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

2. 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

3. 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

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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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.

28. 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

29. 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

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

31. 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

32. 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

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

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

35. 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

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

37. 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

38. 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

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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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