CHAPTER 2, “INTRODUCTION

TO TRANSACTION
PROCESSING”
Prepared by: MAC
For the 2nd Semester SY 2021-2022
The second chapter expands on the subject of transaction cycles introduced in

Chapter 1. While the operational details of specific transaction cycles are covered in subsequent chapters, this chapter
presents material that is common to all cycles. Topics covered include:

1. the relationship between source documents, journals, ledgers, and financial statements in both manual and
computer-based systems;

2. system documentation techniques, such as data flow diagrams, entity relationship (ER) diagrams, document
systems, and program flowcharts; and

3. data processing techniques, including batch and real-time processing.

The techniques and approaches presented in this chapter are applied to specific business cycle applications in later
chapters. The chapter is supported by material in the appendix and on the web site.
 An Overview of Transaction
Processing
Transaction processing system processes financial transactions-economic event that affects
the assets and equities of the firm, is reflected in its accounts, and is measured in monetary
terms.
These common business events that occur with regularity, volume of which reaches in
thousands needed to be dealt with efficiently through grouping similar types of transaction
into transaction cycles, as shown in the figure below.
Labor Customers
Cash
Materials

Finishe

Goods

Cash
d
Physical
Plant

Expenditure Cycle
Conversion Cycle Revenue Cycle
Subsystems
Subsystems Subsystems
Purchasing/Accounts Payable
Cash Disbursements Production Planning and Control Sales Order Processing
Payroll Cost Accounting Cash Receipts
Fixed Assets

Finished
Goods
Cash
 An Overview of Transaction
The Expenditure Cycle
Processing
It covers the acquisition of materials, property and labor in exchange for cash. The process of acquisition to
payment of cash occurs at separate points in time so from a systems perspective, such transaction has two
parts: a physical component (the acquisition of goods) and a financial component (the cash disbursement to
the supplier). The major subsystems of the expenditure cycle are as follow:

1. 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 in. creasing inventory and establishing an account payable to be paid at a late, date.

2. Cash disbursement system

When the obligation created in the purchases system falls 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.

3. Payroll system
The payroll system collects labor usage data for each employee, computes the payroll, and disburses paychecks to the employees. Conceptually payroll is a special-case purchases and cash
disbursements system. Because of accounting complexities associated with payroll, most firms have a separate system for payroll processing.

4. Fixed asset system

A firm's fixed asset system processes transactions pertaining to the acquisition, maintenance, and disposal of its fixed assets. These are relatively permanent items that collectively often
represent the largest financial investment by the organization. Examples of fixed assets include land, buildings, furniture, machinery, and motor vehicles.
 An Overview of Transaction
The Conversion Cycle Processing
The readying of products and services for market and the allocation of resources such as depreciation, building amortization,
and prepaid expenses to the proper accounting period. However, unlike manufacturing firms, merchandising companies do not
process these activities through formal conversion cycle subsystems. The major subsystems of the conversion cycle are as follow:
1. Production System
Involves the planning, scheduling, and control of the physical product through the manufacturing process. This includes determining raw materials 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.

2. Cost Accounting System

Monitors the flow of cost information related to production. Information produced by this system is used for inventory valuation, budgeting, cost control, performance reporting, and
management decisions, such as “make or buy” decisions.

The Revenue Cycle

Involves processing cash sales, credit sales, and the receipt of cash following a credit sale. The major subsystems of the conversion cycle are as follow: Sales order processing.
The majority of business sales are made on credit Cash receipts. For credit sales, some period of time (days or weeks) passes between the point of the 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).

1. Sales order processing

Involve such tasks as preparing sales orders, granting credit, shipping products (or rendering of a service) to the customer, billing customers, and recording the transaction in the accounts
(accounts receivable, inventory, expenses, and sales).

2. Cash receipts
For credit sales, some period of time (days or weeks) passes between the point of the 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).
 Accounting Records

Manual Systems
Documents
Provides evidence of an economic event and may be used to initiate transaction
processing. Three types of documents are as follows:
• Source documents - Economic events give rise to some documents being created at the
beginning (the source) of the transaction. (e.g. Sales order)

Customer’s Order
1
Source 2
Data Document 3

Collection

Sales System
 Accounting Records
Manual Systems
Documents
Provides evidence of an economic event and may be used to initiate transaction
processing. Three types of documents are as follows:
• Product documents - result of transaction processing rather than the triggering
mechanism for the process. (e.g. Bill/Remittance Advice from sales system in reference to the Sales
Order)
1
r Source 2
de
’s Or Data Document 3
er
sto
m Collection
Cu

Customer

Bill

Remittance Sales System

Advice
Product Document
Manual Systems
Accounting Records
Documents
Provides evidence of an economic event and may be used to initiate transaction
processing. Three types of documents are as follows:
• Turn around documents – product documents of one system that become source
documents for another system. (e.g. Bill/Remittance Advice plus Check payment to cash receipts
system) 1
Source 2
Data Document 3

Collection

Customer

Bill

Remittance Sales System

Advice
Product Document
Check

Remittance
Advice Cash Receipts System
 Accounting Records

Manual Systems
Journals
Records of chronological entry. Documents are the primary source of data in journals. Two
primary types of journals are as follows:
• Special Journals- used to record specific classes of transactions that occur in high
volumes. (e.g. cash receipts journal, cash disbursement journal, purchases journal, payroll journal, etc.)
• General Journal – used to record non-recurring, infrequent, and dissimilar transactions
 Accounting Records

Manual Systems
Ledgers
Book of financial accounts, which reflect the financial effects of the firm’s transactions after
they are posted from various journals, showing activity by account type. Such data
provided by ledgers is used to prepare financial statements, support daily operations, and
prepare internal reports. Two basic types of ledgers are as follows:
• General Ledger – contains the firm’s account information in the form of highly
summarized control accounts.
• Subsidiary Ledger – contain the details of the individual accounts that constitute a
particular control account.
 Accounting Records

Manual Systems
Audit Trail
The accounting records described (from documents to journals to ledgers) provide an audit
trail for tracing transactions from source documents to financial statements and vice versa.
Such audit trail is useful in the conduct of audit of an external auditor in order to provide
reasonable assurance to the stakeholders and interested party that the data in the financial
statements of the company is fairly presented.
 Accounting Records

Computer-Based Systems
While audit trails in computer based systems are less observable than those in manual systems, they
still exists in magnetic files. The four different types of magnetic files are as follows:
• Master file – generally contains account data. General and subsidiary ledgers are examples of master files.
• Transaction file – temporary file holding transaction records that will be used to change or update data in the
master file. Journals are examples of transaction files.
• Reference file – stores data that are used as standards for processing transactions. Tax table/employee rosters for
payroll program; pricelist/list of authorized suppliers/ for invoice preparation; customer credit files for credit sales
approval, etc.
• Archive file – contains records of past transactions retained for future references. These includes journals, prior
period records.

Digital audit trail

Same as in the manual system, difference would be in the way data is captured from source
documents which is either done through data input stage (transactions are edited and a transaction
file is produced) or transactions are captured directly on digital media.
 Accounting Records
Source
Document Audit Trail
Sales Keying Balance Sheet
Order AR XXX
1
Transaction
File

Sales Orders
4 Reference File
Master Files
General Ledger
Credit File Control Accounts
• Accounts Receivable
• Inventory
Update • Cost of Goods Sold
Program • Sales

Journal
3 2
Archive File
AR Subsidiary

Error File

Inventory
Subsidiary
 Documentation Techniques

The ability to document systems in graphic form is an important skill for

accountants to master.

The 6 basic documentation techniques are as follows:

• Data flow diagrams
• Entity relationship (ER) diagrams
• Document flowcharts
• System flowcharts
• Program flowcharts
• Record layout diagrams
 Documentation Techniques
Data flow diagram
(DFD) Symbol Description
uses symbols to
represent the
entities, processes, Input source or output
data flows, and Entity
destination of data
data stores that Name
pertain to a
system. N
A process that is
Process triggered or supported
Description by data

A store of data such as a

Data Store
Name
transaction file, a master file,
or a reference file

Direction of data flow

 Documentation Techniques
Data flow diagram Credit Records Shipping Log
(DFD)

Stock
Sales Order Approve Release Packing Slip
Customer Ship Goods Carrier
Sales

Approved
Sales
Customer Bill Shipping Notice
Order

Prepare
Bill
Accounts
Customer Posting Data Receivable

Customer
Sales Order
AR Records
 Documentation Techniques
Entity relationship (ER) diagram
used to represent relationship between entities. Entities are physical resources (automobiles,
cash, or inventories), events (ordering inventory, receiving cash, shipping goods) and agents
(salesperson, customer, or vendor) about which an organization wishes to capture data.

1 Assigned 1
Customer Customer

1 Places M
Customer Customer

M Supply M
Customer Customer
 Documentation Techniques
Document flowcharts
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.
 Documentation Techniques
System flowcharts
portray the computer aspect of a system, depicting the relationships between input (source)
data, transaction files, and output reports produced by the system.
 Documentation Techniques
Program flowcharts
Describes the internal logic of computer programs.
 Documentation Techniques
Record layout diagrams
used to reveal the internal structure of the records that constitute a file or database table,
usually showing the name, data type, and length of each attribute (or field) in the record
 Computer Based Accounting
Systems
Computer-based accounting systems fall into two broad classes, as
follows:
Distinguishing Characteristic Data Processing Methods
Batch Real-Time
Information Time Frame Lag exist between time when Processing takes place when
economic event occurs and the economic event occurs.
when it is recorded.
Resources Generally, fewer resources More resources are required
(hardware, programming, than for batch processing.
training) are required.
Operational Efficiency Certain records are processed All records pertaining to the
after the event to avoid event are processed
operational delays. immediately.