What Is Transaction Processing System?

A transaction processing system or TPS refers to an information

processing system used for business transactions that involve the
retrieval, collection, and modification of transaction data. It offers an
execution environment that ensures data availability, security, and
integrity. Moreover, such a system ensures fast response time and
accuracy.
Home » Investment Banking Resources » Corporate Finance Resources » Transaction
Processing System

Transaction Processing System

Article byRutan Bhattacharyya

Edited byAshish Kumar Srivastav

Reviewed byDheeraj Vaidya, CFA, FRM

What Is Transaction Processing System?

A transaction processing system or TPS refers to an information
processing system used for business transactions that involve the
retrieval, collection, and modification of transaction data. It offers an
execution environment that ensures data availability, security, and
integrity. Moreover, such a system ensures fast response time and
accuracy.
 You are free to use this image o your website, templates, etc, Please provide us with an
attribution link

This system maintains the control and balance of a company’s

buying process. Moreover, it coordinates product distribution,
processes payroll and sales, manages transactions from the
payment accounts, and benefits organizations when monitoring
online purchase or sale transactions. There are two types
of transaction processing systems — batch and real-time
processing.
Table of contents

 What Is Transaction Processing System?

o Transaction Processing System Explained
o Features
o Types
o Examples
o Advantages And Disadvantages
o Transaction Processing vs. Analytical Processing

Home » Investment Banking Resources » Corporate Finance Resources » Transaction

Processing System

Transaction Processing System

Article byRutan Bhattacharyya

Edited byAshish Kumar Srivastav

Reviewed byDheeraj Vaidya, CFA, FRM

What Is Transaction Processing System?

A transaction processing system or TPS refers to an information
processing system used for business transactions that involve the
retrieval, collection, and modification of transaction data. It offers an
execution environment that ensures data availability, security, and
integrity. Moreover, such a system ensures fast response time and
accuracy.
 You are free to use this image o your website, templates, etc, Please provide us with an
attribution link

This system maintains the control and balance of a company’s

buying process. Moreover, it coordinates product distribution,
processes payroll and sales, manages transactions from the
payment accounts, and benefits organizations when monitoring
online purchase or sale transactions. There are two types
of transaction processing systems — batch and real-time
processing.
Table of contents

 What Is Transaction Processing System?

o Transaction Processing System Explained
o Features
o Types
o Examples
o Advantages And Disadvantages
o Transaction Processing vs. Analytical Processing
o Frequently Asked Questions (FAQs)
o Recommended Articles

Key Takeaways
 Transaction processing system meaning refers to a business
tool that stores, modifies, retrieves, and accumulates
transaction data. It has four components — storage,
processing system, inputs, and outputs.
 Batch processing and real-time processing are the two types
of transaction processing systems. In the case of the latter, all
transactions are processed instantly.
 Controlled access, reliability, rapid response, and inflexibility
are noteworthy features of a TPS.
 There are various benefits of transaction processing systems.
For example, they offer increased transaction speeds, better
cost efficiency, automated management, and reliability.

Transaction Processing System Explained

Transaction processing system meaning refers to an information
processing system that processes all transactions taking place
within the business. Such transactions include modification,
collection, and retrieval of transaction data. A TPS is highly
consistent, efficient, and dependable. It is the same system that
online businesses utilize for e-commerce.
A TPS has the following four components. One must understand
them to know how the system works.

1. Inputs: Inputs are original requests for payments or products

outside parties send to an organization’s TPS. Typically, inputs
include bills, coupons, custom orders, and invoices.
2. Output: Outputs are the documents a TPS generates after it
processes all inputs, for example, the receipts stored by
companies in their records. Such documents help validate
transactions and offer crucial reference details for tax and
multiple official purposes.
3. Storage: A TPS’s storage component is where organizations
keep their output and input data. Some businesses store the
documents in a database. This component ensures the
security, accessibility, and organization of all documents for
late use.
4. Processing System: The processing system goes through
every input and establishes a useful output, for example, a
receipt. It helps outline the input data and defines what the
outputs must be. One must remember that the processing
time varies depending on the type of TPS an organization
uses.

Features
The following are some crucial features of a TPS:

 Controlled Access: TPSs are powerful business tools. Hence,

only authorized employees can access it. In other words, it
allows only certain employees to control and process
transactions.
 Connection With The External Environment: TPS establishes
a relationship with the external environment by distributing
information to suppliers and customers.
  Fast Response: This feature is crucial for a TPS as
organizations cannot afford to keep their customers waiting
long before completing a transaction.
 Inflexibility: A TPS processes all transactions in the same way,
irrespective of the time of day, user, or customer, to maximize
efficiency.
 Reliability: A TPS must be reliable as customers do not
tolerate errors; it must have adequate security and safety
measures.
 Distribution Of Details To Other Systems: A TPS produces
and distributes information to different systems. For instance,
sales processing systems provide information to general
ledger systems.

Types
TPSs are of two types. Let us look at them.

#1 – Batch Processing

A TPS interprets batches or sets of data by categorizing items by

similarities via batch processing. This can cause delays as it involves
reviewing various data sets simultaneously. However, the delay is
acceptable as the TPS does not interpret the sets regularly.

Businesses may customize the batches according to their

requirement. For example, a company may want to process its
workers’ wages once every two weeks.

#2 – Real-Time Processing

This type of TPS processes transactions with immediate effect, thus

preventing delays. This is an ideal technique when businesses deal
with singular transactions.
Examples
Let us look at a few transaction processing system examples to
understand the concept better.

Example #1

Suppose David purchased a t-shirt from Amacon, an online apparel

and clothing retailer. He used his credit card to pay for the item. The
company’s TPS collected the credit card details, communicated with
its bank, and approved the purchase based on David’s account
balance.

Example #2

Let us say that John pays for a Chill TV subscription at the beginning
of every month to watch the latest TV shows and movies. Chill TV’s
TPS processes all transactions as a set as they occur simultaneously.
Since the system processes a set of transactions once every month,
it requires high computing power. Hence, a delay in processing the
transactions is acceptable in this case.

Advantages And Disadvantages

Let us look at the benefits and limitations of a TPS:

Advantages

 A TPS helps organizations save funds by minimizing their need

to improve their system or utilize multiple systems to
fulfill demand.
 Companies can use a TPS to process transactions accurately
and quickly.
 A TPS automates a significant part of a company’s revenue
management and internal resources. Because of this,
 employees can review transactions faster. Moreover, this gives
them more time to focus on critical thinking tasks.
 It allows businesses to carry out operations in multiple
segments by working remotely. This enables organizations to
explore new markets that are full of opportunities.

Disadvantages

 A TPS does not have a standard format.

 Companies have to incur a high set-up cost initially for TPS.
 Sometimes, hardware and software have compatibility issues.
 A TPS may stop working or slow down due to many
transactions.

Transaction Processing vs Analytical Processing

Individuals often find the concept of transaction processing and
analytical processing systems confusing. To avoid such confusion,
one must know their critical differences. So, let us look at a tabular
representation of their distinct features.

Transaction Processing Analytical Processing

The purpose of an online

A TPS aims to manage
analytical processing
large amounts of
system or OLAP is to
transaction data
process many transactions
involving various users.
quickly.

A TPS stores the data in

Its multidimensional
a relational database
schema is suitable for
optimized to manage
complex queries drawn
large amounts of data
from multiple data sets.
funneled into the system.

A TPS has a faster The response time is

Transaction Processing Analytical Processing

response time. slower.

This system has lower OLAP systems must have

data storage significant data storage
requirements. capacity to function.

How do BI systems differ from transaction processing systems?

Business intelligence or BI systems are complete solutions involving

processes, technologies, and applications. In contrast, a TPS is an
information processing system responsible for processing every
transaction occurring within an organization. The main purpose of
BI systems is to improve a company’s operations using relevant
data. On the other hand, a TPS’s purpose is to process every
transaction occurring within an organization.

What are the functions of transaction processing system?

A TPS processes an organization’s transactions, thus supporting its

operations. The system records non-inquiry transactions with all
their effects in the database. Moreover, it produces documents that
are related to the transactions.

Is transaction processing system a software?

A TPS combines hardware and software to manage all business

transactions