files that require more expensive storage devices such as magnetic
disksii.
Also, batch systems are generally simpler than their real-time counterparts as they tend
to have shorter development periods and are easier for programmers to maintain. On the other
hand, real-time systems must be friendly, forgiving, and easy to work with. Pop-up menus,
online tutorials, and special help features require additional programming and add greatly to
the cost of the system.
Operational Efficiency
Real-time processing in systems that handle large volumes of transactions each day can
create operational inefficiencies. When multiplied by hundreds or thousands of transactions,
the updating of accounts can cause significant processing delays. But batch processing,
however, improves operational efficiency by eliminating unnecessary activities at critical
points in the process.
Data Processing Methods
Distinguishing
Batch Real-Time
Feature
Information Lag exists between time when the Processing takes place when the
Time Frame economic event occurs and when it is economic event occurs.
recorded.
Resources Generally, fewer resources are More resources are required than
required. for batch processing.
Operational Certain records are processed after the All records pertaining to the event
Efficiency event to avoid operational delays. are processed immediately.
Figure 23. Data Processing Methods
Effectiveness versus Efficiency

In selecting a data processing mode, the designer must consider the trade-off between
efficiency and effectiveness. 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.
Alternative Data Processing Approaches

Legacy Systems vs Modern Systems
Legacy systems4 tend to have the following distinguishing features:
 Mainframe-based applications;
 Tend to be batch oriented;
 Early legacy systems use flat files for data storage
 Later-era legacy systems are often associated to hierarchical and network databases.
DATA STRUCTURES
Data structures constitute the physical and logical arrangement of data in files and
databases. These have two fundamental components: organization and access method.
Organization refers to way records are physically arranged on the secondary storage device.
This may be either sequential or random. The access method is the technique used to locate
records and to navigate through the database or file.
The following table will be about data structures that are used in flat-file systemsiii.
4
For additional information about legacy systems, you may visit https://youtu.be/LSjN4wdSal
Sequential Structure or Sequential Access Method5
All records in the file lie in contiguous storage spaces in a specified sequence (ascending or
descending) arranged by their primary key.
 Simple and easy to process

 Efficient for record updating when a large portion of the file is to be processed in one
operation
 Not efficient when the user is interested in locating only one or few records on a file
 Does not permit accessing a record directly
Payroll Processing
Direct Access Structures
These structures store data at a unique location, known as an address, on a hard disk or floppy
disk. The disk address is a numeric value that represents the cylinder, surface, and block
location on the disk.
 Direct selection
 Efficient in searching through files
Bank account numbers, social security numbers, credit card numbers, license plate numbers
Indexed Structure6
In addition to the actual data file, there exists a separate index that is itself a file of record
addresses. This index contains the numeric value of the physical disk storage location
5
In this video: https://youtu.be/rWJCgZ1QyYk a music analogy is used to describe the sequential and direct access
structures.
If you want to know more about:
6
Indexed Structure, you may visit https://youtu.be/zDzu6vka0rQ
(cylinder, surface, and record block) for each record in the associated data file. The data file
itself may be organized either sequentially or randomly.
 Random indexes are easier to maintain, in terms of adding records, because new key
records are simply added without regard to their sequence.
 Sequential index can be searched rapidly.
 Efficient use of disk storage since records belonging to the same file may reside on
different disks.
 Random files are not efficient structures for operations that involve processing a large
portion of a file.
 Indexes in sequential order are more difficult to maintain because new record keys must
be inserted between existing keys.
 Access time may be greater as records are randomly dispersed throughout the storage
device.
Virtual Storage Access Method (VSAM) Structure7
This is used for very large files that require routine batch processing and a moderate degree
of individual record processing. It is also used for files that often occupy several cylinders of
contiguous storage on a disk.
 VSAM indexes do not provide an exact physical address for a single record but still
identify the disk track on which the record in question resides.
 It is a popular option for large, stable files that need both direct access and batch
processing.
 It does not perform record insertion operations efficiently.

 The physical relocation of all records located beyond the point of insertion when inserting
a new record into the file is extremely time-consuming and disruptive.
If you want to know more about:

7
VSAM Structure, you may visit https://youtu.be/_yWH3bgGX4M or IBM Redbooks Youtube channel.
Hashing Structure
It employs an algorithm that converts the primary key of a record directly into a storage
address. Hashing eliminates the need for a separate index. Records can be retrieved more
quickly by calculating the address.
 Access speed
 Inefficient use of storage space

 Collision because two records cannot be stored at the same location
Pointer Structure
Pointers are the variables that are used to store the location of value present in the memory.
A pointer to a location stores its memory address providing connections between the records.
The process of obtaining the value stored at a location is known as dereferencing the
pointer—which is the same as indexing for a textbook8.
It allocates the memory dynamically.
Linked-List Fileiv 9
Legend: Definition Advantages Disadvantages Example

Figure 24. Sequential Structure or Sequential Access Method
8
(Pointers in Data Structure, 2020)
9
(Jaiswal, n.d.)
Types of Pointers
Figure 25. Types of Pointers
 Physical Address Pointer

- Contains the actual disk storage location (cylinder, surface, and record number) that
the disk controller needs. This physical address allows the system to access the record
directly without obtaining further information.
 Relative Address Pointer
- Contains the relative position of a record in the file. This must be further manipulated
to convert it to the actual physical address.
 Logical Key Pointer
- Contains the primary key of the related record. This key value is then converted into
the record’s physical address by a hashing algorithm.
Modern systems tend to be client-server (network)-based and process transactions in
real time. Modern systems store transactions and master files in relational database tables. A
major advantage of database storage is the degree of process integration and data sharing that
can be achieved which is discouraged in legacy systems as these promote single-user
environment.
Batch Processing Using Sequential Files

Batch mode using sequential file structures is the most basic computer-processing
configuration. Each program in a batch system is called a run. The entire file or batch of
records is processed through each run before it moves to the next run. When the last run finishes
processing the batch, the session terminates.
The use of sequential files is simple to create and maintain. This file structure is also
effective for managing large files that have high activity ratio v.
Figure 26. Batch System Using Sequential Files

1. Keystroke
This is the first step in this process. Here, source documents are transcribed by
clerks to magnetic tape for processing later.
2. Edit Run
This program identifies clerical errors in the batch and automatically removes
these records from the transaction file as it placed in a separate error file.
3. Sort Runs
Before updating a sequential master file, the transaction file must be sorted and
placed in the same sequence as the master file.
4. Update Runs
Changing the value of one or more of its variable fields to reflect the effects of a
transaction happens when updating a master file record.
5. Backup Procedure
In this step, the original master continues to exist and a new master file is created
which contains all of the records from the original file, including those that were updated
by transactions and those that were not updated. This feature provides an automatic
backup capability called the grandparent-parent-child approach.
The sequential files in the system are represented in the flowchart as tapes but disks are
also a common medium for sequential files. In addition, the following graphical presentation
presents the operational description of these steps.
Keystroke Edit Run Sort Runs Update Runs Backup

Procedure
Transaction file In a separate The record In the example,
created contains error file, error structure there are two The parent is the
data about records are contains a PK separate update original master
customer sales. corrected and and SK fields to procedures being file, and the
resubmitted for locate and performed. child is the
processing with update its newly created
Data are used to the next day's corresponding (updated) file.
See the
update the batch. master file. following topic
appropriate for further For every next
customer and discussion. batch, the child
Batch total is
inventory AR update run becomes the
recalculated to
records. comes first in parent, the
reflect changes
the sequence, so original parent
due to the
the sales order becomes the
If the system removal of error
file must be first grandparent
detects out-of- records.
be sorted by (backup), and a
balance ACCOUNT new child is
condition after NUMBER. created.
recalculation of
control totals, it
sends error Then sorted by
reports to users INVENTORY
and data control NUMBER to
personnel. update
inventory.
Figure 27. Steps in Processing Sequential Files
Updating Master Files from Transactions

In data processing, updating a master file record involves changing the value of one or
more of its variable fields to reflect the effects of a transaction.
The following figure presents the record structures for a sales order transaction file and
two associated master files, AR and inventory. The record structure for sales order file contains
a primary key (PK) - SALES ORDER NUMBER and two secondary key (SK) fields,
ACCOUNT NUMBER and INVENTORY NUMBER. These secondary keys are used for
locating the corresponding records in the master files. The primary key in AR file is the
ACCOUNT NUMBER while the primary key for the inventory file is INVENTORY
NUMBER.
2
3
4
5
Figure 28. Record Structures for Sales, Inventory, and Accounts Receivable
The following are the steps in an update procedure in accordance with the figure:
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 records.
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.
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.
Batch Processing Using Direct Access Files

Changing the file structures from sequential to direct access greatly simplifies the system.
The shift to direct access files causes two noteworthy changes to this system. The first is the
elimination of the sort programs because in sequential file updating, there is a need to sort the
transaction file before each update run. Aside from the computer time sorting consumes, it is
also error-prone when very large files are involved.
The second change is the elimination of automatic file backup in the system. Direct
access update does not produce a new physical master as a by-product of the process.
Database Backup Procedures

Each record in a database file is assigned a unique disk location or address that is
determined by its primary key value. Because only a single valid location exists for each record,
updating the record must occur in place.
Figure 29. Destructive Update Approach
The destructive update approach leaves no backup copy of the original master file. Only
the current value is available to the user. If the current master becomes damaged or corrupted
in some way, no backup version exists from which to reconstruct the file. To preserve adequate
accounting records in case the current master becomes damaged or corrupted, separate
backup procedures, must be implemented.
Figure 30. Backup and Recovery Procedures for Database Files
Prior to each batch update or periodically, the master file being updated is copied to
create a backup version of the original file. Should the current master be destroyed after the
update process, reconstruction is possible in two stages. First, a special recovery program uses
the backup file to create a pre-update version of the master file. Second, the file update process
is repeated using the previous batch of transactions to restore the master to its current
condition.
Because of the potential risk to accounting records, accountants are naturally concerned
about the adequacy of all backup procedures.
Batch Processing Using Real-Time Data Collection

A popular data processing approach, particularly for large operations, is to electronically
capture transaction data at the source as they occur. 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 that plague older legacy systems.
The transaction file is later processed in batch mode to achieve operational efficiency.
Figure 31. Batch Processing with Real-Time Data Collection
Key steps in the process are:
 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 information
to the other clerks as to inventory availability.
 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.
Assuming that the organization using the sales order system configuration illustrated in
Figure 5 is large and capable of serving hundreds of customers concurrently. Also assume that
500 sales terminals are distributed throughout its many large departments.
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 goods sold (GL – common)
To maintain the integrity of accounting data, 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. Using the affected records noted here as an example, consider the implications
that this data-locking rule has on the users of the system.
Each user accesses only his or her unique record. 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.
However, this is not the case when updating the records in the general ledger. General
ledger accounts previously listed need to be updated by every sales transaction. If the
processing of a transaction begins before that of someone, then the customer or client must
wait until all six records have been updated before her transaction can proceed. However, the
20- or 30-second delay brought about by this conflict will probably not inconvenience the next
customer. But a 20-second delay in each of 500 customer transactions would create operational
inefficiency on a chaotic level. Each of the 500 customers must wait until the person ahead of
him or her in the queue has completed processing their transaction. The last person in the queue
will experience a delay of 500 x 20 seconds = 2 ¾ hours.
Real-Time Processing
Real- time systems process the entire transaction as it occurs. For example, a sales order
processed by the system can be captured, filled, and shipped the same day. Such a system has
many potential benefits, including improved productivity, reduced inventory, increased
inventory turnover, decreased lags in customer billing, and enhanced customer satisfaction.
Because transaction information is transmitted electronically, physical source documents can
be eliminated or greatly reduced.
Real-time processing is well suited to systems that process lower transaction volumes
and those that do not share common records. These systems make extensive use of local area
network and wide area network technology. Terminals at distributed sites throughout the
organization are used for receiving, processing, and sending information about current
transactions. These must be linked in a network arrangement so users can communicate.
Data Coding Schemes

System having codes are designed for easy manipulation of data and hence, for
convenience among its users. This is what makes a technology-based accounting system
different from a traditional one back then. A more detailed analysis can be facilitated, lessen
the clerical errors in inputting data, and saves a lot of time.
Just imagine long names for inventories, different account names, and series of employee
names, departments, and complex jargons that a system would store. It does not just use big
storage and space but also exhaust the one using the system (see figure 3). These are the benefits
brought by a system employing codes (James Hall, 2011):
1. Concisely represent large amounts of complex information that would otherwise be unmanageable.
2. Provide a means of accountability over the completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective audit trail.
Figure 32. Journalizing without Codes

As can be seen on figure 4, a system with code is much more organized. The three digit
number represents the code for the inventory that has a complex details. There are different data
coding schemes which of course aims to ease the disadvantages brought by a system without
codes.
Figure 33. Journalizing with Codes
Sequential Codes
Sequential codes represent items in some sequential order (ascending or descending).
From the term itself, it is continuous. Meaning to say, it is useful in tracking down lost
documents whenever the system detects a gap in the sequential numbering codes. Here are its
advantages and disadvantages according to James Hall (2011):
ADVANTAGES. Sequential coding supports the reconciliation of a batch of transactions, such as sales
orders, at the end of processing. If the transaction processing system detects any gaps in the sequence of
transaction numbers, it alerts management to the possibility of a missing or misplaced transaction. By
tracing the transaction number back through the stages in the process, management can eventually
determine the cause and effect of the error. Without sequentially numbered documents, problems of this
sort are difficult to detect and resolve.
DISADVANTAGES. Sequential codes carry no information content beyond their order in the sequence.
For instance, a sequential code assigned to a raw material inventory item tells us nothing about the
attributes of the item (type, size, material, warehouse location, and so on). Also, sequential coding
schemes are difficult to change. Inserting a new item at some midpoint requires renumbering the
subsequent items in the class accordingly. In applications where record types must be grouped together
logically and where additions and deletions occur regularly, this coding scheme is inappropriate.
Figure 34. Sequential Coding

Block Codes
Just like a sequential coding, it assigns code to an item but more classified in such a way
that these items can easily be grouped by class. The best example of it are the codes given to
accounts in the so-called chart of accounts. The first number from a three-digit number
represents its class whether it is an asset account, expense account, or revenue account, etc. One
of its advantages is that, it is not required to be continuous which means as long as the code is
unique and abide with the class code, it does not need to be sequential. Items can be categorized
easily unlike with sequential coding. This three-digit code accommodates 100 individual items
(X00 through X99) within each block. Obviously, the more digits in the code range, the more
items that can be represented. For its disadvantages, the data content of the block code is not
readily apparent. For instance, account number 626 means nothing until matched against the
chart of accounts, which identifies it as advertising expense.
Figure 35. Block Codes
Group Codes
A certain item within a class can have multiple details which requires complex coding to
be considered unique and be able to include every relevant data that the business can use.
Sequential and block coding cannot cater to this kind of transaction. According to James Hall
(2011) its advantages and disadvantages can be:
ADVANTAGES. Group codes have a number of advantages over sequential and block codes.
1. They facilitate the representation of large amounts of diverse data.
2. They allow complex data structures to be represented in a hierarchical form that is logical and more
easily remembered by humans.
3. They permit detailed analysis and reporting both within an item class and across different classes of
items.
DISADVANTAGES. Ironically, the primary disadvantage of group coding results from its success as a
classification tool. Because group codes can effectively present diverse information, they tend to be
overused. Unrelated data may be linked simply because it can be done. This can lead to unnecessarily
complex group codes that cannot be easily interpreted. Finally, overuse can increase storage costs,
promote clerical errors, and increase processing time and effort.
Figure 36. Group Codes
Alphabetic Codes
It has the same purpose as the numeric coding that uses numbers but this time, letters are
being used instead. It is believed that with the use of the alphabetic codes, the range of codes
can be greater compared to the use of numbers. It can be used in sequential coding, block code,
and group code. In block coding, the range of items that can be grouped within a class is much
larger compared to numeric codes that was exemplified earlier. To visualize this, here are the
advantages and disadvantages cited by James Hall (2011):
ADVANTAGES. The capacity to represent large numbers of items is increased dramatically through
the use of pure alphabetic codes or alphabetic characters embedded within numeric codes
(alphanumeric codes). The earlier example of a chart of accounts using a three-digit code with a
single blocking digit limits data representation to only 10 blocks of accounts—0 through 9. Using
alphabetic characters for blocking, however, increases the number of possible blocks to 26—A
through Z. Furthermore, whereas the two-digit sequential portion of that code has the capacity of
only 100 items (10^2), a two-position alphabetic code can represent 676 items (26^2). Thus, by using
alphabetic codes in the same three-digit coding space, we see a geometric increase in the potential
for data representation.
DISADVANTAGES. The primary drawbacks with alphabetic coding are (1) as with numeric codes,
there is difficulty rationalizing the meaning of codes that have been sequentially assigned, and (2)
users tend to have difficulty sorting records that are coded alphabetically.
As an example, the use of the phonetic alphabet can be a substitute for a large company
to name its branches or departments in the encoding of data in the information system.
Figure 37. Alphabetic Codes
Mnemonic Codes
One distinguishing feature of this coding scheme is that it uses alphabet letters instead of
numbers. Rather than using the whole name of an inventory, for example, it will be abbreviated
like cancelling all of the vowel letters or into letter combinations that can easily be remembered
by the user. The very advantage of this coding scheme is the apparent meaning behind codes.
Usually codes are far different from its true meaning. But with mnemonic coding, no one needs
to memorize the code itself plus the intended meaning. With the disadvantage, it is good in
categorizing classes but will not be cost-friendly for sorting the items within the class. If a
certain class has a diverse and large amount of data, abbreviating all of them would be
exhausting and uses much storage.
Figure 38. Mnemonic Coding

Alpha-Numeric Coding
By the name itself, it is just simply the combination of the numeric and alphabetic coding
system. It can be used in sequential, block and group coding. The user of it would enjoy the
benefit of a much greater number of available codes that can be formulated by combining letters
and numbers. As an example, see figure 10 (identifying the account of a magazine subscriber
with an alpha-numeric derivation code.
Figure 39.Alpha-Numeric Coding
i
Most modern magnetic tape systems use reels that are similar to a VCR tape. A tape drive is used to record
bits of data onto magnetic tape by winding the tape from one reel to the other and passing it across a read/write
head. The tape drive reads and writes blocks of data at a time. Each block is separated by an interblock gap,
which instructs the tape drive to stop reading or writing the data until another block is requested. Its important
advantage include large amounts of data can be stored on magnetic tape at a relatively low cost, and magnetic
tape is reusable. The primary disadvantage is that tapes record data sequentially, making data retrieval slower
than direct access storage media.
ii
The data stored on magnetic disks are considered nonvolatile. The data will reside in a certain location on
the magnetic surface until they are replaced with different data or erased. Data can be recorded to magnetic
disks using either of the access methods described.
iii
The flat-file approach is a single-view model that characterizes legacy systems in which data files are
structured, formatted and arranged to suit the specific needs of the owner or primary user of the system.
iv
Linked List can be defined as collection of objects called nodes that are randomly stored in the memory. A
node contains two fields: data stored at that particular address and the pointer which contains the address of
the next node in the memory. The node can reside anywhere in the memory and linked together to make the
list hence the linked list is not required to be contiguously present in the memory which achieves optimized
utilization of space.
v
The activity ratio of a file is defined as the percentage of records on the file that are processed each time the
file is accessed.
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POLY TECHNIC U NIVERSITY OF THE PHILIPPINES

INTRODUCTION TO TRANSACTION PROCESSING

A Written Report Submitted to

Prof. Leandro C. Fua

In Partial Fulfillment of the Requirement in

Accounting Information System

The Transaction Processing System: An Overview

Figure 1: The Transaction Processing System

What are the Three Transaction Cycles?

Figure 2: The Three Primary Transaction Cycles

The Expenditure Cycle

The Conversion Cycle

The Revenue Cycle

 Sales Order – prepared when customer

Source of the photo:

 Payroll Record – documentation of hours

Source of the photo:

 Purchase Order – it is a documentation given

Source of the photo:

 Payroll Check – product of payroll system

Source of the photo:

 Receipts – a document used as a proof

Source of the photo:

c. Turnaround Document – it is a product document that becomes a source document for

Example of Turnaround Document:

 Invoices – listing of goods provided and

Source of the photo:

 Sales journal – it is where the

Source of the photo: Figure 4. Sales Journal

 Purchases Journal – it is where the

Source of the photo: Figure 5. Purchase Journal

 Cash Disbursement Journal – this

Source of the photo: Figure 6. Cash Disbursement Journal

 Cash Receipts Journal – this journal

Source of the photo: Figure 7. Cash Receipt Journal

Figure 8. General Journal Figure 9. Journal Voucher

Sources of the photos:

Accounting Information Systems by James A. Hall, p.48 figure 2-7 (left)

b. Subsidiary Ledger reflects the detailed information that comprises a corresponding

Figure 10. General and Subsidiary Ledger

Source of the photo:

Flow of Economic Events into General Ledger

Figure 11. Flow of Economic Events into General Ledger

Source Journal General Financial

Figure 12. Audit Process

Auditing is very important to be performed in publicly traded corporations to protect

For example, accounts receivable is to be audited, sampling is selecting number of

The Digital Audit Trail

Accounting Records in a Computer-Based System

Figure 13. Accounting Records in a Computer-Based System

Accountants need documentation to understand how processes work in a systemic

Data Flow Diagram

N The “N” represents the number

iii. Data Store

iv. Data Flow

Figure 14. Symbols

It should be easily understood by a wide audience, including stakeholders, business