Chapter 2

Introduction to Transaction
Processing

Dr. Hisham Madi

Chapter
2-1
 Introduction to Transaction
Processing

An economic event that affects the assets and equities of

the firm.
Similar types of transactions are grouped together into
three transaction cycles:
 the expenditure cycle,
 the conversion cycle, and
 the revenue cycle.

Chapter
2-2
 Introduction to Transaction
Processing

Expenditure Cycle: time lag between the two due to credit relations
with suppliers:
 physical component (acquisition of goods)
 financial component (cash disbursements to the supplier)

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.

Chapter
2-3
 Introduction to Transaction
Processing

Expenditure Cycle
 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

Fixed asset system. A firm’s fixed asset system processes

transactions pertaining to the acquisition, maintenance, and
disposal of its fixed assets
Chapter
2-4
 Transaction Processing

Conversion Cycle :
 the production system (planning, scheduling, and control of the
physical product through the manufacturing process)
 the cost accounting system (monitors the flow of cost information
related to production)

 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.
 Information this system produces is used for inventory valuation,
budgeting, cost control, performance reporting, and management
decisions, such as make or-buy decisions
Chapter
2-5
 Transaction Processing

 Firms sell their finished goods to customers through the revenue cycle
which includes Cash sales, credit sales, and the receipt of cash
following a credit sale

Revenue Cycle: time lag between the two due to credit relations with
customers :
 physical component (sales order processing)
 financial component (cash receipts)
Sales order processing, 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).
Chapter
2-6
 Transaction Processing

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)

Chapter
2-7
Manual System Accounting Records

A document provides evidence of an economic event and may

be used to initiate transaction processing Some documents are
a result of transaction processing
Source Documents - used to capture and
formalize transaction data needed for transaction
processing
Product Documents - the result of transaction
processing
Turnaround Documents - a product document of
one system that becomes a source document for
Chapter
another system 2-8
Creation a source Document

Chapter
2-9
A Product Document

Chapter
2-10
A Turnaround Document

Chapter
2-11
 Manual System Accounting
Records

Journals - a record of chronological entry

 special journals - specific classes of transactions that occur in high
frequency
 Such transactions can be grouped together in a special journal and
processed more efficiently than a general journal permits.
 At the end of the processing period (month, week, or day), a clerk posts
the amounts in the columns to the ledger accounts indicated
 general journal - nonrecurring, infrequent, and dissimilar transactions.
 periodic depreciation and closing entries are recorded in the general
journal
 Journal vouchers are used to record summaries of routine transactions,
non-routine transactions, adjusting entries, and closing entries
Chapter
2-12
Manual System Accounting
Records

Ledger - a book of financial accounts that reflects the

financial effects of the firm’s transactions after they are
posted from the various journals
 general ledger - shows activity for each account listed on the chart
of accounts
 subsidiary ledger - shows activity by detail for each account type

Chapter
2-13
Flow of Economic Events Into the General Ledger

Chapter
2-14
 Audit Trail

tracing transactions from source documents to the financial

statements.
auditor wishes to verify the accuracy of a client’s AR as published
in its annual financial statements.
The auditor can trace the AR figure on the balance sheet to the
general ledger AR control account. This balance can then be
reconciled with the total for the accounts receivable subsidiary
ledger.
the auditor can select a number of accounts from the AR subsidiary
ledger and trace these back to the sales journal.
From the sales journal, the auditor can identify the specific source
Chapter
documents that initiated the transactions and pull them from 2-15 the
files to verify their validity and accuracy
 Computer-Based Systems

Types of 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 (sales orders, cash receipt, and
inventory receipt).
Reference File - contains relatively constant information
(price list, lists of authorized supplier)

Chapter
2-16
Computer-Based Systems

ARCHIVE FILE. An archive file contains

records of past transactions that are retained for
future reference (lists of former employees)

Chapter
2-17
Documentation Techniques

it is important for accountants to understand the

documentation that describes how processing takes place.

Documentation includes the flowcharts, narratives, and

other written communications that describe the inputs,
processing, and outputs of an AIS

Chapter
2-18
Documentation Techniques

Five common documentation techniques:

 EntityRelationship Diagram
 Data Flow Diagrams
 Document Flowcharts
 System Flowcharts
 Program Flowcharts

Chapter
2-19
Data Flow Diagrams (DFD)

Use symbols to represent the processes, data sources, data

flows, and entities in a system
Entities represent the sources of Data.
Entities may be external to the organization such as
customer or supplier.
Data stores represent the accounting records used in each
process, and labeled arrows represent the data flows
between processes, data stores, and entities

Chapter
2-20
Data Flow Diagram Symbols

Entity Data Store

Name Name

N
Process
Description Direction of
data flow

Chapter
2-21
Data Flow Diagram Symbols

Chapter
2-22
 System Flowcharts

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)

Chapter
2-23
Symbol Set for Document Flowcharts/manuualy

Terminal showing source Calculated batch total

or destination of documents
and reports

Source document or
report
On-page connector

Manual operation
Off-page connector

File for storing source Description of process

documents and or comments
reports

Accounting records
Document flowline
(journals, registers, Chapter
2-24
logs, ledgers)
 Sales Department Credit Department Warehouse Shipping Department
Sales A
Customer
Order #1 Sales
Order2
Customer Sales
Checks
Order Credit Order 4
Credit
Records Sales
Picks Stock
Prepare Records Order3
Goods
Sales
Orders Signed Sales
Order #1
Customer Sales Picks
Order Order2 Goods
Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1 Sales
Order #1 Order 4
Sales
Signed Sales Order3
N Order #1
Sales
Order2 N
Distribute
SO and
File A
Customer
Sales Customer
Order
Signed Sales
Order #1 Order 4
Sales
Order3
Finished Document
Chapter
Sales
N
Order2
Flowchart Showing Areas
2-25
Systems Flowchart Symbols/computer
Terminal input/
Hard copy
output device

Computer process
Process flow

Real-time
Direct access storage (online)
device connection

Video display
device
Magnetic tape

Chapter
2-26
Sales Department Computer Operations Department Warehouse Shipping Department

Customer Sales A
Edit and Credit File Order1
Credit Check
Customer Sales
Order Order 3
Picks Stock Sales
Sales Records Order2
Goods
Orders

Terminal
AR File
Update Sales Picks
Program Order1 Goods
Customer Inventory Sales
Order Order2
Sales
Order3

N A
N
Sales Sales
Order 3 Order1
Sales
Order2
Sales
Order1
Customer

Finished System Flowchart Showing All Chapter

2-27
Facts Translated into Visual Symbols
Flowcharting Computer Processes

1. A clerk in the sales department receives a customer order by

mail and enters the information into a computer terminal that is
networked to a centralized computer program in the computer
operations department. The original customer order is filed in
the sales department.
2. A computer program edits the transactions, checks the
customers’ credit by referencing a credit history file, and
produces a transaction file of sales orders.
3. The sales order transaction file is then processed by an update
program that posts the transactions to corresponding records in
AR and inventory files
Chapter
2-28
Flowcharting Computer Processes

4. Finally, the update program produces three hard copies of the

sales order. Copy 1 is sent to the warehouse, and Copies 2 and 3
are sent to the shipping department.
5. On receipt of Copy 1, the warehouse clerk picks the products
from the shelves. Using Copy 1 and the warehouse personal
computer (PC), the clerk records the inventory transfer in the
digital stock records that are kept on the PC. Next, the clerk
sends the physical inventory and Copy 1 to the shipping
department.

Chapter
2-29
Flowcharting Computer Processes

5. The shipping department receives Copy 1 and the goods from

the warehouse. The clerk reconciles the goods with Copies 1, 2,
and 3 and attaches Copy 1 as a packing slip. Next, the clerk
ships the goods (with Copy 1 attached) to the customer. Finally,
the clerk records the shipment in the hardcopy shipping log and
files Copies 2 and 3 in the shipping department

Chapter
2-30
Computer-Based Accounting
Systems

Two broad classes of systems:

 batch systems
 real-time systems

Chapter
2-31
 Batch Processing

A batch is a group of similar transactions that are

accumulated over time and then processed together.

There is always a time lag between the point at which an

economic event occurs and the point at which it is reflected
in the firm’s accounts.
The amount of lag depends on the frequency of batch processing

A time lag exists between the event and the processing.

Chapter
2-32
 Batch Processing

Payroll processing is an example of a typical batch

system.
At the end of the period, the paychecks for all
employees are prepared together as a batch

Chapter
2-33
 Real-Time Systems

Process transactions individually at the moment the

economic event occurs.
Have no time lag between the economic event and the
processing.
An example of real-time processing is an airline
reservations system, which processes requests for services
from one traveler at a time while he or she waits

Chapter
2-34
 Efficiency Versus Effectiveness

The designer must consider the trade-off between

efficiency and effectiveness. For example, users of an
airline reservations system cannot wait until 100
passengers (an efficient batch size) assemble in the travel
agent’s office before their transactions are processed.
When immediate access to current information is critical to
the user’s needs, real-time processing is the logical choice.
When time lags in information have no detrimental effects
on the user’s performance and operational efficiencies can
be achieved by processing data in batches, batch
processing is probably the superior choice.
Chapter
2-35