Purchases/accounts payable system.

This system
MODULE 2: INTRODUCTION TO TRANSACTION
PROCESSING recognizes the need to acquire physical inventory (such
as raw materials) and places an order with the vendor.

An Overview of Transaction Processing

Cash disbursements system. When the obligation created
● TPS applications process financial transactions
in the purchases system is due, the cash disbursements
● The most common financial transactions are
system authorizes the payment, disburses the funds to
economic exchanges with external parties.
the vendor, and records the transaction by reducing the
● Financial transactions are common business
cash and accounts payable accounts.
events that occur regularly. For instance,
thousands of transactions of a particular type
Payroll system. The payroll system collects labor usage
(sales to customers) may occur daily. To deal
data for each employee, computes the payroll, and
efficiently with such volume, business firms
disburses paychecks to the employees.
group similar types of transactions into
transaction cycles.
Fixed asset system. A firm’s fixed asset system
processes transactions pertaining to the acquisition,
Transaction Cycles
maintenance, and disposal of its fixed assets.
Three transaction cycles process most of the firm’s
economic activity: the expenditure cycle, the conversion
The Conversion Cycle
cycle, and the revenue cycle. These cycles exist in all
The conversion cycle provides value added through its
types of businesses—both profit-seeking and
products or services (conversion cycle) and is
not-for-profit types.
composed of two major subsystems: the production
system 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.
● The cost accounting system monitors the flow
of cost information related to production.
Information this system produces is used for
inventory valuation, budgeting, cost control,
The Expenditure Cycle
performance reporting, and management
Business activities begin with the acquisition of
decisions, such as make-or-buy decisions.
materials, property, and labor in exchange for cash—the
expenditure cycle.
The Revenue Cycle
● Most expenditure transactions are based on a
Firms sell their finished goods to customers through the
credit relationship between the trading parties.
revenue cycle, which involves processing cash sales,
The actual disbursement of cash takes place at
credit sales, and the receipt of cash following a credit
some point after the receipt of the goods or
sale.
services. Days or even weeks may pass between
● Revenue cycle transactions also have a physical
these two events.
and a financial component, which are processed
● Thus, from a systems perspective, this
separately.
transaction has two parts: a physical
component (the acquisition of the goods) and a
The primary subsystems of the revenue cycle are briefly
financial component (the cash disbursement to
outlined below.
the supplier). A separate subsystem of the cycle
● Sales order processing. The majority of business
processes each component.
sales are made on credit and involve tasks such

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 as preparing sales orders, granting credit, A Product Document
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 Turnaround Documents – product documents of one

Accounting records are documents, journals or ledgers system that become source documents for another
used in transaction cycles. system. The customer receives a perforated two-part bill
or statement. The top portion is the actual bill, and the
Manual Systems bottom portion is the remittance advice. Customers
Documents remove the remittance advice and return it to the
Provides evidence of an economic event and may be company along with their payment (typically a check).
used to initiate transaction processing. Some ● A turnaround document contains important
documents are a result of transaction processing. information about a customer’s account to help
the cash receipts system process the payment.
Source Documents – Economic events result in some One of the problems designers of cash receipts
documents being created at the beginning (the source) systems face is matching customer payments to
of the transaction. These are called source documents. the correct customer accounts. Providing this
Source documents are used to capture and formalize needed information as a product of the sales
transaction data that the transaction cycle needs for system ensures accuracy when the cash
processing. receipts system processes it.

Creation of a Source Document A Turnaround Document

The economic event (the sale) causes the sales clerk to

prepare a multipart sales order, which is formal evidence
that a sale occurred. Copies of this source document
enter the sales system and are used to convey
information to various functions, such as billing,
shipping, and AR. The information in the sales order Journals
triggers specific activities in each of these departments. A journal is a record of a chronological entry. At some
point in the transaction process, when all relevant facts
Product Documents – are the result of transaction about the transaction are known, the event is recorded in
processing rather than the triggering mechanism for the a journal in chronological order. Documents are the
process. For example, a payroll check to an employee is primary source of data for journals.
a product document of the payroll system.

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The journal holds a complete record of transactions and specifying the general ledger accounts that are
thus provides a means for posting to accounts. There affected. Journal vouchers are used to record
are two primary types of journals: special journals and summaries of routine transactions, nonroutine
general journals. transactions, adjusting entries, and closing
entries. The total of journal vouchers processed
Sales Order Recorded in Sales Journal is equivalent to the general journal.

Ledgers
A ledger is a book of accounts that reflects the financial
effects of the firm’s transactions after they are posted
from the various journals. Whereas journals show the
Special journals – used to record specific classes of chronological effect of business activity, ledgers show
transactions that occur in high volume. Such activity by account type. A ledger indicates the
transactions can be grouped together in a special journal increases, decreases, and current balance of each
and processed more efficiently than a general journal account. Organizations use this information to prepare
permits. Most organizations use several other special financial statements, support daily operations, and
journals, including the cash receipts journal, cash prepare internal reports.
disbursements journal, purchases journal, and the
payroll journal. There are two basic types of ledgers: (1) general ledgers,
which contain the firm’s account information in the form
Sales Journal of highly summarized control accounts, and (2)
subsidiary ledgers, which contain the details of the
individual accounts that constitute a particular control
account

General Ledgers – summarizes the activity for each of

the organization’s accounts. The general ledger
department updates these records from journal
vouchers prepared from special journals and other
sources located throughout the organization
● provides a single value for each control account,
such as accounts payable, accounts receivable,
and inventory. This highly summarized
information is sufficient for financial reporting,
Register – The term register is often used to denote but it is not useful for supporting daily business
certain types of special journals. For example, the payroll operations.
journal is often called the payroll register. We also use
the term register, however, to denote a log. For example, Subsidiary Ledgers – are kept in various accounting
a receiving register is a log of all receipts of raw departments of the firm, including inventory, accounts
materials or merchandise ordered from vendors. payable, payroll, and accounts receivable. This
Similarly, a shipping register is a log that records all separation provides better control and support of
shipments to customers. operations.
● Thus, in addition to providing financial statement
General journals – Firms use the general journal to information, the general ledger is a mechanism
record nonrecurring, infrequent, and dissimilar for verifying the overall accuracy of accounting
transactions. For example, we usually record periodic data that separate accounting departments have
depreciation and closing entries in the general journal. processed. Any event incorrectly recorded in a
journal or subsidiary ledger will cause an
As a practical matter, most organizations have replaced out-of-balance condition that should be detected
their general journal with a journal voucher system during the general ledger update. By periodically
● A journal voucher is actually a special source reconciling summary balances from subsidiary
document that contains a single journal entry accounts, journals, and control accounts, the

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 completeness and accuracy of transaction Digital Accounting Records in a Computer-Based System
processing can be formally assessed.

Relationship between the Subsidiary Ledger and the

General Ledger

Master File – generally contains account data. The

general ledger and subsidiary ledgers are examples of
master files. Data values in master files are updated
from transactions

Audit Trail Transaction File – is a temporary file of transaction

The accounting records described previously provide an records used to change or update data in a master file.
audit trail for tracing transactions from source Sales orders, inventory receipts, and cash receipts are
documents to the financial statements. Of the many examples of transaction files.
purposes of the audit trail, most important to
accountants is the year-end audit. Reference File – stores data that are used as standards
for processing transactions. For example, the payroll
Computer-Based Systems program may refer to a tax table to calculate the proper
Audit trails in computer-based systems are less amount of withholding taxes for payroll transactions.
observable than in traditional manual systems, but they Other reference files include price lists used for
still exist. Accounting records in computer-based preparing customer invoices, lists of authorized
systems are represented by four different types of suppliers, employee rosters, and customer credit files for
magnetic files: master files, transaction files, reference approving credit sales
files, and archive files.
Archive File – contains records of past transactions that
are retained for future reference. These transactions
form an important part of the audit trail. Archive files
include journals, prior period payroll information, lists of
former employees, records of accounts written off, and
prior-period ledgers.

Digital Trail Audit

These are less observable than those between hard-copy
documents, but they still exist.

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File Structures Flat-File Model
● Digital file structures and storage techniques
vary widely among transaction processing
systems.
● Some structures are effective at processing all
records in large master files.
● Some file structures are better for directly
locating and processing a single record in a
large file.
● The legacy systems are large mainframe
systems implemented in the late 1960s through
the 1980s.

The Flat-File Model

Database Model
● The flat-file model is an environment in which
● The database model is a symbolic model of the
individual data files are not related to other files.
structure of, and the associations between, an
● There are three significant problems in the
organization’s data entities.
flatfile environment: data storage, data updating,
● The database management system (DBMS) is a
and currency of information.
software system that controls access to the
● Data Capture and Storage – Data storage is an
data resource.
efficient information system that captures and
● The most striking difference between the
stores data only once and makes this single
database model and the flat-file model is the
source available to all users who need it.
pooling of data into a common database that all
Organizations must incur the costs of multiple
organizational users share.
collection and storage procedures.
● Data Updating – is the periodic updating of data
Database Model
stored in the files of an organization. Changes or
additions must be performed multiple times
which adds significantly to the task and cost of
data management. •
● Currency of Information – is a problem
associated with the flat-file model because of its
failure to update all the user files affected by a
change in status; may result in decisions based
on outdated information.
● Task-Data Dependency – is a user’s inability to
obtain additional information as his or her needs Documentation Techniques
change. This is the effect of user’s information Experience has shown that a visual image can convey
set constrained by the data user possess and vital system information more effectively and efficiently
controls than words. Accountants use system documentation
● Flat Files Limit Data Integration – Files routinely, as both systems designers and auditors, The
structured in the view of the primary user (single ability to document systems in graphic form is thus an
user view model), may not be useful to other important skill for accountants to master. Five basic
users, thus preventing data integration (e.g. documentation techniques are introduced in this section:
accounting data according to standards); data flow diagrams, entity relationship diagrams, system
Separate files are difficult to integrate across flowcharts, program flowcharts, and record layout
multiple users; options diagrams.

Data Flow Diagrams And Entity Relationship Diagrams

Two commonly used systems design and
documentation techniques are the entity relationship
diagram and the data flow diagram.

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 relationship, called cardinality, is the numeric mapping
Data Flow Diagrams (DFD) – uses symbols to represent between entity instances. A relationship can be
the entities, processes, data flows, and data stores that one-to-one (1:1), one-to-many (1:M), or many-to-many
pertain to a system (M:M). Cardinality reflects normal business rules as well
as organizational policy.
Data Flow Diagram Symbol Set
Entity Relationship Diagram Symbols

System designers identify entities and prepare a model

of them. This data model is the blueprint for what
ultimately will become the physical database. The data
Entities in a DFD are external objects at the boundary of
model presented in our example is not, however,
the system being modeled. They represent sources of
sufficiently refined to be the plan for a workable
and destinations for data. Entities may be other
database.
interacting systems or functions, or they may be external
to the organization. Entities should always be labeled as
Data Model
nouns on a DFD, such as customer or supplier. Data
stores represent the accounting records used in each
process, and labeled arrows represent the data flows
between processes, data stores, and entities
● Processes in the DFD should be labeled with a
descriptive verb such as Ship Goods, Update
Records, or Receive Customer Order.
● Systems analysts use DFDs extensively to
represent the logical elements of the system.
This technique does not, however, depict the
physical system. In other words, DFDs show
what logical tasks are being done, but not how
Relationship between ER Diagrams and Data Flow
they are done or who (or what) is performing
Diagrams
them. For example, the DFD does not show
DFDs and ER diagrams depict different aspects of the
whether the sales approval process is separated
same system, but they are related and can be reconciled.
physically from the billing process in compliance
● A DFD is a model of system processes, and the
with internal control objectives.
ER diagram models the data used in or affected
by the system. The two diagrams are related
Entity Relationship Diagrams (ERD) – m is a
through data; each data store in the DFD
documentation technique used to represent the
represents a corresponding data entity in the ER
relationship between entities. Entities are physical
diagram.
resources (automobiles, cash, or inventory), events
(ordering inventory, receiving cash, shipping goods), and
System Flowcharts
agents (salesperson, customer, or vendor) about which
A system flowchart is the graphical representation of the
the organization wishes to capture data
physical relationships among key elements of a system.
These elements may include organizational
The labeled connecting line represents the nature of the
departments, manual activities, computer programs,
relationship between two entities. The degree of the
hard-copy accounting records (documents, journals,

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ledgers, and files), and digital records (reference files, process. The accuracy of the process is established by
transaction files, archive files, and master files). System periodically reconciling the batch against the control
flowcharts also describe the type of computer media figure.
being employed in the system, such as magnetic tape,
magnetic disks, and terminals. Flowcharting Computer Processes
Lay out the physical area of activity.
Flowcharting Manual Activities The flowcharting process begins by creating a template
Lay out the physical area of activity. that depicts the areas of activity similar to the one
Remember that a flowchart reflects the physical system, shown in the Figure. The only differences in this case
which is represented as vertical columns of events and are that this system has a computer operations
actions separated by lines of demarcation. Generally, department but does not have a credit department.
each of these areas of activity is a separate column with
a heading. From the written system facts, we see that Symbol Set for Representing Computer Process
there are four distinct areas of activity: sales
department, credit department, warehouse, and shipping
department. The first step in preparing the flowchart is
to lay out these areas of activity and label each of them.

Flowchart showing areas of activity

Transcribe the written facts into visual format.

At this point we are ready to start visually representing
Transcribe the written facts into visual format.
the system facts.
As with the manual system example, the next step is to
systematically transcribe the written facts into visual
objects.
Symbol Set for Representing Manual Procedures
Program Flowcharts
A program flowchart is a diagram providing a detailed
description of the sequential and logical operations of
the program. Every program represented in a system
flowchart should have a supporting program flowchart
that describes its logic. The connector lines between the
symbols establish the logical order of execution

Program Flowchart Symbols

Batch Processing
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. First,
organizations improve 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. Second, batch
processing provides control over the transaction

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 Program Flowchart for Edit Program Record Layout Diagram for Customer Files

Computer-Based Accounting Systems

Computer-based accounting systems fall into two broad
classes: batch systems and real-time systems. A
number of alternative configurations exist within each of
these classes. Systems designers base their
configuration choices on a variety of considerations.

Differences Between Batch And Real-Time Systems

Information Time Frame
● Batch systems assemble transactions into
System Flowchart groups for processing. Under this approach,
there is always 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. The
amount of lag depends on the frequency of
batch processing.
● Real-time systems process transactions
individually at the moment the event occurs.
Because records are not grouped into batches,
there are no time lags between 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.

Resources
● Generally, batch systems demand fewer
organizational resources (such as programming
costs, computer time, and user training) than
real-time systems.
● Finally, real-time systems require dedicated
Record Layout Diagrams
processing capacity. Real-time systems must
Record layout diagrams are used to reveal the internal
deal with transactions as they occur. Some
structure of the records that constitute a file or database
types of systems must be available 24 hours a
table. The layout diagram usually shows the name, data
day whether they are being used or not. The
type, and length of each attribute (or field) in the record.
computer capacity dedicated to such systems
Detailed data structure information is needed for such
cannot be used for other purposes. Thus,
tasks as identifying certain types of system failures,
implementing a real-time system may require
analyzing error reports, and designing tests of computer
either the purchase of a dedicated computer or
logic for debugging and auditing purposes.
an investment in additional computer capacity.
In contrast, batch systems use computer

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 capacity only when the program is being run. relational database tables. A major advantage of
When the batch job completes processing, the database storage is the degree of process
freed capacity can be reallocated to other integration and data sharing that can be
applications. achieved.

Operational Efficiency Updating Master Files from Transactions

● Real-time processing in systems that handle Updating a master file record involves changing the
large volumes of transactions each day can value of one or more of its variable fields to reflect the
create operational inefficiencies. A single effects of a transaction (batch and real-time).
transaction may affect several different ● Master file backup procedures - standard
accounts. Some of these accounts, however, procedures to maintain file integrity in the event
may not need to be updated in real time. In fact, that:
the task of doing so takes time that, when ○ An update program error corrupts the
multiplied by hundreds or thousands of master file being updated.
transactions, can cause significant processing ○ Undetected transaction errors result in
delays. Batch processing of noncritical corrupted balances.
accounts, however, improves operational ○ A disaster physically destroys current
efficiency by eliminating unnecessary activities master files.
at critical points in the process. ● If the current master file becomes corrupted or
is destroyed, corporate IT professionals can
Operational retrieve the most current backed-up file from the
● In selecting a data processing mode, the archives.
designer must consider the trade-off between
efficiency and effectiveness. For example, users
of an airline reservations system cannot wait Record Structures for Sales, Inventory, and Accounting
until 100 passengers (an efficient batch size) Receivable Files
assemble in the travel agent’s office before their
transactions are processed. 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 Versus Modern Systems
Batch Processing Using Real-Time Data Collection
● Not all modern organizations use entirely
A popular data processing approach, particularly for
modern information systems. Some firms
large operations, is to electronically capture transaction
employ legacy systems for certain aspects of
data at the source as they occur. By distributing data
their data processing. When legacy systems are
input capability to users, certain transaction errors can
used to process financially significant
be prevented or detected and corrected at their source.
transactions, auditors need to know how to
The result is a transaction file that is free from most of
evaluate and test them
the errors that plague older legacy systems. The
● Modern systems tend to be client-server
transaction file is later processed in batch mode to
(network)–based and process transactions in
achieve operational efficiency.
real time. Although this is the trend in most
organizations, please note that many modern
To maintain the integrity of accounting data, once a
systems are mainframe-based and use batch
record has been accessed for processing, it is locked by
processing. Unlike their predecessors, modern
the system and made unavailable to other users until its
systems store transactions and master files in

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processing is complete. Using the affected records Real-Time Processing of Sales Orders
noted here as an example, consider the implications that
this data-locking rule has on the users of the system.

Deadlock or “wait” is a state that occurs between sites

when data are locked by multiple sites that are waiting
for the removal of the locks from the other sites.

Batch Processing with Real-Time Data Collection

Data Coding Schemes

Within the context of transaction processing, data
coding involves creating simple numeric or alphabetic
codes to represent complex economic phenomena that
facilitate efficient data processing.

A System Without Codes

Firms process large volumes of transactions that are
similar in their basic attributes. For instance, a firm’s AR
file may contain accounts for several different
customers with the same name and similar addresses.
To process transactions accurately against the correct
accounts, the firm must be able to distinguish one John
Smith from another. This task becomes particularly
difficult as the number of similar attributes and items in
the class increase.
● Uncoded entry takes a great deal of recording
Real-Time Processing space, is time-consuming to record, and is
Real-time systems process the entire transaction as it obviously prone to many types of errors.
occurs.
● Real-time processing is well suited to systems A System With Codes
that process lower transaction volumes and These problems are solved, or at least greatly reduced,
those that do not share common records. These by using codes to represent each item in the inventory
systems make extensive use of local area and supplier accounts.
network and wide area network technology.
Terminals at distributed sites throughout the Other uses of data coding in AIS are to:
organization are used for receiving, processing, 1. Concisely represent large amounts of complex
and sending information about current information that would otherwise be
transactions. These must be linked in a network unmanageable.
arrangement so users can communicate. 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

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Numeric And Alphabetic Coding Schemes Chart of Accounts
Sequential Codes
Sequential codes represent items in some sequential
order (ascending or descending). A common application
of numeric sequential codes is the prenumbering of
source documents
● 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 ● ADVANTAGES. Block coding allows for the
the process, management can eventually insertion of new codes within a block without
determine the cause and effect of the error. having to reorganize the entire coding structure.
Without sequentially numbered documents, ● DISADVANTAGES. As with the sequential codes,
problems of this sort are difficult to detect and the information content of the block code is not
resolve. readily apparent.
● DISADVANTAGES. Sequential codes carry no
information content beyond their order in the Group Codes
sequence. For instance, a sequential code Numeric group codes are used to represent complex
assigned to a raw material inventory item tells items or events involving two or more pieces of related
us nothing about the attributes of the item (type, data. The code consists of zones or fields that possess
size, material, warehouse location, and so on). specific meaning.
Also, sequential coding schemes are difficult to
change. Inserting a new item at some midpoint For example, a department store chain might code sales
requires renumbering the subsequent items in order transactions from its branch stores as follows:
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. ADVANTAGES. Group codes have a number of
advantages over sequential and block codes.
Block Codes 1. They facilitate the representation of large
A numeric block code is a variation on sequential coding amounts of diverse data.
that partly remedies the disadvantages just described. 2. They allow complex data structures to be
This approach can be used to represent whole classes represented in a hierarchical form that is logical
of items by restricting each class to a specific range and more easily remembered by humans.
within the coding scheme. A common application of 3. They permit detailed analysis and reporting both
block coding is the construction of a chart of accounts 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.

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Alphabetic Codes
Alphabetic codes are used for many of the same
purposes as numeric codes. Alphabetic characters may
be assigned sequentially (in alphabetic order) or may be
used in block and group coding techniques.
● 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).
● 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.

Mnemonic Codes
Mnemonic codes are alphabetic characters in the form
of acronyms and other combinations 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 items, they
have limited ability to represent items within a
class. For example, the entire class of accounts
receivable could be represented by the
mnemonic code AR, but we would quickly
exhaust meaningful combinations of alphabetic
characters if we attempted to represent the
individual accounts that make up this class.
These accounts would be represented better by
sequential, block, or group coding techniques.

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