Chapter 2

The Introduction to Transaction Processing Three Similar Types of Transaction Cycles;

A Financial Transaction or Transaction Processing
is an economic event that affects the assets and equities of the firm, is reflected These three transaction cycles process most of the firm’s economic activity.
in its accounts and is measured in monetary terms. These cycles exist in all types of businesses—both profit-seeking and not-for-
It means this is the agreement or communication between a buyer and in a profit types.
seller to exchange goods, services or either assets for payment. ● Expenditure Cycles – Every business activities begin with the
acquisition of materials, property, and labor in exchange for cash—the
● And in basic accounting includes most commonly the external parties expenditure cycle. How we spend the money that we have.
also it certain the internal event or parties in this such as the ● Conversion Cycles – In our Cost Accounting defines that A process of
depreciation of fixed assets; the application of labor, raw materials and making a particular product
many more. ● Revenue Cycles - Firms sell their finished goods to customers through
the revenue cycle, which involves processing cash sales, credit sales,
For Instances or Related activities in Financial Transaction Cycle; and the receipt of cash following a credit sale.
---- Sale of goods to customers; acquisition of merchandise and payment to
vendors; production of finished products for sale; and payment to employees Each Cycles has two primary subsystems;
for services they had rendered. 1. Expenditure Cycle;
● Physical component (the acquisition of the goods)
To understand more these transaction cycles, we explore the nature of these ● Financial component (the cash disbursement to the supplier)
using the following five categories of interrelated major cycles.
2. Conversion Cycle
● The Production System (Planning, scheduling and control of the
physical product through the manufacturing processes.)
● The Cost Accounting System (monitors the flow of cost information
related to production)
3. Revenue Cycle
● Physical Component ( Sales order Processing)
● Financial Component (Cash Receipts)

● What are the Objectives of Transaction Cycles?

- Record the effects of transactions in accounting records
- Provide information about transactions to users in support of their day-
to-day activities.
- To promote adequate segregation of incompatible duties
- To provide protection to the entity’s resources
 • PRODUCT DOCUMENTS
In this Diagram or Image, this is Relationship between the three types of Cycles. The result of transaction processing
Start in Expenditure Cycle we spend our money in either the materials, goods,
the physical plant or property or the labor. And the output on this expenditure As we can see in the figure we will notice that it is just an extension from the
will be the input of the Conversion Cycle, this is the process of production itself previous figure That is shown in the source document. The salesclerk will
and making the product. After on this Conversion Cycle we already have a collect the customers order and also the sales clerk will prepare multipart sales
finished goods and this finished goods will be sold. So in this scenario this order that will serve as the formal evidence that there is an occurrence of the
where the Revenue Cycle will include because the sales order processing, the sale and it will enter the sales system and as a result of the transaction we will
receipt then when it sold the finished goods or product to the customer, the be having the bill which is the Product document.
customer will pay in cash and the cash will be it again to buy a new raw
materials and it becomes a cycle. Ex. A payroll check. Because it is a result of transaction processing.

• TURNAROUND DOCUMENTS
BASIC ACCOUNTING RECORDS USED IN TRANSACTION PROCESSING A product document of one system that becomes a source document for
SYSTEMS another system. This turn around documents will help provide the needed
information as a product of the sales system to ensure the accuracy when the
MANUAL SYSTEM ACCOUNTING RECORDS cash receipts system processes it.
This section describes the purpose of each type of accounting record used in
transaction cycles. We begin with traditional records used in manual systems JOURNALS
such as documents, journal and ledgers and then examine their digital A journal is a chronological record of financial transactions. The event
counterparts in computer-based systems. is recorded in chronological order.

DOCUMENTS Journals fall into two classes: General journals and special journals:
Documents are important in transaction processing. Because they have
several purposes in transaction processing. In this section, we will be discussing • GENERAL JOURNALS
about the three types of documents:source documents, product documents, and Nonrecurring, infrequent, and dissimilar transactions.
turnaround documents.
The main difference between a general journal and the special journal is
• SOURCE DOCUMENTS that the general journal includes all transactions for a business, while the
Used to capture and formalize transaction data needed for transaction special journal includes only specific types of transactions. The general journal
processing. serves as the foundation for most businesses' financial reporting, while the
special journal is used for more detailed reporting.
As we can see in the figure . the sales clerk will prepare a multipart sales
order which will serve as a formal evidence that sale occurred. The copies of • SPECIAL JOURNALS
this sources will enter the sales system and are used to convey information to Specific classes of transactions that occur in high frequency.
various functions, such as the billing, shipping, and accounts receivable. Ex. makes it easier and more efficient to find a specific type of transaction and
Receipt, check speeds up the process of posting these transactions. In each special journal, all
transactions are totaled at the end of the month, and these totals are posted to
You would keep source documents for your business just like you keep the general ledger.
receipts for tax-deductible items for your taxes. If your taxes are audited, the
source documents provide the proof that you've made those purchases. The • JOURNAL VOUCHERS
same holds for your business, but in business, you keep original documents for Accounting journal entries into an accounting system for the purposes of
every financial transaction, not just charitable donations. making corrections or adjustments to the accounting data; should be approved
by the appropriate designated authority.
LEDGER FILE STRUCTURES
A book of financial accounts. Indicates the increases, decreases, and current make it easy for users to file, locate, and retrieve the records they need.
balance of each account Since no single structure works optimally in all applications, selecting a data
management file structure often involves compromise.
• GENERAL LEDGER
Shows activity for each account listed on the chart of accounts. From the Two class of file structures
beginning balances, the changes, and the ending balances of a particular for
several different. FLAT-FILE MODEL
A flat-file model can be defined as an AIS model that allows each department
• SUBSIDIARY LEDGER or function to own its data file instead of sharing them.
Shows activity by detail for each account type.
Three significant problems in the flat-file environment:
Figure 2-10 illustrates that the total of account balances in a subsidiary
ledger should equal the balance in the corresponding general ledger control • Data Capture and Storage
account.
For an efficient information system capture and stores data only once and
AUDIT TRAIL makes this single source available to all users who need it but in the flat-file
An audit trail is a step-by-step record by which accounting, trade details, or environment, this is not possible. Some commonly used data may be duplicated
other financial data can be traced to their source. Audit trails are used to verify dozens, hundreds, or even thousands of time.
and track many types of transactions, including accounting transactions and
trades in brokerage accounts. • Data Updating

COMPUTER-BASED SYSTEMS For ex. A change to customer’s name or address must be reflected in all the
MODERN ACCOUNTING SYSTEMS master files that contain those data. When users keep separate files, all changes
must be made separately for each user. This adds significantly to the task and
Four types of digital computer files: the cost of data management.

1. MASTER FILE • Currency of Information

Contains account data. Ex. Are the general and subsidiary ledgers
In contrast to the problem of performing multiple updates is the problem of
2. TRANSACTION FILE failing to update all the user files affected by a change in status. If update
A temporary file containing transactions since the last update. information is not properly disseminated, changes will not be reflected in some
users’ data, resulting in actions and decisions based on outdated information.
3. REFERENCE FILE
Contains relative constant information used in processing . For example, the
payroll program may refer to a tax table to calculate the proper amount of • Task-data dependency
withholding taxes for payroll transactions.
If a user needs more information to make an informed decision in a flat-file
4. ARCHIVE FILE model, he or she must get that information independent from other
Contains past transactions for reference purposes. departments. Users in the various departments or functions cannot depend on
each other for data.
For ex. If the accounting department Needs data of customers based on
THE DIGITAL AUDIT TRAIL geography, it has to source the information itself. Whereas, this data is readily
Less observable in computer-based system than traditional manual systems. available in the marketing department. This will result in a wastage of time,
Less observable because it is already in the system. more data redundancy, and make the costs of data management higher.
DATABASE MODEL (Centralized Data Processing)
Organizations have overcome some of the problems associated with flat files
by implementing the database model to data management. with the
organizations data in a central location, all users have access to the data they
need to achieve their. respective objectives.

• Database management system (DBMS)

The DBMS is a software system that permits users to access authorized data
only. the users application program sends requests for the data to the DBMS,
which validates and authorizes access to the database in accordance with the
users access privileges. If the user requests data that he or she is not authorized
to access the request is denied.

Documentation Techniques
“A picture is worth a thousand words” is very applicable when it comes to
documenting accounting information systems. One of the important ability we
need to learn is to document systems in graphic form. For this part of our
Introduction to Transaction Processing we will going to talk about the five basic
documentation techniques which are: DATA FLOW DIAGRAMS, ENTITY
RELATIONSHIP DIAGRAM, SYSTEM FLOWCHARTS, PROGRAM FLOWCHARTS,
and RECORD LAYOUT DIAGRAMS.

First we have two commonly used system designs and documentation

technique.
● Data Flow Diagram (DFD) - uses symbols to represent the entities,
processes, data flows, and data stores that pertain to a system.

In simple term, DFD maps out the flow of information for any process
or system. It consist of different levels of system from very general up
to the detailed one. We have presented two pictures, it consist of
symbol, its name and function. (Elaborate in class).
● Entity Relationship Diagram – used to represent the relationship ● System Flowcharts - Flowcharts used to show the relationship
among data entities in a system. between the key elements input sources, programs, and output
An Entity Relationship (ER) Diagram is a type of flowchart that products of computer systems.
illustrates how “entities” such as people, objects or concepts relate to System flowcharts are the diagram type that shows you the flow of data
each other within a system. In this context, the term entity applies to and how decisions can affect the events surrounding it.
anything about which the organization captures data. When we say
entities they are the objects or concepts that represents an important
data. Example (Elaborate)
An entity may be:
Physical Resource (cash or inventory)
Event (Customer Order or Purchase Inventory)
Agent (Salesperson or Customer)

● Cardinality - degree of the relationship; numerical mapping between

entity instances (ex: one-to-one (1:1), one-to-many (1:M), and many-to-
many (M:M)).

Like the picture shown: Cardinality are shown by the styling of a line and its
endpoint.

NOTE: DFDs and ER diagrams document different aspects of systems, but

they are related. DFDs model system processes while ER diagrams model
the data used in systems. Each data store in a DFD is represented as an
entity in a corresponding ER diagram.
.
 Transaction Processing Models
● Program flowchart - Diagram providing a detailed description of the ● Batch Processing - involves gathering transactions into groups or
sequential and logical operations of the program. batches and then processing the entire batch as a single event.
The program flowchart is a data flow that shows the data flow while So basically, from the name batch processing it is the processing of
writing a program. It allows the user to explain the process quickly as transaction in a group or by batch. Upon reading, a good example of
they collaborate with others. These programming flowcharts also batch processing is how credit card companies do their billing. When
analyze the logic behind the program to process the code of the customers get their credit card bills, it isn't a separate bill for each
programming. In an Accountant’s perspective, they sometimes use it to transaction; rather, there is one bill for the entire month. That bill is
verify the correctness of program logic. created using batch processing.

● Real-time processing - process individual transactions continuously

as they occur.
Real-time processing is the method where data is processed almost
immediately. There’s no pause or waiting in this method. Just like bank
atm, this allows the customers’ balance information to be
simultaneously be updated both in the bank and atm.

● 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 may be the best choice.

DATA PROCESSING METHODS

DISTINGUISHING BATCH REAL-TIME
FEATURE
INFORMATION Lag exists between No time lag exists.
TIME FRAME time when the Processing takes place
● Record layout diagrams - Used to reveal the internal structure of the economic event when the economic event
records that constitute a file or database table. occurs and when it occurs.
This diagram usually shows the name, data type, and length of each is recorded.
attribute (or field) in the record. This type of layout shows the content RESOURCES Generally, fewer More resources are
of a record. Each data attribute and key field is shown in terms of its resources (e.g., required than for batch
name and relative location in the record. (See example) hardware, processing.
programming, and
training) are
required
OPERATIONAL Certain records are Operational delays are
EFFICIENCY processed after the not an issue. All records
event to avoid pertaining to the event
operational delays. are processed
immediately.
 ● A SYSTEM WITH CODES
 Master File Backup - Master file backup is a standard procedure in ADVANTAGES OF DATA CODING IN AIS ARE:
transaction processing systems to maintain master file integrity in the Concisely representing large amounts of complex information that
event that any of the following problems should occur: would otherwise be unmanageable.
1) An update program error corrupts the master files being Providing a means of accountability over the completeness of the
updated. transactions processed.
2) Undetected errors in the transaction data result in corrupted Identifying unique transactions and accounts within a file.
master file balances. Supporting the audit function by providing an effective audit trail.
3) A disaster such as a fire or flood physically destroys current
master files. NUMBERIC AND ALPHABETIC CODING SCHEMES
If the current master file becomes corrupted or is destroyed, corporate
IT professionals can retrieve the most current backed-up file from the ● Sequential Codes - Codes that represent items in some sequential
archives and use it to reconstruct the current version of the master file. order. A common application of numeric sequential codes is the pre-
Backup procedures will vary depending on whether batch or real-time numbering of source documents.
processing is being used. It also tracks each transaction processed. And this coding schemes
identifies any out of the sequence documents. These types of codes are
● Deadlock - “Wait” state that occurs between sites when data are locked mostly applied in source documents such as cheques, invoices.
by multiple sites that are waiting for the removal of the locks from the
other sites. ● Advantages
It is a situation in which more than one process is blocked because it is If the transaction processing system detects any gaps in the sequence
holding a resource and also requires some resource that is acquired by of transaction numbers, it alerts management to the possibility of a
some other process. Basically, it’s a “waiting” of other information for missing or misplaced transaction.
them to proceed. Disadvantages
Sequential codes carry no information content beyond their order in
Data Coding - Involves creating simple numeric or alphabetic codes to the sequence and sequential coding schemes are difficult to change.
represent complex economic phenomena that facilitate efficient data Inserting a new item at some midpoint requires renumbering the
processing. subsequent items in the class accordingly.
Coding of data refers to the process of transforming collected
information or observations to a set of meaningful, cohesive categories. ● Block Code - Coding scheme that assigns ranges of values to specific
It is a process of summarizing and re-presenting data in order to attributes such as account classifications. A common application of
provide a systematic account of the recorded or observed phenomenon. block coding is the construction of a chart of accounts.

● A SYSTEM WITHOUT CODES

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 For example, account 110 represents cash, account 120
the key. This will be painfully slow, and postings to the wrong
accounts will be common. represent cash in bank.
● Advantages ● MNEMONIC CODES - Alphabetic characters in the form of acronyms
Block coding allows for the insertion of new codes within a block that convey meaning.
without having to reorganize the entire coding structure. These are alphabetic characters in the form of acronyms and other
Disadvantages combinations that convey meaning. For example, a student enrolling in
As with the sequential codes, the information content of the block code college courses may enter the following course codes on the
is not readily apparent. registration form. Like our subject CAE 020 or Introduction to
Accounting Information System.
● Group Codes - Codes used to represent complex items or events ●
involving content of the block code is not readily apparent. Advantages
These are used to represent complex items or events involving two or The mnemonic coding scheme does not require the user to memorize
more pieces of related data. The code consists of zones or fields that meaning; the code itself conveys a high degree of information about the
possess specific meaning. item that is being represented.
For example, department store chain might code sales order Disadvantage
transactions from its branch stores as follows. Although mnemonic codes are useful for representing classes of items,
they have limited ability to represent items within a class.

Advantages
They facilitate the representation of large amounts of diverse data,
allow complex data structures to be represented in a hierarchical form
that is logical and more easily remembered by humans, and 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.

Used for many of the same purposes as numeric codes. Alphabetic
characters may be assigned sequentially (in alphabetic order).

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.