An Overview of Transaction Processing (CHAPTER 2)

A financial transaction is an economic event that affects Accounting Records are documents, journals, or ledgers
the assets and equities of the firm, is reflected in its used in transaction cycles.
accounts, and is measured in monetary terms.
MANUAL SYSTEMS
Financial transactions are common, repetitive events
Manual Systems utilize documents to provide evidence
that involve external parties (customers or suppliers) or
of an economic event. The document may either initiate
internal events (depreciation, use of materials, etc.).
the transaction processing or be a result of processing.
Similar transactions are grouped into cycles.
There are three types of documents discussed in this
chapter:
THE TRANSACTION CYCLES
 Source documents are triggers created at
The most common financial transactions are economic beginning of the transaction to capture data.
exchanges with external parties. o are documents that capture and
formalize transaction data needed for
The three primary transaction cycles and their typical
processing by their respective
subsystems:
transaction cycles.
- expenditure  Product documents: are the results of
transaction processing (invoices, paychecks).
- conversion
 Turnaround documents: are product
- revenue cycles documents that become source documents for
another system. (e.g., the part of the bill that
The Expenditure Cycle involves the acquisition of gets returned with your check).
materials, property, and labor in exchange for cash.
Creation of a source document
The actual disbursement of cash may occur at a
different point after the receipt of the goods or services,
based on a credit relationship. These financial
transactions have a physical component and a financial
component.

The subsystems of the expenditure cycle include:

- Purchases/accounts payable system

(materials – direct cost – COS/COGS)
(supplies – indirect cost – Operating Expense)
- Cash disbursement system Product Document
- Payroll system (cash outflow)
- Fixed asset system

The Conversion Cycle involves tracing the cost flows in

the transformation of raw materials into finished goods,
a primary concern of cost accounting courses.

The conversion cycle (for manufacturing companies) has

two typical subsystems:

- Production system (materials planning,

scheduling, releasing, controlling)
(inflow and outflow of cash) Turnaround Document
- Cost accounting system (flow of costs for
inventory valuation, budgeting, decisions)

The Revenue Cycle involves tracing a customer's order

through delivery (physical component) and payment
(financial component), which may occur at two points in
time.

The subsystems of the revenue cycle include:

- Sales order processing (order, credit, shipping,

billing)
- Cash Receipts (collecting, depositing, recording)
Journals are records of chronological entry. Documents
are the primary source of data for journals. Each
transaction requires a separate journal entry. There
may be a time lag between when the source document
is prepared and when the journal entry is made.
There are two types of journals:
entry to the source documents, auditors can
better verify the existence of assets claimed to
be owned. Confirmation refers to the auditing
technique of asking individual customers or
suppliers to agree with the recorded balance for
their account.

- Special Journals: group like types of

transactions, and are more efficient. Periodic
posting to the general ledger and subsidiary
ledgers is required from the special journals.
Common special journals: sales, purchasing,
cash receipts, cash disbursements.
Registers can be a type of special journal
(payroll register).
- General Journal: nonrecurring, infrequent, and
dissimilar transactions. These events appear in
chronological order. Journal voucher systems
help keep these transactions controlled.
Ledgers: by account type, show the account balances,
or the financial effects of the transactions on the related
account(s). [Figure 2-8 shows flow from source
documents to ledgers.]
DIGITAL ACCOUNTING RECORDS (computer-based
systems)
Types of Files in computer-based accounting systems
include:
- Master files: contain account data that are
updated from transaction data: ledgers.
- Transaction files: a temporary file that holds
records from events that will change master
files: journals.
- Reference files: a file that stores that hold the
transaction processing standards or rules:
vendors, prices.
- Archive files: are historical files of past journals
and ledgers.
Digital Accounting Records in a Computer-Based System

Two types of ledgers:

- General ledger: beginning, current activity,

ending balance and control accounts for
subsidiary ledger totals
- Subsidiary ledger: Groups of similar individual
accounts (customers for accounts receivable,
vendors for accounts payable, specific inventory
items for inventory, specific machines for fixed
assets, etc.).

THE AUDIT TRAIL

- An audit trail is a set of accounting records that

trace transactions from their source documents
to the financial statements.

- An audit trail is of utmost importance in the

conduct of a financial audit.
FILE STRUCTURES
- The external auditor’s responsibility involves, in
part, the review of selected accounts and - Digital file structures and storage techniques
transactions to determine their validity, vary widely among transaction processing
accuracy, and completeness. systems.

- It is important that managers, accountants, and - Some structures are effective at processing all
auditors be able to follow the audit trails of records in large master files.
data through the accounting system. If records
- Some file structures are better for directly
are kept properly, an accountant should be able
locating and processing a single record in a large
to trace forward from source documents to the
file.
journals to the ledger(s) to the financial
statements, as well as to vouch back from the - The legacy systems are large mainframe
financial statements to the ledger(s) to the systems implemented in the late 1960s through
journals to source documents. By tracing the 1980s.
forward from source documents, auditors can
verify the completeness of the recording of
assets, and by vouching back from the recorded
THE FLAT-FILE MODEL
- The flat-file model is an environment in which
individual data files are not related to other
files.
- There are three significant problems in the flat-
file environment: data storage, data updating,
and currency of information.
- Data Capture and Storage
• Data storage is an efficient information
system that captures and stores data
only once and makes this single source
available to all users who need it.
- Data Updating
• Data updating is the periodic updating
of data stored in the files of an
organization.
- Currency of Information
• Currency of information is a problem
associated with the flat-file model
because of its failure to update all the
user files affected by a change in status;
may result in decisions based on
outdated information.
- Task-Data Dependency
• Task-data dependency is a user’s
inability to obtain additional
information as his or her needs change.
- Flat Files Limit Data Integration
DATABASE MODEL
- The database model is a symbolic model of the
structure of, and the associations between, an
organization’s data entities.
- The database management system (DBMS) is a
software system that controls access to the data
resource.
- The most striking difference between the
database model and the flat-file model is the
pooling of data into a common database that all
organizational users share.
DOCUMENTATION TECHNIQUES
These are visual or graphic descriptions that can convey
accounting system components and flows more
effectively and efficiently than words.
Accountants use system documentation routinely, as
both systems designers and auditors.
This chapter explains five documentation techniques:
- Data flow diagrams,
- Entity-relationship diagrams,
- Document flowcharts,
- System flowcharts
- Program flowcharts
- Record layout diagrams
Data Flow Diagrams
- The data flow diagram (DFD) is the use of a set
of symbols in a diagram to represent the
processes, data sources, data flows, and process
sequences of a current or proposed system.
- For example, a broad scope level 0 DFD for the
sales process would describe approving credit
sales, shipping products, billing customers, and
preparing the accounts receivable. Then, a
higher level DFD would take one of these
subsystems (shipping product) and explain the
substeps within that subsystem.

Entity Relationships Diagrams
- An entity relationship (ER) diagram is a
documentation technique used to represent the
relationship among data entities in a system.
- Depict the established relationships between
entities (resources, events, agents).   •
- Rectangles represent entities (nouns). Entities
can be:
 Resources: automobile, cash, inventory, a
college major.
 Events: ordering inventory, receiving cash,
payment, shipment, selecting a major.
 Agents: salesperson, vendor, customer, student.
- Diamonds represent relationships (verbs).
Relationships have inherent cardinalities
representing the maximum number of records
in one file that relate to one record in another
file.
 1:1 (one to one): one salesperson is assigned to
one automobile.
 1:M (one to many): one customer may owe on
many invoices.
 M:M (many to many): many inventory items are
purchased from many vendors
- DFDs model the processes of a system. ER
diagrams model the data that is used or
affected by the system. Each data store in a DFD
represents a corresponding data entity in the ER
diagram.
- A data model is the blueprint for what
ultimately will become the physical database
System Flowcharts
- System flowcharts contain both manual and
computerized processes.
- A system flowchart is used to show the
relationship between the key elements—input
sources, programs, and output products—of
computer systems.
- Flowcharting Manual Activities
Lay out the physical areas of activity.
• Transcribe the written facts into visual
format.
- Flowcharting Computer Processes
• Transcribe the written facts into visual
format.
Flowcharts
Flowcharts represent the physical relationship between
key entities. They explain how, where, and by whom
processes are accomplished:
 Document flowcharts: manual system
components and processes.
 Systems flowcharts: contain both computerized
system components and processes.
 Program flowcharts: describe the logic of
application programming.
Document Flowcharts
Document flowcharts are typically created by following
the hard copy of business forms utilized by a company
(purchase order, customer order, etc.) from beginning
to end.

- The internal entities (entities that perform data

processing of some sort) are presented as
columns in a document flowchart.
- Other document flowcharting symbols include:
start/end of processing oval, source document,
manual process, hardcopy file, accounting
journals, registers, logs and ledgers, batch
totals, on- and off-page connectors, comments,
and data flow arrows.

Batch processing refers to grouping large volumes of

similar transactions to increase efficiency and to control
the data processing. Batch processing occurs in both
manual and computerized systems. Several sums are
calculated at the initial transaction grouping (e.g., total
sales, total customer number, the total number of
items, etc.). Then, throughout the process, these totals
can be checked and verified against the initial totals to
ensure that no transactions have been lost, were added,
or were included in error. Processing in batches adds
control over this process.

 Batch size is determined as a function of the

volume of transactions, the competitiveness of the
industry, the normal frequency of errors, the
financial implications of an undetected error, and
the costs of processing.

System flowcharts

System flowcharts contain both manual and

computerized processes.

 Compare the system flowchart to the

Manual/Document flowcharting: the systems
flowchart has a Computer Operations Department
as a column and does not have a Credit
Department.
 Note that the Data Flow Diagram for both of Program Flowcharts
these would be identical. While there are physical
differences, the same processing (the “what”) is Program Flowcharts explain what a computer
performed. Note that the flowcharts (the how, application program does to the data.
where, by whom) are different from each other,
both in terms of columns and symbols utilized. • A program flowchart is a diagram providing a
 Note the flow lines for some files only go one detailed description of the sequential and
way (read or write) while others go both ways (read and logical operations of the program.
write).
• Every program represented in a system
flowchart should have a supporting program
flowchart that describes its logic.

• The connector lines between the symbols

establish the logical order of execution.

Record Layout Diagrams
Record layout diagrams are used to reveal the internal
structure of the records that constitute a 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.
COMPUTER-BASED ACCOUNTING SYSTEMS
The two types of computer-based accounting systems
with respect to transaction processing classes are:
batch systems and real-time systems. 
- Time Lag refers to the period of time between
the economic event and when it is recorded
- Resources: the hardware, programming, and
training required to perform the processing.
- Operational Efficiency refers to the number of
resources consumed per unit of output.
- Batch processing is typically more efficient
when there are large volumes of similar
transactions. Efficiency (minimizing the
consumption of resources) needs to be evaluated
concerning effectiveness (accomplishing your goals)
Alternative Data Processing Approaches
Legacy Systems versus Modern Systems
Legacy systems typically use a large mainframe
computer, are batch-oriented, and can have highly
structured and inflexible storage systems. The appendix
to this chapter discusses the details of legacy systems. 
Modern systems are more likely to be client-server
networks of distributed data processing in real-time,
where transactions are stored in databases in real-time.
Database Backup Procedures
Each record in a database needs a unique identifier
(field or combination of fields) so that the record can be
updated accurately with confidence. Destructive
updating is when the prior field contents are replaced
with the new field contents. Therefore, before each
update, a backup is typically created.
Batch Processing using Real-Time Data Collection
Real-time transaction file creation and subsidiary ledger
update with the delayed batch mode of sales journal
and general ledger master file updating for efficiency
purposes. 
Real-Time Processing
Excellent for systems that process lower transaction
volumes (reducing the efficiency reason for batches)
and do not share common records (eliminating the need
to “lock” master files). 
TRANSACTION PROCESSING MODELS
- Alternative transaction processing models fall
broadly into two types: (1) batch processing and
(2) real-time processing.
 - Batch processing involves gathering
transactions into groups or batches and then
processing the entire batch as a single event.
- Real-time processing systems process individual
transactions continuously as they occur.
- Many systems incorporate both real-time and
batch processing features.
Differences Between Batch and Real-Time Systems
- Information Time Frame
• Batch systems are systems that
assemble transactions into groups for
processing.
• Real-time systems are systems that
process transactions individually at the
moment the economic event occurs.
- Resources
- Operational Efficiency
- Efficiency versus Effectiveness
UPDATING MASTER FILES FROM TRANSACTIONS
- Updating a master file record involves changing
the value of one or more of its variable fields to
reflect the effects of a transaction.
- Master file backup procedures
- If the current master file becomes corrupted or
is destroyed, corporate IT professionals can
retrieve the most current backed-up file from
the archives.
BATCH PROCESSING USING REAL-TIME DATA
COLLECTION
- A popular data processing approach,
particularly for large operations, is to digitally
capture and process aspects of the transaction
at the source as they occur, and process other
aspects of the transaction in batch mode.
- Deadlock or “wait” is a state that occurs
between sites when data are locked by multiple
sites that are waiting for the removal of the
locks from the other sites.
REAL-TIME PROCESSING
- Real-time systems process the entire
transaction as it occurs.
- Real-time processing is well suited to systems
that process lower transaction volumes and
those that do not share common records.
- Terminals at distributed sites throughout the
organization are used for receiving, processing,
and sending information on the status of
current transactions.
Data Coding Schemes
Data coding involves creating simple numeric or
alphabetic codes to represent complex economic
phenomena that facilitate efficient data processing.
A System Without Codes
Business organizations process large volumes of
transactions that are similar in their basic attributes.
Uncoded entry takes a great deal of recording space, is
time-consuming to record, and is obviously prone to
many types of errors.
A System With Codes
 - Advantages of data coding in AIS are: other combinations that convey
meaning.
• Concisely representing large amounts of
complex information that would • ADVANTAGES
otherwise be unmanageable.
• DISADVANTAGES
• Providing a means of accountability
over the completeness of the
transactions processed.

• Identifying unique transactions and

accounts within a file.

• Supporting the audit function by

providing an effective audit trail.

Numeric And Alphabetic Coding Schemes

- Sequential Codes

• Sequential codes are codes that

represent items in some sequential
order (ascending or descending).

• ADVANTAGES

• DISADVANTAGES

- Block Codes

• A numeric block code is a coding

scheme that assigns ranges of values to
specific attributes such as account
classifications.

• A chart of accounts is a listing of an

organization’s accounts showing the
account number and name.

• ADVANTAGES

• DISADVANTAGES

- Group Codes

• Group codes are used to represent

complex items or events involving two
or more pieces of related data.

• ADVANTAGES

• DISADVANTAGES

- Alphabetic Codes

• Alphabetic codes are alphabetic

characters assigned sequentially.

• ADVANTAGES: Alphanumeric codes are

codes that allow the use of pure
alphabetic characters embedded within
numeric codes.

• DISADVANTAGES

- Mnemonic Codes

• Mnemonic codes are alphabetic

characters in the form of acronyms and