GROUP 2

INTRODUCTION TO TRANSACTION
PROCESSING

JANUARY 27, 2025

Objectives:
1. Broad objectives of transaction cycles
2. Types of transaction processed by each of the three transaction
cycles
3. The basic accounting records used in Transaction Processing
Systems (TPS)
4. The traditional accounting records and their magnetic equivalents
5. Documentation techniques
6. Batch and real-time processing and the impact of these
technologies on transaction processing
 What is Introduction to Transaction
Processing?
Transaction processing is a fundamental concept in
Accounting Information System (AIS). It encompasses
the methods and procedures used tod to captured,
record, process, and report business events that impact
an organization’s financial position. These events,
known as transactions, represent the lifeblood of any
business, driving changes in assets, liabilities, and
equity.
 The chapter’s purpose is to present preliminary
topics common to all three cycles, which will be
further explored in subsequent chapters. It is
organized into four sections:

1. Overview of Transaction Processing

2. Relationship Among Accounting Records
3. Documentation Techniques
4. Computer-Based Systems
 3 Importance of Transaction Processing in AIS
1. Accurate Financial Reporting - Transactions form the foundation of financial
statements. Accurate and timely processing ensures that financial reports reflect
the true financial position of the organization.

2. Operational Efficiency - Transaction Processing System (TPS) support daily

business operations, enabling efficient execution of task like sale order
processing, inventory management, and payroll.

3. Decision-Making Support - Processed transaction data provides valuable

insights for management decision-making. By analyzing trends and patterns,
managers can informed choices regarding resource allocation, pricing,
strategies, and other critical aspects of the business.
 It explains that these cycles represent the core economic activities of
any organization, whether for profit or non-profit.
The text focuses on the expenditure cycle, which involves acquiring
resources like materials, property, and labor in exchange for cash. It breaks
down this cycle into two main subsystems:
1. Purchase/accounts payable system: This system handles the ordering
and receiving of goods,creating an account payable to be paid later.
2. Cash disbursements system: This system authorizes and processes
payments to vendors, reducing cash and account payable balances.
 4 Key Components of Transaction Processing

1. Data Input - This stage involves capturing transaction data from various
sources, such as source documents, turnaround documents, and source data
automation devices. Data accuracy and completeness are crucial at this stage.
2. Data Storage - Captured data is stored in organized files and databases, often
using coding techniques to facilitate efficient retrieval and analysis.
3. Data Processing - Processed data is transformed into meaningful information
through various operations, including classifying, sorting, summarizing, and
comparing.
4. Information Output - Processed information is presented to users in various
formats, such as reports, summaries, and dashboards, to support
decision-making and operational activities.
 The differences between real-time and batch processing systems, as well as
the trade offs between efficiency and effectiveness in system design.

It highlights the following key points:

1. Real-time systems require dedicated processing capacity and are suitable

for handling transactions as they occur. They are often used in applications
where immediate access to information is critical, such as online banking or
airline reservations.

2. Batch processing systems process transactions in groups, which can be

more efficient for a large volumes of data but may introduce delays in
accessing information
 Efficiency versus Effectiveness involves considering the trade-off
between processing speed and relevance of the information produced.
Real-time processing is generally more effective for time-sensitive tasks,
while batch processing can be more efficient for large data sets.
Legacy system are older systems that may not be as efficient or
flexible as modern systems.They often use flat files for data storage and
hierarchical data structures.
Modern system tend to be client-server based and process
transactions in real-time. They often use databases for data storage and
have a higher degree of process integration.
 The text first outlines the six accounting records affected by a customer sale:

1. Customer account receivable: Unique to each customer.

2. Inventory item: Subsidiary record, almost unique.
3. Inventory control: General ledger, common.
4. Account receivable control: General ledger,common.
5. Sales: General ledger, common.
6. Cost of good sold: General ledger,common.

Where the entire transaction is processed as it occurs. This eliminates delays

and improves efficiency, as seen in the example of a sales order being capture,
filled, and shipped in the same day. Real-time processing also reduces the need
for physical documents and allows for better communication between different
locations.
What is Transaction Cycle?

A transaction cycle is a series of related

business activities that occur in a specific
sequence to complete a business process. It’s a
fundamental concept in accounting and business
management, as it helps businesses understand
and manage the flow of transactions and
resources within their operations.
Creation of a Source Document

Customer’s Order
Source
Data Collection Document

Sales Order

Sales System
Relationship between Transaction Cycle
LABOR
Customer
MATERIALS
Conversion Cycle
PHYSICAL Subsystem
PAINT Production, Planning and
Control Cost Accounting
Expenditure Cycle Revenue Cycle
Subsystem Subsystem
-Purchasing/Accounts Sales Order Processing
Payable Cash Receipts
-Cash Disbursement
-Payroll
-Fixed Assets Finished Goods
 Advantages of Transaction Cycle
● Enhanced Efficiency and Productivity.
- Streamlined Processes
- Reduces Errors
- Improved Resource Allocation
● Stronger Internal Controls and Risk Management
- Clear Responsibilities
- Improved Compliance
● Better Financial Management and Reporting
- Improved Budgeting and Forecasting
- Faster Financial Reporting
 Disadvantages of Transaction Cycle
● Complexity and Costs.

- Implementation Costs

- Complexity of Processes

● Rigidity and Lack of Flexibility.

- Limited Adaptability

- Resistance to Change

● Potential for Errors and Fraud

- Human Error

- Internal Control Weaknesses

A Product Document

Customer’s Order Source

Data Document
Collection
Sales Order

Customer

Bill
—-------------------------
Remittance Advance
Sales
System
A Turnaround Document

Customer’s Order
Data Source Document
Collection
Sales Order

Customer

Bill
—------------------- Sales System
Remittance Advice
Check
Remittance
Cash Receipt System
Journals

A journal is a record of a
chronological entry. At some point in
the transaction process, when all
relevant facts about the transaction
are known, the event is recorded in a
journal in chronological order.
Sales Order Recorded in Sales Journal
Economic Event Capture Event Record Event

Customer’s Order Sales Order Sales

Journal
Special Journals

Special journals are used to record

specific classes of transactions that occur
high in high volume. Such transactions can
be grouped together in a special journal
and processed more efficiently than a
general journal permits.
 Sales Journal

Date Customer Invoice Acct. Post Debit Credit

Num Num. —---- Sales
Acct. Rec. #401
#102
Sept 1 Hewitt Co. 4523 1120 3300 3300

Sept .15 Acme 8821 1298 6825 6825

Drilling
Oct. 3 Buell Corp. 22987 1030 4000 4000

Oct. 10 Check Ltd. 66734 1110 8500 8500

Ledger

A ledger is a book of account that reflects

the financial effects of the firm’s
transactions after they are posted from the
various journals.Where journals show the
chronological effect of business activity,
ledger shows the activity by account type.
General Journal
DATE DESCRIPTION POST. DEBIT CREDIT
REF.

1 SEPT 1, 2007 Depreciation 520 5000 1

Expense

2 Accumulated 210 5000 2

Depreciation

3 3

4 SEPT 2, 2007 Insurance Expense 525 1200 1200 4

5 Prepaid Insurance 180 1200 5

6 6

7 SEPT 3, 2007 Cash 101 11000 11000 7

8 Capital Stock 310 11000 8

Flow of Information from the Economic Event to the GL
Customer’s Order
Sales Order Sales
Journal GL

Periodically
Reconcile
Subsidiary
Ledger to
Accounts General Ledger
Receivable
Subsidiary Ledger
What is Conversion Cycle?

The conversion cycle, also known as the

production cycle, is the series of activities involved
in transforming raw materials into finished goods.
It’s a core process in manufacturing and production
businesses and plays a crucial role in the overall
flow of goods and services.
 Advantages of Conversion Cycle
Efficient Production: A well-managed conversion cycle ensures that goods are
produced efficiently, minimizing waste, and maximizing output. This leads to lower
production cost and higher profit margins.
Improved Quality Control: A streamlined conversion cycle allows for better quality
control throughout the production process, resulting in higher-quality products and
reduced defects.
Faster Delivery Times: Efficient production processes can lead to faster delivery
times, which can enhance customer satisfaction and increase competitiveness.
Reduced Inventory Costs: As well-planned conversion cycle can optimize
inventory management, minimizing the amount of raw materials and finished goods
held in stock, thereby reducing storage costs and the risk of obsolescence.
 Disadvantages of Conversion Cycle
Complexity: Managing a conversion cycle can be complex, requiring
careful planning, coordination, and control of various stages and
resources.
Capital Investment: The conversion cycle often requires significant
capital investment in equipment, facilities and skilled labor.
Risk of Disruptions: The conversion cycle is susceptible to various
disruptions, including supply chain issues, equipment failures, and labor
shortages, which can impact production schedules and delivery times.
Environmental Impact: Production processes can have a significant
environmental impact requiring businesses to consider sustainability and
minimize waste generation.
What is Manual System?

Manual Accounting System is a traditional method for

managing financial records that involves handwritten
entries in journals and ledgers, along with physical
documents and manual calculations. This approach is
often favored by small business with limited transaction
due to it’s cost effectiveness, as it avoid the expenses
associated with computer equipment, software licenses,
and employee training.
 Advantages of Manual System

Cost-Effective: Manual systems are significantly cheaper than

computerized systems, as they eliminate the need for expensive
software, hardware, and ongoing maintenance costs.
Simplicity: Manual systems are easy to understand and implement,
requiring minimal technical expertise.
Control: Manual systems provide greater control over financial
records, as all transactions are handled directly by the individual
responsible for the system.
Independence: Manual systems are not reliant on external
software or internet connectivity, making them more independent and
secure.
 Disadvantages of Manual System

Time-Consuming: Manual systems require significant time and effort for

recording, summarizing, and analyzing data.
Error-prone: Human error is significant risk in manual systems, leading to
inaccuracies and discrepancies in financial records.
Limited-Functionality: Manual systems lacked the advanced features and
automation capabilities offered by computerized systems, such as data
analysis, reporting, and forecasting.
Difficult to Scale: As business grow, manual system become increasingly
cumbersome and difficult to manage.
Security Risk: Manual records can be easily lost,damaged, or stolen.
What is Database Management?
Database management is crucial for accounting
information systems, enabling efficient storage,
organization, and retrieval of financial data. Databases
structure information into table, ensuring data integrity
and consistency, while security features protect
sensitive financial information from unauthorized
access. This organized approach allows for accurate
and timely generation of financial reports, supporting
informed decision-making and regulatory compliance.
 Advantages of Database Management

● Efficiency and Accuracy: Automated data entry and processing significant

Increased reduce errors and boost efficiency in financial operations. This
minimizes manual tasks, freeing up staff for more strategic activities.
● Enhanced Decision-Making: Real-time access to accurate financial data
empowers managers to make better informed decisions. They can analyze trends,
identify patterns, and predict future performance with greater confidence.
● Improved Auditability and Compliance: Database system track all transactions and
changes, making it easier to conduct audits and demonstrate compliance with
regulations. This helps to ensure transparency and accountability in financial
reporting.
● Scalability and Flexibility: Databases can easily adapt to growing business needs,
accommodating increasing data volumes and evolving reporting requirements.
 Disadvantages of Database Management
● Increased Costs: Implementing and maintaining robust database
system can be expensive. This includes the cost of hardware,
software, and specialized staff training. The initial investments can be
significant, and on going maintenance, upgrades, and licensing fees
add to overall cost.
● Complexity: Database system are complex to design,implement and
manage. They require skill personnel with specialized knowledge of
database administration and programming.
● Performance Overhead: The complex architecture and processing
required for database management can introduce performance
overhead, especially for high-volume and real-time applications.