To Transaction Processing: Accounting Information Systems 9e James A. Hall

Chapter 2
Introduction
to
Transaction
Processing
Accounting Information
Systems 9e
James A. Hall
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Objectives for Chapter 2
• Understand the broad objectives of transaction cycles.
• Recognize the types of transactions processed by each of the
three transaction cycles.
• Know the basic accounting records used in TPS.
• Understand the relationship between traditional accounting
records and their computer-based digital equivalents.
• Be familiar with documentation techniques.
• Understand the differences between batch and real-time
processing and their impact on transaction processing.
• Be familiar with data coding schemes used in AIS.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2
An Overview of Transaction Processing
• A financial transaction is an economic event that affects the
assets and equities of the firm, is reflected in its accounts, and
is measured in monetary terms.
• Three transaction cycles: the expenditure cycle, the conversion
cycle and the revenue cycle. Every business:
– Incurs expenditures in exchange for resources (expenditure cycle).
– Provides value added through its products or services (conversion
cycle).
– Receives revenue from outside sources (revenue cycle).
• Expenditure Cycle: Time lag between components due to
credit relationship 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 components due to credit
relationship with customers.
– physical component (sales order processing)
– financial component (cash receipts)
Accounting Records: Manual Systems
• Source documents are used to capture and formalize
transaction data needed for transaction processing.
• Product documents are the result of transaction
processing.
• Turnaround documents - product documents of one
system that becomes source documents for another.
• Journals are chronological records of transactions.
– Special journals are used to record specific classes of transactions
that occur in high frequency.
– Register denotes certain types of special journals.
– General journal is used to record nonrecurring, infrequent, and
dissimilar transactions.
• Ledger is a book of accounts that reflects the financial
effects of a firm’s transactions as they are posted from the
various journals.
– General ledgers contain account information in highly
summarized control accounts.
– Subsidiary ledgers contain details for each 0f the individual
accounts that constitute a particular control account.
• Together the accounting records provide an audit trail for
tracing account balances contained in the financial
statements back to the source documents and events that
created them.
– Important in the conduct of a financial audit.
Digital Accounting Records
• Master file contains account data.
• Transaction file is a temporary file of transaction records
used to update data in a master file.
• Reference file stores data that are use as standards for
processing transactions.
• Archive file contains records of past transactions retained
for future reference
– Form an important part of the audit trail.
• Digit record audit trails are less observable than those
between hard-copy documents, but they still exist.
Digital Accounting Records
File Structures
• The flat-file model describes an environment where
individual data files are not related to other files. Leads to
three significant data redundancy problems:
• Data Storage:
– Organizations must incur the costs of multiple collection and
storage procedures.
• Data Updating:
– Changes or additions must be performed multiple times which
adds significantly to the task and cost of data management.
• Currency of Information:
– If update information is not properly disseminated, changes will
not be reflected in some users’ data, resulting in decisions based
on outdated information.
File Structures
• Other problems with the flat-file approach:
• Task-Data Dependency:
– User’s information set is constrained by the data user possess
and controls. This leads to the inability to obtain additional
information as needs change.
• Data Integration:
– Separate files are difficult to integrate across multiple users.
File Structures
The Database Model
Documentation Techniques
• Data flow diagram (DFD) uses symbols to represent
entities, processes, data flows and data stores.
– Used extensively by systems analysts to represent the logical
elements of the system but does not depict the physical system.
• Entity relationship diagram (ER) is a technique used to
represent the relationship between business entities.
– The degree of the relationship (cardinality) is the numeric
mapping between entities: one-to-one (1:1), one-to-many (1:M)
or many-to-many (M:M).
– A data model is a blueprint for the physical database.
• DFDs and ER diagrams document different system aspects

but are related.
– DFDs model systems processes and ER diagrams system data.
• System flowchart is the graphical representation of the
physical relationships among key elements of a system.
– Elements include departments, manual activities, computer
programs, hard-copy and digital accounting records.
– Also describe the physical computer media being employed.
– Shows the processing of a single transaction only.
• Program flowchart provides operational details for every

program represented in a system flowchart.
– Sometimes used by accountants to verify the correctness of
program logic.
• Record layout diagrams reveal the internal structure of
digital records in a database table.
Transaction Processing Models: Batch vs. Real-Time
• Information time frame:
– Batch systems assemble transactions in groups, resulting in a
time lag. Real-time systems process transactions individually as
they occur with no time lag.
• Resources:
– Generally fewer required with a batch system.
• Operational efficiency:
– Batch processing of noncritical accounts eliminates unnecessary
activities at critical points in the process.
• Designer must consider the trade-off between efficiency
and effectiveness.
Transaction Processing Models: Batch vs. Real-Time
• Updating master files from transactions:
– Involves changing the value of one or more variable fields to
reflect the effects of a transaction (batch and real-time).
• Master file backup is a standard procedure to maintain file
integrity in the event that:
– An update program error corrupts the master file being updated.
– Undetected transaction errors result in corrupted balances.
– A disaster physically destroys current master files.
• Batch processing using real-time data collection:
– Popular approach that captures and processes some aspects of a
transaction when in occurs and other aspects in batch mode.
• Real-time systems process entire transactions as they occur.
Transaction Processing Models
Data Coding Schemes
• Involves creating simple codes to facilitate efficient data
processing.
• Business organizations process large volumes of transactions
with similar basic attributes.
– Uncoded entries require extensive recording space, are time
consuming to record and are error prone.
• Advantages of data coding in AIS:
– Concisely represents large amounts of complex information that
would otherwise be unmanageable.
– Provides accountability over transaction completeness.
– Identifies unique transactions and accounts within a file
– Supports the audit function by providing an effective audit trail.
Data Coding Schemes
Data Coding Schemes
• Numeric group codes are used to represent complex items
or events involving two or more pieces of related data.
– Zones or fields have specific meanings.
• For example, a coding scheme for tracking sales might be
04-09-476214-99, meaning:
Store Number Dept. Number Item Number Salesperson
04 09 476214 99
• Facilitates representation of large amounts of diverse data.

• Allows complex data to be logically represented.
• Permits detailed analysis and reporting.
• Disadvantages are overuse which can increase costs and
linking of unrelated data.
Data Coding Schemes
• Alphabetic codes are used for many of the same purposes
as numeric codes.
– May use sequential, block or group coding techniques.
– Dramatically increases the capacity to represent large numbers of
items.
– Disadvantages are it is difficult to rationalize the meaning of the
codes and they tend to be difficult for users to sort.
• Mnemonic codes are alphabetic character acronyms and
other combinations that convey meaning.
– Common application is the two code state abbreviations or
college course coding (in combination with numeric codes).
– Codes convey a high degree of information.
– Disadvantage is limited ability to represent items within a class.

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Chapter 2

• DFDs and ER diagrams document different system aspects

• Program flowchart provides operational details for every

• Facilitates representation of large amounts of diverse data.

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