Republic of the Philippines

ISABELA STATE UNIVERSITY

Echague, Isabela

CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 CHAPTER 2: INTRODUCTION TO TRANSACTION PROCESSING

This course is designed to provide accounting students with basic knowledge of the design, operations, risks,
and controls of accounting information systems (AIS). Emphasis is placed on financial transaction cycles and
core business processes vis-à-vis risks and controls involved in the processing of accounting information in a
computerized environment. This course also covers analysis of the current issues in accounting information
systems that have business implications and ethical considerations. The students learn about the development
standards and practices for accounting information systems and gain hands-on experience in, the use of
electronic spreadsheet software for advanced business analysis, and to gain hands-on experience with a
commercial accounting software package. The course familiarizes students with the overall data flow systems
emphasizing financial information and computerized systems for accounting. It covers discussion on basic
client server technology and security for electronic transactions, general and application processing controls,
and various types of electronic systems used for transaction processing. It will develop in the students the
ability to identify active and passive threats to information systems and an understanding of the risks
associated with the various transaction cycles and recognize the controls that reduce risks.

An Overview of Transaction Processing

Accounting Records

File Structures

Documentation Techniques

Transaction Processing Models

Data Coding Schemes

Upon completion of this course, the learners are expected to:

✓ 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.
✓ 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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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

Chapter 1 introduced the transaction processing system (TPS) as an activity consisting of three major subsystems called cycles:
the revenue cycle, the expenditure cycle, and the conversion cycle. Even though each cycle performs different specific tasks and
supports different objectives, they share common characteristics. For example, all three TPS cycles capture financial transactions,
record the effects of transactions in accounting records, and provide information about transactions to users in support of their
day-to-day activities. In addition, transaction cycles produce much of the raw data from which management reports and financial
statements are derived. Because of their financial impact on the firm, transaction cycles command much of the accountant’s
professional attention.

The purpose of this chapter is to present some preliminary topics that are common to all three transaction processing cycles. In
subsequent chapters, we will draw heavily from this material as we examine the individual subsystems of each cycle in detail.

 Topic 1: An Overview of 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 and 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.
TRANSACTION CYCLES
Three transaction cycles process most of the firm’s economic activity: the expenditure cycle, the conversion
cycle, and the revenue cycle. These cycles exist in all types of businesses—both profit-seeking and 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), and (3) receives revenue
from outside sources (revenue cycle). Figure 2-1 shows the relationship of these cycles and the resource flows
between them.

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Echague, Isabela

CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

The Expenditure Cycle

Business activities begin with the acquisition of materials, property, and labor in exchange for cash—the
expenditure cycle. Figure 2-1 shows the flow of cash from the organization to the various providers of these
resources. Most expenditure transactions are based on a credit relationship between the trading parties. The
actual disbursement of cash takes place at some point after the receipt of the goods or services. Days or even
weeks may pass between these two events. Thus, from a systems perspective, this transaction has two parts:
a physical component (the acquisition of the goods) and a financial component (the cash disbursement to the
supplier). A separate subsystem of the cycle processes each component.
Subsystems
Purchases/accounts payable system. This system recognizes the need to acquire physical inventory (such as
raw materials) and places an order with the vendor. When the goods are received, the purchases system
records the event by increasing inventory and establishing an account payable to be paid at a later date.
Cash disbursements system. When the obligation created in the purchases system is due, the cash
disbursements system authorizes the payment, disburses the funds to the vendor, and records the transaction
by reducing the cash and accounts payable accounts.
Payroll system. The payroll system collects labor usage data for each employee, computes the payroll, and
disburses paychecks to the employees. Conceptually, payroll is a special-case purchases and cash
disbursements system. Because of accounting complexities associated with payroll, most firms have a separate
system for payroll processing.
Fixed asset system. A firm’s fixed asset system processes transactions pertaining to the acquisition,
maintenance, and disposal of its fixed assets. These are relatively permanent items that collectively often
represent the organization’s largest financial investment. Examples of fixed assets include land, buildings,
furniture, machinery, and motor vehicles.
The Conversion Cycle
The conversion cycle is composed of two major subsystems: the production system and the cost accounting
system. The production system involves the planning, scheduling, and control of the physical product through
the manufacturing process. This includes determining raw material requirements, authorizing the work to be
performed and the release of raw materials into production, and directing the movement of the work-in-
process through its various stages of manufacturing. The cost accounting system monitors the flow of cost
information related to production. Information this system produces is used for inventory valuation,
budgeting, cost control, performance reporting, and management decisions, such as make or-buy decisions.
The Revenue Cycle
Firms sell their finished goods to customers through the revenue cycle, which involves processing cash sales,
credit sales, and the receipt of cash following a credit sale. Revenue cycle transactions also have a physical and
a financial component, which are processed separately. The primary subsystems of the revenue cycle are
briefly outlined below.
Sales order processing. The majority of business sales are made on credit and involve tasks such as preparing
sales orders, granting credit, shipping products (or rendering of a service) to the customer, billing customers,
and recording the transaction in the accounts (accounts receivable, inventory, expenses, and sales).
Cash receipts. For credit sales, some period of time (days or weeks) passes between the point of sale and the
receipt of cash. Cash receipts processing includes collecting cash, depositing cash in the bank, and recording
these events in the accounts (accounts receivable and cash).

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Echague, Isabela

CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 Topic 2: Accounting Records

MANUAL SYSTEMS
This section describes the purpose of each type of accounting record used in transaction cycles. We begin
with traditional records used in manual systems (documents, journals, and ledgers) and then examine their
magnetic counterparts in computer-based systems.
Documents
A document provides evidence of an economic event and may be used to initiate transaction processing.
SOURCE DOCUMENTS. Economic events result in some documents being created at the beginning (the
source) of the transaction. These are called source documents. Source documents are used to capture and
formalize transaction data that the transaction cycle needs for processing.

PRODUCT DOCUMENTS. 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. Figure 2-3 extends the example in Figure 2-2 to illustrate that the customer’s bill is a
product document of the sales system.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

TURNAROUND DOCUMENTS. Turnaround documents are product documents of one system that become
source documents for another system. This is illustrated in Figure 2-4. A turnaround document contains
important information about a customer’s account to help the cash receipts system process the payment.

Journals

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. Documents are the
primary source of data for journals.

SPECIAL JOURNALS. Special journals are used to record specific classes of transactions that occur in high
volume. Such transactions can be grouped together in a special journal and processed more efficiently than a
general journal permits.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

REGISTER. The term register is often used to denote certain types of special journals.

GENERAL JOURNALS. Firms use the general journal to record nonrecurring, infrequent, and dissimilar
transactions.

Ledgers 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. A ledger indicates the increases, decreases, and current balance of each
account. Organizations use this information to prepare financial statements, support daily operations, and
prepare internal reports.

GENERAL LEDGERS. 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.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

SUBSIDIARY LEDGERS. 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.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

THE AUDIT TRAIL

✓ An audit trail is a set of accounting records that trace transactions from their source documents to
the financial statements.
✓ An audit trail is of utmost importance in the conduct of a financial audit.
✓ The external auditor’s responsibility involves, in part, the review of selected accounts and
transactions to determine their validity, accuracy, and completeness.

DIGITAL ACCOUNTING RECORDS

Modern accounting systems store data in four types of digital computer files:
✓ A master file contains account data.
✓ A transaction file is a temporary file that holds transaction records that will be used to change or
update data in a master file.
✓ A reference file is a file that stores the data used as standards for processing transactions.
✓ An archive file is a file that contains records of past transactions that are retained for future reference.

The Digital Audit Trail

Audit trails in computer-based systems are less observable than in traditional manual systems, but they still
exist. Let’s walk through the system represented in Figure 2-11 to illustrate how computer files provide an
audit trail. We begin with the capture of the economic event. In this example, sales are recorded manually on
source documents, just as in the manual system. The next step in this process is to convert the source
documents to digital form. This is done in the data-input stage, when the transactions are edited and a
transaction file of sales orders is produced. Some computer systems do not use physical source documents.
Instead, transactions are captured directly on digital media.

The next step is to update the various master file subsidiary and control accounts that the transaction affects.
During the update procedure, additional editing of transactions takes place. Some transactions may prove to
be in error or invalid for such reasons as incorrect account numbers, insufficient quantities on hand, or
customer credit problems. In this example, the system determines the available credit for each customer from
the credit file before processing the sale. Any records that are rejected for credit problems are transferred to
the error file. The remaining good records are used to update the master files. Only these transactions are
added to the archive file that serves as the sales journal. By copying the valid transactions to the journal, the
original transaction file is not needed for audit trail purposes. This file can now be erased (scratched) in
preparation for the next batch of sales orders. Like the paper trail, this digital audit trail allows transaction
tracing. Again, an auditor attempting to evaluate the accuracy of the AR figure published in the balance sheet
could do so via the following steps, which are identified in Figure 2-11.
1. Compare the accounts receivable 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 specific source documents that can be pulled from their files and
verified. If necessary, the auditor can confirm the accuracy and propriety of these source documents
by contacting the customers in question.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 Topic 3: File Structures

Digital file structures and storage techniques vary widely among transaction processing systems. Some
structures are effective at processing all records in large master files. Some file structures are better for directly
locating and processing a single record in a large file. The legacy systems are large mainframe systems
implemented in the late 1960s through the 1980s.

THE FLAT-FILE MODEL

The flat-file model is an environment in which individual data files are not related to other files.
The significant problems in the flat-file environment are the following:

Data Capture and Storage. Data storage is an efficient information system that captures and stores data only
once and makes this single source available to all users who need it.

Data Updating. Data updating is the periodic updating of data stored in the files of an organization.

Currency of Information. Currency of information is a problem associated with the flat-file model because
of its failure to update all the user files affected by a change in status; may result in decisions based on outdated
information.

Task-Data Dependency. Task-data dependency is a user’s inability to obtain additional information as his or
her needs change.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

THE DATABASE MODEL

The database model is a symbolic model of the structure of, and the associations between, an organization’s
data entities. The database management system (DBMS) is a software system that controls access to the
data resource. The most striking difference between the database model and the flat-file model is the pooling
of data into a common database that all organizational users share.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 Topic 4: Documentation Techniques

Visual images convey vital system information more effectively and efficiently than words. Accountants use
system documentation routinely, as both systems designers and auditors.

Five basic documentation techniques are introduced in this section: data flow diagrams, entity relationship
diagrams, system flowcharts, program flowcharts, and record layout diagrams.

DATA FLOW DIAGRAMS AND ENTITY RELATIONSHIP DIAGRAMS

Data Flow Diagrams

The data flow diagram (DFD) is the use of a set of symbols in a diagram to represent the processes, data
sources, data flows, and process sequences of a current or proposed system.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

Entity Relationship Diagrams

An entity relationship (ER) diagram is a documentation technique used to represent the relationship among
data entities in a system.
✓ Cardinality is the numeric mapping between entities such as one-to-one (1:1), one-to-many (1:M),
and many-to-many (M:M).
✓ A data model is the blueprint for what ultimately will become the physical database.

Relationship between ER Diagrams and Data Flow Diagrams

DFDs and ER diagrams depict different aspects of the same system, but they are related and can be reconciled.
A DFD is a model of system processes, and the ER diagram models the data used in or affected by the system.
The two diagrams are related through data; each data store in the DFD represents a corresponding data entity
in the ER diagram

SYSTEM FLOWCHARTS
A system flowchart is used to show the relationship between the key elements—input sources, programs,
and output products—of computer systems.

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Flowcharting Manual Activities

To demonstrate the flowcharting of manual activities, let’s assume that an auditor needs to flowchart a sales
order system to evaluate its internal controls and procedures. The auditor will begin by interviewing
individuals involved in the sales order process to determine what they do. This information will be captured
in a set of written facts similar to those below. Keep in mind that the purpose here is to demonstrate
flowcharting. Thus, for clarity, the system facts are intentionally simplistic.
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. When the sales clerk receives credit approval, he or she files Copy 1 and the customer order in the
department. The clerk sends Copy 2 to the warehouse and Copies 3 and 4 to the shipping department.
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.

Based on these facts, the auditor can create a flowchart of this partial system. It is important to note that
flowcharting is as much an art form as it is a technical skill, giving the flowchart author a great deal of
license. Nevertheless, the primary objective should be to provide an unambiguous description of the
system. With this in mind, certain rules and conventions need to be observed:
1. The flowchart should be labeled to clearly identify the system that it represents.
2. The correct symbols should be used to represent the various entities in the system.
3. All symbols on the flowchart should be labeled.
4. Lines should have arrowheads to clearly show the process flow and sequence of events.
5. If complex processes need additional explanation for clarity, a text description should be included on
the flowchart or in an attached document referenced by the flowchart.

LAY OUT THE PHYSICAL AREAS OF ACTIVITY. Remember that a flowchart reflects the physical system,
which is represented as vertical columns of events and actions separated by lines of demarcation. Generally,
each of these areas of activity is a separate column with a heading. From the written system facts, we see that
there are four distinct areas of activity: sales department, credit department, warehouse, and shipping
department. The first step in preparing the flowchart is to lay out these areas of activity and label each of
them.

TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT. At this point we are ready to start visually
representing the system facts.

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Flowcharting Computer Processes

We now examine flowcharting techniques to represent a system that employs both manual and computer
processes.

LAY OUT THE PHYSICAL AREAS OF ACTIVITY. The flowcharting process begins by creating a template
that depicts the areas of activity.

TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT. As with the manual system example, the
next step is to systematically transcribe the written facts into visual objects.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

PROGRAM FLOWCHARTS
A program flowchart is a diagram providing a detailed description of the sequential and logical operations of
the program. Every program represented in a system flowchart should have a supporting program flowchart
that describes its logic.

A separate symbol represents each step of the program’s logic, and each symbol represents one or more lines
of computer program code. The connector lines between the symbols establish the logical order of execution.
Tracing the flowchart downward from the start symbol, we see that the program performs the following
logical steps in the order listed:
1. The program retrieves a single record from the unedited transaction file and stores it in memory.
2. The first logical test is to see if the program has reached the end-of-file (EOF) condition for the
transaction file. Most file structures use a special record or marker to indicate an EOF condition.
When EOF is reached, the edit program will terminate and the next program in the system (in this
case, the update program) will be executed. As long as there is a record in the unedited transaction
file, the result of the EOF test will be ‘‘no’’ and process control is passed to the next logical step in the
edit program.
3. Processing involves a series of tests to identify certain clerical and logical errors. Each test,
represented by a decision symbol, evaluates the presence or absence of a condition. For example, an
edit test could be to detect the presence of alphabetic data in a field that should contain only numeric
data.
4. Error-free records are sent to the edited transaction file.
5. Records containing errors are sent to the error file.
6. The program loops back to Step 1, and the process is repeated until the EOF condition is reached.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

RECORD LAYOUT DIAGRAMS

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.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 Topic 5: Transaction Processing Models

This section examines alternative transaction processing models, which fall broadly into two types: (1)
batch processing and (2) real-time processing.

Differences between Batch and Real-Time Processing

✓ Information Time Frame
✓ Resources
✓ Operational Efficiency

UPDATING MASTER FILES FROM TRANSACTIONS

Whether batch or real-time processing is being used, updating a master file record involves changing the value
of one or more of its variable fields to reflect the effects of a transaction. Figure 2-28 presents record structures
for a sales order transaction file and two associated master files, AR and inventory. The primary key (PK)—
the unique identifier—for the inventory file is INVENTORY NUMBER. The primary key for AR is
ACCOUNT NUMBER. Notice that the record structure for the sales order file contains a primary key (SALES
ORDER NUMBER) and two secondary key (SK) fields, ACCOUNT NUMBER and INVENTORY NUMBER.
These secondary keys are used for locating the corresponding records in the master files.

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BATCH PROCESSING USING REAL-TIME DATA COLLECTION

A popular data processing approach, particularly for large operations, is to digitally capture and process
aspects of the transaction at the source as they occur, and process other aspects of the transaction in batch
mode.

Deadlock or “wait” is a state that occurs between sites when data are locked by multiple sites that are waiting
for the removal of the locks from the other sites.

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REAL-TIME PROCESSING
Real-time systems process the entire transaction as it occurs. Real-time processing is well suited to systems
that process lower transaction volumes and those that do not share common records. Terminals at distributed
sites throughout the organization are used for receiving, processing, and sending information on the status of
current transactions.

 Topic 6: Data Coding Schemes

Data coding involves creating simple numeric or alphabetic codes to represent complex economic phenomena
that facilitate efficient data processing.

A SYSTEM WITHOUT CODES

Business organizations process large volumes of transactions that are similar in their basic attributes.
Uncoded entry takes a great deal of recording space, is time-consuming to record, and is obviously prone to
many types of errors.

A SYSTEM WITH CODES

Advantages of data coding in AIS are:
1. Concisely representing large amounts of complex information that would otherwise be
unmanageable.
2. Providing a means of accountability over the completeness of the transactions processed.
3. Identifying unique transactions and accounts within a file.
4. Supporting the audit function by providing an effective audit trail.

The following discussion examines some of the more commonly used coding techniques and explores their
respective advantages and disadvantages.

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NUMERIC AND ALPHABETIC CODING SCHEMES

Sequential Codes
As the name implies, sequential codes represent items in some sequential order (ascending or descending). A
common application of numeric sequential codes is the prenumbering of source documents. At printing, each
hard-copy document is given a unique sequential code number. This number becomes the transaction number
that allows the system to track each transaction processed and to identify any lost or out-of-sequence
documents. Digital documents are similarly assigned a sequential number by the computer when they are
created.

ADVANTAGES. Sequential coding supports the reconciliation of a batch of transactions, such as sales orders,
at the end of processing. If the transaction processing system detects any gaps in the sequence of transaction
numbers, it alerts management to the possibility of a missing or misplaced transaction. By tracing the
transaction number back through the stages in the process, management can eventually determine the cause
and effect of the error. Without sequentially numbered documents, problems of this sort are difficult to detect
and resolve.

DISADVANTAGES. Sequential codes carry no information content beyond their order in the sequence. For
instance, a sequential code assigned to a raw material inventory item tells us nothing about the attributes of
the item (type, size, material, warehouse location, and so on). Also, sequential coding schemes are difficult to
change. Inserting a new item at some midpoint requires renumbering the subsequent items in the class
accordingly. In applications where record types must be grouped together logically and where additions and
deletions occur regularly, this coding scheme is inappropriate.

Block Codes

A numeric block code is a variation on sequential coding that partly remedies the disadvantages just
described. This approach can be used to represent whole classes of items by restricting each class to a specific
range within the coding scheme. A common application of block coding is the construction of a chart of
accounts.

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ADVANTAGES. Block coding allows for the insertion of new codes within a block without having to
reorganize the entire coding structure. For example, if advertising expense is account number 626, the first
digit indicates that this account is an operating expense. As new types of expense items are incurred and have
to be specifically accounted for, they may be added sequentially within the 600 account classification. This
three-digit code accommodates 100 individual items (X00 through X99) within each block. Obviously, the
more digits in the code range, the more items that can be represented.

DISADVANTAGES. As with the sequential codes, the information content of the block code is not readily
apparent. For instance, account number 626 means nothing until matched against the chart of accounts,
which identifies it as advertising expense.

Group Codes

Numeric group codes are used to represent complex items or events involving two or more pieces of related
data. The code consists of zones or fields that possess specific meaning. For example, a department store chain
might code sales order transactions from its branch stores as follows:

Store Number Dept. Number Item Number Salesperson

04 09 476214 99

ADVANTAGES. Group codes have a number of advantages over sequential and block codes.
1. They facilitate the representation of large amounts of diverse data.
2. They allow complex data structures to be represented in a hierarchical 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. Ironically, the primary disadvantage of group coding results from its success as a
classification tool. Because group codes can effectively present diverse information, they tend to be overused.
Unrelated data may be linked simply because it can be done. This can lead to unnecessarily complex group
codes that cannot be easily interpreted. Finally, overuse can increase storage costs, promote clerical errors,
and increase processing time and effort.

Alphabetic Codes

Alphabetic codes are used for many of the same purposes as numeric codes. Alphabetic characters may be
assigned sequentially (in alphabetic order) or may be used in block and group coding techniques.

ADVANTAGES. The capacity to represent large numbers of items is increased dramatically through the use
of pure alphabetic codes or alphabetic characters embedded within numeric codes (alphanumeric codes). The
earlier example of a chart of accounts using a three-digit code with a single blocking digit limits data
representation to only 10 blocks of accounts—0 through 9. Using alphabetic characters for blocking, however,
increases the number of possible blocks to 26—A through Z.

DISADVANTAGES. The primary drawbacks with alphabetic coding are (1) as with numeric codes, there is
difficulty rationalizing the meaning of codes that have been sequentially assigned, and (2) users tend to have
difficulty sorting records that are coded alphabetically.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

Mnemonic Codes

Mnemonic codes are alphabetic characters in the form of acronyms and other combinations that convey
meaning. For example, a student enrolling in college courses may enter the following course codes on the
registration form:
Course Type Course Number
Acctg 101
Psyc 110
Mgt 270
Mktg 300

This combination of mnemonic and numeric codes conveys a good deal of information about these courses;
with a little analysis, we can deduce that Acctg is accounting, Psyc is psychology, Mgt is management, and
Mktg is marketing. The sequential number portion of the code indicates the level of each course.

ADVANTAGES. The mnemonic coding scheme does not require the user to memorize meaning; the code itself
conveys a high degree of information about the item that is being represented.

DISADVANTAGES. Although mnemonic codes are useful for representing classes of items, they have limited
ability to represent items within a class. For example, the entire class of accounts receivable could be
represented by the mnemonic code AR, but we would quickly exhaust meaningful combinations of alphabetic
characters if we attempted to represent the individual accounts that make up this class. These accounts would
be represented better by sequential, block, or group coding techniques.

 Appendix - Data Structures

✓ Data structures are techniques for physically arranging records in a database.

✓ Organization refers to the way records are physically arranged on the secondary storage device (e.g., a
disk).
✓ Access method is a technique used to locate records and navigate through the database.
✓ Flat-file approach is an organizational environment in which users own their data exclusively.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

SEQUENTIAL STRUCTURE
Sequential structure is a data structure in which all records in the file lie in contiguous storage spaces in a specified
sequence arranged by their primary key.
Sequential access method is a method in which all records in the file are accessed sequentially.
Sequential files are files that are structured sequentially and must be accessed sequentially.

DIRECT ACCESS STRUCTURES

Direct access structures are the storage of data at a unique location, known as an address, on a hard disk or floppy disk.

INDEXED STRUCTURE
Indexed structure is a class of file structure that uses indexes for its primary access method.
Indexed random file is a randomly organized file accessed via an index.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

VIRTUAL STORAGE ACCESS METHOD STRUCTURE

Virtual storage access method (VSAM) is a structure used for very large files that require routine batch
processing and a moderate degree of individual record processing.

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

HASHING STRUCTURE
Hashing structure is a structure employing an algorithm that converts the primary key of a record directly
into a storage address.

POINTER STRUCTURE
Pointer structure is a structure in which the address (pointer) of one record is stored in the field on a related
record.

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Types of Pointers: A physical address pointer contains the actual disk storage location (cylinder, surface,
and record number) that the disk controller needs. A relative address pointer contains the relative position
of a record in the file. A logical key pointer contains the primary key of the related record.

References:

Bagranoff, N., Norman, C., & Simkin, M., 2007. Accounting Information System, 10 th Edition
Cashman, T., Rosenblatt, H., & Shelly, G., 2005. Systems Analysis and Design, 6 th Edition
Chang, C., Richardson, V., & Smith, R., 2014. Accounting Information System, 1st Edition
Hall, J., 2019. Accounting Information System, 10th Edition
Hall, J., 2011. Accounting Information System, 7th Edition
Savage, A., Simkin, M., & Worrell, J., 2017. Accounting Information System, 14 th Edition

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CBAPA – DEPARTMENT OF ACCOUNTANCY AND MANAGEMENT ACCOUNTING

 EXERCISE 1

1. What is an audit trail? What is the purpose of a digital audit trail?

2. Give an example of a record that might comprise each of the four file types found in a computer-based
system.
3. Give an example of how cardinality relates to business policy.
4. What are the advantages of real-time data processing?
5. Explain whether the cost accounting system primarily supports internal or external reporting.
6. Discuss the role of the conversion cycle for service and retailing entities.
7. Can a turnaround document contain information that is subsequently used as a source document?
Why or why not?
8. Would the writing down of obsolete inventory be recorded in a special journal or the general journal?
Why?

 EXERCISE 2

Devise a coding scheme using block and sequential codes for the following chart of accounts for Jensen
Camera Distributors.

Cash Accounts Receivable

Office Supplies Inventory Prepaid Insurance
Inventory Investments in Marketable Securities
Delivery Truck Accumulated Depreciation—Delivery Truck
Equipment Accumulated Depreciation—Equipment
Furniture and Fixtures Accumulated Depreciation—Furniture and Fixtures
Building Accumulated Depreciation—Building
Land Accounts Payable
Wages Payable Taxes Payable
Notes Payable Bonds Payable
Common Stock Paid-In Capital in Excess of Par
Treasury Stock Retained Earnings
Sales Sales Returns and Allowances
Dividend Income Cost of Goods Sold
Wages Expense Utility Expense
Office Supplies Expense Insurance Expense
Depreciation Expense Advertising Expense
Fuel Expense Interest Expense

 EXERCISE 3

For each of the following file processing operations, indicate whether a sequential file, indexed random file,
virtual storage access method, hashing, or pointer structure would work best. You may choose as many as you
wish for each step. Also indicate which would perform the least optimally.
a. Retrieve a record from the file based on its primary key value.
b. Update a record in the file.
c. Read a complete file of records.
d. Find the next record in a file.
e. Insert a record into a file.
f. Delete a record from a file.
g. Scan a file for records with secondary keys.

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