TPS(Transaction Processing System) – 3.

The Revenue Cycle - Firms sell their goods and services to

 all three TPS cycles capture financial transactions, customers through the revenue cycle, which involves
record the effects of transactions in accounting processing cash sales, credit sales, and the receipt of cash
records, and provide information about transactions following a credit sale
to users in support of their day-to-day activities. The primary subsystems of the revenue cycle:
 , transaction cycles produce much of the raw data Sales order processing. The majority of business sales are
from which management reports and financial made on credit and involve tasks such as preparing sales
statements are derived orders, granting credit, shipping products (or rendering of a
 Because of their financial impact on the firm, service) to the customer, billing customers, and recording the
transaction cycles command much of the transaction in the accounts (accounts receivable, inventory,
accountant’s professional attention expenses, and sales).
-TPS applications process financial transactions. Cash receipts. For credit sales, some period of time (days or
- A financial transaction is an economic event that affects the weeks) passes between the point of sale and the receipt of
assets and equities of the firm. cash. Cash receipts processing includes collecting cash,
- financial transaction: external parties (most common ft) & depositing cash in the bank, and recording these events in the
internal events accounts (accounts receivable and cash).
TRANSACTION CYCLEs: Accounting Records
1. The Expenditure Cycle - the acquisition of materials, MANUAL SYSTEM
property, and labor in exchange for cash. Documents- serve several purposes in transaction processing.
Most business-to-business (B2B) expenditure transactions are Documents may initiate transaction processing or be the
based on a credit relationship between the trading parties. output of a process.
The actual disbursement of cash takes place at some point 3 types of documents:
after the receipt of the goods or services. source documents, - documents at the beginning (the source)
this transaction has two parts: of the transaction. These are called source documents and
-a physical component (the acquisition of the goods or are used to capture and formalize transaction data that the
services) and transaction cycle uses for processing.
-a financial component (the cash disbursement to the product documents, - are the result of transaction processing
supplier). rather than the triggering mechanism for the process.
The primary expenditure cycle subsystems: turnaround documents- are product documents of one
Purchases/accounts payable (AP) system. This system system that become source documents for another system
recognizes the need to acquire physical inventory (such as Journals- a chronological record of financial transactions.
raw materials) two classes:
Cash disbursements system. When the obligation created in Special journals are used to record specific classes of
the purchases system becomes due, the cash disbursements transactions that occur in high volume.
system authorizes the payment Register- to denote certain types of special journals.
Payroll system. The payroll system collects labor usage data General journal to record nonrecurring, infrequent, and
for each employee, computes the payroll, and disburses dissimilar transactions.
paychecks to the employees. Conceptually, payroll is a Journal vouchers,- which are written authorizations
special-case purchases and cash disbursements system prepared for every transaction that meets the
Fixed asset system. A firm’s fixed asset system processes general journal requirements:
transactions pertaining to the acquisition, maintenance, and (1) a unique voucher number
disposal of its fixed assets. (2) transaction date
2. The Conversion Cycle - comprises two major subsystems: (3) transaction amount
the production system and the cost accounting system. The (4) ledger accounts to be updated
production system involves the planning, scheduling, and (5) signatures of individuals authorized to create
control of the physical product through the manufacturing A ledger - is a book of accounts that reflects the financial
process. effects of the firm’s transactions after they are posted from
The cost accounting system monitors the flow of cost the various journals and journal vouchers
information including labor, overhead, and raw materials - A ledger indicates the increases, decreases, and
related to production. current balance of each account. Organizations
use this information to prepare financial
 statements, support daily operations, and 1. Compare the AR balance in the balance sheet with the
prepare internal reports master file AR control account balance.
- Ledgers fall into two categories: 2. Reconcile the AR control figure with the AR subsidiary
(1) general ledgers, which contain the firm’s account total.
account information in the form of highly 3. Select a sample of updated entries made to accounts in the
summarized control accounts, and AR subsidiary ledger and trace these to transactions in the
(2) subsidiary ledgers, which contain the details sales journal (archive file).
that support a particular control account 4. From these journal entries, identify specific source
THE AUDIT TRAIL- The accounting records described documents that can be pulled from their files and verified. If
previously provide an audit trail for tracing account balances necessary, the auditor can confirm the accuracy and propriety
contained in the financial statements back to source of these source documents by contacting the customers in
documents and the economic events that created them question.
- confirmation. involves contacting selected
customers to determine if the transactions File Structures
recorded in the accounts actually took place and - Digital file structures and storage techniques
if customers agree with the recorded balance. vary widely among transaction processing
DIGITAL ACCOUNTING RECORDS systems. This is because no single structure
Modern accounting systems store data in four works well for all data processing tasks.
types of digital computer files: 2classes:
- A master file contains account data. The general - The flat-file model serves an environment
ledger and subsidiary ledgers are examples of where end users own their data files rather than
master files. share them with other users.
- A transaction file is a temporary file of - The flat-file approach is often associated with
transaction records used to update data in a so-called legacy systems, which are large
master file. mainframe systems that were commonplace in
- A reference file stores data that are used as the 1960s and 1970s but still exist today.
standards for processing transactions The data redundancy demonstrated in this example
- An archive file contains records of past contributes to three significant problems in the flat-file
transactions that are retained for future environment: data storage, data updating, and currency of
reference and form an important part of the information. These and other problems associated with flat
audit trail. files are discussed in the following sections.

The Digital Audit Trail Data Capture and Storage An efficient information system
- Audit trails among digital records are less captures and stores data only once and makes this single
source available to all users who need it. In the flat-file
observable than those between hard-copy
environment, this is not possible. To meet the private data
documents, but they still exist
needs of users, organizations must incur the costs of both
- We begin with the capture of the economic
multiple collection and multiple storage procedures. Some
event., The next step in this process is to convert
commonly used data may be duplicated dozens, hundreds, or
the source documents to digital form., The next
even thousands of times.
step is to update the various master file
subsidiary and GL control accounts that are
Data Updating
affected by the transaction. During the update
Organizations have stored data stored that require periodic
procedure, editing of transactions takes place to
updating to reflect changes. For example, a change to a
detect errors, Records that pass successfully
customer’s name or address must be reflected in all the
through editing are used to update the master
master files that contain those data. When users keep
files.
separate files, all changes must be made separately for each
evaluate the accuracy of the AR figure published in
user. This adds significantly to the task and the cost of data
the balance sheet could do so via the following
management.
steps:

Currency of Information
In contrast to the problem of performing multiple updates is noteworthy point to make here is that the data are stored in
the problem of failing to update all the user files affected by a the most granular format rather than being shaped and
change in status. If update information is not properly configured to the needs of any single user. Access to the data
disseminated, changes will not be reflected in some users’ resource is controlled by a database management system
data, resulting in actions and decisions based on outdated (DBMS). The DBMS is a software system that permits users to
information. access authorized data only. The user’s application program
sends requests for data to the DBMS, which validates and
Task-Data Dependency authorizes access to the database in accordance with the
Another problem with the flat-file approach is the user’s user’s access privileges. If the user requests data that he or
inability to obtain additional information as his or her needs she is not authorized to access, the request is denied. Clearly,
change. This problem is called task-data dependency. The the organization’s procedures for assigning user authority is
user’s information set is constrained by the data that he or an important control issue for auditors to consider. The most
she possesses and controls. In such an environment, striking difference between the database model and the flat-
establishing a mechanism for the formal sharing of data is file model is the pooling of data into a common database that
difficult because users act independently rather than as all organizational users share. With access to the full domain
members of a user community. Therefore, new information of entity data, changes in user information needs can be
needs tend to be satisfied by procuring new data files. This satisfied without obtaining additional private data sets. Users
takes time, inhibits performance, adds further to data are constrained only by the limitations of the data available to
redundancy, and drives data management costs even higher. the entity and the legitimacy of their need to access it.
Through data sharing, the traditional problems associated
Flat Files Limit Data Integration with flat-file systems described previously can be eliminated.
The flat-file approach is a single-user-view model. Files are We devote Chapters 9 and 10 to a detailed examination of
structured, formatted, and arranged to suit the specific needs the relational database model and the process and control
of the owner or primary user of the data. Such structuring, issues unique to it. Until then, to simplify discussion in the
however, may exclude data needed by other users, thus transaction processing chapters that follow, we make no
preventing successful integration of data across the references to the specific file technology that may be used in
organization. For example, because the accounting function is the systems presented. The specific file structure employed,
the primary user of accounting data, these data are often whether flat file or databases, is for the most part irrelevant
captured, formatted, and stored to accommodate financial to the process and control issues that are the focus of those
reporting and generally accepted accounting principles chapters. Instead, we will refer to digital data files in generic
(GAAP). This structure, however, may be useless to the terms such as AR subsidiary ledger, Accounts Payable Control,
organization’s other (nonaccounting) users of accounting data and Customer Order file. Similarly, the digital data storage
such as the marketing, finance, production, and engineering symbols depicted in system flowcharts that follow in this
functions. These users are presented with three options: (1) chapter and in subsequent chapters represent generic data
do not use accounting data to support decisions, (2) files.
manipulate and massage the existing data structure to suit
their unique needs, or (3) obtain additional private sets of the Documentation Techniques
data and incur the costs and operational problems associated The old saying that a picture is worth a thousand words is
with data redundancy. In spite of these inherent limitations, very applicable when it comes to documenting accounting
some organizations still make limited use of flat files in their information systems. A written description of a system can be
older legacy systems wordy and difficult to follow. Experience shows that visual
images convey vital system information more effectively and
THE DATABASE MODEL efficiently than words. Accountants use system
documentation routinely, as both systems designers and
Organizations have overcome some of the problems auditors. The ability to document systems in graphic form is
associated with flat files by implementing the database model therefore an important skill for accountants to master. Five
to data management. Figure 2-13 illustrates how this basic documentation techniques are introduced in this
approach centralizes the organization’s data into a common section: data flow diagrams, entity relationship diagrams,
database that is shared by other users. With the system flowcharts, program flowcharts, and record layout
organization’s data in a central location, all users have access diagrams.
to the data they need to achieve their respective objectives. A
DATA FLOW DIAGRAMS AND ENTITY RELATIONSHIP process, which compliance with internal control objectives
DIAGRAMS Two commonly used systems design and would require.
documentation techniques are the data flow diagram and the
entity relationship diagram. This section introduces the Entity Relationship Diagrams An entity relationship (ER)
principal features of these techniques, illustrates their use, diagram is a documentation technique used to represent the
and shows how they are related. relationship between business entities. In this context, the
term entity applies to anything about which the organization
Data Flow Diagrams The data flow diagram (DFD) uses captures data. An entity may be a physical resource
symbols to represent the entities, processes, data flows, and (automobile, cash, or inventory), an event (customer order,
data stores that pertain to a system. Figure 2-14 presents the purchase inventory, or receive payment), or an agent
most commonly used symbol set. DFDs are used to represent (salesperson, customer, or vendor). One common use for ER
systems at different levels of detail from very general to diagrams is to model an organization’s database, which we
highly detailed. In Chapter 13, we will study the construction examine in detail in Chapters 9 and 10. Figure 2-16 shows the
of multilevel DFDs. At this point, a singlelevel DFD is sufficient symbol set used in an ER diagram. The square symbol
to demonstrate its role as a documentation tool. Figure 2-15 represents entities in the system. The labeled connecting line
provides an example of this. Entities in a DFD represent represents the nature of the relationship between two
objects that lie outside the system being modeled. They are entities. The degree of the relationship, called cardinality, is
the sources of and destinations for data. These may be other the numeric mapping between entities such as one-to-one
interfacing systems or entities external to the organization. As (1:1), one-to-many (1:M), and many-to-many (M:M).2
a matter of convention, entities are labeled as singular nouns Cardinality reflects normal business rules as well as
on a DFD, such as customer and supplier. Data stores organizational policy. For instance, the 1:1 cardinality in the
represent the accounting files and records used in each first example in Figure 2-16 suggests that each salesperson in
process, and the labeled arrows represent data flows the organization is assigned one automobile. If instead the
between processes, data stores, and entities. Processes in the organization’s policy were to assign a single (one) automobile
DFD should be labeled with a descriptive verb such as Review to more than one (many) salespersons who share it, this
Inventory Levels, Prepare Purchase Order, Receive Customer policy would be reflected by a 1:M relationship. Similarly, the
Order, and Update Accounts Receivable. Processes should not M:M relationship between vendor and inventory in Figure 2-
be represented as nouns like Inventory Warehouse, 16 implies that the organization buys the same type of
Purchases Dept., and Sales Dept. The arrows connecting the products from one or more vendors. A company policy to buy
DFD objects should be labeled to represent specific flows of particular items from a single vendor only would be
data such as Inventory Requisition, Purchase Order, and Sales represented by a 1:M cardinality. System designers identify
Order. In addition, each data flow label should be uniquely organization entities and prepare a model of them, similar to
named; the same label should not be attached to two the one presented in Figure 2-17. This data model is the
different flow lines in the same DFD. When data flow into a blueprint for what ultimately will become the physical
process and out again (to another process), the data have, in database. The data model presented in our example is not,
some way, been changed. This is true even if the data have however, sufficiently refined to be the plan for a workable
not been physically altered. For example, consider the database. Constructing a realistic data model is an advanced
approval process for a purchase order: A purchase order topic that involves understanding and applying techniques
flows into the process, is reviewed for correctness, is and rules that are presented in Chapters 9 and 10.
approved, and flows out to the next process. While physically
the same document, the approved purchase order (PO) is Relationship between ER Diagrams and DFDs
different, as a matter of information content, from the DFDs and ER diagrams document different aspects of
unapproved PO that entered the process. Otherwise, the systems, but they are related. DFDs model system processes
process serves no purpose. Systems analysts use DFDs while ER diagrams model the data used in systems. Each data
extensively to represent the logical elements of the system. store in a DFD is represented as an entity in a corresponding
This technique does not, however, depict the physical system. ER diagram. Figure 2-17 presents the ER diagram for the DFD
In other words, DFDs show what logical tasks are being in Figure 2-15.
performed but not how they are performed or who (or what)
is performing them. For example, the DFD in Figure 2-15 does SYSTEM FLOWCHARTS A system flowchart is the graphical
not show whether the Review Inventory Levels process is representation of the physical relationships among key
separated physically from the Prepare Purchase Order elements of a system. These elements may include
organizational departments, manual activities, computer
programs, hard-copy accounting records (documents, TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT. At
journals, ledgers, and files), and digital records (reference this point, we are ready to start visually representing the
files, transaction files, archive files, and master files).3 System system facts. The symbols used for this purpose will be
flowcharts also describe the physical computer media being selected from the set presented in Figure 2-19.
employed in the system, such as magnetic tape, magnetic
disks, and terminals. The flowcharting examples in the Figure 2-20 illustrates how this fact is represented. The
following sections illustrate techniques for representing both customer is the source of the order but is not part of the
manual activities and computer processes. We begin by system. The oval object is typically used to convey a data
documenting manual activities and will add computer source or destination that is separate from the system being
processes to the system later. flowcharted. The document symbol entering the sales
department signifies the hard-copy customer order and is
Flowcharting Manual Activities To demonstrate the labeled accordingly. The bucket-shaped symbol represents a
flowcharting of manual activities, let’s assume that an auditor manual process. In this case, the clerk in the sales department
needs to flowchart a sales order system to evaluate its prepares four copies of the sales order. Notice that the clerk’s
internal controls and procedures. The auditor will begin by task, not the clerk, is depicted. The arrows between the
interviewing individuals involved in the sales order process to objects show the direction of flow and the sequence of
determine what they do. This information will be captured in events. By transcribing each fact in this way, we
a set of written facts similar to those discussed further in the systematically construct a flowchart. See how the second and
text. Keep in mind that the purpose here is to demonstrate third facts restated further in the text add to the flowchart in
flowcharting. Therefore, for clarity, the system facts are Figure 2-21.
intentionally simplistic.
Two new symbols are introduced in this figure. First, the
Based on these facts, the auditor can create a flowchart of inverted triangle symbol represents the temporary file
this partial system. It is important to note that flowcharting is mentioned in Fact 2. This is a physical file of paper documents
as much an art form as it is a technical skill, giving the such as a drawer in a filing cabinet or desk. Such files are
flowchart author a great deal of license. Nevertheless, the typically arranged according to a specified order. To signify
primary objective should be to provide an unambiguous the filing system used, the file symbol will usually contain an
description of the system. With this in mind, certain rules and “N” for numeric (invoice number), “C” for chronological
conventions need to be observed: (date), or “A” for alphabetic order (customer name). Second,
1. The flowchart should be labeled to clearly identify the the parallelogram shape represents the credit records
system that it represents. mentioned in Fact 3. This symbol is used to depict many types
2. The correct symbols should be used to represent the of hard-copy accounting records, such as journals, subsidiary
various entities in the system. ledgers, general ledgers, and shipping logs.
3. All symbols on the flowchart should be labeled.
4. Lines should have arrowheads to clearly show the process The completed flowchart is presented in Figure 2-22. Notice
flow direction and sequence of events. the circular symbol labeled “A.” This is an on-page connector
5. If complex processes need additional explanation for used to replace flow lines that otherwise would cause
clarity, a text description should be included on the flowchart excessive clutter on the page. In this instance, the connector
or in an attached document referenced by the flowchart replaces the lines that signify the movement of Copies 3 and
4 from the sales department to the shipping department.
LAY OUT THE PHYSICAL AREAS OF ACTIVITY. Remember that Lines should be used whenever possible to promote clarity.
a flowchart reflects the physical system, which is represented Restricted use of connectors, however, can improve the
as vertical columns of events and actions separated by lines readability of the flowchart. Notice also that the physical
of demarcation. Generally, each of these areas of activity is a products or goods mentioned in Fact 5 are not shown on the
separate column with a heading. From the written system flowchart. The document (Copy 2) that accompanies and
facts, we see that there are four distinct areas of activity: controls the goods, however, is shown. Typically, a system
sales department, credit department, warehouse, and flowchart shows only the flow of documents, not physical
shipping department. The first step in preparing the flowchart assets. Finally, for visual clarity, system flowcharts show the
is to lay out these areas of activity and label each of them. processing of a single transaction only. You should keep in
This step is illustrated in Figure 2-18. mind, however, that transactions may flow through a system
in batches (groups) rather than as single events. Batch Figure 2-25 how this computer activity is represented; the
processing involves gathering together large numbers of warehouse PC is a stand-alone computer system that is not
similar transactions and processing them as a single unit of networked into the computer operations department like the
work. This provides for certain operational efficiencies that terminal in the sales department. The PC, the stock record
are discussed in a later section of this chapter. update program, and the stock records themselves are all
physically located in the warehouse. As with manual
Flowcharting Computer Processes We now examine procedures, when documenting computer operations, the
flowcharting techniques to represent a system that employs flowchart author must accurately represent the physical
both manual and computer processes. The symbol set used to arrangement of the system components. As we will see in
construct this system flowchart will come from both The later chapters, the physical arrangement of system
flowcharting process begins by creating a template that components (both manual and computer) often plays an
depicts the areas of activity similar to the one shown in Figure important role in the auditor’s assessment of internal control.
2-18. The differences in this case are that this system has a Finally, Fact 6 describes how the shipping department clerk
computer operations department and does not have a credit reconciles the goods with the supporting documents, sends
department. the goods and the packing slip to the customer, updates the
shipping log, and files two copies of the sales order. This is
TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT. As entirely a manual operation, as evidenced by the symbols in
with the manual system example, the next step is to Figure 2-25. Note that the shipping log uses the same symbol
systematically transcribe the written facts into visual objects. that is used for representing journals and ledgers
Figure 2- 24 illustrates how Facts 1, 2, and 3 translate visually.
The customer, customer order, and file symbols in this PROGRAM FLOWCHARTS The system flowchart in Figure 2-25
flowchart are the same as in the previous example. The sales shows the relationship between computer programs, the files
clerk’s activity, however, is now automated, and the manual they use, and the outputs they produce. This high-level
process symbol has been replaced with a computer terminal documentation, however, does not provide all the
symbol. Also, because this is a data-input operation, the operational details that are sometimes needed. For example,
arrowhead on the flowchart line points in the direction of the an auditor wishing to assess the correctness of the edit
edit and credit check program. If the terminal was also used program’s logic cannot do so from the system flowchart. This
to receive output (the facts do not specify such an operation), requires a program flowchart. The symbol set used for
arrowheads would be on both ends of the line. Recall that the program flowcharts is presented in Figure 2-26
emphasis in flowcharting is on the physical system. For
example, the terminal used by the sales clerk to enter Every program represented in a system flowchart should have
customer orders is physically located in the sales department, a supporting program flowchart that describes its logic. Figure
but the programs that process the transactions and the files 2-27 presents the logic of the edit program shown in Figure 2-
that it uses and updates are stored in a separate computer 28. A separate symbol represents each step of the program’s
operations department. Notice how the flow line points from logic, and each symbol represents one or more lines of
the credit history file to the edit program. This indicates that computer program code. The connector lines between the
the file is read (referenced) but not changed (updated) by the symbols establish the logical order of execution. Tracing the
program. In contrast, the interactions between the update flowchart downward from the start symbol, we see that the
program and the AR and inventory files are in the opposite program performs the following logical steps in the order
direction. The relevant records in these files have been listed:
changed to reflect the transactions. The file update process is 1. The program retrieves a single record from the unedited
explained later in the chapter. Let’s now translate the transaction file and stores it in memory.
remaining facts into visual symbols. Fact 4 states that the 2. The first logical test is to see if the program has reached
update program produces three hard-copy documents in the the end-of-file (EOF) condition for the transaction file. Most
computer operations department, which are then distributed file structures use a special record or marker to indicate an
to the warehouse and shipping departments. The translation EOF condition. When EOF is reached, the edit program will
of this fact is illustrated in Figure 2-25. terminate and the next program in the system (in this case,
the update program) will be executed. As long as there is a
Fact 5 states that the warehouse clerk updates the stock record in the unedited transaction file, the result of the EOF
records on the department PC and then sends the physical test will be “no,” and process control is passed to the next
inventory and Copy 1 to the shipping department. Notice on logical step in the edit program.
3. Processing involves a series of tests to identify certain which an economic event occurs and the point at which it is
clerical and logical errors. Each test, represented by a processed by the system and reflected in the firm’s accounts.
decision symbol, evaluates the presence or absence of a The length of lag (minutes or weeks) depends on the
condition. For example, an edit test could be to detect the frequency of batch processing. For example, payroll
presence of alphabetic data in a field that should contain only processing is typically a batch system with long lag times. The
numeric data. We examine specific edit and validation tests in economic events—the application of employee labor—occur
Chapter 3. continuously throughout the pay period. At the end of the
4. Error-free records are sent to the edited transaction file. period (a week or a month), the paychecks for all employees
5. Records containing errors are sent to the error file. are prepared together as a batch. On the other hand, real-
6. The program loops back to Step 1, and the process is time systems process transactions individually at the moment
repeated until the EOF condition is reached the event occurs; therefore, no time lags exist between
occurrence and processing. An example of real-time
Accountants sometimes use program flowcharts to verify the processing is an airline reservation system, which processes
correctness of program logic. They compare flowcharts to the transactions of one traveler at a time while he or she waits.
actual program code to determine whether the program is
actually doing what the documentation describes. Program Resources Generally, batch systems demand fewer
flowcharts provide essential details for conducting IT organization resources (such as programming costs, computer
application audits, which we examine in Chapter 16. time, and user training) than real-time systems. For example,
because the programming logic of batch systems is generally
RECORD LAYOUT DIAGRAMS Record layout diagrams are simpler than that of equivalent real-time systems, they tend
used to reveal the internal structure of digital records in a to have shorter development periods and are easier for
flat-file or database table. The layout diagram usually shows programmers to maintain. On the other hand, a large portion
the name, data type, and length of each attribute (or field) in of total programming costs for real-time systems are incurred
the record. Detailed data structure information is needed for in designing user interfaces. Real-time systems must be user-
such tasks as identifying certain types of system failures, friendly, forgiving, and easy to work with. Pop-up menus,
analyzing error reports, and designing tests of computer logic online tutorials, and special help features require additional
for debugging and auditing purposes. A simpler form of programming and add to the cost of the system. In addition,
record layout, shown in Figure 2- 29, suits our purposes best. real-time systems require dedicated processing capacity
This type of layout shows the content of a record. because they must deal with transactions as they occur. Some
Each data attribute and key field is shown in terms of its real-time systems need to be available 24 hours a day
name and relative location in the record. whether they are being used or not. The computer capacity
dedicated to such systems cannot beused for other purposes.
Transaction Processing Models Thus, implementing a real-time system may require either the
This section in the chapter examines alternative transaction purchase of a dedicated computer or an investment in
processing models, which fall broadly into two types: (1) additional computer capacity. In contrast, batch systems use
batch processing and (2) real-time processing. Batch computer capacity only when the program is being run. When
processing involves gathering transactions into groups or the batch job completes processing, the freed capacity can be
batches and then processing the entire batch as a single reallocated to other applications.
event. Real-time processing systems process individual
transactions continuously as they occur. Many systems Operational Efficiency Real-time processing of large volumes
incorporate both real-time and batch processing features. of transactions can create operational inefficiencies. A single
Systems designers base their configuration choices on a transaction may affect several different accounts. Some of
variety of considerations. Table 2-1 summarizes some of the these accounts, however, may not need to be updated in real
distinguishing characteristics of batch and real-time time, and the task of doing so takes time that, when
processing that feature prominently in these decisions. multiplied by thousands of transactions, can cause significant
processing delays. Batch processing of noncritical accounts,
DIFFERENCES BETWEEN BATCH AND REAL-TIME SYSTEMS however, improves operational efficiency by eliminating
Information Time Frame unnecessary activities at critical points in the process.

Because batch systems assemble transactions into groups for Efficiency versus Effectiveness In selecting a transaction
processing, a time lag will always exist between the point at processing mode, the designer must consider the trade-off
between efficiency and effectiveness. When immediate If the current master file becomes corrupted or is destroyed,
access to current information is critical to the user’s needs, corporate IT professionals can retrieve the most current
real-time processing is the logical choice. When time lags in backed-up file from the archives and use it to reconstruct the
information have no detrimental effects on the user’s current version of the master file. Backup procedures will
performance, and operational efficiencies can be achieved by vary depending on whether batch or real-time processing is
processing data in batches, batch processing may be the best being used. File backup is an important IT control issue that
choice. we examine in Chapter 3.
UPDATING MASTER FILES FROM TRANSACTIONS Whether
batch or real-time processing is being used, updating a master BATCH PROCESSING USING REAL-TIME DATA COLLECTION
file record involves changing the value of one or more of its A popular data processing approach, particularly for large
variable fields to reflect the effects of a transaction. Figure 2- operations, is to digitally capture and process aspects of the
30 presents record structures for a sales order transaction file transaction at the source as they occur, and process other
and two associated master files, AR subsidiary ledger and aspects of the transaction in batch mode. Figure 2-31
inventory subsidiary ledger. The primary key (PK)—the unique illustrates this approach with a sales order system such as
identifier— for the inventory file is INVENTORY NUMBER. The that used in a department store. Note that although only one
primary key for AR is ACCOUNT NUMBER. Notice that the sales department is represented in the system flowchart,
record structure for the sales order file contains a primary key such a system could have dozens or even hundreds of sales
(SALES ORDER NUMBER) and two secondary key (SK) fields, locations all connected to the same central system. Key steps
ACCOUNT NUMBER and in the process are the following:
• The sales department clerk captures customer sales data
INVENTORY NUMBER. These secondary keys are used for pertaining to the item(s) being purchased and the customer’s
locating the corresponding records in the master files. To account.
simplify the example, we assume that each sale is for a single • The system then checks the customer’s credit limit from
item of inventory only.4 The update procedure in this data in the customer record (account receivable subsidiary
example involves the following steps: file) and updates his or her account balance to reflect the
amount of the sale.
1. The computer update program reads a sales order record. • Next the system updates the quantity-on-hand field in the
2. ACCOUNT NUMBER is used to search the AR master file inventory record (inventory subsidiary file) to reflect the
and retrieve the corresponding AR record. reduction in inventory. This provides up-to-date information
3. The update program calculates the new customer balance to other clerks as to inventory availability.
by adding the value stored in the INVOICE AMOUNT field of • A record of the sale is then added to the sales order file
the sales order record to the CURRENT BALANCE field value in (transaction file), which is processed in batch mode at the
the AR master record. end of the business day. This batch process records each
4. Next, INVENTORY NUMBER is used to search for the transaction in the sales journal and updates the affected
corresponding record in the inventory master file. general ledger accounts.
5. The update program reduces inventory levels by deducting
the QUANTITY SOLD value in a transaction record from the You may be wondering at this point why the sales journal
QUANTITY ON HAND field value in the inventory record. and general ledger accounts are being processed in batch
6. A new sales order record is read, and the process is mode. Why not update them in real time along with the
repeated. subsidiary accounts? The answer is to achieve operational
efficiency by avoiding potential processing delays. We
Master File Backup Procedures examine this issue next.
Master file backup is a standard procedure in transaction
processing systems to maintain master file integrity in the Assume that an organization employs a high volume sales
event that any of the following problems should occur: order system, similar to the one in Figure 2-31, which is
1) An update program error corrupts the master files being capable of processing thousands of concurrent transactions
updated. from distributed terminals throughout its many large
2) Undetected errors in the transaction data result in departments. Each customer sales transaction will affect a
corrupted master file balances. change in the following six accounting records:
3) A disaster such as a fire or flood physically destroys current • Customer account receivable (Subsidiary unique to the
master files. customer)
• Inventory item (Subsidiary almost unique) processes wait for the locks to be removed by the other. For
• Inventory control (GL common to all customers) example, assume process #1 has a lock on the AR Control—GL
• Account receivable control (GL common) • Sales (GL record, process #2 has a lock on the Sales—GL record,
common) process #3 has a lock on the Inventory Control—GL record,
• Cost of goods sold (GL common) and process #4 has a lock on the CGS—GL record. None of
these processes can finish updating the GL accounts to
To maintain the integrity of accounting data, once a complete their transactions. This situation creates a standoff
particular record is accessed for updating, it is locked by the that can bring processing to a halt because a deadlock will
system and made unavailable to other processes (customer never resolve itself without outside intervention. Typically
transactions) until the current process is complete. Using the after a period of time when the deadlock is detected, the
six records here as an example, consider the implications that system will terminate the transactions that are furthest from
this data-locking rule has on the customers using the system. completion and make them restart.

When processing a customer AR subsidiary record, the rule To avoid these problems and to achieve internal control
has no implications for other users of the system. Each user benefits associated with batch processing (discussed in
accesses only his or her unique record. For example, Chapter 3), general ledger accounts are often updated
accessing John Smith’s account does not prevent Mary Jones periodically in batch mode. Batch processing may be
from accessing her account. Updating the inventory performed as end-of-day procedures or more frequently
subsidiary record is almost unique. Because it is possible, throughout the day.
however, that both Mary Jones and John Smith are
independently purchasing the same item at the same time, REAL-TIME PROCESSING
Mary Jones may be kept waiting a few seconds until John
Smith’s transaction releases the lock on the inventory Real-time systems process the entire transaction as it occurs.
account, but such rare conflicts will be of little inconvenience For example, a sales order processed by the system in Figure
to customers. In general, therefore, master file records that 2-32 can be captured, filled, and shipped the same day. Such
are unique to a transaction such as customer accounts and a system has many potential benefits, including improved
individual inventory records may be updated in real time productivity, reduced inventory, increased inventory
without causing operational delays. turnover, decreased lags in customer billing, and enhanced
customer satisfaction. Because transaction information is
In high-volume data processing systems, however, updating transmitted electronically, physical source documents can be
general ledger records in real time may cause data access eliminated or greatly reduced. Real-time processing is well
delays. The general ledger accounts listed earlier are common suited to systems that process lower transaction volumes and
to all the customer transactions being processed by the those that do not share common records. These systems
system and would need to be updated by each transaction make extensive use of local area network and wide area
before it can be completed. If the processing of John Smith’s network technology. Terminals at distributed sites
transaction in real time begins before that of Mary Jones, throughout the organization are used for receiving,
then she will wait only a few seconds until all four general processing, and sending information on the status of current
ledger records have been updated before her transaction can transactions. These are linked in a network arrangement so
proceed. This short delay time, however, when multiplied by users can communicate. The operational characteristics of
hundreds or thousands of users who are processing networks are examined in Chapter 12.
transactions simultaneously, can result in long delays for
customers whose transactions are placed on hold until they Data Coding Schemes
can access the GL accounts needed to complete the process.
Data coding involves creating simple numeric or alphabetic
Also, depending on how record locks are assigned by the codes to represent complex economic phenomena that
system, a disruptive condition called a deadlock may result. facilitate efficient data processing. In Figure 2-30, for
This happens when one process places a lock on one or more example, we saw how the secondary keys of transaction file
of the records it needs for processing, but has not locked all records are linked to the primary keys of master file records.
of them. At the same time, a second process places a lock on The secondary and primary keys in the example are instances
the remaining record(s) needed by the first. Neither of data coding. In this section, we explore several data coding
transaction can be completed; they are in a deadlock as both schemes and their application in AIS. To emphasize the
importance of data codes, we first consider a hypothetical
system that does not use them. A SYSTEM WITH CODES These problems are solved, or at
least greatly reduced, by using codes to represent each item
A SYSTEM WITHOUT CODES in the inventory and supplier accounts. Let’s assume the
Business organizations process large volumes of transactions inventory item in our previous example had been assigned
that are similar in their basic attributes. For instance, a firm’s the numeric code 896, and the supplier in the AP account is
AR file may contain accounts for several different customers given the code number 321.
with the same name and similar addresses. To process
transactions accurately against the correct accounts, the firm This is not to suggest that detailed information about the
must be able to distinguish one John Smith from another. This inventory and the supplier is of no interest to the
task becomes particularly difficult as the number of similar organization. Obviously it is! These facts will be kept in
attributes in an item class increases. reference files and used for such purposes as the preparation
of parts lists, catalogs, bills of material, and mailing
Consider the most elemental item that a machine shop information. The inclusion of such details, however, would
wholesaler firm might carry in its inventory—a machine nut. clutter the task of transaction processing and could prove
Assume that the total inventory of nuts has only three dysfunctional, as this simple example illustrates. Other
distinguishing attributes: size, material, and thread type. As a advantages of data coding in AIS are:
result, this entire item class of inventory must be 1. Concisely representing large amounts of complex
distinguished on the basis of these three features, which are information that would otherwise be unmanageable.
as follows: 2. Providing a means of accountability over the completeness
of the transactions processed.
1. The size attribute falls within a range of ¼ inch to 1¾ inches 3. Identifying unique transactions and accounts within a file.
in diameter in increments of 1 64 of an inch, giving 96 nut 4. Supporting the audit function by providing an effective
sizes. audit trail. The following discussion examines some of the
2. For each size subclass, four materials are available: brass, more commonly used coding techniques and explores their
copper, mild steel, and casehardened steel. respective advantages and disadvantages.
3. Each of these size and material subclasses come in three
different threads: fine, standard, and coarse. NUMERIC AND ALPHABETIC CODING SCHEMES

Under these assumptions, this class of inventory could Sequential Codes

contain 1,152 separate items (96 × 4 × 3). The identification of As the name implies, sequential codes represent items in
a single item in this class thus requires a description featuring some sequential order (ascending or descending). A common
these distinguishing attributes. To illustrate, consider the application of numeric sequential codes is the prenumbering
following journal entry to record the receipt of $1,000 worth of source documents. At printing, each hard-copy document
of half-inch, case-hardened steel nuts with standard threads is given a unique sequential code number. This number
supplied by Industrial Parts Manufacturer of Cleveland, Ohio. becomes the transaction number that allows the system to
track each transaction processed and to identify any lost or
This uncoded entry takes a great deal of recording space, is out-of-sequence documents. Digital documents are similarly
time-consuming to record, and is obviously prone to many assigned a sequential number by the computer application
types of errors. The negative effects of this approach may be when they are created.
seen in many parts of the organization:
1. Sales staff. Properly identifying the items sold requires the ADVANTAGES.
transcription of large amounts of detail onto source Sequential coding supports the reconciliation of a batch of
documents. Apart from the time and effort involved, this transactions, such as sales orders, at the end of processing. If
tends to promote clerical errors and incorrect shipments. the transaction processing system detects any gaps in the
2. Warehouse personnel. Locating and picking goods for sequence of transaction numbers, it alerts management to
shipment are impeded and shipping errors will likely result. the possibility of a missing or misplaced transaction. By
3. Accounting personnel. Postings to ledger accounts will tracing the transaction number back through the stages in the
require searching through the subsidiary files using lengthy process, management can eventually determine the cause
descriptions as the key. This will be painfully slow, and and effect of the error. Without sequentially numbered
postings to the wrong accounts will be common.
documents, problems of this sort are difficult to detect and
resolve. Group Codes
DISADVANTAGES. Numeric group codes are used to represent complex items or
Sequential codes carry no information content beyond their events involving two or more pieces of related data. The code
order in the sequence. For instance, a sequential code consists of zones or fields that possess specific meaning.
assigned to a raw material inventory item tells us nothing ADVANTAGES.
about the attributes of the item (type, size, material, Group codes have a number of advantages over sequential
warehouse location, etc.). Also, sequential coding schemes and block codes.
are difficult to change. Inserting a new item at some midpoint 1. They facilitate the representation of large amounts of
requires renumbering the subsequent items in the class diverse data.
accordingly. In applications where record types must be 2. They allow complex data structures to be represented in a
grouped together logically and where additions and deletions hierarchical form that is logical and more easily remembered
occur regularly, this coding scheme is inappropriate. by humans.
3. They permit detailed analysis and reporting both within an
Block Codes A numeric block code is a variation on sequential item class and across different classes of items.
coding that partly remedies the disadvantages just described. Using the previous example to illustrate, Store Number 04
This approach can be used to represent whole classes of could represent the Hamilton Mall store in Allentown; Dept.
items by restricting each class to a specific range within the Number 09 represents the sporting goods department; Item
coding scheme. A common application of block coding is the Number 476214 is a hockey stick; and Salesperson 99 is Jon
construction of a chart of accounts. Innes. With this level of information, a corporate manager
A well-designed and comprehensive chart of accounts is the could measure profitability by store, compare the
basis for the general ledger and is thus critical to a firm’s performance of similar departments across all stores, track
financial and management reporting systems. The more the movement of specific inventory items, and evaluate sales
extensive the chart of accounts, the more precisely a firm can performance by employees within and between stores.
classify its transactions and the greater the range of DISADVANTAGES.
information it can provide to internal and external users. Ironically, the primary disadvantage of group coding results
Figure 2-33 shows an example of accounts using block codes. from its success as a classification tool. Because group codes
Notice that each account type is represented by a unique can effectively present diverse information, they tend to be
range of codes or blocks. Thus, balance sheet and income overused. Unrelated data may be linked simply because it can
statement account classifications and subclassifications can be done. This can lead to unnecessarily complex group codes
be presented. In this example, each of the accounts consists that cannot be easily interpreted. Finally, overuse can
of a three-digit code. The first digit is the blocking digit and increase storage costs, promote clerical errors, and increase
represents the account classification; for example, current processing time and effort.
assets, liabilities, and operating expense. The other digits in
the code are sequentially assigned. Alphabetic Codes
ADVANTAGES. Alphabetic codes are used for many of the same purposes as
Block coding allows for the insertion of new codes within a numeric codes. Alphabetic characters may be assigned
block without having to reorganize the entire coding sequentially (in alphabetic order) or may be used in block and
structure. For example, if advertising expense is account group coding techniques. ADVANTAGES.
number 626, the first digit indicates that this account is an The capacity to represent large numbers of items is increased
operating expense. As new types of expense items are dramatically through the use of pure alphabetic codes or
incurred and have to be specifically accounted for, they may alphabetic characters embedded within numeric codes
be added sequentially within the 600 account classification. (alphanumeric codes). The earlier example of a chart of
This three-digit code accommodates 100 individual items accounts using a three-digit code with a single blocking digit
(X00 through X99) within each block. Obviously, the more limits data representation to only 10 blocks of accounts—0
digits in the code range, the more items that can be through 9. Using alphabetic characters for blocking, however,
represented. DISADVANTAGES. increases the number of possible blocks to 26—A through Z.
As with the sequential codes, the information content of the Furthermore, while the two-digit sequential portion of that
block code is not readily apparent. For instance, account code has the capacity of only 100 items (102 ), a twoposition
number 626 means nothing until matched against the chart alphabetic code can represent 676 items (262 ). Thus, by
of accounts, which identifies it as advertising expense. using alphabetic codes in the same three-digit coding space,
we see a geometric increase in the potential for data
representation:
DISADVANTAGES. The primary drawbacks with alphabetic
coding are
(1) as with numeric codes, there is difficulty rationalizing the
meaning of codes that have been sequentially assigned, and
(2) users tend to have difficulty sorting records that are coded
alphabetically.

Mnemonic Codes
Mnemonic codes are alphabetic characters in the form of
acronyms and other combinations that convey meaning. For
example, a student enrolling in college courses may enter the
following course codes on the registration form: This
combination of mnemonic and numeric codes conveys a good
deal of information about these courses; with a little analysis,
we can deduce that Acctg is accounting, Psyc is psychology,
Mgt is management, and Mktg is marketing. The sequential
number portion of the code indicates the level of each
course. Another example of the use of mnemonic codes is
assigning state codes in mailing addresses ADVANTAGES.
The mnemonic coding scheme does not require the user to
memorize meaning; the code itself conveys a high degree of
information about the item that is being represented.
DISADVANTAGES.
Although mnemonic codes are useful for representing classes
of items, they have limited ability to represent items within a
class. For example, the entire class of accounts receivable
could be represented by the mnemonic code AR, but we
would quickly exhaust meaningful combinations of alphabetic
characters if we attempted to represent the individual
accounts that make up this class. These accounts would be
represented better by sequential, block, or group coding
techniques