Chapter 2: Introduction to Transaction Processing ▪ general ledger - shows activity for each account

listed on the chart of accounts

A Financial Transaction is...
▪ subsidiary ledger - shows activity by detail for each
▪ an economic event that affects the assets and equities of the
account type
firm, is reflected in its accounts, and is measured in
monetary terms. EXPLANATION OF STEPS IN FIGURE:
▪ similar types of transactions are grouped together into three 1. Compare the AR balance in the balance sheet with the
transaction cycles: master file AR control account balance.
▪ the expenditure cycle 2. Reconcile the AR control figure with the AR subsidiary
account total.
▪ the conversion cycle
3. Select a sample of update entries made to accounts in the
▪ the revenue cycle
AR subsidiary ledger
Each Cycle has Two Primary Subsystems
and trace these to transactions in the sales journal (archive
▪ Expenditure Cycle: time lag between the two due to file).
credit relations with suppliers:
4. From these journal entries, identify source documents that
▪ physical component (acquisition of goods) can be pulled from their files and verified. If necessary,
confirm these source documents by contacting the
▪ financial component (cash disbursements to the customers.
supplier)
Audit Trail
▪ 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)
▪ Revenue Cycle: time lag between the two due to credit
relations with customers : Accountants should be able to trace in both directions.

▪ physical component (sales order processing) Sampling and confirmation are two common techniques.

▪ financial component (cash receipts) Example of Tracing an Audit Trail

Manual System Accounting Records Verifying Accounts Receivable

▪ 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 another
system
▪ Journals - a record of chronological entry
Computer-Based Systems
▪ special journals - specific classes of transactions
that occur in high frequency ▪ The audit trail is less observable in computer-based
systems than traditional manual systems.
▪ general journal - nonrecurring, infrequent, and
dissimilar transactions ▪ The data entry and computer programs are the physical
trail.
▪ Ledger - a book of financial accounts
▪ The data are stored in magnetic files.
Computer Files ▪ illustrate the relationship among processes and the
documents that flow between them
▪ Master File - generally contains account data (e.g.,
general ledger and subsidiary file) ▪ contain more details than data flow diagrams
▪ Transaction File - a temporary file containing ▪ clearly depict the separation of functions in a system
transactions since the last update
▪ Reference File - contains relatively constant information
Symbol Set for Representing Manual Procedures
used in processing (e.g., tax tables, customer
addresses)
▪ Archive File - contains past transactions for reference
purposes
Documentation Techniques
▪ Documentation in a CB environment is necessary for
many reasons.
▪ Five common documentation techniques:
▪ Entity Relationship Diagram
Flowchart Showing All Stated Facts Translated into
▪ Data Flow Diagrams Visual Symbols
▪ Document Flowcharts ▪ are used to represent the relationship between the key
elements--input sources, programs, and output
▪ System Flowcharts
products--of computer systems
▪ Program Flowcharts
▪ depict the type of media being used (paper, magnetic
Entity Relationship Diagram (ERD) tape, magnetic disks, and terminals)

▪ A documentation technique to represent the relationship ▪ in practice, not much difference between document and
between entities in a system. system flowcharts

▪ The REA model version of ERD is widely used in AIS. Symbol Set for Representing Computer Processes
REA uses 3 types of entities:
▪ resources (cash, raw materials)
▪ events (release of raw materials into the production
process)
▪ agents (inventory control clerk, vendor, production
worker)
Cardinalities
▪ Represent the numerical mapping between entities: Program Flowcharts…

▪ one-to-one illustrate the logic used in programs

▪ one-to-many
▪ many-to-many
Data Flow Diagrams (DFD)…
▪ use symbols to represent the processes, data sources,
data flows, and entities in a system
▪ represent the logical elements of the system
Modern Systems versus Legacy Systems
▪ do not represent the physical system
▪ Modern systems characteristics:
System Flowcharts…
 ▪ client-server based and process transactions in real Batch Processing
time
▪ A batch is a group of similar transactions that are
▪ use relational database tables accumulated over time and then processed together.
▪ have high degree of process integration and data ▪ The transactions must be independent of one another
sharing during the time period over which the transactions are
accumulated in order for batch processing to be
▪ some are mainframe based and use batch
appropriate.
processing
▪ A time lag exists between the event and the processing.
▪ Some firms employ legacy systems for certain aspects
of their data processing. Steps in Batch Processing/Sequential File
▪ Accountants need to understand legacy systems. ▪ Keystroke - source documents are transcribed by
clerks to magnetic tape for processing later
▪ Legacy systems characteristics:
▪ Edit Run - identifies clerical errors in the batch and
▪ mainframe-based applications
places them into an error file
▪ batch oriented
▪ Sort Run - places the transaction file in the same order
▪ early legacy systems use flat files for data storage as the master file using a primary key

▪ later legacy systems use hierarchical and network ▪ Update Run - changes the value of appropriate fields in
databases the master file to reflect the transaction

▪ data storage systems promote a single-user ▪ Backup Procedure - the original master continues to
environment that discourages information integration exist and a new master file is created

Record Structures for Sales, Inventory, and Accounts Advantages of Batch Processing
Receivable Files
▪ Organizations can increase efficiency by grouping
large numbers of transactions into batches rather than
processing each event separately.
▪ Batch processing provides control over the transaction
process via control figures.
Real-Time Systems…
▪ process transactions individually at the moment the
Database Backup Procedures economic event occurs
• Destructive updates leave no backup. ▪ have no time lag between the economic event and the
• To preserve adequate records, backup procedures must processing
be implemented, as shown below: ▪ generally require greater resources than batch
▪ The master file being updated is copied as a backup. processing since they require dedicated processing
capacity; however, these cost differentials are
▪ A recovery program uses the backup to create a pre- decreasing
update version of the master file.
▪ oftentimes have longer systems development time

Computer-Based Accounting Systems

▪ Two broad classes of systems:
▪ batch systems
▪ real-time systems
Why Do So Many AIS Use Batch Processing? • Disadvantages:
▪ AIS processing is characterized by high-volume, – arbitrary information
independent transactions, such are recording cash
receipts checks received in the mail. – overused

▪ The processing of such high-volume checks can be Alphabetic Codes

done during an off-peak computer time. ▪ Used for many of the same purposes as numeric codes
▪ This is one reason why batch processing maybe done ▪ Can be assigned sequentially or used in block and
using real-time data collection. group coding techniques
Uses of Coding in AIS ▪ May be used to represent large numbers of items
▪ Concisely represent large amounts of complex ▪ Can represents up to 26 variations per field
information that would otherwise be unmanageable
▪ Disadvantage:
▪ Provide a means of accountability over the
completeness of the transactions processed ▪ arbitrary information

▪ Identify unique transactions and accounts within a file Mnemonic Codes

▪ Support the audit function by providing an effective audit ▪ Alphabetic characters used as abbreviations, acronyms,
trail and other types of combinations

Sequential Codes ▪ Do not require users to memorize the meaning since the
code itself is informative – and not arbitrary
▪ Represent items in sequential order
▪ NY = New York
▪ Used to prenumber source documents
▪ Disadvantages:
▪ Track each transaction processed
▪ limited usability and availability
▪ Identify any out-of-sequence documents
▪ Disadvantages:
▪ arbitrary information
▪ hard to make changes and insertions
Block Codes
▪ Represent whole classes by assigning each class a
specific range within the coding scheme
▪ Used for chart of accounts
▪ The basis of the general ledger
▪ Allows for the easy insertion of new codes within a block
▪ Don’t have to reorganize the coding structure
▪ Disadvantage:
▪ arbitrary information
Group Codes
▪ Represent complex items or events involving two or
more pieces of data using fields with specific meaning
▪ For example, a coding scheme for tracking sales might
be 04-09-476214-99, meaning: