Chapter 2

Introduction to Transaction
Processing

Accounting Information Systems, 5th edition

James A. Hall

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license
Objectives for Chapter 2
• Broad objectives of transaction cycles
• Types of transactions processed by each of the three
transaction cycles
• The basic accounting records used in TPS
• The traditional accounting records and their magnetic
equivalents
• Documentation techniques
• Batch and real-time processing and the impact of
these technologies on transaction processing
A Financial Transaction is...
• an economic event that affects the assets and
equities of the firm, is reflected in its accounts, and is
measured in monetary terms.
• similar types of transactions are grouped together
into three transaction cycles:
• the expenditure cycle,
• the conversion cycle, and
• the revenue cycle.
Relationship between Transaction Cycles
Each Cycle has Two Subsystems
• Expenditure Cycle: time lag between the two due to credit relations with
suppliers:
• physical component (acquisition of goods)
• financial component (cash disbursements to the supplier)
• Conversion Cycle :
• the production system (planning, scheduling, and control of the
physical product through the manufacturing process)
• the cost accounting system (monitors the flow of cost information
related to production)
• Revenue Cycle: time lag between the two due to credit relations with
customers :
• physical component (sales order processing)
• financial component (cash receipts)
Manual System Accounting Records
• Source Documents - used to capture and formalize
transaction data needed for transaction processing
• Product Documents - the result of transaction
processing
• Turnaround Documents - a product document of one
system that becomes a source document for another
system
Manual System Accounting Records
• Journals - a record of chronological entry
• special journals - specific classes of transactions that occur
in high frequency
• general journal - nonrecurring, infrequent, and dissimilar
transactions
• Ledger - a book of financial accounts
• general ledger - shows activity for each account listed on the
chart of accounts
• subsidiary ledger - shows activity by detail for each account
type
Flow of Economic Events Into
the General Ledger
 Audit Trail
Source General Financial
Journal
Document Ledger Statements

Financial General Source

Statements Journal Document
Ledger

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.
 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account-General Ledger

Accounts Receivable Subsidiary Ledger

(sum of all customers’ receivables)

Sales Journal Cash Receipts Journal

Sales Order Deposit Slip

Shipping Notice
Remittance Advice
 Computer-Based Systems
• The audit trail is less observable in computer-based
systems than traditional manual systems.
• The data entry and computer programs are the
physical trail.
• The data are stored in magnetic files.
 Computer Files
• Master File - generally contains account data (e.g.,
general ledger and subsidiary file)
• Transaction File - a temporary file containing transactions
since the last update
• Reference File - contains relatively constant information
used in processing (e.g., tax tables, customer addresses)
• Archive File - contains past transactions for reference
purposes
Documents Flowcharts…
• illustrate the relationship among processes and the
documents that flow between them
• contain more details than data flow diagrams
• clearly depict the separation of functions in a
system
System Flowcharts…
• are used to represent the relationship between the
key elements--input sources, programs, and output
products--of computer systems
• depict the type of media being used (paper, magnetic
tape, magnetic disks, and terminals)
• in practice, not much difference between document
and system flowcharts
Systems Flowchart Symbols
Terminal input/
Hard copy
output device

Computer process
Process flow

Real-time
Direct access storage (online)
device connection

Video display
device
Magnetic tape
Program Flowcharts…
illustrate the logic used in programs

Program Flowchart Symbols

Terminal start or
Logical process
end operation

Input/output
operation
Decision
Flow of logical
process
Computer-Based Accounting
Systems
• Two broad classes of systems:
• batch systems
• real-time systems
 Batch Processing
• A batch is a group of similar transactions that are
accumulated over time and then processed together.
• The transactions must be independent of one another
during the time period over which the transactions are
accumulated in order for batch processing to be
appropriate.
• A time lag exists between the event and the processing.
 Advantages of Batch Processing
• Organizations can increase efficiency by grouping
large numbers of transactions into batches rather
than processing each event separately.
• Batch processing provides control over the
transaction process via control figures.
 Real-Time Systems…
• process transactions individually at the moment the
economic event occurs
• have no time lag between the economic event and
the processing
• generally require greater resources than batch
processing since they require dedicated processing
capacity; however, these cost differentials are
decreasing
• oftentimes have longer systems development time
 Why Do So Many AIS Use Batch
Processing?
• AIS processing is characterized by high-volume,
independent transactions, such are recording cash
receipts checks received in the mail.
• The processing of such high-volume checks can be
done during an off-peak computer time.
• This is one reason why batch processing maybe done
using real-time data collection.