Chapter 2

Introduction to
Transaction Processing

Accounting Information Systems, 7e

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 the traditional
accounting records and their magnetic equivalents.
■ Be familiar with documentation techniques.
■ 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 AIS.

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 Understand the broad objectives of transaction cycles:
A Financial Transaction Processing is...
■ an economic event that affects the assets and equities
of the firm, is reflected in its accounts, and is measured
in monetary terms. Selling, buying goods.

■ Similar types of transactions are grouped together into

three transaction cycles:
■ The expenditure cycle includes Purchase; Accounts
payable systems; Cash disbursement, Payroll systems.

■ The conversion cycle: Production and Cost accounting

Systems.
■ The revenue cycle: Sales, credit sales, the receipt of
sales.
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 Relationship between Transaction Cycles

Figure 2- 1
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Each Cycle has Two Primary Subsystems
Physical component Financial component

Expenditure Cycle Acquisition of goods. Cash disbursements to the

supplier.
Conversion Cycle The production The cost accounting
system (planning, system (monitors the flow
scheduling, and of cost information related
control of the to production).
physical product
through the
manufacturing
process).
Revenue Cycle Physical component Financial component (cash
(sales order receipts)
processing)

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 Manual System Accounting Records
page 44- 51

■ Journals - a record of chronological entry

■ special journals - specific classes of transactions
that occur in high frequency
■ general journal - nonrecurring, infrequent, and
dissimilar transactions
■ Ledger - a book of financial accounts
■ general ledger - shows activity for each account
listed on the chart of accounts
■ subsidiary ledger - shows activity by detail for each
account type
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 Flow of Information from Economic
Event Into the General Ledger page 48

Figure 2- 8

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 Audit Trail page 50

Source General Financial

Journal Statements
Document Ledger

Financial General Source

Statements Journal
Ledger Document

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.
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 Computer Accounting Based Systems
■ The audit trail is less observable in computer- based
systems than traditional manual systems.
■ The data entry and computer programs are the physical
trail.
■ The data are stored in magnetic files.
Computer Files:
■ Master File - generally contains account data (e.g., general ledger
and subsidiary file).
■ Transaction File - a temporary file containing transactions since the
last update.
■ Reference File - contains relatively constant information used in
processing (e.g., tax tables, customer addresses).
■ Archive File - contains past transactions for reference purposes.

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 Accounting Records in a Computer- Based System
EXPLANATION OF STEPS
IN FIGURE:
1. Compare the AR balance
in the balance sheet with
the master file AR control
account balance.
2. Reconcile the AR control
figure with the AR
subsidiary account total.
3. Select a sample of
update entries made to
accounts in the AR
subsidiary ledger
and trace these to
transactions in the sales
journal (archive file).
4. From these journal
entries, identify source
documents that can be
pulled from their files and
verified. If necessary,
confirm these source
documents by contacting
the customers.
Figure 2- 11
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 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account- General Ledger

Accounts Receivable Subsidiary Ledger

(sum of all customers’ receivables)

Physical Financial

Sales Journal Cash Receipts Journal

Sales Order Deposit Slip

Shipping Notice
Remittance Advice
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 Computer Based Accounting Systems
Two broad classes of systems:
i) Real- time systems: Real- time systems process the entire transaction
as it occurs. For example, a sales order processed by the system, can be
captured, filled, and shipped the same day. Because transaction
information is transmitted electronically, physical source documents
can be eliminated or greatly reduced.

ii) Batch Processing:

A batch is a group of similar transactions that are accumulated over
time and then processed together. The transactions must be
independent of one another during the time period over which the
transactions are accumulated in order for batch processing to be
ii) Batch Processing
appropriate. A time lag exists between the event and

the processing.
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 Advantages of Batch Processing and Real- time processing

■ In Batch processing
organizations can Real- time processing is well suited to
increase efficiency systems that process lower transaction
by grouping large volumes and those that do
numbers of not share common records.
transactions into
batches rather than
processing each Real time system has many potential
event separately. benefits, including improved productivity,
■ Batch processing reduced inventory, increased inventory
provides control turnover, decreased lags in customer
over the transaction billing, and enhanced customer
process via control satisfaction.
figures.

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 Practical 2

■ MANAGER iO
■ Explore the other free
Accounting Software

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 Database Backup Procedures

● 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.

Figure 2- 30
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 Documentation Techniques: page 53
■ Documentation in a CB environment is necessary
for many reasons.
■ Five common documentation techniques:
■ Entity Relationship Diagram:
■ Data Flow Diagrams:
■ Document Flowcharts
■ System Flowcharts
■ Program Flowcharts

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 1.Entity Relationship Diagram (ERD)
■A documentation technique to represent
the relationship between entities in a
system.
■The REA model version of ERD is widely
used in AIS. REA uses 3 types of entities:
■ resources (cash, raw materials)
■ events (release of raw materials into the
production process)
■ agents (inventory control clerk, vendor,
production worker)

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 1.Entity Relationship Diagram
(ERD) : Cardinalities
■ Represent the numerical mapping between
entities:
■ one- to- one
■ one- to- many
■ many- to- many

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 2.Data Flow Diagram: Pg. 53
■ DFD uses symbols to represent the entities,
processes, data flows and data store.
■ DFD labeled as Ship Goods, Update Records,
or Receive Customers.

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 Draw a flow diagram of sales order process
Systems:

■ Class task

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 3. Document Flowcharts

■ Flow chart of the Documents: journals,

ledgers, and files, and digital records :
reference files, transaction files, archive files,
and master files.
■ In many organisation DF is a part of system
flowchart,or means the same.

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 4. System Flowcharts …
■ Is a graphical
representation of the
physical relationships
among the key elements
of a systems.
■ Includes, organisational
departments, manual
activity, hard copy.
■ contain more details than
data flow diagrams.
■ clearly depict the
separation of functions in
a system.
■ Pg.58
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 Flowchart Showing Stated Fact I Translated
into Visual Symbols

Sales Department Credit Department Warehouse Shipping Department

Customer

Customer
Order

Prepare
Sales
Orders

Sales
Order #1
Sales
Order #1
Sales
Order #1
Sales
Order #1

Figure 2- 18

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 Symbol Set for Representing Computer
Processes
Hard copy Terminal input/
output device

Computer process
Process flow

Real- time
Direct access storage
(online)
device
connection

Video display
Magnetic tape device
Figure 2- 21
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 5. Program Flowcharts: pg.64
■ Program flowchart is a more logical
representation that provides details of
operational activities for auditors’
assessment.

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 Thank you

End of Chapter

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