CHAPTER II

INTRODUCTION TO TRANSACTION PROCESSING

INTRODUCTION

This chapter presents some preliminary topics that are common to all three transaction processing cycles. It is
organized into six major sections; first is an overview of transaction processing, which defines the broad
objective of the three transaction cycles and specifies the roles of their individual subsystems. Second, it
describes the relationship among accounting records, both traditional and digital, in forming an audit trail.
Third, it describes the key features of flat file and database structures used to store accounting data. The fourth
section examines several documentation techniques used to represent systems including manual procedures and
the computer components of system. The fifth section addresses alternative transaction processing approaches.
It reviews the fundamental features of batch and real-time technologies and their implication for transaction
processing. The final section examines data coding schemes and their role in transaction processing.

LEARNING OBJECTIVES

 Understand the broad objectives of transaction cycles

 Recognize the types of transactions processed by each of the three transaction cycles
 To know the basic accounting records used in TPS
 To understand the relationship between the traditional accounting records and their digital equivalents in
computer-based systems
 To be familiar with the documentation techniques for presenting 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
 To be familiar with data coding schemes used in accounting information systems

An Overview of Transaction Processing

 Transaction Processing System applications process financial transaction, which is an economic event
that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary
terms.
TRANSACTION CYCLES

Three transaction cycles process most of the firm's economic activity:

 Expenditure cycle

Two parts:
 physical component (the acquisition of the goods or services) and
 financial component (the cash disbursement to the supplier)

SUBSYSTEMS:

Purchases/accounts payable (AP) system. ---This system recognizes the need to acquire physical
inventory (such as raw materials) and places an order with the vendor. +inventory, + Accounts
Payable

Cash disbursements system. ---When the obligation created in the purchases system becomes
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.

Fixed asset system. ---A firm's Fixed asset system processes transactions pertaining to the
acquisition, maintenance, and disposal of its fixed assets.

 Conversion Cycle
 Two major sub-systems:
 production system- Which involves the planning, scheduling, and control of the
physical product through the manufacturing process.
 cost accounting system- Which monitors the flow of cost information including
labor, overhead, and raw materials related to production.

Manufacturing firms convert raw materials into finished products through formal, physical, and observable
conversion cycle operations. The conversion cycle in service and retailing establishments, still engage in value-
added conversion cycle activities which include the readying of products and services for market and allocating
resources such as depreciation, building amortization, and prepaid expenses to the proper accounting period.

 Revenue Cycle

Two parts:
 physical component
 financial component

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---- Cash receipts processing includes collecting cash, depositing cash in the bank,
and recording these events in the accounts (accounts receivable and cash).

ACCOUNTING RECORDS

MANUAL SYSTEMS

Documents

Three Types:

 SOURCE DOCUMENTS. Economic events result in the creation of some documents at the
beginning (the source) of the transaction. These are called source documents and are used to
capture and formalize transaction data that the transaction cycle uses 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.

 TURNAROUND. Turnaround documents are product documents of one system that become
source documents for another system.

Journals

A journal is a chronological record of financial transactions. The primary sources of data entry into journals are
documents.

Two classes:

 SPECIAL JOURNALS.
Special journals are used to record specific classes of transactions that occur in high volume. Most
organizations use several other special journals, including the cash receipts journal, cash
disbursements journal, purchases journal, and the payroll journal.

REGISTER. The term register is often used to denote certain types of special journals. For example,
the payroll journal is often called the payroll register.

 GENERAL JOURNALS. Firms use the general journal to record nonrecurring, infrequent, and
dissimilar transactions. For example, depreciation and closing entries are typically recorded in the
general journal. As a practical matter, it is common practice to replace the traditional general
journal with a collection journal vouchers, which are written authorizations prepared for every
transaction that meets the general journal requirements.

Each journal voucher contains the following information:

(1) a unique voucher number,
(2) transaction date,
(3) transaction amount,
 (4) ledger accounts to be updated, and
(5) signatures of individuals authorized to create or approve the journal voucher.

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 and journal vouchers. A ledger indicates the increases, decreases, and current
balance of each account.

Two categories:

 General ledgers, which contain the firm's account information in the form of highly summarized
control for each of the organization's financial accounts. 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 have processed.

 Subsidiary ledgers, which contain the details that support a particular control account, including
inventory, accounts payable, payroll, and accounts receivable. This separation provides better
control and support of operations.

THE AUDIT TRAIL

Used for tracing account balances contained in the financial statements back to source documents and the
economic events that created them. It is a review of selected accounts and transactions to determine their
validity, accuracy, and completeness.

NOTE:

The audit of AR often includes a procedure called confirmation. This involves contacting
selected customers to determine if the transactions recorded in the accounts actually took place
and if customers agree with the recorded balance.