CHAPTER 2

Introduction to
 Transaction Processing
OVERVIEW OF TRANSACTION PROCESS
• TPS applications process financial transactions. A financial transaction was
defined in Chapter 1 as an economic event that affects the assets and equities
of the firm, is reflected in its accounts, and is measured in monetary terms.
• The most common financial transactions are economic exchanges with
external parties. These include the sale of goods or services, the purchase of
inventory, the discharge of financial obligations, and the receipt of cash on
account from customers.
• Financial transactions also include certain internal events such as the
depreciation of fixed assets; the application of labor, raw materials, and
overhead to the production process; and the transfer of inventory from one
department to another.
• Financial transactions are common business events that occur regularly.
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 TRANSACTION CYCLES
• Three transaction cycles process most of the firm’s
economic activity: the expenditure cycle, the conversion
cycle, and the revenue cycle. These cycles exist in all types
of businesses—both profit‐seeking and not‐for‐profit types.

3
Relationship between Transaction Cycles

Figure
2‐1
4
 Each Cycle has Two Primary 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)

5
 Manual System Accounting Records

• Manual Systems describes the purpose of each type of accounting

record used in transaction cycles. We begin with traditional records
used in manual systems (documents, journals, and ledgers) and then
examine their magnetic counterparts in computer‐based systems.

• Documents
• A document provides evidence of an economic event and may be
used to initiate transaction processing.
• Some documents are a result of transaction processing. In this
section, we discuss three types of documents:
• Source documents, Product documents, and Turnaround documents.
6
 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
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8
9
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 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

11
Flow of Information from Economic Event Into the
General Ledger

Figure
2‐8

12
 Audit Trail

Source Genera Financial

Journa Statement
Documen l
l s
t Ledger

Financial General Source

Statements Journa Documen
Ledger
l t

Accountants should be able to trace in both
directions.
Sampling and confirmation are two common
techniques.
13
 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account‐General
Ledger

Accounts Receivable Subsidiary Ledger
    (sum of all customers’ receivables)
Physical Financial

Sales Cash Receipts
Journal Journal

Sales Deposit
Shipping
Order Slip
Notice Remittance
Advice 14
 File
Structures

15
Digital file structures and storage techniques vary widely
among transaction processing system.

Flat Files 01
2 Classes of
File 02
Technologies 02 Database
06
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08
 Flat File Databas
e
Flat File approach is
often associated Database technology
with so called legacy has been with us
systems, which are since the 1960s, and
large mainframe some legacy systems
systems that were use early database
commonplace in the technology
1960s and 1970s, but
still exist today Your Logo Here 17
 Describes an
environment in which
individual data files
are not related to
other files.
FLAT FILE 01 02
DIAGRAM End users in this
environment own
their data files rather
than share the with
other users.
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Your Logo Here 19
 02

Three significant Data
problems in the flat‐file 01 updating 03
environment Data Currency of
information
storage

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    Data Storage

To meet the private data needs of users,
organization must incur the costs of both
multiple collection and multiple storage
procedures

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    Data Updating

Organizations have a great deal of data
stored in files that require periodic
updating reflect changes

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 Currency of
   

Information

Update information is not properly disseminated, the
change will not be reflected in some users’ data,
resulting in decisions based on outdated information

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 Task­data
    Flat files Limit
   

Dependency Data Integration

The user’s inability
to obtain additional
information as his or
her needs change
Your Logo Here
The flat‐file approach is a
single‐view model. Files
are structured,
formatted, and arranged
to suit the specific needs
of the owner or primary
24
user of the data.
 Do not use accounting data
1
to support decisions.

Manipulate and massage
2 the existing data structure
to suit their unique needs.
THREE
OPTIONS Obtain additional private
sets of the data and incur
3 the costs and operational
problems associated with
data redundancy.
   Documentation
      Techniques

Uses visual images instead of words in documenting
systems.

“A picture is worth a thousand words”
Data Flow Diagram 5 Basic
Entity Relationship Diagram Documentation
Techniques
System Flowcharts

Program Flowcharts

Record Layout Diagrams
 A. Data Flow Diagram
(DFD)

• Uses symbols to represent the entities, processes,
data flows and data stores which is a system.
• Used to present a systems at different level of
details from:

Very General             Highly Detailed
DATA FLOW DIAGRAM SYMBOL SET
 • External objects of the system being modeled
ENTITIES • Represent sources and destination for data
• Addressed as nouns (e.g., customers or supplier)

• Represent the accounting records used in each
DATA
processes
STORES
• Represent the data flows between processes,
LABELED data stores and entities
ARROWS • Connecting the process objects

• Labeled with a descriptive verb (e.g., ship goods,
PROCESSES update records or receive customer order)
• To represent logically the elements of the system
Your Logo Here 31
 B. Entity Relationship
Diagrams (ERD)

• Document that represents the relationship between
entities

• Physical resources (Automobiles, cash or inventory
• Events (Ordering inventory, receiving cash,
ENTITIES shipping goods)
• Agents (Salesperson, customer, vendor)

USES • To model organization’s database
 SQUARE SYMBOL

• To represent entities in the system

LABELED CONNECTING LINE

• To represent the nature of the relationship
between two entities

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 • Degree of the relationship
• Uses numeric mapping between entity
1 instances
• (1:1), (1:M), (M:M)

• In terms of record filing, it is the maximum
2
Cardinality number of records in one file

3 • Reflects normal business rules as well
as organizational policy

34
35
DATA Blueprint for what it would really
looked like in a physical database
MODE
L
36
 Each data in DFD represents a
corresponding data entity in the ERD
Relationshi
p between
DFD and
ERD

37
 C. System Flowcharts

• Graphical representation of the physical
relationships among key elements of a system

Key Elements:
✔ Organizational department
✔ Manual activities
✔ Computer programs
✔ Hard copy accounting records
✔ Digital records

38
 RULES IN
CREATING
FLOWCHART
• Flowchart should be labeled to clearly identify the system that it
represents.
• Correct symbols should be used to represent the various entities in the
system.
• All symbols on the flowchart should be labeled.
• Lines should have arrowheads to clearly show the flow and sequence of
events.
• If complex processes need additional explanation then a text description
should be included on the flowchart or in an attached document
referenced by the flowchart.
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40
41
 1 Sales Department

4 2 Credit department

Distinct
Areas of 3 Warehouse

Activity
4 Shipping Department
42
 BATCH
PROCESSING
• Permits the efficient management of a large volume of transactions

BATCH
• Group of similar transactions that are accumulated over time and then
processed together

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 1. Organizations
2 General
improve operational Advantage
efficiency
s
2. Provides control over
the transaction process

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 FLOWCHARTING COMPUTER
PROCESS

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Your Logo Here 46
 D. Program Flowcharts

• Provide essential details for conducting information
technology audits

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 E. Record Layout Diagram
• Used to reveal the internal structure of the records
that constitute a file or database table
• Shows the name, data type and length of each
attribute (or field) in the record.

Detailed Data structure Information
• For identifying certain types of system failures,
analyzing error reports and designing tests of
computer logic for debugging and auditing purposes
 DATA CODING SCHEMES

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 DATA CODING

Involves creating simple numeric or alphabetic

codes to represent complex economic
phenomena that facilitates efficient data
processing.

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Your Logo Here 51
Your Logo Here 52
 1 Sale Stuff

The negative
effects of this
approach may 2 Warehouse Personnel
be seen in part
of:

3 Accounting Personnel

Your Logo Here 53
 A SYSTEM WITH CODES

• Concisely represent large amounts of complex

information.
• provide a means of accountability over the
completeness of the transaction processed.
• Identify unique transaction and accounts within a file
• support the audit function by providing an effective audit
trail.

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 NUMERIC AND
ALPHABETIC SCHEMES

Advantages Disadvantages
• Sequential
codes ­Supports the ­Carry no
reconciliation of information content
• Represent items batch of transaction
in some beyond their order
­ Detect any gaps in sequence.
sequential order in the sequence of
(ascending or transaction ­Difficult to change.
descending) numbers.
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 BLOCK CODES
This approach can be used to represent whole
classes of items by restricting each class to a
specific range within the coding scheme.

Advantages
Block coding allows Disadvantages
for the insertion of The information
new codes within a content of the block
block without having code is not readily
to recognize the entire apparent.
coding structure.
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Your Logo Here 57
 GROUP CODES
Used to represent complex items or events
involving two or more pieces of related data

Advantages Disadvantages
­They facilitate the ­result from its success
representation of large as a classification tool.
amounts of diverse
data. ­ overuse can increase
­They allow complex storage costs, promote
data structures to be clerical errors and
represented in a increase processing
hierarchical form that is time and effort.
logical and more easily
Your Logo Here remembered by 58

humans
 ALPHABETIC CODES
Alphabetic characters may be assigned
sequentially in alphabetic order .

Advantages Disadvantages
The capacity to numeric codes there is
represent large difficulty rationalizing
numbers of items is the meaning of codes
increased dramatically that have been
through the use of sequentially assigned.
pure alphabetic codes ­users tend to have
or alphabetics difficulty sorting
character embedded records that are coded
within numeric codes.
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 MNEMONIC CODES
Alphabetical characters in the form of
acronyms and other combination that convey
meaning.

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 Advantages Disadvantages
• Mnemonic coding • Although mnemonic
scheme does not codes are useful for
require the user to representing classes
memorize meaning . of items they have
• The code itself limited ability to
conveys a high represent items
degree of information within a class.
about the item that is
being represented.

Your Logo Here
 Computer
based‐system

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1. While audit trails in computer‐based
TYPES OF
systems are less observable than in
traditional manual systems, they still
FILES
exist.

2. Accounting records in computer‐
based systems are represented by four
different types of magnetic files:
master files, transaction files,
reference files, and archive files.
63
 1. A master file generally
contains account data.
MASTER 2. The general ledger and
subsidiary ledgers are
FILES examples of master files.

 3. Data values in master
files are updated from
transactions.
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 TRANSACTION
FILES

A transaction file
is a temporary file Sales orders,
of transaction inventory receipts,
records used to and cash receipts
change or update are examples of
data in a master transaction files.
file.
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 Reference files
• A reference file stores data that are used as
standards for processing transactions.
• For example, the payroll program may refer to a
tax table to calculate the proper amount of
withholding taxes for payroll transactions.

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 ARCHIVE FILE
• An archive file contains records of past
transactions that are retained for future
reference.
• These transactions form an important part of
the audit trail.

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Your Logo Here 68
THANK YOU