Chapter 2 - Introduction to Transaction Processing
Financial transaction - An economic event that
affects the assets and equities of the firm, is
reflected in its accounts, and is measured in
monetary terms.
Economic exchanges with external parties -
The most common financial transactions.
Transaction Cycles
 incurs expenditures in exchange for
resources (expenditure cycle),
 provides value added through its
products or services (conversion cycle),
and
 receives revenue from outside sources
(revenue cycle).
1. Expenditure cycle - Acquisition of materials,
property, and labor in exchange for cash.
A business-to-business transaction has
two parts: a physical component (the
acquisition of the goods or services) and a
financial component (the cash disbursement to
the supplier).
Primary expenditure cycle subsystems
Purchases/accounts payable (AP) system -
recognizes the need to acquire physical
inventory (such as raw materials), places an
order with the vendor and establishes an
account payable to be paid later.
Cash disbursements system - authorizes the
payment when the obligation created in the
purchases system becomes due.
Payroll system - collects labor usage data for
each employee, computes the payroll, and
disburses paychecks to the employees.
Fixed asset system - processes transactions
pertaining to the acquisition, maintenance, and
disposal of its fixed assets.
2. Conversion cycle - Cycle composed of the
production system and the cost accounting
system.
Production system involves the
planning, scheduling, and control of the
physical product through the
manufacturing process.
Cost accounting system monitors the
flow of cost information including labor,
overhead, and raw materials related to
production.
3. Revenue cycle - Cycle composed of sales
order processing and cash receipts.
Primary subsystems of the revenue cycle
 Sales order processing
 Cash receipts
Accounting record - Document, journal, or
ledger used in transaction cycles.
Manual Systems
1. Documents - may initiate transaction
processing or be the output of a process;
provide auditors with evidence of economic
events.
Three types of documents
 Source Documents - Documents
that capture and formalize
transaction data needed for
processing by their respective
transaction cycles.
Chapter 2 - Introduction to Transaction Processing

The primary sources of data entry into journals

are documents.

Journals fall into two classes: special journals

and general journals.

 Product documents - Documents Special journals - are used to record specific

that result from transaction classes of transactions that occur in high
processing. volume.

Register - Often used to denote certain

types of special journals and to denote a
log. For example, the payroll journal is often
called the payroll register.

General journal – are used to record

nonrecurring, infrequent, and dissimilar
transactions (e.g., depreciation and closing
entries).

Journal vouchers - Accounting journal

 Turnaround documents - Product
entries into an accounting system for
documents of one system that
the purposes of making corrections or
become source documents for
adjustments to the accounting data;
another system.
should be approved by the appropriate
designated authority.

General ledger - summarizes the activity for

each of the organization’s financial accounts.

Subsidiary ledgers - are kept in various

accounting departments of the firm,
including inventory, accounts payable,
payroll, and accounts receivable.

Journal - is a chronological record of financial

transactions.
Chapter 2 - Introduction to Transaction Processing

Relationship between the Subsidiary Ledger

and the General Ledger
Modern accounting systems

Four types of digital computer files: master

files, transaction files, reference files, and
archive files.

1. Master file - File containing account data

Audit trail - Accounting records that trace
transactions from their source documents to
the financial statements; of utmost importance
in the conduct of a financial audit.
(ex: general ledger and subsidiary ledgers).
2. Transaction file - Temporary file that holds
transaction records that will be used to
change or update data in a master file (ex:
Sales orders, inventory receipts, and cash
receipts).
3. Reference file - File that stores the data
used as standards for processing
transactions.
4. Archive file - File that contains records of
past transactions that are retained for
future reference.
Two classes of file structures
 flat files
 databases

Legacy systems - large mainframe systems

implemented in the late 1960s through the
1980s.

Flat-file model (Distributed Data Processing) -

serves an environment where end users own
their data files rather than share them with
other users; environment in which individual
data files are not related to other files.

Three significant problems in the flat-file

environment: data storage, data updating, and
currency of information.

 Data Capture and Storage – Some

commonly used data may be duplicated
Confirmation - involves contacting selected since a single source may not be
customers to determine if the transactions available to all users.
recorded in the accounts actually took place  Data Updating – Periodic updating of
and if customers agree with the recorded data stored in the files of an
balance. organization.
Chapter 2 - Introduction to Transaction Processing

 Currency of Information – Failure to

update all the user files affected by a
change in status; may result in decisions
based on outdated information.

Additional problems in the flat file

environment

 Task-data dependency - User’s inability

to obtain additional information as his
or her needs change.
 Flat Files Limit Data Integration

Database model (Centralized Data Processing)-

Symbolic model of the structure of, and the
associations between, an organization’s data
entities.
 Entity relationship diagram -
Database management system (DBMS) - Documentation technique used to
Software system that controls access to the represent the relationship among data
data resource; permits users to access entities in a system.
authorized data only.
An entity may be:
Documentation techniques  physical resource (automobile, cash, or
inventory)
Five basic documentation techniques are
introduced in this section: data flow diagrams,  event (customer order, purchase
entity relationship diagrams, system flowcharts, inventory, or receive payment)
program flowcharts, and record layout  agent (salesperson, customer, or
diagrams. vendor)

Two commonly used systems design and Cardinality - degree of the relationship;
documentation techniques numerical mapping between entity instances
(ex: one-to-one (1:1), one-to-many (1:M), and
 Data flow diagram (DFD) - uses symbols many-to-many (M:M)).
to represent the entities, processes,
data flows, and data stores that pertain
to a system.
Chapter 2 - Introduction to Transaction Processing

Data model - Blueprint for what ultimately will  Real-time processing - process
become the physical database. individual transactions continuously as
they occur.
System flowchart - Flowcharts used to show the
relationship between the key elements—input Characteristic Differences between Batch
sources, programs, and output products—of and Real-Time Processing
computer systems. Data Processing Methods
Distinguishin
Batch Real-Time
g Feature
Information Lag exists No time lag
time frame between time exists.
when the Processing
economic takes place
event occurs when the
and when it is economic
recorded. event
occurs.
Program flowchart - Diagram providing a Resources Generally, More
detailed description of the sequential and fewer resources
resources are required
logical operations of the program.
(e.g., than for
hardware, batch
programming processing.
, and training)
are required.
Operational Certain Operational
efficiency records are delays are
Accountants sometimes use program flowcharts processed not an issue.
to verify the correctness of program logic. after the All records
Record layout diagrams - Used to reveal the event to pertaining
avoid to the event
internal structure of the records that constitute
operational are
a file or database table. The layout diagram
delays. processed
usually shows the name, data type, and length
immediately
of each attribute (or field) in the record. .

When immediate access to current information

is critical to the user’s needs, real-time
Transaction Processing Models processing is the logical choice.
Two types of alternative transaction When time lags in information have no
processing models detrimental effects on the user’s performance,
and operational efficiencies can be achieved by
 Batch processing - involves gathering
processing data in batches, batch processing
transactions into groups or batches and
may be the best choice.
then processing the entire batch as a
single event.
Chapter 2 - Introduction to Transaction Processing

Master file backup - is a standard procedure in  Supporting the audit function by

transaction processing systems to maintain providing an effective audit trail.
master file integrity in the event.
Numeric and Alphabetic Coding Schemes
Deadlock - “Wait” state that occurs between
Sequential codes - Codes that represent items
sites when data are locked by multiple sites that
in some sequential order. A common
are waiting for the removal of the locks from
application of numeric sequential codes is the
the other sites.
prenumbering of source documents.
Data coding - involves creating simple numeric
Advantages - If the transaction
or alphabetic codes to represent complex
processing system detects any gaps in the
economic phenomena that facilitate efficient
sequence of transaction numbers, it alerts
data processing.
management to the possibility of a missing or
A System Without Codes misplaced transaction.

The negative effects of this approach may be
seen in many parts of the organization:
 Sales staff. Properly identifying the
items sold requires the transcription of
large amounts of detail onto source
documents. Apart from the time and
effort involved, this tends to promote
clerical errors and incorrect shipments.
 Warehouse personnel. Locating and
picking goods for shipment are
impeded and shipping errors will likely
result.
 Accounting personnel. Postings to
ledger accounts will require searching
through the subsidiary files using
lengthy descriptions as the key. This will
be painfully slow, and postings to the
wrong accounts will be common.
A System with Codes
Advantages of data coding in AIS are:
 Concisely representing large amounts of
complex information that would
otherwise be unmanageable.
 Providing a means of accountability
over the completeness of the
transactions processed.
 Identifying unique transactions and
accounts within a file.
Disadvantages - Sequential codes carry
no information content beyond their order in
the sequence.
- sequential coding schemes are
difficult to change. Inserting a new
item at some midpoint requires
renumbering the subsequent items
in the class accordingly.
Block code - Coding scheme that assigns ranges
of values to specific attributes such as account
classifications. A common application of block
coding is the construction of a chart of
accounts.
Advantages - Block coding allows for
the insertion of new codes within a block
without having to reorganize the entire coding
structure.
Disadvantages - As with the sequential
codes, the information content of the block
code is not readily apparent.
Group codes - Codes used to represent complex
items or events involving two or more pieces of
related data.
Chapter 2 - Introduction to Transaction Processing

Advantages - They facilitate the items, they have limited ability to represent
representation of large amounts of diverse items within a class.
data.

- They allow complex data structures

to be represented in a hierarchical
form that is logical and more easily
remembered by humans.
- They permit detailed analysis and
reporting both within an item class
and across different classes of
items.

Disadvantages - 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.

Alphabetic codes - Alphabetic characters

assigned sequentially.

Advantages - The capacity to represent

large numbers of items is increased dramatically
using pure alphabetic codes or alphabetic
characters embedded within numeric codes.

Disadvantages - as with numeric codes,

there is difficulty rationalizing the meaning of
codes that have been sequentially assigned, and

- users tend to have difficulty sorting

records that are coded
alphabetically.

Mnemonic codes - Alphabetic characters in the

form of acronyms that convey meaning.

Advantages - The mnemonic coding

scheme does not require the user to memorize
meaning; the code itself conveys a high degree
of information about the item that is being
represented.

Disadvantages - Although mnemonic

codes are useful for representing classes of