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Chapter 2 Introduction to Transaction Processing (AIS)

BS accountancy (University of Cebu)

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CHAPTER 2: Introduction to Transaction Processing i. Special journals - are used to record specific
classes of transactions that occur in high volume
Transaction Cycles:  The term register is often used to denote
1. the expenditure cycle, certain types of special journals and to denote
2. the conversion cycle, and a log
3. the revenue cycle ii. General journals - to record nonrecurring,
infrequent, and dissimilar transactions
The Expenditure Cycle
 the acquisition of materials, property, and labor in C. Ledger
exchange for cash  is a book of accounts that reflects the financial
 The major subsystems of the expenditure cycle: effects of the firm’s transactions after they are
o Purchases/accounts payable system posted from the various journals
o Cash disbursements system  Whereas journals show the chronological effect of
o Payroll system business activity, ledgers show activity by account
o Fixed asset system type.
 A ledger indicates the increases, decreases, and
The Conversion Cycle current balance of each account.
 is composed of two major subsystems:  Two basic types of ledgers:
o the production system i. General ledgers - which contain the firm’s
o the cost accounting system account information in the form of highly
summarized control accounts, and
The Revenue Cycle  This highly summarized information is
 Firms sell their finished goods to customers sufficient for financial reporting, but it is not
 processing cash sales, credit sales, and the receipt of useful for supporting daily business
cash following a credit sale operations.
 The primary subsystems of the revenue cycle:  a mechanism for verifying the overall
o Sales order processing accuracy of accounting data that separate
o Cash receipts accounting departments (subsidiary
ledgers) have processed
Accounting Records ii. Subsidiary ledgers - are kept separately in
Manual Systems various accounting departments of the firm
A. Documents  This separation provides better control and
 provides evidence of an economic event and may support of operations.
be used to initiate transaction processing
 Three types of documents: The Audit Trail
i. Source Documents - used to capture and  The accounting records described previously provide
formalize transaction data that the an audit trail for tracing transactions from source
transaction cycle needs for processing documents to the financial statements.
ii. Product Documents - are the result of
transaction processing rather than the Computer-Based Systems
triggering mechanism for the process  Four different types of magnetic files: [MRTA]
iii. Turnaround Documents - are product 1. Master files
documents of one system that become source 2. Transaction files
documents for another system. 3. Reference files
4. Archive files.
B. Journals
 is a record of a chronological entry Master File
 Documents are the primary source of data  A master file generally contains account data.
for journals  The general ledger and subsidiary ledgers are
 two primary types of journals: examples of master files.

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 Data values in master files are updated from 2. Entity Relationship (ER) Diagrams
transactions.  is a documentation technique used to represent the
relationship between entities.
Transaction File  Entities are:
 A transaction file is a temporary file of transaction o physical resources (automobiles, cash, or
records used to change or update data in a master inventory)
file. o events (ordering inventory, receiving cash,
 Sales orders, inventory receipts, and cash receipts shipping goods), and
are examples of transaction files. o agents (salesperson, customer, or vendor)
about which the organization wishes to
Reference File capture data.
 A reference file stores data that are used as  The degree of the relationship, called cardinality, is
standards for processing transactions. the numerical mapping between entity instances.
 For example, the payroll program may refer to a tax  A relationship can be:
table to calculate the proper amount of withholding o one-to-one (1:1)
taxes for payroll transactions. o one-to- many (1:M), or
 Other reference files include price lists used for o many-to-many (M:M).
preparing customer invoices, lists of authorized  If we think of entities in the ER diagram as files of
suppliers, employee rosters, and customer credit records, cardinality is the maximum number of
files for approving credit sales. records in one file that are related to a single record
in the other file and vice versa.
Archive File  Cardinality reflects normal business rules as well as
 An archive file contains records of past transactions organizational policy.
that are retained for future reference.  System designers identify entities and prepare a
 These transactions form an important part of the model of them.
audit trail.  This data model is the blueprint for what ultimately
 Archive files include journals, prior-period payroll will become the physical database.
information, lists of former employees, records of
accounts written off, and prior-period ledgers.  The two diagrams are related through data; each
data store in the DFD represents a corresponding
Documentation Techniques data entity in the ER diagram.
Six basic documentation techniques:
1. Data flow diagrams Flowcharts
2. Entity relationship diagrams  a graphical representation of a system that describes
3. Document flowcharts the physical relationships between its key entities.
4. System flowcharts  can be used to represent manual activities,
5. Program flowcharts computer processing activities, or both.
6. Record layout diagrams  A document flowchart is used to depict the
elements of a manual system, including accounting
1. The Data Flow Diagram (DFD) records (documents, journals, ledgers, and files),
 uses symbols to represent the entities, processes, organizational departments involved in the process,
data flows, and data stores that pertain to a system. and activities (both clerical and physical) that are
 DFDs are used to represent systems at different performed in the departments.
levels of detail from very general to highly detailed  A system flowcharts portray the computer aspects
 They represent sources of and destinations for data. of a system.
 Systems analysts use DFDs extensively to represent  They depict the relationships between input (source)
the logical elements of the system. data, transaction files, computer programs, master
 This technique does not, however, depict the files, and output reports produced by the system.
physical system. In other words, DFDs show what  It also describe the type of media being used in the
logical tasks are being done, but not how they are system, such as magnetic tape, magnetic disks, and
done or who (or what) is performing them. terminals.

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 The dichotomy (difference) between document Computer-Based Accounting Systems

flowcharts and system flowcharts reflects the  Two broad classes:
dichotomy that traditionally existed between the 1. Batch systems
manual and the computer aspects of an information 2. Real-time systems
system.  Distinguishing Feature between Batch systems and
Real-time System:
Batch Processing o Information Time Frame
 Batch processing permits the efficient management o Resources
of a large volume of transactions. o Operational Efficiency
 A batch is a group of similar transactions (such as  Information time frame:
sales orders) that are accumulated over time and o Batch System: Lag exists between time
then processed together. when the economic event occurs and when
 Two general advantages to batch processing: it is recorded.
1. Organizations improve efficiency by o Real time system: Processing takes place
grouping together large numbers of when the economic event occurs.
transactions into batches rather than  Resources:
processing each event separately. o Batch system: Generally, fewer resources
2. Batch processing provides control over the (hardware, programming, training) are
transaction process. required.
 Implications for designing batch systems: o Real time system: More resources are
1. Economies are derived from having batches required than for batch processing.
that are as large as possible. The cost of  Operational efficiency:
processing each transaction is reduced o Batch system: Certain records are
when the fixed costs of data processing are processed after the event to avoid
allocated across a large number of operational delays.
transactions. o Real time system: All records pertaining to
2. Finding an error in a very large batch may the event are processed immediately.
prove difficult.
Alternative Data Processing Approaches
Program Flow Chart  Legacy Systems versus Modern Systems
 Every program represented in a system flowchart  Updating master files from transactions
should have a supporting program flowchart that  Database back-up procedures
describes its logic.  Real-time processing
 Accountants sometimes use program flowcharts to
verify the correctness of program logic. Data Coding Schemes
 Program flowcharts provide essential details for  Data coding involves creating simple numeric or
conducting information technology (IT) audits alphanumeric codes to represent complex economic
Record Layout Diagrams phenomena that facilitate efficient data processing.
 are used to reveal the internal structure of the records  Example: primary and secondary keys (data coding)
that constitute a file or database table. a. A system WITHOUT codes
 The layout diagram usually shows the name, data type, b. A system WITH codes
and length of each attribute (or field) in the record.  Other uses of data coding in AIS:
 Detailed data structure information is needed for such 1. Concisely represent large amount of
tasks as identifying certain types of system failures, complex information that would otherwise
analyzing error reports, and designing tests of computer be manageable.
logic for debugging and auditing purposes. 2. Provide a means of accountability over the
 This type of layout shows the content of a record. Each completeness of the transactions
data attribute and key field is shown in terms of its name processed.
and relative location. 3. Identify unique transactions and account
within a file.

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4. Support the audit function by providing an 2. They allow complex data structures to be
effective audit trail. represented in a hierarchal form that is
logical and more easily remembered by
Numeric and Alphabetic Coding Schemes humans.
1. Sequential Codes 3. They permit detailed analysis and reporting
2. Block Codes both within an item class and across
3. Group Codes different classes of items.
4. Alphabetic Codes  Disadvantages:
5. Mnemonic Codes 1. They tend to be overused
2. Increase storage cost
1. Sequential Codes 3. Promote clerical errors
 Represent items in some sequential order (ascending 4. Increase processing time and effort
or descending)
 Common application: pre-numbering source 4. Alphabetic Codes
documents  Used with the same purpose of the numeric codes
 These numbers become transaction numbers  May be assigned sequentially (alphabetical) or may
 Advantages: be used in block and group coding techniques
1. Supports reconciliation of a batch  Advantage:
transactions 1. The capacity to represent large number of
2. It alerts the management to the possibility items (alphanumeric codes)
of missing transactions  Disadvantages:
 Disadvantages: 1. With numeric codes, there is difficulty in
1. Sequential codes carry no information rationalizing the meaning of codes that
content beyond their order in the have been sequentially assigned
sequence. 2. Users tend to have difficulty sorting records
2. Difficult to change. that are coded alphabetically
3. In applications where record types must be
group together logically and where 5. Mnemonic Codes
additions and deletions occur regularly, this  Alphabetic in characters in a form of acronyms and
coding scheme is inappropriate. other combinations that convey meaning
 Advantage:
2. Block Codes 1. Does not require the user to memorize
 A variation in sequential codes meaning
 Partly remedies the disadvantages just described  Disadvantage:
 Common application: chart of accounts 1. They have limited ability to represent items
 Advantage: within a class
1. It allows for the insertion of new codes
within a block without having to reorganize
the entire coding structure.
 Disadvantage: END
1. The information content of the block code
is not readily apparent.

3. Group Codes
 (numeric) group codes are used to represent
complex items or events involving two or more
pieces of related data.
 Advantages:
1. They facilitate representation of large
amounts of diverse data.

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