Chapter 2: Introduction to Transaction Processing
requirement, authorizing work to be
Most common financial transaction: economic
exchanges with external parties. Include: sale of goods
and services, purchase of inventory, discharge of
financial obligation, receipt of cash on account from
customers
THREE TRANSACTION CYCLE:
1. Expenditure cycle – incurs expenditures in
exchange for resources
2. Conversion cycle – provides value added
through its product or services
3. Revenue cycle – receives revenue from outside
sources
Expenditure cycle – business activities begin with
acquisition of materials, property, and labor in exchange
for cash
Physical component – acquisition of goods or services
Financial component – cash disbursement to supplier
SUBSYSTEMS:
1. Purchases/AP system – recognizes the need to
acquire physical inventory and places an order
with vendor
2. Cash disbursement system – when obligation
created in purchases system becomes due,
system authorizes payment, disclosures the
funds to vendor, records transaction by
reducing cash and AP
3. Payroll system – collects labor usage data for
each employee
- Special-case purchase and cash
disbursement system
Note: because of accounting complexities associated
with payroll, most firms have a separate system for
payroll processing
4. Fixed asset system – processes transactions
pertaining to acquisition, maintenance, disposal
of fixed assets.
Conversion cycle SUBSYSTEMS:
1. Production system – involves planning,
scheduling, control of physical product through
manufacturing process
- Include: determining raw material
performed and release of materials into
production, directing movement of WIP
2. Cost accounting system – monitors the flow of
cost information including labor, overhead and
raw materials related to production
- Information produced is used for inventory
valuation, budgeting, cost control,
performance reporting, management
decisions
Revenue cycle – involves processing cash sales, credit
sales, receipt of cash ff. credit sale
SUBSYSTEMS:
1. Sales order processing – majority of business
sales are made on credit
2. Cash receipts – some period of time passes
between point of sale and receipt of cash
(credit sales)
ACCOUNTING RECORDS
MANUAL SYSTEMS:
1. Document – may initiate transaction processing
or be the output of process
- Provide auditor with evidence of economic
events
THREE TYPESS:
a. Source document – used to capture ad
formalize transaction data that transaction cycle
uses for processing
- Result in creation of some documents at
beginning of transaction
b. Product document – result of transaction
processing rather than triggering mechanism for
process
c. Turnaround document – product documents of
one system that become source document for
another system
Remittance advice – contains important information
about customer’s account to help cash receipts
system process the payment
2. Journal – chronological record of transaction
- Documents are primary data source
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TYPES:
a. Special journal – used to record specific classes
of transactions that occur in high volume
Register – used to denote certain types of journal
Ex. Payroll journal called payroll register
- Used to denote a log
Ex. Receiving register – log of all receipts of raw
materials or merchandise from vendors
Shipping register – log that records all shipment to
customers
b. General journals – used to record nonrecurring,
infrequent, and dissimilar transactions
Ex. We record periodic depreciation and closing entries
Journal voucher – replaced general journal by most
organizations
- Special source document that contains a
single journal entry specifying general
ledger accounts affected
- Used to record summaries of routine
transactions, nonroutine transactions,
adjusting entries, closing entries
3. Ledgers – book of accounts that reflects
financial effects of firm’s transactions after they
are posted from various journals
- Show activity by account type
- Indicates the increases, decreases, and
current balance of each account
- Org. uses this info to prepare financial
statement, support daily operations,
prepare internal reports
TYPES:
a. General ledger – contain firm’s account
information in form of highly summarized
control accounts
- Summarizes activity for each of
organization’s accounts
- Provides a single value for each control
account
- Highly summarized information is sufficient
for financial reporting, but not useful for
supporting daily business operations
- Mechanism for verifying the overall
accuracy of accounting data that separate
accounting departments have processed
b. Subsidiary ledger – contain details of individual
accounts that constitute a particular control
account
Audit trail – utmost importance in conduct of financial
audit
- Tracing account balances contained in FS
back to source documents and economic
events that created them
DIGITAL ACCOUNTING RECORDS
FOUR TYPES OF DIGITAL COMPUTER FILES:
1. Master file – contains account data
-data values are updated (changed) by
transactions
Ex. General and subsidiary ledger
2. Transaction file – temporary file of transaction
records used to update data in master file
Ex. Sales order, inventory receipts, cash receipts
3. Reference file – stores data used as standards
for processing transactions
Ex. Payroll program – tax table
4. Archive file – contains records of past
transactions that are retained for future
reference and form an important part of audit
trail
Ex. Journals, prior-period payroll information, list of
former employees, records of account written off, prior-
period ledger
FILE TECHNOLOGIES TWO CLASSES:
1. Flat-file model – describes an environment in
which individual data files are not related to
other files
THREE SIGNIFICANT PROBLEMS:
a. Data storage
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 b. Data updating Note: each data store in DFD is represented as an entity
c. Currency of information in corresponding ER diagram (different aspects of
system, but related)
Task-data dependency – user’s inability to obtain
additional information as his or her needs change 3. System flowcharts – graphical representation of
physical relationships among key elements of
- User’s information set is constrained by
system
data that he or she possesses and controls
- Also describe physical computer media
THREE OPTIONS
being employed in system
a. Do not use accounting data to support
decision FOUR DISTINCT AREAS OF ACTIVITY
b. Manipulate and massage the existing data
a. sales department
structure to suit their unique needs
b. credit department
c. Obtain additional private sets of data and
c. warehouse
incur the cost and operational problems
d. shipping department
associated with data redundancy

4. Program flowcharts – describes the logic of the

2. Database model – centralizes organization’s
program
data into a common database that is shared by
5. Record layout diagrams – used to reveal
other users
internal structure of digital records in flat-file or
DBMS – software system that permits users to access database table
authorized data only
TYPES OF TRANSACTION PROCESSING MODELS:
Note: the most striking difference of flat-file and
1. Batch processing – gathering transactions into
database is the pooling of data into a common database
groups or batches and then processing entire
that all organizational users share
batch as single event
FIVE DOCUMENTATION TECHNIQUES: 2. Real-time processing – process individual
transactions continuously as they occur
1. Data flow diagram – uses symbols to represent
- Well suited to systems that process lower
the entities, processes, data flows, and data
transaction volumes and those that do not
stores that pertain to a system
share common records
- Used to represent systems at different
- These systems makes extensive use of LAN
levels of detail from very general to highly
and WAN
detailed
2. Entity relationship diagram – used to represent Batch systems – assemble transactions into groups for
the relationship between entities processing, a time lag will always exist between point
- Common use is to model an organization’s which economic event occurs and point which it is
database processed by system and reflected in firm’s account

Entity – applies to anything about which the - Demand fewer organization resources
organization captures data - Use computer capacity only when program
is being run
Cardinality – degree of relationship
Note: length of lag depends on frequency of batch
- Numeric mapping between entities
processing
Data model – blueprint for what ultimately will become
Real-time systems – process transactions individually at
the physical database
the moment the event occurs; no time lag exist
between occurrence and processing

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 - Large portion of programming cost are
incurred in designing user interface
- Must be user friendly, forgiving, easy to
work with
- Require dedicated processing capacity
because they must deal with transactions as
they occur
- Require either purchase of dedicated
computer or investment in additional
computer capacity
Master file backup – procedure in transaction
processing systems to maintain master file integrity in
event that any of the ff. problem should occur:
1. Update program error corrupts master files
being updated
2. Undetected errors in transaction data result in
corrupted master file balances
3. A disaster such as fire or flood physically
destroys current master files
Deadlock – happens when one process places a lock on
one or more of the records it needs for processing but
has not locked all of them
Data coding – involves creating simple numeric or
alphabetic codes to represent complex economic
phenomena that facilitate efficient data processing
Sequential codes – represent items in sequential order
(ascending or descending)
- Prenumbering of source documents
Advantages: supports reconciliation of batch of
transactions
Disadvantages: carry no information content beyond
their order in sequence
Block code – variation on sequential coding that partly
remedies the disadvantages
- Approach can be used to represent whole
classes of items by restricting each class to
specific range within coding scheme
- Construction of chart of accounts
Advantages: allows for insertion of new codes within
block without having to recognize entire coding
structure
Disadvantages: information content is not readily
apparent
Group codes – used to represent complex items or
events involving two or more pieces of related data
- Consist of zones or fields that possess
specific meaning
Advantages:
1. They facilitate representation of large amounts
of diverse data
2. They allow complex data structures to be
represented in hierarchical form that is logical
and more easily remembered by humans
3. They permit detailed analysis and reporting
both within an item class and across diff. classes
of items
Disadvantage: tend to be overused resulting in increase
of storage cost, clerical errors, increase processing time
and effort
Alphabetic codes – used for many of the same purposes
as numeric codes
Advantages: capacity to represent large numbers of
items is increased dramatically through use of pure
alphabetic characters embedded within numeric codes
Disadvantages:
1. Difficulty rationalizing the meaning of codes
that have been sequentially assigned
2. Users tend to have difficulty sorting records
that are coded alphabetically
Mnemonic codes – alphabetic characters in form of
acronyms and other combinations that convey meaning
Advantage: does not require user to memorize meaning
Disadvantage: limited ability to represent items within a
class
Data structures – represent the physical and logical
arrangement of data in files and databases
TWO FUNDAMENTAL COMPONENTS:
1. Organization – refers to way records are
physically arranged on secondary storage device
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 2. Access method – technique used to locate - Disadvantages: does not use storage space
records and to navigate through database or file efficiently; collision

Flat-file approach – single-view model that characterizes
legacy system in which data files are structured,
formatted, arranged to suit the specific needs of owner
or primary user of system
Sequential structure/sequential access method – all
records in the file lie in contiguous storage spaces in a
specified sequence arranged by their primary key
- Does not permit assessing records directly
Direct access structure – store data at a unique location,
known as address, on a disk.
- Similar to way songs are stored on a cd
Indexed structure – in addition to actual file, there
exists a separate index that is itself a file of record
addresses
Indexed random file – operations involving the
processing of individual records
- Efficient us of storage
- Dispersed throughout a disk without regard
for their physical proximity to other related
records
Virtual storage access method (VSAM) structure – used
for very large files that require routine batch processing
and moderate degree of individual record processing
Collision – diff. record keys may generate the same
residual, which translates into the same address
- Records cannot be stored at the same
location
Pointer structure – used to create linked-list file
- This approach stores in a field of one record
the address of related record
TYPES OF POINTERS
a. Physical address pointer – contains actual disk
storage location that the disk controller needs.
- Allows system to record directly without
obtaining further information
- Has the advantage of speed bec. It does not
need to be manipulated further to
determines record’s location
b. Relative address pointer – contains relative
position of record in file
- Must be further manipulated to convert it
to actual physical address
c. Logical key pointer – contains primary key of
related record
- This key value is converted into record’s
physical address by hashing algorithm

- Can be searched sequentially for efficient

batch processing
- Used for files that often occupy several
cylinders of contiguous storage on disk
- Greatest advantage: does not perform
record insertion operations efficiently

THREE PHYSICAL COMPONENTS:

1. Indexes
2. Prime data storage area
3. Overflow area

Hashing structure – employs an algorithm that converts

primary key of a record directly into a storage ideas.

- Eliminates the need for separate index

- Principal advantage: access speed