TRANSACTION PROCESSING

A transaction process system (TPS) is an information processing system for business transactions
involving the collection, modification and retrieval of all transaction data.

Transaction processing systems (TPS) process the company's business transactions and thus
support the operations of an enterprise. A TPS records a non-inquiry transaction itself, as well as
all of its effects, in the database and produces documents relating to the transaction.
TPS are necessary to conduct business in almost any organization today. TPSs bring data into the
organizational databases, these systems are also a foundation on which management oriented
information systems rest.

In finance, transaction processing is the range of daily activities central to any company’s
accounting and financial management. The four main types of business financial transactions are
sales, purchases, receipts and payments. The efficient, accurate and secure processing of these
transactions via expert systems is central to the success of any business and its brand.

Transaction Processing Modes

Transaction processing may be accomplished in one of two modes:

 On-line mode
 Batch mode

Characteristics of on-line transaction processing:

 Each transaction is completely processed immediately upon entry.

 OLAP is the most common mode of processing used today
 More costly than batch processing
 Database is always up to date
 Require the use of fast secondary storage
  It allows thousands of users to simultaneously request and perform transactions real time.

Characteristics of batch transaction processing:

 Relies on accumulating transaction data over a period of time and then processing the
entire batch at once.
 Batch processing is usually cyclic: daily, weekly, or monthly run cycle is established
depending on the nature of the transactions
 Easier to control than on-line processing
 Database is constantly out of date
 Delay may occur during data processing.
 It cost efficient and offers low processing costs per transaction.
 It is used for processing data that does not require immediate results, for example, check
payments.

How Transaction Processing System enhance the operational productivity of an

organization

TPS enhances productivity through the following:

 Performance
TPS efficiently generates on-time results for transaction processes. By being proficient it
is able to process a large number of transactions at a particular time.

 Continuous availability
TPS should be a stable and reliable system that is not susceptible to easy
collapse. Interruption in the use of TPS in an organization can lead to serious work
disturbance and financial consequences.

 Data integrity
Due to its ability to maintain the same method for all transactions processed, it protects
data and easily defends any error and hardware/ software issues.
  Ease of use
By being user-friendly, it encourages human interaction/interface and decreases errors
from inputting of data. It should be designed in such a way that it makes it easy to
comprehend and able to guard users against making mistakes during data-entry.

 Modular growth
The TPS hardware and software components should be able to be upgraded individually
without completely shutting down business transactions and requiring a total overhaul.

 Improved security
Due to controlled processing, only authorized personnel/employees are able to access it at
a time thereby reducing security threats from the third parties and ensuring smooth
operations.

Transaction processing system components

Each TPS has four major components that help it function:

1. Inputs

An input is an original request for a product or payment that an outside party sends to a
company's TPS. If your company uses batch processing, its TPS stores groups of inputs and then
processes them at a later time. In comparison, if your company uses a real-time system, it
processes each input as it arrives.
Inputs typically include:
 Invoices
 Bills
 Coupons
 Custom orders
2. Processing system

The processing system reads each input and creates a useful output, such as a receipt. This
element can help you define the input data and what the output should be. Based on the kind of
TPS your company is using, processing times can vary.

3. Storage

The storage component of TPS refers to where a company keeps its input and output data. Some
companies store these documents in a database. The storage component ensures the organization,
security and accessibility of every document for later use.
For example, if a vendor would like to confirm that your company has paid an invoice, you can
check your system's storage to find the invoice and determine if you delivered a payment.

4. Outputs

TPS outputs are documents the system generates once it completes processing all inputs, such as
receipts the company stores in its records. These documents can help validate a sale or
transaction and provide important reference information for tax and other official purposes.
For example, if a vendor sends your company an invoice, you can pay the invoice and send the
vendor confirmation of your payment. Then, you can amend the original invoice and mark it as
"paid" in the company's TPS.

Outputs Provided by Transaction Processing Systems

The outputs provided by TPSs may be classified as:

 Transaction documents
 Query responses
 Reports

Transaction Documents
Many TPSs produce transaction documents, such as invoices, purchase orders, or payroll checks.
These transaction documents produced by TPS may be divided into two classes: action
documents and information documents.
  Action documents direct that an action take place. Turnaround documents initiate action
and are returned after its completion to the requesting agency. They therefore also serve
as input documents for another transaction.
 Information documents confirm that a transaction has taken place or inform about one or
several transactions. Transaction documents require manual handling and, in some cases,
distribution of multiple copies. The process is costly and may lead to inconsistencies if
one of the copies fails to reach its destination.

Query Responses and Reports

TPS offer certain querying and simple reporting capabilities, albeit much less elaborate than
those of management reporting systems. Most queries produce a screen full of information.
However, reports are also often produced as a result of inquiries.
TPSs typically provide a limited range of preplanned reports. The content and format of such
reports are programmed into the TPS software and the reports are produced on schedule. The
TPS reports are often quite long.
The following report types are produced by TPS:

 Transaction Logs - are listings of all transactions processed during a system run and
include purchase order manifests or sales registers.
 Error (Edit) Reports - error reports list transactions found to be in error during the
processing. They identify the error and sometimes also list the corresponding master file
or database records.
 Detail Reports - detail reports are extracts from the database that lists records satisfying
particular criteria.
 Summary Reports - typical summary reports produced by TPSs include financial
statements.

Transaction Processing Subsystems in a Firm

Overall transaction processing, also known as data processing, reflects the principal business
activities of a firm. The principal transaction processing subsystems in a firm are those
supporting:
 Sales
 Production
 Inventory
 Purchasing
 Shipping
 Receiving
 Accounts payable
 Billing
 Accounts receivable
 Payroll
 General ledger
ACCOUNTING TRANSACTION CYCLES
Introduction to accounting cycles
This chapter will describe the technology that accounting information systems use and the
information system controls that prevent and detect errors and threats to these systems. To make
it easier to understand these procedures, they are structured by accounting transaction cycle.
Different accountants describe transaction cycles in different ways. Transaction cycles
emphasize the continuous nature of all business and accounting processes. Transaction cycles
demonstrate how events early in a transaction cycle affect events and records later in the cycle. A
weakness in internal control affecting a transaction may mean that records created later in that
same cycle are mis-stated.
Accounting systems are designed to record summarize, and report the results of economic events
for a wide range of organizations. Even though businesses differ in their operations, all of them
engage in a cycle of business activities. Each activity has certain economic events common to
most; these economic events produce accounting transactions that must be processed by the
accounting system.

The cycles of Business Activities

All businesses engage in a cycle of business activities that are common to most businesses.
These activities are; Capital investment, input acquisition, conversion and sales.
Capital Investment
Capital investments can refer to a business’s acquisition of a capital asset or a type of loan by a
financial institution in a business. In the latter, a financial institution, commonly a venture capital
group, loans business money in exchange for a promise of repayment or a share of the profits.
The cycle of business activities begins when capital is invested in a business. Generally accepted
accounting principles (GAAP) require recognizing the business as an entity separate from the
sources of this capital.
These sources may be the owners of the business, or they may be creditors. If the source is the
owners, the investment is owners’ equity. If the source is creditors, the investment is either long
term debt or current liabilities. In many businesses, most of the capital is used to purchase long-
term productive assets.
The business uses the productive assets to increase its capital. Periodically, the business reports
the results of its operations to the sources of its capital.
Capital investment comprises two significant economic events: raising capital and using capital
to acquire productive assets. Another event that occurs during this activity is not economic in the
sense of the other two: Periodically the business reports to its sources of capital. This is
necessary to maintain those sources when additional capital is needed later.
Capital investment gives businesses the money they need to achieve their goals. There are
typically three main reasons for a business to make capital investments:

 To acquire additional capital assets for expansion, which enables the business to—for
example—increase unit production, create new products, or add value
 To take advantage of new technology or advancements in equipment or machinery to
increase efficiency and reduce costs
 To replace existing assets that have reached end-of-life (a high-mileage delivery
vehicle or an aging laptop computer
Input Acquisition
The second component of the cycle of business activities is the acquisition of materials and
overhead items such as supplies. These inputs are used to increase the capital of the business.
The exact way in which they are used is not important at this point; they are used differently for
different businesses. Most organizations operate on credit—that is, when a business purchases
inputs, it receives the inputs in return for a promise to pay for them. The business records an
obligation to pay and pays for them at a later date. So, the activity of input acquisition has these
four economic events: ordering of inputs, receiving them, recording an obligation to pay for
them, and paying for them.

Conversion
The next step in the cycle of activities is the conversion of inputs into goods or services. The
business sells these to increase its capital. The conversion process is different for different
businesses. Manufacturing companies buy raw material inventories, apply labor and overhead to
them, and produce an output different from the material purchased. Service companies convert
inputs that are predominantly labor into outputs in the form of services.
In contrast, the conversion process of merchandising companies (retailers and wholesalers) uses
relatively little labor. These organizations purchase inventories of goods, repackage them, and
then market them. All three businesses use inventories of supplies in their conversion processes.
One economic event taking place during conversion is the consumption of labor materials, and
overhead to produce a salable product or service.

Sales
The final component in the cycle of basic business activities is the sale of the goods or services
that were outputs of the conversion process. When these are sold at profit, the capital investment
of the business increases. Additional cash is available for reinvestment, or for making payments
to the sources of capital in the form of dividends and interest. By providing a source of additional
capital, the sales component completes the cycle of business activities. The sale of goods or
services consists of four economic events: receiving a customer order, delivering goods to the
customer, requesting payment for the goods, and receiving payment.
Summary

Normal business operation consists of a series of economic events. This series results from the
cycle of business activities that describes how all accounting entities operate. An accounting
system records economic event in the form of accounting transactions, summarizes those
transactions, and reports them in some useful way. Thus, you can consider business activities as
cycles of accounting transactions. In fact, the study of transaction cycles is a convenient way to
understand how most accounting systems work.

2.3 Transaction Cycles

A transaction cycle is a set of accounting transactions that occur in a normal sequence. They
record the economic events of a component in the cycle of business activities. For example, a
sales transaction is normally followed by a shipping transaction, a billing transaction, and a cash
receipts transaction. These constitute a cycle. The four accounting transaction cycles are; the
financial cycle, the expenditure cycle, the conversion cycle, and the revenue cycle.
Financial Cycle
The financial cycle consists of those accounting transactions that record the acquisition of capital
from owners and creditors, the use of that capital to acquire productive assets, and the reporting
to owners and creditors on how it is used.
The two significant economic events in the financial cycle are raising capital and using that
capital to acquire property, plant, and equipment.
A third event—not really an economic one—is periodic reporting to the sources of capital.
The basic financial statements provide periodic reporting. These statements include the balance
sheet, the income statement, and the statement of cash flows. The summaries in these statements
come from the general ledger. Periodic reporting to the sources of capital enables a business to
raise additional capital. For this reason, you can view the series of transactions as a cycle.
The three accounting application systems that record the events in the financial cycle are the
property, the journal entry, and the financial reporting systems.

Expenditure Cycle
The expenditure cycle consists of those transactions incurred to acquire material and overhead
items for the conversion process of the business. This processes transactions representing the
following economic events: requesting the items, receiving the items, recording the obligation to
pay for the items, and paying for them.
Most businesses use a purchasing department to acquire materials and supplies. A
purchasing agent orders material from a vendor, who ships the material and mails an
invoice. The business uses the invoice to record the payable and later pays the vendor.
When the vendor is paid according to the terms of the sale, the vendor again sells items
to the business. This causes the sequence of transactions to form a cycle.

Revenue Cycle
The revenue cycle includes the accounting transactions that record the generation of revenue
from the outputs of the conversion process. As mentioned earlier, these four economic events
generate revenue: receiving an order from a customer, delivering goods or services to the
customer, requesting payment from the customer, and receiving the payment. Whenever
companies sell goods or services on credit, each of these events produces a transaction. Each
transaction may occur at separate times. If the sale is a cash sale, then ordering, delivery, request,
and payment occur at the same time. In this case, accounting systems ordinarily record these four
events with one transaction. When a customer pays and the accounting system records the cash
receipt, the business is willing to sell again to the customer. This causes the cycle of transactions
to repeat.

Conversion Cycle
The conversion cycle contains those transactions incurred when inputs are converted into salable
goods or services. One economic event exists in the conversion cycle. Materials, labor, and
overhead are consumed in the conversion process.
In manufacturing and service companies, either actual or standard material and labor costs are
recorded in a cost ledger as conversion occurs. Overhead costs are allocated in the cost ledger,
usually based on the amount of labor used. These costs become associated with the products and
are matched with revenue when the products are sold.
In merchandising companies, costs of conversion are recorded when incurred and matched
against revenue in the same period. Depending on the type of organization, the conversion cycle
contains either two or three application systems. Manufacturing and service companies use the
cost accounting system to record material, labor, and overhead costs. All types of organizations
use the payroll system. It ensures that employees are paid for their labor. Manufacturing and
merchandising companies use the inventory system to maintain records of inventory on hand.
In merchandising and manufacturing companies, the systems of the conversion cycle provide
interfaces between the expenditure and revenue cycles. Because it contains only one event, the
conversion cycle cannot be represented as a circle as can the other cycles.