CHAPTER II

Overview of Transaction
Processing and Enterprise
Resource Planning Systems
Learning Objectives
After studying this chapter, you should be able to:
1. Describe the data processing cycle used to process
transactions, including how data is input, stored, and
processed and how information is output.

2. Discuss how organizations use enterprise resource

plannning (ERP) systems to process transactions and
provide information.
1. How should I organize the accounting records so
that financial statements can be easily produced?
2. How am I going to collect and process data about
all of S&S's transactions?
3. How do I organize all the data that will be
collected?
4. How should I design the AIS so that the
information provided is reliable and accurate?
5. How can I design procedures to ensure that they
meet all government obligations, such as remitting
sales, income, and payroll taxes?
Introduction
This chapter is divided into two major sections. First
section discusses the data processing cycle and its
role in organizing business activities and providing
information to users. It also discusses basic data
storage concepts Finally, information output is
discussed.
Second section discusses the role of the information
system in modern organizations and introduces the
concept of an enterprise resource planning (ERP)
system.
Transaction Processing: The Data
Processing Cycle
Data Processing Cycle - The four operations (data
input, data storage, data processing, and information
output) performed on data to generate meaningful
and relevant information.

Data Storage

Information
Data Input Data Processing Output
DATA INPUT
The first step in processing input is to capture
transaction data and enter them into the system. The
data capture process is usually triggered by a
business activity. Data must be collected about three
facets of each business activity:
1. Each activity of interest.
2. The resource(s) affected by each activity.
3. The people who participate in each activity.
For example, the most frequent revenue cycle transaction
is a sale, either for cash or on credit.
S&S may find it useful to collect the following data
about a sales transaction:
 Date and time the sale occured
 Employee who made the sale and the checkout clerk
who processed the sale
 Checkout register where the sale processed
 Item(s) sold
 Quantity of each item sold
 List price and actual price of each item sold
 Total amount of the sale
 Delivery instructions
 For credit sales: customer name, customer bill-to and
ship-to addresses
Source Documents - Documents used to capture
transaction data at its source - when the transaction
takes place. Examples include sales orders, purchase
orders, and employee time cards.
Turnaround Documents - Records of company data
sent to an external party and then returned to the
system as input. Turnaround documents are in
machine-readable form to facilitate their subsequent
processing as input records. An example is a utility
bill.
Source Data Automation - The collection of
transaction data in machine-readable form at the
time and place of origin. Examples are point-of-sale
(POS), ATMs, and bar code scanners used in
warehouses.
The second step in processing input is to make sure
captured data are accurate and complete.
The third step in processing input is to make sure
company policies are followed, such as approving or
verifying a transaction.

DATA STORAGE
General Ledger - A ledger that contains summary-
level data for every asset, liability, equity, revenue,
and expense account of the organization.
Subsidiary Ledger - A ledger used to record detailed
data for a general ledger account with many
individual subaccounts, such as accounts receivable,
inventory, and accounts payable.
Control Account - A title given to a general ledger
account that summarizes the total amounts recorded
in a subsidiary ledger.
CODING TECHNIQUES
Coding - The systematic assignment of numbers or
letters to items to classify and organize them.
In sequence codes, items are numbered
consecutively so that gaps in the sequence code
indicate missing items that should be investigated.
Examples include prenumbered checks, invoices, and
purchase orders.
In block code, blocks of numbers that are reserved
for specific categories of data, thereby helping to
organize the data. An example is a chart of accounts.
PRODUCT CODE PRODUCT TYPE
1000000-1999999 Electric range
2000000-2999999 Refrigerator
3000000-3999999 Washer
4000000-4999999 Dryer

Group codes - two or more subgroups of digits that

are used to code an item. A group code is often used
in conjunction with a block code.
DIGIT POSITION MEANING
1-2 Product line, size, style
3 Color
4-5 Year of manufacture
6-7 Optional features
In mnemonic codes, letters and numbers that are
interspersed to identify an item. The mnemonic code
is derived from the description of the item and is
usually easy to memorize. For example, Dry300W05
could represent a low end (300), white (W) dryer
(Dry) made by Sears (05).

The following guidelines result in a better coding system. The code should:
 Be consistent with its intended use.
 Allow for growth.
 Be as simple as possible to minimize costs, facilitate memorization and
interpretation, and ensure employee acceptance.
 Be consistent with the company's organizational structure and across
the company's divisions.
Chart of Accounts - A listing of all the numbers
assigned to balance sheet and income statement
accounts. The account numbers allow transaction
data to be coded, classified, and entered into the
proper accounts. They also facilitate financial
statement and report preparation.
General Journal - A journal used to record infrequent
or nonroutine transactions, such as loan payments
and end-of-period adjusting and closing entries.
Specialized Journal - A journal used to record a large
number of repetitive transactions such as credit
sales, cash receipts, purchases, and cash
disbursements.
Audit trail - A path that allows a transaction to be
traced through a data processing system from point
of origin to output or backwards from output to
point of origin. It is used to check the accuracy and
validity of ledger postings and to trace changes in
general ledger accounts from their beginning balance
to their ending balance.
COMPUTER-BASED STORAGE CONCEPTS
Entity - The item about which information is stored in a record.
Examples include an employee, an inventory item, and a customer.
Attributes - The properties, identifying numbers, and
characteristics of interest of an entity that is stored in a database.
Examples are employee number, pay rate, name, and address.
Field - The portion of a data record where the data value for a
particular attribute is stored. For example, in a spreadsheet each
row might represent a customer and each column is an attribute of
the customer. Each cell in a spreadsheet is a field.
Record - A set of fields whose data values describe specific at
tributes of an entity, such as all payroll data relating to a single
employee. An example is a row in a spreadsheet.
Data value - The actual value stored in a field. It describes a par
ticular attribute of an entity. For example, the customer name field
would contain "ZYX Company" if that company was a customer.
File- A set of logically related records, such as the
payroll re cords of all employees.
Master file- A permanent file of records that stores
cumulative data about an organization. As transactions
take place, individual records within a master file are
updated to keep them current.
Transaction file - A file that contains the individual
business transactions that occur during a specific fiscal
period. A transac tion file is conceptually similar to a
journal in a manual AIS.
Database - A set of interrelated, centrally controlled
data files that are stored with as little data redundancy
as possible. A database consolidates records previously
stored in separate files into a common pool and serves
a variety of users and data processing applications.
DATA PROCESSING
Once business activity data have been entered into the
system, they must be processed to keep the database
current. The four different types of data processing
activities, referred to as CRUD, are as follow;
1.Creating, new data records such as adding and newly
hired employee to all the payroll database.
2. Reading,retrieving, or viewing existing data.
3. Updating- previously stored data. figure 2-4 depics the
steps required to update an accounts receivable record with
a sales transaction. The two records are matched using the
account number. The sale amount ($363) is added to the
account balance ($1,500) to get a new current balance
($1,860).
4. Deleting data, such as purging the vendor master file all
of all vendors to the company no longer does business with.
Batch processing - accumulating transaction records
into groups or batches for processing at a regular
interval such as daily or weekly. The records are
usually sorted into some sequence before
processing.
Online, Real-time processing - the computer system
processes data immediately after capture and
provides updated information to users on a timely
basis.
INFORMATION OUTPUT
The final step in the data processing cycle, when displayed
on a monitor, output is referred to as "soft copy". When
printed on paper, it is referred to as "hard copy".
Documents - a record of a transaction or other company
data.
Reports - system output, organized in a meaningful
fashion, that is used by employees to control operational
activities, by managers to make decisions and design
strategies, and by investors and creditors to understand a
company's business activities.
Query - a request for the database to provide the
information needed to a deal with a problem or answer a
question. The information is retrieved, displayed or
printed, and/or analyzed as requested.
Enterprise Resource Planning (ERP) Systems
Traditional the AIS has been referred to as a transaction
processing system because it's only concern was financial
data and accounting transaction. For example, when a
sale took place the AIS would record a journal entry
showing only the date of the sale, a debit to either cash or
account receivable and a credit to sales. Other potentially
useful non financial information about the sale such as
the time of day that it occurred would traditionally be
collect and processed outside the AIS.Enterprise Resource
Planning (ERP) overcome these problems as they
integrate all aspects of a company's operations with a
traditional AIS. The ERP system collects,processes and
stores data and provides the information managers and
external parties need to asses the company.
Integrated ERP System

*Financial - general ledger, accounts receivable, accounts payable, fixed assets,

budgeting, cash management, and preparation of managerial reports and
financial statements.
*Human Resources and Payroll- human resources, payroll, employee
benefits,training,time and attendance, benefits and government reporting.
*Order to cash (revenue cycle) -sales order entry,shipping inventory, cash
receipts , commission calculation.
* Purchase to pay (disbursement cycle) purchasing, receipt and inspection of
inventory, inventory and warehouse management and cash disbursements.
*Manufacturing (Production cycle) engineering, production scheduling,bill of
materials,work in process, workflow management , quality control ,cost
management and manufacturing processes and projects.
*Project Management- costing ,billing , time and expenses, performance units ,
activity management.
*Customer Relationship Management- sales and marketing , commissions ,
service, customer contact and call center support.
*System tools- for establishing master file data, specifying flow of
information ,access controls and so on.
An ERP system with if centralized database provides significant Advantages
*An ERP provides an integrated, enterprises wide ,single hire of the
organizations data and financial situation.
*Data input is captured or keyed once rather than multiple times as it is
entered into different systems.
*Management gains greater visibility into every area of the enterprise and
greater monitoring capabilities. Employees are more productive and
efficient because they can quickly gather data from both inside and outside
their own department.
*An ERP can consolidate multiple permissions and security models into
single data access structure.
* Procedures and reports are standardized across business units.This
standardization can be especially valuable with mergers and acquisitions
because an ERP System can replace the different system with single unified
system.
*Customer Service improves because employees can quickly access orders
available, inventory, shipping information and past customers transaction
details.
*Manufacturing plants receive new order in real time and automation of
Manufacturing processes leads to increased productivity.
ERP Systems also have significant disadvantages.
*Cost- ERP hardware software and consulting costs.
*Amount of time required- Depending in business
size , number of modules to implemented.
*Changes to business processes- unless a company
wants to spend time and money customizing modules.
*Complexity - It comes from integrating many
different business activities and systems each having
different process.
*Resistance Organization that have multiple
departments with separate resources, mission profit
and loss and chains of command may believe that a
single systems has few benefits.