1 CHAPTER 2: Introduction to Transaction Processing Transaction Cycles: 1. the expenditure cycle, 2. the conversion cycle, and 3. the revenue cycle The Expenditure Cycle the acquisition of materials, property, and labor in exchange for cash The major subsystems of the expenditure cycle: o Purchases/accounts payable system o Cash disbursements system o Payroll system o Fixed asset system The Conversion Cycle is composed of two major subsystems: o the production system o the cost accounting system The Revenue Cycle Firms sell their finished goods to customers processing cash sales, credit sales, and the receipt of cash following a credit sale The primary subsystems of the revenue cycle: o Sales order processing o Cash receipts Accounting Records Manual Systems A. Documents provides evidence of an economic event and may be used to initiate transaction processing Three types of documents: i. Source Documents - used to capture and formalize transaction data that the transaction cycle needs for processing ii. Product Documents - are the result of transaction processing rather than the triggering mechanism for the process iii. Turnaround Documents - are product documents of one system that become source documents for another system. B. Journals is a record of a chronological entry Documents are the primary source of data for journals two primary types of journals:
i. Special journals - are used to record specific classes of transactions that occur in high volume The term register is often used to denote certain types of special journals and to denote a log ii. General journals - to record nonrecurring, infrequent, and dissimilar transactions C. 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. Two basic types of ledgers: i. General ledgers - which contain the firm’s account information in the form of highly summarized control accounts, and This highly summarized information is 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 (subsidiary ledgers) have processed ii. Subsidiary ledgers - are kept separately in various accounting departments of the firm This separation provides better control and support of operations. The Audit Trail The accounting records described previously provide an audit trail for tracing transactions from source documents to the financial statements. Computer-Based Systems Four different types of magnetic files: [MRTA] 1. Master files 2. Transaction files 3. Reference files 4. Archive files. Master File A master file generally contains account data. The general ledger and subsidiary ledgers are examples of master files.
2 Data values in master files are updated from transactions. Transaction File A transaction file is a temporary file of transaction records used to change or update data in a master file. Sales orders, inventory receipts, and cash receipts are examples of transaction files. Reference File A reference file stores data that are used as standards for processing transactions. For example, the payroll program may refer to a tax table to calculate the proper amount of withholding taxes for payroll transactions. Other reference files include price lists used for preparing customer invoices, lists of authorized suppliers, employee rosters, and customer credit files for approving credit sales. Archive File An archive file contains records of past transactions that are retained for future reference. These transactions form an important part of the audit trail. Archive files include journals, prior-period payroll information, lists of former employees, records of accounts written off, and prior-period ledgers. Documentation Techniques Six basic documentation techniques: 1. Data flow diagrams 2. Entity relationship diagrams 3. Document flowcharts 4. System flowcharts 5. Program flowcharts 6. Record layout diagrams 1. The Data Flow Diagram (DFD) uses symbols to represent the entities, processes, data flows, and data stores that pertain to a system. DFDs are used to represent systems at different levels of detail from very general to highly detailed They represent sources of and destinations for data. Systems analysts use DFDs extensively to represent the logical elements of the system. This technique does not, however, depict the physical system. In other words, DFDs show what logical tasks are being done, but not how they are done or who (or what) is performing them.
2. Entity Relationship (ER) Diagrams is a documentation technique used to represent the relationship between entities. Entities are: o physical resources (automobiles, cash, or inventory) o events (ordering inventory, receiving cash, shipping goods), and o agents (salesperson, customer, or vendor) about which the organization wishes to capture data. The degree of the relationship, called cardinality, is the numerical mapping between entity instances. A relationship can be: o one-to-one (1:1) o one-to- many (1:M), or o many-to-many (M:M). If we think of entities in the ER diagram as files of records, cardinality is the maximum number of records in one file that are related to a single record in the other file and vice versa. Cardinality reflects normal business rules as well as organizational policy. System designers identify entities and prepare a model of them. This data model is the blueprint for what ultimately will become the physical database.
The two diagrams are related through data; each data store in the DFD represents a corresponding data entity in the ER diagram.
Flowcharts a graphical representation of a system that describes the physical relationships between its key entities. can be used to represent manual activities, computer processing activities, or both. A document flowchart is used to depict the elements of a manual system, including accounting records (documents, journals, ledgers, and files), organizational departments involved in the process, and activities (both clerical and physical) that are performed in the departments. A system flowcharts portray the computer aspects of a system. They depict the relationships between input (source) data, transaction files, computer programs, master files, and output reports produced by the system. It also describe the type of media being used in the system, such as magnetic tape, magnetic disks, and terminals.
3 The dichotomy (difference) between document flowcharts and system flowcharts reflects the dichotomy that traditionally existed between the manual and the computer aspects of an information system. Batch Processing Batch processing permits the efficient management of a large volume of transactions. A batch is a group of similar transactions (such as sales orders) that are accumulated over time and then processed together. Two general advantages to batch processing: 1. Organizations improve efficiency by grouping together large numbers of transactions into batches rather than processing each event separately. 2. Batch processing provides control over the transaction process. Implications for designing batch systems: 1. Economies are derived from having batches that are as large as possible. The cost of processing each transaction is reduced when the fixed costs of data processing are allocated across a large number of transactions. 2. Finding an error in a very large batch may prove difficult. Program Flow Chart Every program represented in a system flowchart should have a supporting program flowchart that describes its logic. Accountants sometimes use program flowcharts to verify the correctness of program logic. Program flowcharts provide essential details for conducting information technology (IT) audits 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. This type of layout shows the content of a record. Each data attribute and key field is shown in terms of its name and relative location.
Computer-Based Accounting Systems Two broad classes: 1. Batch systems 2. Real-time systems Distinguishing Feature between Batch systems and Real-time System: o Information Time Frame o Resources o Operational Efficiency Information time frame: o Batch System: Lag exists between time when the economic event occurs and when it is recorded. o Real time system: Processing takes place when the economic event occurs. Resources: o Batch system: Generally, fewer resources (hardware, programming, training) are required. o Real time system: More resources are required than for batch processing. Operational efficiency: o Batch system: Certain records are processed after the event to avoid operational delays. o Real time system: All records pertaining to the event are processed immediately. Alternative Data Processing Approaches Legacy Systems versus Modern Systems Updating master files from transactions Database back-up procedures Real-time processing Data Coding Schemes Data coding involves creating simple numeric or alphanumeric codes to represent complex economic phenomena that facilitate efficient data processing. Example: primary and secondary keys (data coding) a. A system WITHOUT codes b. A system WITH codes Other uses of data coding in AIS: 1. Concisely represent large amount of complex information that would otherwise be manageable. 2. Provide a means of accountability over the completeness of the transactions processed. 3. Identify unique transactions and account within a file.
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Support the audit function by providing an effective audit trail.
Numeric and Alphabetic Coding Schemes 1. Sequential Codes 2. Block Codes 3. Group Codes 4. Alphabetic Codes 5. Mnemonic Codes 1. Sequential Codes Represent items in some sequential order (ascending or descending) Common application: pre-numbering source documents These numbers become transaction numbers Advantages: 1. Supports reconciliation of a batch transactions 2. It alerts the management to the possibility of missing transactions Disadvantages: 1. Sequential codes carry no information content beyond their order in the sequence. 2. Difficult to change. 3. In applications where record types must be group together logically and where additions and deletions occur regularly, this coding scheme is inappropriate. 2. Block Codes A variation in sequential codes Partly remedies the disadvantages just described Common application: chart of accounts Advantage: 1. It allows for the insertion of new codes within a block without having to reorganize the entire coding structure. Disadvantage: 1. The information content of the block code is not readily apparent. 3. Group Codes (numeric) group codes are used to represent complex items or events involving two or more pieces of related data. Advantages: 1. They facilitate representation of large amounts of diverse data.
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They allow complex data structures to be represented in a hierarchal 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: 1. They tend to be overused 2. Increase storage cost 3. Promote clerical errors 4. Increase processing time and effort
4. Alphabetic Codes Used with the same purpose of the numeric codes May be assigned sequentially (alphabetical) or may be used in block and group coding techniques Advantage: 1. The capacity to represent large number of items (alphanumeric codes) Disadvantages: 1. With numeric codes, there is difficulty in rationalizing the meaning of codes that have been sequentially assigned 2. Users tend to have difficulty sorting records that are coded alphabetically 5. Mnemonic Codes Alphabetic in characters in a form of acronyms and other combinations that convey meaning Advantage: 1. Does not require the user to memorize meaning Disadvantage: 1. They have limited ability to represent items within a class
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