Chapter 2

Introduction
to
Transaction
Processing

Accounting Information
Systems 9e
James A. Hall

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 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.

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 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).

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 An Overview of Transaction Processing

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 An Overview of Transaction Processing
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)

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 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.

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 Accounting Records: Manual Systems

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 Accounting Records: Manual Systems

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 Accounting Records: Manual Systems

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9
Accounting Records: Manual Systems

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10
Accounting Records: Manual Systems

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11
 Accounting Records: Manual Systems

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 Accounting Records: Manual Systems
Ledger is a book of accounts that reflects the financial
effects of a firms 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.

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Accounting Records: Manual Systems

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 Accounting Records: Manual Systems

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15
Accounting Records: Manual Systems

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 Accounting Records: Manual Systems

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 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.

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 Digital Accounting Records

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 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.

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 File Structures
Other problems with the flat-file approach:
Task-Data Dependency:
Users 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.

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 File Structures

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 The Database Model

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 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.
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 Documentation Techniques

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 Documentation Techniques

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Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques
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.

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 Documentation Techniques

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 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.

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 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.
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Transaction Processing Models

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 Transaction Processing Models

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 Transaction Processing Models

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 Transaction Processing Models

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 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.
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 Data Coding Schemes

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 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.
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 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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