Introduction to

Transaction Processing
 TPS applications process financial transactions. A financial transaction was
defined in Chapter 1 as An economic event that affects the assets and equities of
the firm, is reflected in its accounts, and is measured in monetary terms.
The most common financial transactions are economic exchanges with
external parties. These include the sale of goods or services, the purchase of
inventory, the discharge of financial obligations, and the receipt of cash on account
from customers.
Financial transactions also include certain internal events such
as the depreciation of fixed assets; the application of labor, raw materials, and
overhead to the production process; and the transfer of inventory from one
department to another.
Financial transactions are common business events that occur regularly. For
instance, thousands of transactions of a particular type (sales to customers) may
occur daily. To deal efficiently with such volume, business firms group similar types
of transactions into transaction cycles.
 Three transaction cycles process most of the firm’s economic activity:
I. the expenditure cycle,
II. the conversion cycle
III. the revenue cycle.

These cycles exist in all types of businesses

a) both profit-seeking
b) not-for-profit types.

For instance, every business

(1) Incurs expenditures in exchange for resources (expenditure
cycle)
(2) provides value added through its products or services (conversion
cycle)
(3) receives revenue from outside sources (revenue cycle). Figure 2-1
shows the relationship of these cycles and the resource flows
between them.
1. Cash
2. Subsystems
3. Purchasing/Accounts Payable
4. Cash Disbursements
5. Payroll
6. Fixed Assets
7. Subsystems
8. Production Planning and Control
9. Cost Accounting
10. Subsystems
11. Sales Order Processing
12. Cash Receipts
13. Labor
14. Physical Plant
15. Materials
16. Finished Goods
17. Customers
 Documents

 Journals

 Ledgers
 Source Documents

 Product Documents

 Turnaround Documents
 Economic events result in some documents being
created at the beginning (the source) of the transaction.

 Source documents are used to capture and formalize

transaction data that the transaction cycle needs for
processing.
 Product documents are the result of transaction
processing rather than the triggering mechanism for
the process.

 For example, a payroll check to an employee is a

product document of the payroll system.
 Turnaround documents are product documents of one
system that become source documents for another
system.

 A turnaround document contains important

information about a customer’s account to help the
cash receipts system process the payment.
 A journal is a record of a chronological entry. At some point in the
transaction process, when all relevant facts about the transaction
are known, the event is recorded in a journal in chronological
order.

 The journal holds a complete record of transactions and thus

provides a means for posting to accounts.
 Special journals are used to record specific classes of
transactions that occur in high volume.

 Special journals are designed as a simple way to record

the most frequently occurring transactions.
 Firms use the general journal to record nonrecurring,
infrequent, and dissimilar transactions.

 For example, we usually record periodic depreciation

and closing entries in the general journal.
 A 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.
 general ledgers, which contain the firm’s account
information in the form of highly summarized control
accounts, and

 subsidiary ledgers, which contain the details of the

individual accounts that constitute a particular control
account.
 The general ledger (GL) summarizes the activity
for each of the organization’s accounts.

 The general ledger department updates these

records from journal vouchers prepared from
special journals and other sources located
throughout the organization.
1. Data flow diagrams
2. Entity relationship diagrams
3. System flowcharts
4. Program Flowchart
 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
 An entity relationship (ER) diagram is a documentation technique used to
represent the relationship between entities

 Entities are physical resources (automobiles, cash, or inventory), events

(ordering, inventory, receiving cash, shipping goods), and agents
(salesperson, customer, or vendor) about which the organization wishes
to capture data.
 A system flowchart is the graphical representation of the physical
relationships among key elements of a system. These elements may
include organizational departments, manual activities, computer
programs, hard-copy accounting records (documents, journals, ledgers,
and files), and digital records (reference files, transaction files, archive
files, and master files).
1. A clerk in the sales department receives a hard-copy
customer order by mail and manually prepares four hard
copies of a sales order.
2. The clerk sends Copy 1 of the sales order to the credit
department for approval. The other three copies and the
original customer order are filed temporarily, pending credit
approval.
3. The credit department clerk validates the customer’s order
against hard-copy credit records kept in the credit
department. The clerk signs Copy 1 to signify approval and
returns it to the sales clerk.
4. A clerk in the sales department receives a hard-copy
customer order by mail and manually prepares four
hard copies of a sales order.
5. The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the
shipping department.
6. The shipping department receives Copy 2 and the
goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer.
Finally, the clerk files Copies 3 and 4 in the shipping
department.
2. The clerk sends Copy 1 of the sales order to the credit department for
approval. The other three copies and the original customer order are
filed temporarily, pending credit approval.

3. The credit department clerk validates the customer’s order against

hard-copy credit records kept in the credit department. The clerk signs
Copy 1 to signify approval and returns it to the sales clerk
4. A clerk in the sales department receives a hard-
copy customer order by mail and manually prepares
four hard copies of a sales order.
5. The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the
shipping department.
6. The shipping department receives Copy 2 and the
goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer.
Finally, the clerk files Copies 3 and 4 in the shipping
department.
 This high level of documentation, however, does not provide the
operational details that are sometimes needed. For example, an auditor
wishing to assess the correctness of the edit program’s logic cannot do so
from the system flowchart

 Every program represented in a system flowchart should have a

supporting program flowchart that describes its logic.
-Within the context of transaction processing,
data coding involves creating simple numeric
or alphabetic codes to represent complex
economic phenomena that facilitate efficient
data processing.
-In this section we explore several data coding
schemes and examples of their application in
AIS. To emphasize the importance of data
codes, we first consider a hypothetical system
that does not use them.
-Firms process large volumes of transactions that
are similar in their basic attributes. For
instance, a firm’s AR file may contain
accounts for several different customers with
the same name and similar addresses.
-This task becomes particularly difficult as the
number of similar attributes and items in the
class increase.
 Subsidiary ledgers are kept in various accounting
departments of the firm, including inventory, accounts
payable, payroll, and accounts receivable.

 This separation provides better control and support of

operations.
 The accounting records described previously provide
an audit trail for tracing transactions from source
documents to the financial statements.

 a system that traces the detailed transactions relating to

any item in an accounting record.

 a record of the changes that have been made to a

database or file.
 Audit trails in computer-based systems are less
observable than in traditional manual systems, but
they still exist.

 Accounting records in computer-based systems are

represented by four different types of magnetic files:
master files, transaction files, reference files, and
archive files.
 A master file generally contains account data.

 The general ledger and subsidiary ledgers are

examples of master files.

 Data values in master files are updated from

transactions.
 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.
 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.
 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.
-These problems are solved, or at least greatly
reduced, by using codes to represent each
item in the inventory and supplier accounts
1. Concisely represent large amounts of complex
information that would otherwise be
unmanageable.
2. Provide a means of accountability over the
completeness of the transactions processed.
3. Identify unique transactions and accounts
within a file.
4. Support the audit function by providing an
effective audit trail.
- represent items in sequential order. -used to
pre-number source documents -track each
transaction processed -identify any out of
sequence documents
-Sequential codes carry no information
content
beyond their order in the sequence
-Hard to make changes and insertions
This approach can be used to represent the
whole classes of items by restricting each
class to a specific rang within the coding
scheme.

Example: Chart of accounts

Advantages:
It allows the insertion of new codes within
a block without having to re-organize the
entire coding structure.

Disadvantages:
The information content of the block code
is not readily apparent.
 Are used to represent a complex items or
events involving two or more pieces of
related data. The code consists of zones or
field that posses specific meaning.

Example: sales order transactions

Advantages:
1. They facilitate the representation of large
amounts of diverse data.
2. They allow complex data structures to be
prepared in a hierarchical from that is logical
and more easily to remembered.
3. They permit detailed analysis and reporting
both within an items class and across
different classes of items.
Disadvantages:
1. Users tend to have difficulty sorting records
that are coded alphabetically.

2. As with numeric code there is difficulty

rationalizing the meaning of the codes.
 Alphabetic characters in the form of
acronyms and other combination that convey
meaning.
Advantages:
The code does not require the user to
memorize meaning.

Disadvantages:
Limited ability to represent items within
a class.
 Batch System- Assemble transactions into
groups for processing
 Real Time Systems- process transactions
individually at the moment the event occurs
 Real Time Processing can create operational
inefficiencies even handling large volumes of
transactions
 Batch Time Processing however needs to
eliminate unnecessary activities to improve
operational efficiency
Real tine processing is a choice when immediate
process access to the current information is
required

Batch Processing is a choice when time lags have

no determinal effects on user’s peformance
 Legacy systems are mainframe based
applications, tends to be batch oriented, use
flat files to data storage(early legacy systems)
and hieraichal and network databases(late
legacy systems)
 Modern Systems tends tio be client server
network based and process transactions in
real time
• Destructive updates leave no backup.
• To preserve adequate records, backup
procedures must be implemented, as shown
below:
 The master file being updated is copied as a
backup.
 A recovery program uses the backup to create a pre-
update version of the master file.
 A popular data processing approach,
particularly for large operations, is to
electronically capture transaction data at the
source as they occur. By distributing data
input capability to users, certain transaction
errors can be prevented or detected and
corrected at their source
 Real-time processing is well suited to systems
that process lower transaction volumes and
those that do not share common records
1. Data flow diagrams
2. Entity relationship diagrams
3. System flowcharts
4. Program Flowchart
 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
 An entity relationship (ER) diagram is a
documentation technique used to represent
the relationship between entities

 Entities are physical resources (automobiles,

cash, or inventory), events (ordering,
inventory, receiving cash, shipping goods),
and agents (salesperson, customer, or vendor)
about which the organization wishes to
capture data.
 A system flowchart is the graphical
representation of the physical relationships
among key elements of a system. These
elements may include organizational
departments, manual activities, computer
programs, hard-copy accounting records
(documents, journals, ledgers, and files), and
digital records (reference files, transaction files,
archive files, and master files).
1. A clerk in the sales department receives a hard-
copy customer order by mail and manually
prepares four hard copies of a sales order.
2. The clerk sends Copy 1 of the sales order to the
credit department for approval. The other three
copies and the original customer order are filed
temporarily, pending credit approval.
3. The credit department clerk validates the
customer’s order against hard-copy credit records
kept in the credit department. The clerk signs Copy
1 to signify approval and returns it to the sales
clerk.
4. A clerk in the sales department receives a hard-
copy customer order by mail and manually
prepares four hard copies of a sales order.
5. The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the
shipping department.
6. The shipping department receives Copy 2 and the
goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer.
Finally, the clerk files Copies 3 and 4 in the
shipping department.
2. The clerk sends Copy 1 of the sales order to the
credit department for approval. The other three
copies and the original customer order are filed
temporarily, pending credit approval.

3. The credit department clerk validates the

customer’s order against hard-copy credit records
kept in the credit department. The clerk signs
Copy 1 to signify approval and returns it to the
sales clerk
 This high level of documentation, however,
does not provide the operational details that
are sometimes needed. For example, an
auditor wishing to assess the correctness of
the edit program’s logic cannot do so from the
system flowchart

 Every program represented in a system

flowchart should have a supporting program
flowchart that describes its logic.