Computer-Based Transaction Processing

Based on James A. Hall – Accounting Information Systems (6th Edition)

Document Processing
Document processing is a fundamental component of a computer-based accounting system
because every financial transaction begins with documentation. According to James Hall,
documents capture and communicate information about business events and form the basis
of the audit trail that links individual transactions to financial reports. In other words,
documents are not only pieces of paper or electronic files; they are the official evidence of
business activities and the starting point of the accounting cycle.

There are three main types of documents in an AIS. Source documents are the original
records of a transaction, such as sales invoices, purchase orders, time cards, and checks.
These initiate the process by capturing data about business events. Product documents are
the outputs of transaction processing that are distributed to users, such as paychecks,
customer billing statements, or monthly account statements. Turnaround documents are
product documents that are later returned to the system as input, such as utility bills or
credit card statements that customers send back with payment.

The processing of documents in an AIS follows a systematic flow. When a transaction

occurs, a source document is created. This document is entered into the system, validated
for accuracy, and used to update accounting records such as journals and ledgers. From
there, the data is stored for later use and may also be used to generate product documents
or management reports. Throughout this process, documents provide an audit trail,
ensuring that financial statements can always be traced back to original evidence.

In practice, document processing is central to the major accounting cycles. In the revenue
cycle, a sales order (source document) leads to the issuance of an invoice (product
document) and possibly a remittance advice (turnaround document). In the expenditure
cycle, a purchase order initiates a transaction that eventually results in supplier invoices
and payment records. In payroll, time cards serve as source documents that are processed
into paychecks and payroll summaries. Thus, document processing ensures the accuracy,
accountability, and integrity of all accounting records.

Processing Approaches
Another important aspect of computer-based transaction processing is the method used to
handle transactions. James Hall describes two principal approaches: Batch (Periodic)
Processing and Real-Time (Immediate) Processing. These approaches differ mainly in the
timing of when transactions are posted to accounting records.

Batch processing is the traditional method where transactions are collected over time and
processed as a single group. Instead of updating the master file immediately, the system
holds the data until the batch is complete. For example, in a payroll system, employee
working hours are recorded daily but are only processed together on payday to compute
salaries. This method is efficient for high-volume, repetitive transactions because it
minimizes the strain on system resources and simplifies processing. However, it has a
drawback: the records are not up to date until the batch is processed, which means that
information available to managers may be delayed.

Real-time processing, on the other hand, updates the system instantly as each transaction
occurs. Once a transaction is initiated, it is validated, recorded, and the master file is
updated immediately. This ensures that the data in the system always reflects the most
current situation. Real-time processing is essential in situations where timeliness and
accuracy are critical. For instance, airline reservation systems update seat availability
immediately to prevent double booking. Retail point-of-sale systems process sales as they
happen, instantly reducing inventory and recording revenue. Online banking transactions
are also processed in real time, ensuring that balances remain accurate. While real-time
processing provides speed and accuracy, it is more complex and costly to implement, and it
requires stronger controls since errors are recorded immediately.

In conclusion, batch processing is well-suited to high-volume, repetitive activities where

delays are acceptable, while real-time processing is essential in settings where up-to-date
information is critical. Both methods are widely used in accounting information systems,
and the choice between them depends on the balance between efficiency, cost, and the need
for timeliness.

File Organization and Storage

The final component of computer-based transaction processing involves the way data is
organized and stored. James Hall emphasizes that proper file organization and storage are
critical for supporting accurate transaction processing and for maintaining records that can
be retrieved, updated, and audited.

In an AIS, there are several types of files that serve different purposes. The master file
contains relatively permanent data, such as customer accounts, employee records, and
inventory balances, which are updated when new transactions occur. The transaction file
stores temporary data about current events, such as sales or payroll entries, which are later
posted to the master file. The reference file contains stable data used during processing, like
tax rate tables, product prices, or supplier information. Lastly, the archive file stores past
records that are no longer active but must be retained for compliance, audits, or historical
analysis, such as old invoices or payroll records.

The way these files are organized affects the efficiency of the system. Sequential
organization stores records in a fixed order and is efficient for batch jobs, such as payroll
runs, but slower for individual record searches. Direct access organization allows the
system to locate and update records instantly using a key field, which makes it suitable for
real-time processing. Indexed structures improve efficiency by maintaining an index,
similar to a book’s index, to guide the system to the correct location. Some systems also use
hashing, where mathematical formulas calculate the exact storage location of a record,
providing extremely fast access in large databases.

Storage media provide the foundation for these files. Earlier systems relied on magnetic
tape for backups, which was inexpensive but limited to sequential access. Magnetic disks,
such as hard drives, enabled direct access and supported both batch and real-time systems.
Optical disks, including CD-ROMs and DVDs, offered reliable long-term storage. Today, most
businesses rely on cloud storage and relational databases, which combine scalability, speed,
and security to handle vast amounts of accounting data.

In summary, file organization and storage determine how effectively an accounting system
can process, safeguard, and retrieve information. By using different types of files and
efficient storage methods, businesses ensure that accounting data remains accurate,
accessible, and secure for both day-to-day operations and long-term reporting.