TRANSACTION

PROCESSING
INTRODUCTION

JEMIMA P. PASCUAL
JHOANA D. RAGUINDIN
Transaction
Processing System
(TPS)
 The Revenue Cycle
 The Expenditure Cycle
 The Conversion Cycle

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Six Major Sections in this
Chapter:
1. Overview of transaction processing
2. Relationship among accounting
records, both traditional and digital
in forming audit trail
3. Key features of flat file and database
structures
4. Documentation techniques
5. Transaction processing approaches
6. Data coding schemes and their role
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 Learning Objectives
After studying this chapter, you
should:
 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 transaction processing systems.
 Understand the relationship between
traditional accounting records and their
digital equivalents in computer-based
systems. 4
 Learning Objectives
After studying this chapter, you
should:
 Be familiar with the documentation
techniques used for representing manual
procedures and the computer
components of systems.
 Understand the differences between
batch and real-time processing and the
impact of these technologies on
transaction processing.
 Be familiar with data coding schemes
used in accounting information systems.
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An Overview of
Transaction Processing
Transaction Processing System applications process financial transactions.
Financial Transaction- an economic event that affects the assets and equities of the
firm, is reflected in its accounts, and is measured in monetary terms.

Financial Transactions include:

External Events
 Sale of goods or services
 Purchase of inventory
 Discharge of financial obligations
 Receipt of cash on account from
customers
Internal Events
 Depreciation of fixed assets
 Application of labor, raw materials
and overhead to the production
process
 Transfer of inventory from one
department to another
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Transaction Cycles
Process most of the firm’s economic activity

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The Expenditure Cycle
-acquisition of materials, property and labor in exchange for cash

Two Parts of this Transaction:

• Physical component
• Financial component

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The Conversion Cycle
-converting raw materials into finished products

Two Major Subsytems of the Conversion Cycle:

• Production System
• Cost Accounting System

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The Revenue Cycle
-firms sell their goods and services to customers through this cycle

Primary Subsystems of the Revenue Cycle:

• Sales Order Processing
• Cash Receipts

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ACCOUNTING
RECORDS
MANUAL SYSTEMS
DOCUMENTS
 may initiate transaction processing
 be the output of a process
 provide auditors with evidence of
economic events

THREE TYPES:
 SOURCE DOCUMENTS
 PRODUCT DOCUMENTS
 TURNAROUND DOCUMENTS
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SOURCE DOCUMENTS
Used to capture and formalize transaction data that the transaction cycle uses for
processing

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PRODUCT DOCUMENTS
Result of transaction processing rather than triggering mechanism for the process

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TURNAROUND DOCUMENTS
Product documents of one system that become source documents for another
system

REMITTANCE ADVICE- turnaround document that contains important information

about a customer’s account to help the cash receipts system process the payment

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JOURNALS
Chronological record of financial transactions
SPECIAL JOURNALS
 Used to record specific classes
of transactions that occur in
high volume
 REGISTER –used to denote
certain types of special journals
 -also used to denote a log
GENERAL JOURNALS
 To record nonrecurring,
infrequent, and dissimilar
transactions
 Columns are nonspecific, allowing
any type of transaction to be
recorded
 JOURNAL VOUCHERS –written
authorizations prepared for every
transaction that meets the general
journal requirements 15
JOURNAL VOUCHERS
Each journal voucher contains the following information:
1. A unique voucher number
2. Transaction date
3. Transaction amount
4. Ledger accounts to be updated
5. Signatures of individuals authorized to create or approve the general voucher

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LEDGERS
A book of accounts that reflects the financial effects of the firm’s transactions
after they are posted from the various journals and journal vouchers

GENERAL LEDGERS SUBSIDIARY LEDGERS

 Contain the firm’s account
information in the form of highly
summarized control accounts
 Summarizes the activity for each
of the organization’s financial
accounts
 Updates these records from
journal vouchers
 Are kept in various accounting
departments of the firm
including inventory, accounts
payable, payroll, and accounts
receivable
 Separation provides better
control and support of
operations

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THE AUDIT TRAIL

 For tracing account balances contained in the financial statements back to

source documents and economic events that created them

 External auditor’s responsibility: VALIDITY, ACCURACY, and

COMPLETENESS

 CONFIRMATION –involves contacting selected customers

 FAIR PRESENTATION OF THE FINANCIAL STATEMENTS

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DIGITAL ACCOUNTING
RECORDS
4 TYPES OF DIGITAL COMPUTER FILES
MASTER FILE
 Contains account data
 General ledger and
subsidiary ledgers
 Data values are updated
(changed) by transactions
TRANSACTION FILE
 A temporary file of
transaction records used
to update data in a master
file
 Sales orders, inventory
receipts, and cash receipts
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REFERENCE FILE
 Stores data that are used as
standards for processing
transactions
 Price lists –used for preparing
customer invoices
 Lists of authorized suppliers,
employee rosters, customer
credit history files, and freight
charges
ARCHIVE FILE
 Contains records of past
transactions that are retained for
future reference and form an
important part of the audit trail
 Journals, prior-period payroll
information, list of former
employees, records of accounts
written off, and prior-period
ledgers
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THE DIGITAL AUDIT TRAIL
 Less observable than those between hard-copy documents
 1. Capture of the economic event
sales are recorded manually on source documents
 2. Convert the source documents to digital form
data entry stage
 3. Update the various master file subsidiary and GL control accounts
editing of transactions to detect errors
 Digital audit trail allows transaction tracing

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THE DIGITAL AUDIT TRAIL
To evaluate the accuracy of the AR:
 1. COMPARE
 2. RECONCILE
 3. SELECT
 4. IDENTIFY

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FILE STRUCTURES

Two Classes of File Structures:

1. Flat Files
2. Databases

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FLAT FILES
- associated with so-called legacy systems
- stand-alone applications
-leads to significant data redundancy

Significant Problems in the Flat File Environment:

• Data Capture and Storage
• Data Updating
• Currency of Information
• Task-Data Dependency
• Flat Files Limit Data Integration

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DATABASE MODEL
- centralizes the organization’s data
- controlled by Database Management System (DBMS)

Database Management System

- is a software system that permits users to access authorized data only

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DOCUMENTAION
TECHNIQUES
FIVE BASIC DOCUMENTATION
TECHNIQUES:
 1. DATA FLOW DIAGRAMS
 2. ENTITY RELATIONSHIP
DIAGRAMS
 3. SYSTEM FLOWCHARTS
 4. PROGRAM FLOWCHARTS
 5. RECORD LAYOUT DIAGRAMS

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DATA FLOW DIAGRAMS
 Uses symbols to represent the entities, processes, data flows, and data stores
that pertain to a system
 Used to represent systems at different levels of detail form very general to highly
detailed
 OBJECTS –sources of and destination of data

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DATA FLOW DIAGRAMS
 Uses symbols to represent the entities, processes, data flows, and data stores that
pertain to a system
 Used to represent systems at different levels of detail form very general to highly
detailed

 OBJECTS/ENTITIES –sources of and destination of data

 DATA STORES –represent the accounting files and records used in each process

 LABELED ARROWS –represent data flows between processes, data stores and
entities

 PROCESSES –should be labeled with a descriptive verb 28

ENTITY RELATIONSHIP DIAGRAMS
 A documentation technique used to represent the relationship between business
entities
 ENTITY –applies to anything about which the organization captures data
physical resource, an event, or an agent
 CARDINALITY –the numeric mapping between entities such as one-to-one (1:1),
one-to-many (1:M), and many-to-many (M:M)

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RELATIONSHIP BETWEEN ER
DIAGRAMS AND DFDs
DFDs model system processes while ER diagrams model the date used in
systems. Each data store in a DFD is represented as an entity in a corresponding
ER diagram.

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SYSTEM FLOWCHARTS
The graphical representation of the physical relationships among key elements of a
system
 Elements: organizational departments, manual activities, computer programs,
hard-copy accounting records and digital records
 Describe the physical computer media being employed in the system

FLOWCHARTING MANUAL ACTIVITIES

LAYOUT THE PHYSICAL AREAS OF ACTIVITY

TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT

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FLOWCHARTING COMPUTER
PROCESSES

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TRANSCRIBE THE WRITTEN FACTS
INTO VISUAL FORMAT

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PROGRAM FLOWCHARTS
 presents the logic of the edit program
 consists of symbols

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RECORD LAYOUT DIAGRAMS
used to reveal the internal structure of digital records in a flat file or database table

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TRANSACTION
PROCESSING MODELS

DIFFERENCES BETWEEN:

 BATCH PROCESSING
 REAL-TIME SYSTEMS

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 Data processing methods
DISTINGUISHING
FEAUTURES
BATCH REAL-TIME
CHARACTERISTIC
DIFFERENCES INFORMATION
TIME FRAME Lag exists No time lag exists.
BATCH AND
REAL-TIME RESOURCES
PROCESSING Fewer resources are More resources are
required required

OPERATIONAL Certain records are All records pertaining

EFFICIENCY processed after the to the event are
event to avoid processed
operational delays immediately.
EFFICIENCY versus EFFECTIVENESS

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UPDATING MASTER FILES FROM
TRANSACTIONS
Involves changing the value of one or more of its variable fields to reflect the effects
of a transaction

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MASTER FILE BACKUP PROCEDURES
A standard procedure in transaction processing systems to maintain master
file integrity in the event that any of the following problems should occur:

1. An update program error corrupts the master files being updated

2. Undetected errors in the transaction data result in corrupted master file
balances
3. A disaster such as fire or flood physically destroys current master files

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BATCH PROCESSING USING REAL-TIME
DATA COLLECTION
Batch Processing
- the collection and storage of data, for processing at a scheduled time when a
sufficient amount of data has been accumulated

Key Steps in the Process:

1. Sales department clerk captures:
- customer sales data
- customer’s account
2. The system then,
- checks customer’s credit limit from data 41
- updates account balance
BATCH PROCESSING USING REAL-TIME
DATA COLLECTION
3. Next, the system updates the quantity-on-hand field in the inventory record
4. Record of sale is then added to the sales order file, which is processed in
batch mode.
This batch process records each transaction in the sales journal and updates the
affected general ledger accounts.

Deadlock
-happens when one process places a lock on one or more of the records it needs
for processing, but has not locked all of them.

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REAL-TIME PROCESSING
 immediate processing of data after the transaction occurs, with the
database being updated at the time of the event

 suited to systems that process lower transaction volumes and those that
do not share common records

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DATA CODING
SCHEMES
Involves creating simple numeric or
alphabetic codes to represent complex
economic phenomena that facilitate
efficient data processing

 NUMERIC CODING
SCHEMES
 ALPHABTIC CODING
SCHEMES

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A SYSTEM WITHOUT CODES
A SYSTEM WITH CODES

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NUMERIC AND ALPHABETIC CODING
SCHEMES
Sequential Codes
- represent items in some sequential order (ascending or descending)

• Numeric Sequential Codes

-prenumbering of source documents
-this number becomes the transaction number

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SEQUENTIAL
CODING
ADVANTAGE
 Sequential coding supports
the reconciliation of a batch
of transactions such as sales
orders, at the end of
processing.
DISADVANTAGES
 Sequential codes carry no
information content beyond
their order in the sequence.
 Sequential coding schemes
are difficult to change.
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BLOCK CODES
- can be used to represent whole classes of items by restricting each class to a
specific range within the coding scheme.

ADVANTAGE DISADVANTAGE
 Block coding allows for the  The information content of
insertion of new codes within the block code is not readily
a block without having to apparent.
reorganize the entire coding
structure

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NUMERIC GROUP
Store Dept. Item Salesperson
Number Number Number

CODES 04 09 476214 99

-used to represent complex items or events involving two or more pieces of

related data

ADVANTAGES DISADVANTAGE
 They facilitate the
representation of large amounts  They tend to be overused.
of diverse data.
 They allow complex data
structures to be represented in
a hierarchical form that is logical
and more easily remembered
by humans.
 They permit detailed analysis
and reporting both within an 49
item class and across different
classes of items.
ALPHABETIC
CODES
- used for many of the same purposes as numeric codes.
ADVANTAGE
 The capacity to represent
large numbers of items is
increased through the use of
alphanumeric codes
DISADVANTAGE
 There is difficulty rationalizing
the meaning of codes that have
been sequentially assigned.
 Users tend to have difficulty
sorting records that are coded
alphabetically.
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MNEMONIC CODES Course
Type
Course
Number
Acctg 101

- are alphabetic characters in the form of Psyc 110

acronym and other combinations that Mgt 270
convey meaning. Mktg 300

ADVANTAGE DISADVANTAGE
 The mnemonic coding  They have limited ability to
scheme does not require the represent items within a
user to memorize meaning. class.

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SUMMARY
This chapter divided the treatment of
transaction processing systems into
five major sections:
FIRST SECTION:
• Overview of transaction processing
• The three transaction cycles
SECOND SECTION:
• Relationship among accounting records
in both manual and computer-based
systems
THIRD SECTION:
• Overview of documentation techniques
• Five types of documentation
FOURTH SECTION:
• Two approaches to transaction
processing
FIFTH SECTION:
• The coding schemes, major types of
numeric and alphabetic coding
schemes and their advantages and
disadvantages
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APPENDIX

DATA STRUCTURES

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DATA
STRUCTURES
Represent the physical and logical arrangement of data in files and databases

ORGANIZATION ACCESS METHOD

 Refers to the way records are physically  Technique used to locate records and to
arranged on the secondary storage device navigate through the database or file

 SEQUENTIAL –files are stored in

contagious locations that occupy a
specified area of disk space
 RANDOM –files are stored without regard
for their physical relationship to other
records of the same file
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 TYPICAL FILE PROCESSING
TABLE OPERATIONS
2-2 1. Retrieve record from the file based on its
primary key value
2. Insert a record into a file
3. Update a record in the file
4. Read a complete file of records
5. Find the next record in a file
6. Scan a file for records with common secondary
keys
7. Delete a record from a file

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SEQUENTIAL STRUCTURE

• “Sequential access method”

DIRECT ACCESS STRUCTURES

-store data at a unique location, known as an address, on a disk.

Examples:
• Bank account numbers
• Social security numbers
• Credit card numbers
• License plate numbers
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INDEXED STRUCTURE
 is so named because, in addition to the actual data file, there exists a separate index that
is itself a file of record addresses.
 contains numeric value of physical disk storage location (cylinder, surface and record
block)
 Data file may be organized either sequentially or randomly

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RANDOM INDEXES SEQUENTIAL INDEXES

 easier to maintain, in terms of adding  more difficult to maintain

records, without regard to their sequence
ADVANTAGES:
ADVANTAGES:
 It can be searched rapidly
 The principal advantage is in operations
involving the processing of individual  More efficient in processing large
records (Operations 1,2,3 and 6) portion of a file

 Efficient use of disk storage but not in a

large portion of a file
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VIRTUAL STORAGE ACCESS
METHOD STRUCTURE

• Used for very large files that require routine batch processing and a moderate
degree of individual record processing

ADVANTAGE:
• Moderately effective

DISADVANTAGE:
• Does not perform record insertion operations efficiently
VIRTUAL STORAGE ACCESS
METHOD STRUCTURE

THREE PHYSICAL COMPONENTS:

• INDEXES
• PRIME DATA STORAGE AREA
• OVERFLOW AREA
HASHING STRUCTURE

Employs an algorithm that converts the primary key of a record directly into a
storage address

ADVANTAGE:
• Access speed

DISADVANTAGE:
• Does not use storage space efficiently
• Collision problem
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POINTER STRUCTURE
Types of Pointers

1. Physical Address Pointer

- contains the actual disk storage location that the disk controller needs

ADVANTAGE:
• Speed

DISADVANTAGES:
• If the related record is moved from one disk location to another, the pointer must be
changed
• Physical pointers bear no logical relationship to the records they identify 63
POINTER STRUCTURE
2. Relative Address Pointer
- contains the relative position of a record in the file

3. Logical Key Pointer

- contains the primary key of the related record

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THANK
YOU!