Session 02

Chapter 2

Introduction to
Transaction
Processing

Dr Mark Gregory
Email:
[email protected]

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage.

All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Learning Objectives
• Understand the broad objectives of transaction cycles.
• Recognize the types of transactions processed by each of the three
transaction cycles.
• Know the basic accounting records used in transaction processing systems.
• Understand the relationship between traditional accounting records and their
digital equivalents in computer-based systems.
• Be familiar with the documentation techniques used for representing manual
procedures and the computer components of systems.
• Understand the differences between batch and real-time processing and the
impact of these technologies on transaction processing.
• Be familiar with data coding schemes used in accounting information
systems.

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 An Overview of Transaction Processing

• The most common financial transactions are economic exchanges with

external parties.
• These include the sale of goods or services, the purchase of inventory, the
discharge of financial obligations, and the receipt of cash on account from
customers.
• Financial transactions are common business events that occur regularly.

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TRANSACTION CYCLES

• The Expenditure Cycle

• The expenditure cycle is the acquisition of materials, property, and labour in
exchange for cash.
• The Conversion Cycle
• The conversion cycle is the cycle composed of the production system and the cost
accounting system.
• The Revenue Cycle
• The revenue cycle is the cycle composed of sales order processing and cash receipts.

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
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Relationship Between Transaction Cycles

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 Accounting Records

• Accounting records are documents, journals, or ledgers used in transaction

cycles.

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MANUAL SYSTEMS

• Documents
• Source documents are documents that capture and formalize transaction data
needed for processing by their respective transaction cycles.
• Product documents are documents that result from transaction processing.
• Turnaround documents are product documents of one system that become source
documents for another system.

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THE AUDIT TRAIL

• An audit trail is a set of accounting records that trace transactions from

their source documents to the financial statements.
• An audit trail is of utmost importance in the conduct of a financial audit.
• The external auditor’s responsibility involves, in part, the review of selected
accounts and transactions to determine their validity, accuracy, and
completeness.

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DIGITAL ACCOUNTING RECORDS

• Accounting systems may store data in four types of digital computer files:
• A master file contains account data.
• A transaction file is a temporary file that holds transaction records that will be used
to change or update data in a master file.
• A reference file is a file that stores the data used as standards for processing
transactions.
• An archive file is a file that contains records of past transactions that are retained for
future reference.
• The Digital Audit Trail

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 File Structures
• Digital file structures and storage techniques vary widely among transaction
processing systems.
• Some structures are effective at processing all records in large master files.
• Some file structures are better for directly locating and processing a single
record in a large file.
• So-called legacy systems are usually large mainframe systems implemented
in the late 1960s through the 1980s. The bespoke software is the stored
knowledge of the organization and is therefore difficult to replace (and to
maintain).

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
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THE FLAT-FILE MODEL

• The flat-file model is an environment in which individual data files are

not related to other files.
• There are three significant problems in the flat-file environment: data
storage, data updating, and currency of information.
• Data Capture and Storage
• Data storage is an efficient information system that captures and stores data only
once and makes this single source available to all users who need it.
• Data Updating
• Data updating is the periodic updating of data stored in the files of an organization.

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THE FLAT-FILE MODEL (continued)

• Currency of Information
• Currency of information is a problem associated with the flat-file model because of
its failure to update all the user files affected by a change in status; this may result in
decisions based on outdated or incorrect information.
• Task-Data Dependency
• Task-data dependency is a user’s inability to obtain additional information as his or
her needs change.
• Flat Files Limit Data Integration

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THE DATABASE APPROACH AND MODEL
• The database approach splits an organization’s data into separate tables,
with one table for each different entity (kind of data) – e.g. customer, order,
purchase…
• The database model is a symbolic model of the structure of, and the
associations between, an organization’s data entities.
• The database management system (DBMS) is a software system that
controls access to the data resource.
• The most striking difference between the database model and the flat-file
model is the pooling of data into a common database that all organizational
users share.

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Documentation Techniques
• Visual images convey vital system information more effectively and
efficiently than words.
• Accountants use system documentation routinely, as both systems
designers and auditors.
• Five basic documentation techniques commonly used by accountants are:
data flow diagrams, entity relationship diagrams, system flowcharts,
program flowcharts, and record layout diagrams.
• I also use NotionStructuring, my own modelling language.

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DATA FLOW DIAGRAMS AND ENTITY
RELATIONSHIP DIAGRAMS
• Data Flow Diagrams
• The data flow diagram (DFD) is the use of a set of symbols in a diagram to
represent the processes, data sources, data flows, and process sequences of
a current or proposed system.
• Entity Relationship Diagrams
• An entity relationship (ER) diagram is a documentation technique used to
represent the relationship among data entities in a system.
• Cardinality is the numeric mapping between entities such as one-to-one
(1:1), one-to-many (1:M), and many-to-many (M:M).
• A data model is the blueprint for what ultimately will become the physical
database.
• Relationship between ER Diagrams and DFDs
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Data Flow Diagram Symbol Set

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Data Flow Diagram of Purchases System

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Entity Relationships Diagram Symbols

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Data Model

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SYSTEM FLOWCHARTS
• A system flowchart is used to show the relationship between the key
elements—input sources, programs, and output products—of computer
systems.
• Flowcharting Manual Activities
• Lay out the physical areas of activity.
• Transcribe the written facts into visual format.
• Flowcharting Computer Processes
• Transcribe the written facts into visual format.

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Symbol Set for Representing Manual Procedures

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Symbol Set for Representing Computer
Processes

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PROGRAM FLOWCHARTS
• A program flowchart is a diagram providing a detailed description of the
sequential and logical operations of the program.
• Every program represented in a system flowchart should have a supporting
program flowchart that describes its logic.
• The connector lines between the symbols establish the logical order of
execution.
• Program flowcharts are obsolescent.

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Program Flowchart Symbols

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Program Flowchart for Edit Programs

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System Flowchart

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RECORD LAYOUT DIAGRAMS
• Record layout diagrams are used to reveal the internal structure of the
records that constitute a file or database table. The layout diagram usually
shows the name, data type, and length of each attribute (or field) in the
record.
• Detailed data structure information is needed for such tasks as identifying
certain types of system failures, analyzing error reports, and designing tests
of computer logic for debugging and auditing purposes.

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Record Layout Diagram for Customer File

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Transaction Processing Models
• Alternative transaction processing models fall broadly into two types: (1)
batch processing and (2) real-time processing.
• Batch processing involves gathering transactions into groups or batches and
then processing the entire batch as a single event.
• Real-time processing systems process individual transactions continuously
as they occur.
• Many systems incorporate both real-time and batch processing features.

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 UPDATING MASTER FILES FROM
TRANSACTIONS
• Updating a master file record involves changing the value of one or more of
its variable fields to reflect the effects of a transaction.
• Master file backup procedures
• If the current master file becomes corrupted or is destroyed, corporate IT
professionals can retrieve the most current backed-up file from the
archives.

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BATCH PROCESSING USING REAL-TIME
DATA COLLECTION

• A popular data processing approach, particularly for large operations, is to

digitally capture and process aspects of the transaction at the source as
they occur, and process other aspects of the transaction in batch mode.
• Deadlock or “wait” is a state that occurs between sites when data are
locked by multiple sites that are waiting for the removal of the locks from
the other sites.

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REAL-TIME PROCESSING
• Real-time systems process the entire transaction as each one occurs.
• Real-time processing is well suited to systems that process lower
transaction volumes and those that do not share common records.
• Terminals at distributed sites throughout the organization are used for
receiving, processing, and sending information on the status of current
transactions.
• Increasingly, real-time processing is made available outside a business.
Customers register themselves and place orders directly - this is online
business.

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
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Data Coding Schemes
• Data coding involves creating simple numeric or alphabetic codes to
represent complex economic phenomena that facilitate efficient data
processing.
• Many examples, such as car registration numbers, social security numbers
(National Insurance in the UK), IBAN numbers…

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A SYSTEM WITHOUT CODES
• Business organizations process large volumes of transactions that are
similar in their basic attributes.
• Uncoded entry takes a great deal of recording space, is time-consuming to
record, and is obviously prone to many types of errors.

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A SYSTEM WITH CODES
• Advantages of data coding in AIS are:
• Concisely representing large amounts of complex information that would
otherwise be unmanageable.
• Providing a means of accountability over the completeness of the
transactions processed.
• Identifying unique transactions and accounts within a file.
• Supporting the audit function by providing an effective audit trail.

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NUMERIC AND ALPHABETIC CODING
SCHEMES
• Sequential Codes
• Sequential codes are codes that represent items in some sequential order
(ascending or descending).
• ADVANTAGES
• DISADVANTAGES
• Block Codes
• A numeric block code is a coding scheme that assigns ranges of values to specific
attributes such as account classifications.
• A chart of accounts is a listing of an organization’s accounts showing the account
number and name.
• ADVANTAGES
• DISADVANTAGES

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Chart of Accounts

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NUMERIC AND ALPHABETIC CODING
SCHEMES (continued)

• Group Codes
• Group codes are used to represent complex items or events involving two or more
pieces of related data.
• ADVANTAGES
• DISADVANTAGES
• Alphabetic Codes
• Alphabetic codes are alphabetic characters assigned sequentially.
• ADVANTAGES: Alphanumeric codes are codes that allow the use of pure alphabetic
characters embedded within numeric codes.
• DISADVANTAGES

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NUMERIC AND ALPHABETIC CODING
SCHEMES (continued)

• Mnemonic Codes
• Mnemonic codes are alphabetic characters in the form of acronyms and other
combinations that convey meaning.
• ADVANTAGES
• DISADVANTAGES

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Appendix - Data Structures
• Data structures are techniques for physically arranging records in a file.
• Organization refers to the way records are physically arranged on the
secondary storage device (e.g., a disk).
• Access method is a technique used to locate records and navigate through
the database. The most important are sequential (serial) and indexed.
• Flat-file approach is an organizational environment in which users own
their data exclusively within their own application. The data is difficult or
impossible to share with others.

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Typical File Processing Operations

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