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INTRODUCTION TO TRANSACTION PROCESSING

An Overview of Transaction Processing
Three (3) 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 business – both profit-seeking and not-for-profit
types. The figure below shows the relationship of these cycles and the resource flows between them (Hall,
2016).

Figure 1. Relationship Between Transaction Cycles

Source: https://mgh-images.s3.amazonaws.com/9781305465114/202603-2-10PEI1.png

• Expenditure Cycle - This cycle comprises business activities such as the acquisition of materials, property,
and labor in exchange for cash.
• Conversion Cycle - This cycle comprises two (2) major subsystems: the production planning and control
system and the cost accounting system.
o Production planning and control system - It comprises activities such as planning, scheduling, and
control of the physical product through the manufacturing process.
This includes determining the raw materials 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 (Hall, 2016).
o Cost accounting systems - It comprises activities that monitor the flow of cost information, including
labor, overhead, and raw materials related to production.
Information this system produces is used for inventory valuation, budgeting, cost control, performance
reporting, and management decisions, such as make-or-buy decisions (Hall, 2016).
• Revenue Cycle - It comprises activities such as processing cash sales, credit sales, and the receipt of cash
following a credit sale.

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Accounting Records
These are the traditional accounting records used in transaction cycles:
• Documents – These provide the users of information with the evidence of economic events.
The following are the three (3) types of document (Hall, 2016):
o Source documents - These documents capture and formalize the data of an economic event at the
beginning of the transaction.
For example, in the case of a sale transaction, the sales clerk prepares a multiple sales order, which is
a 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 accounts receivable.
The information contained in the sales order triggers specific activities in each of these functions.
o Product documents - These documents are the result of transaction processing rather than triggering
mechanism for the process.
For example, a payroll check to an employee is a product document of a payroll system.
o Turnaround documents - These documents are product documents of one system that become source
documents for another system. The figure below illustrates this type of document.

Figure 2. A Turnaround Document

Source: https://mgh-images.s3.amazonaws.com/9781305465114/202603-2-4PEI1.png

The customer receives a perforated two-part bill or statement. One portion is the actual bill, and the
other portion is the remittance advice. Customers remove the remittance advice and return it to the
company along with their payment, typically a check. The remittance advice is a turnaround document
that contains important information about a customer’s account to help the cash receipt system
process the payment.
• Journal - This contains the chronological record of a transaction. There are two (2) primary types of
journal: special and general (Hall, 2016).

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o Special journals - These are used to record specific classes of transactions that occur in high volume.
The term register is often used to denote certain types of special journal. For example, the payroll
journal is called the payroll register.
o General journals - These are used to record nonrecurring, infrequent, and dissimilar transactions. For
example, periodic depreciation and closing entries are usually recorded in the general journal.
• Ledger - It is a book of accounts that reflects the financial effects of the firm’s transaction after they are
posted from the various journals. There are two (2) basic types of ledgers: general and subsidiary (Hall,
2016).
o General ledger - It contains a firm’s account information in the form of highly summarized control
accounts.
o Subsidiary ledger - It contains the details of individual accounts that constitute a particular control
account.
These are the digital accounting records used in transaction cycles (Hall, 2016):
• Master File - It contains account data. Examples are general ledger and subsidiary ledger.
• Transaction File - It is a temporary file of transaction records used to update data in a master file. Examples
are sales orders, inventory receipts, and cash receipts.
• Reference File - It 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.
• Archive File - It contains past transactions that are retained for future reference and form an important
part of the audit trail. Examples are journals, prior-period payroll information, lists of former employees,
records of accounts written off, and prior-period ledgers.
File Structures
Digital file structures and storage techniques vary widely among transaction processing systems. This is
because each file structure was designed to serve a particular task. Some structures are most effective for
processing large portions of a master file.
File technologies broadly fall into two (2) classes: flat-file and databases (Hall, 2016).
• Flat-File Model - This model describes an environment in which individual data files are not related to
other files. End users in this environment own their data files rather than share them with other users.
Thus, stand-alone applications rather than integrated systems perform data processing. Figure 3 shows
how flat-file model works.
• Database Model - This model uses database management system (DBMS) that allows users to have access
to the data they need to achieve their respective objectives. Figure 4 shows how database model works.

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Figure 3. Flat-File Model

Source: Accounting Information System, 2016, p. 47

Figure 3 illustrates how customer sales data might be presented to two (2) different users in a durable goods
retailing organization. The accounting function needs customer sales data organized by account number and
structured to show outstanding balances. This is used for customer billing, accounts receivable (AR)
maintenance, and financial statement preparation. Marketing needs customer sales history data organized by
demographic keys. Marketing uses this for targeting new product promotions and for selling product upgrades
(Hall, 2016).

Figure 4. Database Model

Source: Accounting Information System, 2016, p. 48

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Figure 4 shows how the database model centralizes the organization’s data into a common database that is
shared by other users. With the organization’s data in a central location, all users have access to the data they
need to achieve their respective objectives. Access to the data resource is controlled by a database
management system (DBMS), a software system that permits users to access authorized data only. The user’s
application program sends requests for data to the DBMS, which validates and authorizes access to the
database in accordance with the user’s level of authority (Hall, 2016).
Documentation Techniques
In AIS environment, experience shows that visual images convey vital system information more effectively
and efficiently than words. The ability to document systems in graphic form is an important skill for
accountants to master. These are the five (5) basic documentation techniques (Hall, 2016):
1. Data Flow Diagram - This technique uses symbols to represent the entities, processes, data flows, and
data stores that pertain to a system. Figure 5 shows the most commonly used symbol set (Hall, 2016).

Figure 5. Data Flow Diagram Symbol Set

Source: Accounting Information System, 2016, p. 49

2. Entity Relationship (ER) Diagram - This technique represents the relationship between entities. In this
context, the term entity applies to anything about which the organization captures data.
Mostly, all ER diagram contains three (3) basic information: entities, attributes, and relationships.
• Entities - These are represented using rectangles. The rectangles are named with the entity set they
represent (Tutorialspoint, 2019).

Figure 6. Entity in ER Diagram

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

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• Attributes - These are the properties of entities, which are represented through ellipses. Each ellipse
represents one (1) attribute and is directly connected to its entity (rectangle) (Tutorialspoint, 2019).

Figure 7. Attributes in ER Diagram

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

If the attributes are composite, they are further divided into a tree-like structure. Every node is then
connected to its attribute. That is, composite attributes are represented by ellipses that are connected
with an ellipse (Tutorialspoint, 2019).

Figure 8. Composite Attributes in ER Diagram

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

Multivalued attributes are depicted by a double ellipse (Tutorialspoint, 2019). An attribute is

considered multivalued when it can have more than one (1) value. For example, a student’s phone is
a multivalued attribute since s/he can have more than one (1) phone number.

Figure 9. Multivalued Attributes in ER Diagram

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

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Derived attributes are depicted by a dashed ellipse (Tutorialspoint, 2019). An attribute is said to be
derived if its value comes from other attributes. For example, a student’s age may be derived by
computing the integer value of the difference between the current date and birth date.

Figure 10. Derived Attributes in ER Diagram

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

• Relationships - These are represented by a diamond-shaped box (refer on Figure 11). The name of
the relationship is written inside the diamond-box. All the entities (rectangles) participating in a
relationship are connected to it by a line (Tutorialspoint, 2019).
A relationship where two entities (2) are participating is called a binary relationship. Meanwhile,
cardinality is the number of instance of an entity from a relation that can be associated with the
relation (Tutorialspoint, 2019).
The following shows binary relationships with cardinality:
 One-to-one − When only one instance of an entity is associated with the relationship, it is marked
as '1:1'. Figure 11 shows that only one instance of each entity should be associated with the
relationship. It depicts a one-to-one relationship (Tutorialspoint, 2019).

Figure 11. One-to-one Relationship

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

 One-to-many - When more than one instance of an entity is associated with a relationship, it is
marked as '1:N'. Figure 12 shows that only one instance of an entity on the left and more than
one instance of an entity on the right can be associated with the relationship. It depicts a one-to-
many relationship (Tutorialspoint, 2019).

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Figure 12. One-to-many Relationship

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

 Many-to-one − When more than one instance of an entity is associated with the relationship, it is
marked as 'N:1'. Figure 12 shows that more than one instance of an entity on the left, and only
one instance of an entity on the right can be associated with the relationship. It depicts a many-
to-one relationship (Tutorialspoint, 2019).

Figure 12. Many-to-one Relationship

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

 Many-to-many – Figure 12 shows that more than one instance of an entity on the left and more
than one instance of an entity on the right can be associated with the relationship. It depicts a
many-to-many relationship (Tutorialspoint, 2019).

Figure 12. Many-to-many Relationship

Source: https://www.tutorialspoint.com/dbms/er_diagram_representation.htm

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To summarize the ER diagram, Figure 13 shows a full set of entities, attributes, and its relationship.

N N

Figure 13. ER Diagram with Entities, Relationship, and Attributes

Source: https://wofford-ecs.org/DataAndVisualization/ermodel/material.htm

The relationship in the above figure is many-to-many because each chemical can be from several
suppliers, and each supplier has a number of chemicals. An order has a purchase date, amount, and
total cost as well as the chemical and supplier information. Thus, the order has attributes Purchase
Date, amount, and Total Cost that we cannot appropriately associate with chemical or supplier
(Shiflet, 2002).
3. System Flowchart - This technique uses symbols that show the flow of data throughout a system and
how decisions are made. These elements may include organizational departments, manual activities,
computer programs, hard-copy accounting records, and digital records. Figures 14 and 15 show the
set of symbols for representing manual procedures and an example of a system flowchart (Hall, 2016).

Figure 14. Symbol Set for Representing Manual Procedures

Source: http://www.engineering-bachelors-degree.com/business-information-management/uncategorized/introduction-to-
transaction-processingthe-audit-trail

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Figure 15. Internal Controls and Flowchart Analysis

Source: https://d2vlcm61l7u1fs.cloudfront.net/media%2Fcef%2Fcefad4fe-3a3e-4841-81ff-5d8145551fb3%2FphpLsHzdi.png

4. Program Flowchart - This technique uses a set of standard graphic symbols to represent
the sequence of coded instructions fed into a computer, enabling it to perform specified logical and
arithmetical operations. It is a great tool to improve work efficiency. There are the four (4) basic
symbols in program flowchart: start, process, decision, and end. Each symbol represents a piece of
the code written for the program (EdrawSoft, 2019).

Figure 16. Four (4) Basic Symbols in Program Flowchart

Source: https://www.edrawsoft.com/flowchart/program-flowchart-definition.php

o Start event symbol signals the first step of a process.

o Process is a series of actions or steps taken to achieve a particular end.
o Decision is the action or process of deciding something or of resolving a question.
o End event symbol stands for the result of a process.

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Figure 17. Program Flowchart Example

Source: https://www.edrawsoft.com/flowchart/program-flowchart-definition.php

Benefits of Program Flowchart

The advantages of a program flowchart are as follows (EdrawSoft, 2019):
1. It can help programmers find the bug in the process before carrying out.
2. It works as a blueprint when analyzing the systems and developing programs, which makes
coding more efficient.
3. It improves programmers’ efficiency in maintaining the operating program.
4. Communicating the logic of a system to all concerned gets much easier.
5. Record Layout Diagrams - This technique reveals the internal structure of digital records in a flat-file
or database table. The layout diagram usually shows the name, data type, and length of each attribute
(or field) in the record. Detailed data structure information is needed for such tasks as identifying
certain types of system failures, analyzing error reports, and designing tests of computer logic for
debugging and auditing purposes (Hall, 2016).

Figure 18. Record Layout Diagram for Customer File

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Computerized Accounting Systems

Computerized accounting systems are software programs that are stored on a company’s computer, network
server, or remotely accessed via the Internet (Study.com, n.d.). A firm prepares various reports with the help of it.
These are the features of a computerized accounting system (Toppr, n.d.):
• Simple and Integrated - It helps all businesses by automating and integrating all the business
activities. Such activities may be sales, finance, purchase, inventory, and manufacturing, etc. It also
facilitates the arrangement of accurate and up-to-date business information in a readily usable form.
• Accuracy & Speed - Computerized accounting has customized templates for users, which allow fast
and accurate data entry. Thus, after recording the transactions, it generates the information and
reports automatically.
• Scalability - It has the flexibility to record the transactions with the changing volume of business.
• Instant Reporting - It can generate a quality report in real time because of high speed and accuracy.
• Security - Secured data and information can be kept confidential as compared to the traditional
accounting system.
• Quick Decision Making - This system generates real-time, comprehensive management information
system (MIS) reports, and ensures access to complete and critical information, instantly.
• Reliability - It generates the report with consistency and accuracy. Minimization of errors makes the
system more reliable.
Two (2) Basic Requirements of Computerized Accounting System (Toppr, n.d.):
• Operating Framework - It is a well-defined operating procedure made according to the operating
environment of the organization. This framework generally outlines company policies. These can
include guiding principles on behavior, employment, and promotion. It might also contain general
guidelines for all employees to follow (Magloff, 2019). These guidelines are in the operational
framework to establish and develop a company ethos and culture.

• Accounting Framework - An accounting framework is a published set of criteria that is used to

measure, recognize, present, and disclose the information appearing in an entity's financial
statements. The most commonly-used accounting frameworks are generally accepted accounting
principles (GAAP) and international financial reporting standards (IFRS). GAAP is used by entities in
the United States, while IFRS is used in most other parts of the world. Other accounting frameworks
are designed for special situations, and which are known as other comprehensive bases of accounting
(Accounting Tools, 2018).

Types of Computerized Accounting Software (Bragg, 2018):

• Spreadsheets. Quite a small business can be run just using an electronic spreadsheet for its
accounting software. The spreadsheet software is inexpensive, and the system can be configured in
any way at all. However, spreadsheets are prone to error, since information may be entered in the
wrong place, incorrectly, or not entered at all, resulting in inaccurate financial statements.
Consequently, spreadsheets are typically only used by organizations that have very
low transaction volumes.
• Commercially-available Software. Commercially-available software or commercial off-the-shelf
software (COTS) is the predominant accounting software used throughout the world. It is moderately
configurable to the needs of a business. It contains multiple layers of error detection to prevent the
entry of incorrect information and produces standard reports that can usually be configured to the
needs of the user. There are COTS packages that are specific to certain industries, with extra features

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to address the needs of their target markets. COTS software may require the services of consultants
to install and can require a lengthy installation process, as well as on-site staff to maintain the
software. A variation on this concept is accounting software that is available as an online service,
which requires users to log into the vendor's site to access the software.
• Enterprise Resource Planning (ERP) Software. ERP software integrates information from all parts
of a business into a single database. This approach eliminates the problems associated with having
independent department-specific software that does not share information. However, it is also
expensive and may require complex installation procedures. This software is usually only needed by
the largest and most complex organizations.
• Custom Accounting Software. This software is custom developed for an organization. This approach
is usually only taken when an entity's needs are so specific that they cannot be met by a COTS or ERP
package. However, this approach is rarely taken since custom software usually shows system errors
and faults, and requires more maintenance than commercially-available packages.

Batch Processing System and Real-Time Processing Systems

Batch processing is an efficient way of processing high volumes of data where a group of transactions is
collected over a period of time. Data is collected, entered, processed, and then the batch results are produced.
Batch processing requires separate programs for input, process, and output. Examples are payroll and billing
systems (Walker, 2013).

In contrast, real-time processing involves a continual input, process, and output of data. Data must be
processed in a small time period (or near real time). Radar systems, customer services, and bank ATMs are
some of the examples (Walker, 2013).

The following shows the differences between the two (2) systems (Tutorialspoint, 2019):

Batch Processing System Real-time Processing System

Jobs with similar requirements are batched Events mostly external to computer system are
together and run through the computer as a accepted and processed within certain deadlines.
group.

Particularly suited for applications such as Particularly suited for applications such as scientific
payroll, forecasting, statistical analysis, etc. experiments, flight control, few military applications,
industrial control, etc.

Most economical and simplest processing Complex and costly processing requires unique
method for business applications hardware and software to handle complex operating
system programs.

Data is collected for defined period of time and is Supports random data input at random time
processed in batches.

Sorting is performed before processing. No sorting is required.

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Measurement oriented Action or event oriented

Transactions are batch processed periodically. Transactions are processed as and when they occur.

There is no time limit. It has to handle a process within the specified time
limit; otherwise, the system fails.

Data Coding Schemes

Data coding involves creating simple numeric or alphabetic codes to represent complex economic phenomena
that facilitate efficient data processing.

Numeric and Alphabetic Coding Schemes (Hall, 2016):

Coding Schemes Definition Advantages Disadvantages
Sequential Codes These codes represent items These codes support the These codes carry no
in some sequential order reconciliation of a batch of information content
(ascending or descending). A transactions, such as sales beyond their order in
common application of orders, at the end of the sequence.
numeric sequential codes is processing.
the numbering of source
documents.
Block Codes These codes are used to These codes allow the As with the sequential
represent whole classes of insertion of new codes code, the information
items by restricting each class within a block without content of block code is
to a specific range within the having to reorganize the not readily apparent.
coding scheme. A common entire coding structure.
application of block coding is
the construction of a chart of
accounts.
Group Codes These codes represent - Facilitate the - Can increase storage
complex items or events representation of large costs
involving two (2) or more amounts of diverse data. - Can promote clerical
pieces of related data. The - Allow complex data errors
code consists of zones or structures to be - Can increase
fields that possess specific represented in a processing time and
meaning. hierarchical form that is effort
logical and more easily
remembered by
humans.
- Permit detailed analysis
and reporting both
within an item class and
across different classes
of items.
Alphabetic Codes These codes are used for The capacity to represent - There is difficulty in
many of the same purposes large numbers of items is rationalizing the
as numeric codes. Alphabetic increased dramatically meaning of codes that
characters may be assigned through the use of pure

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sequentially (in alphabetic alphabetic codes or have been

order) or may be used in
block and group coding
techniques.
Mnemonic Codes These codes are alphabetic
characters in the form of
acronyms and other
combinations that convey
meaning. For example, acctg
stands for accounting, psyc is
psychology, and mgt is
management.
alphabetic characters sequentially assigned.
embedded within numeric - Users tend to have
codes (alphanumeric difficulty sorting
codes). records that are coded
alphabetically.
These codes do not Limited ability to
require the user to represent items within a
memorize meaning; the class
code itself conveys a high
degree of information
about the item that is
being represented.

References
Accounting Tools. (2018). Accounting framework. Retrieved on May 28, 2019, from
https://www.accountingtools.com/articles/2017/5/7/accounting-framework
Bragg, S. (2018). Types of accounting software. Retrieved on May 24, 2019, from
https://www.accountingtools.com/articles/types-of-accounting-software.html
EdrawSoft. (2019). What's a program flowchart? Retrieved on April 30, 2019, from
https://www.edrawsoft.com/flowchart/program-flowchart-definition.php
Hall, J. A. (2016). Accounting information system. Taguig City: Cengage Learning Asia Pte Ltd.
Shiflet, A. B. (2002). Three- level architecture. Retrieved on May 28, 2019, from https://wofford-
ecs.org/DataAndVisualization/ermodel/material.htm
Study.com. (n.d.). What Is a Computerized Accounting System? - Types, Advantages & Disadvantages.
Retrieved on May 28, 2019, from https://study.com/academy/lesson/what-is-a-computerized-
accounting-system-types-advantages-disadvantages.html
Toppr. (n.d.). Concept of computerized accounting system. Retrieved on April 30, 2019, from
https://www.toppr.com/guides/accountancy/computerised-accounting-system/concept-of-
computerized-accounting-system/
Tutorialspoint. (2019). ER diagram representation. Retrieved on May 28, 2019, from
https://www.tutorialspoint.com/dbms/er_diagram_representation.htm
Tutorialspoint. (2019). What are the differences between batch processing system and real time processing
system? Retrieved on April 30, 2019, from https://www.tutorialspoint.com:
https://www.tutorialspoint.com/operating_system/os_types_qa1.htm
Walker, M. (2013). Batch vs. real time data processing. Retrieved on April 30, 2019, from
https://www.datasciencecentral.com/profiles/blogs/batch-vs-real-time-data-processing

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