Introduction to Transaction Processing Chapter 2 Introduction to Transaction Processing TPS 1

A Financial Transaction is... an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms. similar types of transactions are grouped together into three transaction cycles: the expenditure cycle, the conversion cycle, and the revenue cycle. 2

Three Primary Transaction Cycles Labor Customers Materials Cash Finished Goods Cash Physical Plant Expenditure Cycle Conversion Cycle Revenue Cycle Subsystems: Purchasing/Accts Pay Cash Disbursements Payroll Fixed Assets Subsystems: Production Planning and Control Cost Accounting Subsystems: Sales Order Processing Cash Receipts Finished Goods Cash Three Primary Transaction Cycles 4

Each Cycle has Two Subsystems Expenditure Cycle: time lag between the two due to credit relations with suppliers: physical component (acquisition of goods) financial component (cash disbursements to the supplier) 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 : physical component (sales order processing) financial component (cash receipts) 5

Manual System Accounting Records Provide evidence of an economic event. 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 5

Manual System Accounting Records Journals - a record of chronological entry special journals - specific classes of transactions that occur in high frequency general journal - nonrecurring, infrequent, and dissimilar transactions Ledger - a book of financial accounts general ledger - shows activity for each account listed on the chart of accounts subsidiary ledger - shows activity by detail for each account type 13

Flow of Economic Events Into the General Ledger Journal Entry Post Purchase Request Purchases Journal General Ledger Purchase Order Post Periodically Reconcile Subsidiary Ledger to General Ledger Accounts Payable Subsidiary Ledger 17

Audit Trail Accountants should be able to trace in both directions. Source Document Financial Statements General Ledger Journal Financial Statements General Ledger Source Document Journal Accountants should be able to trace in both directions. Sampling and confirmation are two common techniques. 16

Example of Tracing an Audit Trail Verifying Accounts Receivable - The Audit Trail Accounts Receivable Control Account-General Ledger Accounts Receivable Subsidiary Ledger (sum of all customers’ receivables) Sales Journal Cash Receipts Journal Sales Order Deposit Slip Shipping Notice Remittance Advice Example of Tracing an Audit Trail 18

Computer-Based Systems The audit trail is less observable in computer-based systems than traditional manual systems. The data entry and computer programs are the physical trail. The data are stored in magnetic files. 19

Computer Files Master File - generally contains account data (e.g., general ledger and subsidiary file) Transaction File - a temporary file containing transactions since the last update Reference File - contains relatively constant information used in processing (e.g., tax tables, customer addresses) Archive File - contains past transactions for reference purposes 20

Documentation of Systems Documentation is a vital part of any AIS. Accountants use many different types of diagrams to trace the flow of accounting data through an AIS. A wide variety of software is available for documenting AISs. 3

Why Documentation Is Important Depicting how the system works Training users Designing new systems Controlling system development and maintenance costs Standardizing communications with others Auditing AISs Documenting business processes 4

Documentation Techniques Common documentation techniques: Data Flow Diagrams Document Flowcharts System Flowcharts Program Flowcharts Entity Relationship Diagram 19

Data Flow Diagrams A data flow diagram shows the logical flows of data through a transaction processing system of an organization. They are primarily used in the systems development process as a tool for analyzing an existing system. 15

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 do not represent the physical system 24

Data Flow Diagrams Depicts a system’s components, the data flows among the components, and the sources, destinations, and storage of data. Context Diagram Physical Data Flow Diagram Logical Data Flow Diagram

Symbols used in Data Flow Diagrams A square represents an external data source or data destination. A circle indicates a internal entity that changes or transforms data. Two horizontal lines represent the storage of data. This is usually a file. A line with an arrow indicates the direction of the flow of data. 16

Parts of the DFD: Data Flows Data flows - the flow of data between processes, data stores, and sources and destinations. Can be composed of more than one piece of data/elements. Different data flows cannot have the same name Data flows moving in and out of data stores do not require names A DFD does not indicate why a process began. Data flows can move in two directions. 18

Context Diagrams Data flow diagrams are usually drawn in levels that include increasing amounts of detail. A top level (or high-level) DFD that provides an overall picture of an application or system is called a context diagram. A context diagram is then decomposed, or exploded, into successively lower levels of detail. 21

Context Diagram Figure 3-2 Top level -- least detailed External entities - persons, places, or things outside a system that send data to, or receive data from a system Circle - defines the system’s boundary boundary - the border between the “system of interest” and the system’s environment. Environment - all that surrounds a system

Context Diagram Entities - the relevant environment relevant environment - part of the environment that affects the “system of interest” interface - flow connecting a system with the system’s environment

Physical Data Flow Diagrams The first level of detail is commonly called a physical data flow diagram. It focuses on physical entities involved in the system under study, as well as the tangible documents, reports and other hard-copy inputs and outputs. 22

Physical Data Diagram Figure 3-3 Internal entity - person, place, or thing within the system that transforms data (I.e., accounting clerk, departments, computers) Specify where, how and by whom a system’s processes are accomplished - does not indicate what is being accomplished

Physical Data Diagram Circles are labeled with nouns; represent internal entities Data flows are labeled to indicate how data are transmitted between bubbles File’s location indicates where (bookkeeping); file’s label indicates how (Blue sales book) a system maintains sales record Boxes - external entities

Logical Data Diagram Figure 3-4 Shows the system’s processes and the flows of data into and out of the processes. Used to document information systems; represent the logical nature of a system--what tasks the system is doing without specifying how, where, or by whom the tasks are accomplished

Logical Data Flow Diagram (DFD) Logical DFD vs physical DFD: concentrate on the functions that a systems performs Labels on data flows describe the nature of the data; rather than how the data are transmitted Is the payment in form of a check, cash, credit card, or debit card? Logical portrays a system’s activities; physical depicts infrastructure.

Logical DFD Processes are labeled with verbs that describe the actions being performed, rather than being labeled with the nouns as in the physical Level 0 diagram Each data flow from Figure 3.2 also flow into and out of the circles in Figure 3.4 except for the flows between circles

Document Flowcharts A document flowchart traces the physical flow of documents through an organization. Auditors and accountants may use document flowcharts when analyzing a current system for weaknesses in controls and reports. 6

Documents Flowcharts contain more details than data flow diagrams clearly depict the separation of functions in a system 26

Common Document Flowcharting Symbols Keying operation Document Multiple copies of a specific document Manual Operation Connector between two points on a flowchart Journal or ledger 7

System Flowcharts System flowcharts depict the logical flows of data and processing steps in an AIS. depict the type of media being used (paper, magnetic tape, magnetic disks, and terminals) in practice, not much difference between document and system flowcharts 10

Common System Flowchart Symbols Computer Processing Input/Output On-line keying Document Communication Link Screen Display Magnetic Disk On-line Storage 11

Common Systems Flowcharting Routines Figures 3-7a and 3-7b.

Entity Relationship (ER) Diagram is a documentation technique to represent the relationship between entities in a system. The REA model version of ER is widely used in AIS. 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) 21

Cardinality represents the numerical mapping between entities: one-to-one one-to-many many-to-many 22

Cardinalities 1 1 1 M M M Entity Relationship Entity Sales- person Car Assigned 1 M Customer Places Order M M Vendor Supply Inventory 23

Program Flowcharts illustrate the logic used in programs Program Flowchart Symbols Terminal start or end operation Logical process Input/output operation Decision Flow of logical process 30

The Physical Database Data Hierarchy File Record Field Bit - usually magnetically encoded 17

Data Structures allow records to be located, stored, retrieved and allow movement through the database. Two components: The organization of a file is the physical arrangement of records. The access method is the technique used to locate records and to navigate through the database or file. 18

Sequential Access Structure All records lie in contiguous storage spaces in a specified sequence arranged by their primary key. Data retrieval requires that all records before the desired record must be read in order first. This structure does not allow for a record to be accessed directly. 19

Direct Access Structures Records are stored at unique locations known as addresses. Address tells operating system the exact location of record on the disk. This structure allows for accessing a record without going through all preceding records. 19

Index Structure A separate index exists that is a file of record addresses. The records may be dispersed throughout the disk either randomly or sequentially. A record is found by first searching the index for the address of the desired record. VSAM is an example of using an indexed access method on a large database of sequentially stored records. 20

Inserting a Record into an VSAM File Key 223 Key 224 Key 225 Key 226 Key 228 Key 229 Key 231 Key 233 Key 234 Overflow Area Key 235 Key 238 Key 239 Index Key 240 Key 241 ... ... ... ... Key 237 ... ... Prime Area ... ... ... ... ... Key 269 Key 270 Insert New Record with Key Value = 237 22

Hashing Structure employs an algorithm that converts the primary key of a record directly into a unique storage address eliminates the need for a separate index --record retrieval is rapid A disadvantage is that some disk locations will never be selected because they do not correspond to legitimate key values. 23

Pointer Structures A linked-list file stores in a field of one record the address (pointer) of a related record. The records are spread over the entire disk without concern for their physical proximity. Pointers may also be used to link records between files. 24

Three Types of Pointers A physical address pointer contains the actual storage location needed by the disk controller. It is a rapid retrieval method. A relative address pointer contains the relative position of a record in the file. It must be converted to the actual physical address. A logical key pointer contains the primary key of the related record which is then converted to the record’s physical address using a hashing algorithm. 25

Computer-Based Accounting Systems Two broad classes of systems: batch systems real-time systems 31

Batch Processing A batch is a group of similar transactions that are accumulated over time and then processed together. The transactions must be independent of one another during the time period over which the transactions are accumulated in order for batch processing to be appropriate. A time lag exists between the event and the processing. 32

Batch Processing/Sequential File Unedited Transactions Sales Orders Keying catches clerical errors Errors Edit Run correct errors and resubmit Edited Transactions rearranges the transaction data by key field so that it is in the same sequence as the master file Sort Run Transactions Old Master (father) AR Update Run changes the values in the master file to reflect the transactions that have occurred AR Transactions (eventually transferred to an archive file) New Master (son) 42

Steps in Batch Processing/Sequential File Keystroke - source documents are transcribed by clerks to magnetic tape for processing later Edit Run - identifies clerical errors in the batch and places them into an error file Sort Run - places the transaction file in the same order as the master file using a primary key Update Run - changes the value of appropriate fields in the master file to reflect the transaction Backup Procedure - the original master continues to exist and a new master file is created 41

Advantages of Batch Processing 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. 33

Real-Time Systems process transactions individually at the moment the economic event occurs have no time lag between the economic event and the processing generally require greater resources than batch processing since they require dedicated processing capacity; however, these cost differentials are decreasing oftentimes have longer systems development time 34

Why Do So Many AISs Use Batch Processing? Much of AIS processing is characterized by high-volume, independent transactions, such as recording cash receipts checks received in the mail or payroll. The processing of such high-volume checks can be done during an off-peak computer time, such as overnight. 35