CHAPTER 2: Introduction to Transaction Processing

Transaction Cycles:

1. The Expenditure Cycle

- the acquisition of materials, property, and labor inexchange for cash
- The major subsystems of the expenditure cycle:
a) Purchases/accounts payable system
b) Cash disbursements system
c) Payroll system
d) Fixed asset system

2. The Conversion Cycle

- is composed of two major subsystems:
a) the production system
b) the cost accounting system

3. The Revenue Cycle

- Firms sell their finished goods to customersprocessing cash sales, credit sales, and the
receipt of cash following a credit sale
- The primary subsystems of the revenue cycle:
a) Sales order processing
b) Cash receipts
c) Accounting Records

ACOOUNTING RECORDS

Manual Systems

A. Documents- provides evidence of an economic event and may be used to initiate transaction
processing

 Three types of documents:

a. Source Documents - used to capture and formalize transaction data that the
transaction cycle needs for processing
b. Product Documents - are the result of transaction processing rather than the
triggering mechanism for the process
c. Turnaround Documents - are product documents of one system that become
source documents for another system.
B. Journals- is a record of a chronological entry. Documents are the primary source of data for
journals

 Two primary types of journals:

a. Special journals - are used to record specific classes of transactions that occur in
high volume
b. General journals - to record nonrecurring, infrequent, and dissimilar transactions

C. Ledger- is a book of accounts that reflects the financialeffects of the firm’s transactions after
they areposted from the various journals. A ledger indicates the increases, decreases, and

current balance of each account.

 Two basic types of ledgers:

a. General ledgers - which contain the firm’s account information in the form of
highly summarized control accounts
 This highly summarized information issufficient for financial reporting, but it is notuseful
for supporting daily businessoperations.
 a mechanism for verifying the overallaccuracy of accounting data that separateaccounting
departments (subsidiaryledgers) have processed
b. Subsidiary ledgers - are kept separately in various accounting departments of the
firm
 This separation provides better control andsupport of operations.

The Audit Trail- The accounting records described previously providean audit trail for tracing
transactions from sourcedocuments to the financial statements.

COMPUTER-BASED SYSTEMS

 Four different types of magnetic files:

1. Master files- generally contains account data
2. Transaction files- a temporary file of transaction records used to changeor update data in
a master file.
3. Reference files- stores data that are used as standards for processing transactions.
4. Archive files- contains records of past transactions that are retained for future reference.

Documentation Techniques

 Six basic documentation techniques:

1. The Data Flow Diagram (DFD)-uses symbols to represent the entities, processes,data
flows, and data stores that pertain to a system.
 o DFDs are used to represent systems at different levels of detail from very general
to highly detailed
o They represent sources of and destinations for data.
o Systems analysts use DFDs extensively to represent the logical elements of the
system.
o This technique does not, however, depict the physical system. In other words,
DFDs show what logical tasks are being done, but not how they are done or who
(or what) is performing them.
2. Entity Relationship (ER) Diagrams- is a documentation technique used to represent
therelationship between entities.
 Entities are:
 physical resources (automobiles, cash, or
 inventory)
 events (ordering inventory, receiving cash,
 shipping goods), and
 agents (salesperson, customer, or vendor)
 about which the organization wishes to
 capture data.

 The degree of the relationship, called cardinality, isthe numerical mapping between entity
instances.

Flowcharts- a graphical representation of a system that describes the physical relationships

between its key entities.

Batch Processing- permits the efficient managementof a large volume of transactions.

 Two general advantages to batch processing:

1. Organizations improve efficiency by grouping together large numbers of transactions into
batches rather than processing each event separately.
2. Batch processing provides control over the transaction process.
 Implications for designing batch systems:
1. Economies are derived from having batches that are as large as possible. The cost of
processing each transaction is reduced when the fixed costs of data processing are
allocated across a large number of transactions.
2. Finding an error in a very large batch may prove difficult.
PROGRAM FLOWCHARTS- Every program represented in a system flowchartshould have a
supporting program flowchart thatdescribes its logic.

Record Layout Diagrams- are used to reveal the internal structure of the recordsthat constitute
a file or database table.

Computer-Based Accounting Systems

 Two broad classes:

1. Batch systems
2. Real-time systems
 Distinguishing Feature between Batch systems and Real-time System:
1. Information time frame:
a. Batch System: Lag exists between time when the economic event occurs and when it is
recorded.
b. Real time system: Processing takes place when the economic event occurs.

2. Resources:
a. Batch system: Generally, fewer resources(hardware, programming, training) are required.
b. Real time system: More resources are required than for batch processing.

3. Operational efficiency:
a. Batch system: Certain records are processed after the event to avoid operational delays.
b. Real time system: All records pertaining to the event are processed immediately.

ALTERNATIVE DATA PROCESSING APPROACHES

 Legacy Systems versus Modern Systems

 Updating master files from transactions
 Database back-up procedures
 Real-time processing

Data Coding Schemes- Data coding involves creating simple numeric oralphanumeric codes to
represent complex economicphenomena that facilitate efficient data processing.

 Example: primary and secondary keys (data coding)

a. A system WITHOUT codes
b. A system WITH codes

NUMERIC AND ALPHABETIC CODING SCHEMES

1. Sequential Codes- Represent items in some sequential order (ascendingor descending)

  Advantages:
a. Supports reconciliation of a batch transactions
b. It alerts the management to the possibility of missing transactions
 Disadvantages:
a. Sequential codes carry no information content beyond their order in the sequence.
b. Difficult to change.
c. In applications where record types must be group together logically and where additions
and deletions occur regularly, this coding scheme is inappropriate.

2. Block Codes- A variation in sequential codes

 Advantage:
1. It allows for the insertion of new codes within a block without having to reorganize the
entire coding structure.
 Disadvantage:
1. The information content of the block code is not readily apparent.

3. Group Codes- (numeric) group codes are used to representcomplex items or events involving
two or morepieces of related data.

 Advantages:
a. They facilitate representation of large amounts of diverse data.
b. They allow complex data structures to be represented in a hierarchal form that is logical
and more easily remembered by humans.
c. They permit detailed analysis and reporting both within an item class and across different
classes of items.
 Disadvantages:
a. They tend to be overused
b. Increase storage cost
c. Promote clerical errors
d. Increase processing time and effort

4. Alphabetic Codes- Used with the same purpose of the numeric codes

 Advantage:
a. The capacity to represent large number of items (alphanumeric codes)
 Disadvantages:
a. With numeric codes, there is difficulty in rationalizing the meaning of codes that have
been sequentially assigned
b. Users tend to have difficulty sorting record that are coded alphabetically

5. Mnemonic Codes- Alphabetic in characters in a form of acronyms andother combinations that

convey meaning
 Advantage:
a. Does not require the user to memorize meaning
 Disadvantage:
a. They have limited ability to represent items within a class