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CHAPTER 2: Introduction to Transaction Processing
Transaction Cycles:
1. the expenditure cycle,
2. the conversion cycle, and
3. the revenue cycle
The Expenditure Cycle
 the acquisition of materials, property, and labor in
exchange for cash
 The major subsystems of the expenditure cycle:
o Purchases/accounts payable system
o Cash disbursements system
o Payroll system
o Fixed asset system
The Conversion Cycle
 is composed of two major subsystems:
o the production system
o the cost accounting system
The Revenue Cycle
 Firms sell their finished goods to customers
 processing cash sales, credit sales, and the receipt of
cash following a credit sale
 The primary subsystems of the revenue cycle:
o Sales order processing
o Cash receipts
Accounting Records
Manual Systems
A. Documents
 provides evidence of an economic event and may
be used to initiate transaction processing
 Three types of documents:
i. Source Documents - used to capture and
formalize transaction data that the
transaction cycle needs for processing
ii. Product Documents - are the result of
transaction processing rather than the
triggering mechanism for the process
iii. Turnaround Documents - are product
documents of one system that become source
documents for another system.
B. Journals
 is a record of a chronological entry
 Documents are the primary source of data
for journals
 two primary types of journals:
i. Special journals - are used to record specific
classes of transactions that occur in high volume
 The term register is often used to denote
certain types of special journals and to denote
a log
ii. General journals - to record nonrecurring,
infrequent, and dissimilar transactions
C. Ledger
 is a book of accounts that reflects the financial
effects of the firm’s transactions after they are
posted from the various journals
 Whereas journals show the chronological effect of
business activity, ledgers show activity by account
type.
 A ledger indicates the increases, decreases, and
current balance of each account.
 Two basic types of ledgers:
i. General ledgers - which contain the firm’s
account information in the form of highly
summarized control accounts, and
 This highly summarized information is
sufficient for financial reporting, but it is not
useful for supporting daily business
operations.
 a mechanism for verifying the overall
accuracy of accounting data that separate
accounting departments (subsidiary
ledgers) have processed
ii. Subsidiary ledgers - are kept separately in
various accounting departments of the firm
 This separation provides better control and
support of operations.
The Audit Trail
 The accounting records described previously provide
an audit trail for tracing transactions from source
documents to the financial statements.
Computer-Based Systems
 Four different types of magnetic files: [MRTA]
1. Master files
2. Transaction files
3. Reference files
4. Archive files.
Master File
 A master file generally contains account data.
 The general ledger and subsidiary ledgers are
examples of master files.
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 Data values in master files are updated from
transactions.
Transaction File
 A transaction file is a temporary file of transaction
records used to change or update data in a master
file.
 Sales orders, inventory receipts, and cash receipts
are examples of transaction files.
Reference File
 A reference file stores data that are used as
standards for processing transactions.
 For example, the payroll program may refer to a tax
table to calculate the proper amount of withholding
taxes for payroll transactions.
 Other reference files include price lists used for
preparing customer invoices, lists of authorized
suppliers, employee rosters, and customer credit
files for approving credit sales.
Archive File
 An archive file contains records of past transactions
that are retained for future reference.
 These transactions form an important part of the
audit trail.
 Archive files include journals, prior-period payroll
information, lists of former employees, records of
accounts written off, and prior-period ledgers.
Documentation Techniques
Six basic documentation techniques:
1. Data flow diagrams
2. Entity relationship diagrams
3. Document flowcharts
4. System flowcharts
5. Program flowcharts
6. Record layout diagrams
1. The Data Flow Diagram (DFD)
 uses symbols to represent the entities, processes,
data flows, and data stores that pertain to a system.
 DFDs are used to represent systems at different
levels of detail from very general to highly detailed
 They represent sources of and destinations for data.
 Systems analysts use DFDs extensively to represent
the logical elements of the system.
 This technique does not, however, depict the
physical system. In other words, DFDs show what
logical tasks are being done, but not how they are
done or who (or what) is performing them.
2. Entity Relationship (ER) Diagrams
 is a documentation technique used to represent the
relationship between entities.
 Entities are:
o physical resources (automobiles, cash, or
inventory)
o events (ordering inventory, receiving cash,
shipping goods), and
o agents (salesperson, customer, or vendor)
about which the organization wishes to
capture data.
 The degree of the relationship, called cardinality, is
the numerical mapping between entity instances.
 A relationship can be:
o one-to-one (1:1)
o one-to- many (1:M), or
o many-to-many (M:M).
 If we think of entities in the ER diagram as files of
records, cardinality is the maximum number of
records in one file that are related to a single record
in the other file and vice versa.
 Cardinality reflects normal business rules as well as
organizational policy.
 System designers identify entities and prepare a
model of them.
 This data model is the blueprint for what ultimately
will become the physical database.
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The two diagrams are related through data; each
data store in the DFD represents a corresponding
data entity in the ER diagram.
Flowcharts
 a graphical representation of a system that describes
the physical relationships between its key entities.
 can be used to represent manual activities,
computer processing activities, or both.
 A document flowchart is used to depict the
elements of a manual system, including accounting
records (documents, journals, ledgers, and files),
organizational departments involved in the process,
and activities (both clerical and physical) that are
performed in the departments.
 A system flowcharts portray the computer aspects
of a system.
 They depict the relationships between input (source)
data, transaction files, computer programs, master
files, and output reports produced by the system.
 It also describe the type of media being used in the
system, such as magnetic tape, magnetic disks, and
terminals.
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 The dichotomy (difference) between document
flowcharts and system flowcharts reflects the
dichotomy that traditionally existed between the
manual and the computer aspects of an information
system.
Batch Processing
 Batch processing permits the efficient management
of a large volume of transactions.
 A batch is a group of similar transactions (such as
sales orders) that are accumulated over time and
then processed together.
 Two general advantages to batch processing:
1. Organizations improve efficiency by
grouping together large numbers of
transactions into batches rather than
processing each event separately.
2. Batch processing provides control over the
transaction process.
 Implications for designing batch systems:
1. Economies are derived from having batches
that are as large as possible. The cost of
processing each transaction is reduced
when the fixed costs of data processing are
allocated across a large number of
transactions.
2. Finding an error in a very large batch may
prove difficult.
Program Flow Chart
 Every program represented in a system flowchart
should have a supporting program flowchart that
describes its logic.
 Accountants sometimes use program flowcharts to
verify the correctness of program logic.
 Program flowcharts provide essential details for
conducting information technology (IT) audits
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.
 This type of layout shows the content of a record. Each
data attribute and key field is shown in terms of its name
and relative location.
Computer-Based Accounting Systems
 Two broad classes:
1. Batch systems
2. Real-time systems
 Distinguishing Feature between Batch systems and
Real-time System:
o Information Time Frame
o Resources
o Operational Efficiency
 Information time frame:
o Batch System: Lag exists between time
when the economic event occurs and when
it is recorded.
o Real time system: Processing takes place
when the economic event occurs.
 Resources:
o Batch system: Generally, fewer resources
(hardware, programming, training) are
required.
o Real time system: More resources are
required than for batch processing.
 Operational efficiency:
o Batch system: Certain records are
processed after the event to avoid
operational delays.
o Real time system: All records pertaining to
the event are processed immediately.
Alternative Data Processing Approaches
 Legacy Systems versus Modern Systems
 Updating master files from transactions
 Database back-up procedures
 Real-time processing
Data Coding Schemes
 Data coding involves creating simple numeric or
alphanumeric codes to represent complex economic
phenomena that facilitate efficient data processing.
 Example: primary and secondary keys (data coding)
a. A system WITHOUT codes
b. A system WITH codes
 Other uses of data coding in AIS:
1. Concisely represent large amount of
complex information that would otherwise
be manageable.
2. Provide a means of accountability over the
completeness of the transactions
processed.
3. Identify unique transactions and account
within a file.
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4.
Support the audit function by providing an
effective audit trail.
Numeric and Alphabetic Coding Schemes
1. Sequential Codes
2. Block Codes
3. Group Codes
4. Alphabetic Codes
5. Mnemonic Codes
1. Sequential Codes
 Represent items in some sequential order (ascending
or descending)
 Common application: pre-numbering source
documents
 These numbers become transaction numbers
 Advantages:
1. Supports reconciliation of a batch
transactions
2. It alerts the management to the possibility
of missing transactions
 Disadvantages:
1. Sequential codes carry no information
content beyond their order in the
sequence.
2. Difficult to change.
3. In applications where record types must be
group together logically and where
additions and deletions occur regularly, this
coding scheme is inappropriate.
2. Block Codes
 A variation in sequential codes
 Partly remedies the disadvantages just described
 Common application: chart of accounts
 Advantage:
1. It allows for the insertion of new codes
within a block without having to reorganize
the entire coding structure.
 Disadvantage:
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.
2.

They allow complex data structures to be
represented in a hierarchal form that is
logical and more easily remembered by
humans.
3. They permit detailed analysis and reporting
both within an item class and across
different classes of items.
Disadvantages:
1. They tend to be overused
2. Increase storage cost
3. Promote clerical errors
4. Increase processing time and effort
4. Alphabetic Codes
 Used with the same purpose of the numeric codes
 May be assigned sequentially (alphabetical) or may
be used in block and group coding techniques
 Advantage:
1. The capacity to represent large number of
items (alphanumeric codes)
 Disadvantages:
1. With numeric codes, there is difficulty in
rationalizing the meaning of codes that
have been sequentially assigned
2. Users tend to have difficulty sorting records
that are coded alphabetically
5. Mnemonic Codes
 Alphabetic in characters in a form of acronyms and
other combinations that convey meaning
 Advantage:
1. Does not require the user to memorize
meaning
 Disadvantage:
1. They have limited ability to represent items
within a class
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