Introduction to

Transaction Processing
Dan Henley Gellido & Litania Alcantara
 What is Transaction Processing?

An economic event that affects the

assets and equities of the firm, is
reflected in its accounts, and is
measured in monetary terms.
 What is Transaction Processing?

Is an activity consisting of three major

subsystems called cycles: the revenue
cycle, the expenditure cycle, and the
conversion cycle.
 Examples includes….
• Sales of goods or services • Depreciation of PPE,
• Purchases of inventory Application of Labor, Raw
Material, Overhead to the
• Discharge of Financial Production Process and
Obligations Transfer of inventory from
• Receipts of cash one department to another
 Transaction Cycles
(1) incurs expenditures in exchange for
resources (expenditure cycle), (2) provides value
added through its products or services
(conversion cycle), and (3) receives revenue
from outside sources (revenue cycle)
 Relationship Between Transaction Cycles
Labor
Customer
Cash

Finished goods
Material

cash
Physical
Plant

Expenditure Cycle Conversion Cycle Revenue Cycle

• Purchasing/Accounts • Production Planning • Sales Order

Payable and Control Cost Processing Cash
• Cash Disbursements Accounting Receipts
• Payroll
• Fixed Assets

Finished
Goods
Cash
 The Expenditure Cycle
Business activities begin with the
acquisition of materials, property, and
labor in exchange for cash
 Purchases/Accounts Payable System
This system recognizes the need to acquire physical
inventory (such as raw materials) and places an order
with the vendor. When the goods are received, the
purchases system records the event by increasing
inventory and establishing an account payable to be
paid at a later date.
 Cash Disbursements System
When the obligation created in the purchases system
is due, the cash disbursements system authorizes the
payment, disburses the funds to the vendor, and
records the transaction by reducing the cash and
accounts payable accounts.
 Payroll System
Collects labor usage data for each employee,
computes the payroll, and disburses paychecks
to the employees.
 Fixed Assets
These are relatively permanent items that
collectively often represent the organization’s
largest financial investment. Examples of fixed
assets include land, buildings, furniture,
machinery, and motor vehicles.
 Conversion Cycle
This includes determining raw material
requirements, authorizing the work to be
performed and the release of raw materials into
production, and directing the movement of the
work-in-process through its various stages of
manufacturing.
 Production System
Involves the planning, scheduling, and control
of the physical product through the
manufacturing process
 Cost Accounting System
Monitors the flow of cost information related
to production.
 Revenue Cycle
Firms sell their finished goods to customers.
 Sales Order Processing
The majority of business sales are made on credit
and involve tasks such as preparing sales orders,
granting credit, shipping products (or rendering of a
service) to the customer, billing customers, and
recording the transaction in the accounts (accounts
receivable, inventory, expenses, and sales).
 Cash Receipts
For credit sales, some period of time (days or weeks)
passes between the point of sale and the receipt of
cash. Cash receipts processing includes collecting
cash, depositing cash in the bank, and recording
these events in the accounts (accounts receivable and
cash).
Accounting Records
 MANUAL SYSTEMS
This section describes the purpose of each type of
accounting record used in transaction cycles. We
begin with traditional records used in manual
systems (documents, journals, and ledgers) and then
examine their magnetic counterparts in computer-
based systems
 Documents
A document provides evidence of an economic
event and may be used to initiate transaction
processing. Some documents are a result of
transaction processing. In this section, we discuss
three types of documents: source documents,
product documents, and turnaround documents.
 Source Documents
Economic events result in some documents being
created at the beginning (the source) of the
transaction. These are called source documents.
Source documents are used to capture and formalize
transaction data that the transaction cycle needs for
processing.
 Creation of a Source Document

3
2
1
Customer’s
Order Data Source Documents
Collection
Sales Order

Sales System
 Product Documents
Are the result of transaction processing rather
than the triggering mechanism for the process.
For example, a payroll check to an employee is
a product document of the payroll system.
 Product of a Document

3
2
1

Data Source Documents

Collection
Sales Order

Customer

Bill
_______________
Sales System
Remittance Advice

Product
Document
 Turnaround Documents
Are product documents of one system that
become source documents for another system.
 Turnaround Document
3
2
1
Data Source Documents
Collection
Sales Order

Customer
Bill
___________ Sales System
Remittance Advice
Product
Document

Check 1
Cash Receipts
1 System
Remittance
Advice
 Journal
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. Documents are the
primary source of data for journals.
 Special Journals
Are used to record specific classes of transactions
that occur in high volume. Such transactions can be
grouped together in a special journal and processed
more efficiently than a general journal permits.
 Register
Used to denote certain types of special
journals. For example, the payroll journal is
often called the payroll register
 General Journal
Firms use the general journal to record
nonrecurring, infrequent, and dissimilar
transactions. For example, we usually record
periodic depreciation and closing entries in the
general journal.
 Ledger
Book of accounts that reflects the financial
effects of the firm’s transactions after they are
posted from the various journals. A ledger
indicates the increases, decreases, and current
balance of each account.
 General Ledger
Summarizes the activity for each of the
organization’s accounts. The general ledger
department updates these records from journal
vouchers prepared from special journals and other
sources located throughout the organization
 Subsidiary Ledgers
Kept in various accounting departments of the
firm, including inventory, accounts payable,
payroll, and accounts receivable. This
separation provides better control and support
of operations.
 Audit Trail
For tracing transactions from source
documents to the financial statements. Of the
many purposes of the audit trail, most
important to accountants is the year-end audit.
 Computer-Based System
Types of Files - Audit trails in computer-based
systems are less observable than in traditional
manual systems, but they still exist. Accounting
records in computer-based systems are represented
by four different types of magnetic files: master files,
transaction files, reference files, and archive files.
 Accounting Records in Computer-Based System
Source Audit Trail Balance
Document Sales Order Keying Sheet
Transaction
File 1
Reference Sales Order
File

4 Credit File Master File

General Ledger
Update Program Control Accounts
• AR
• Inventory
Journal • COGS
• Sales
Archive File Error File 2

AR Subsidiary

3
Inventory Subsidiary
 Transaction File
Is a temporary file of transaction records used
to change or update data in a master file. Sales
orders, inventory receipts, and cash receipts are
examples of transaction files.
 Reference File
Stores data that are used as standards for
processing transactions. For example, the
payroll program may refer to a tax table to
calculate the proper amount of withholding
taxes for payroll transactions.
 Archive File
Contains records of past transactions that are
retained for future reference. These transactions
form an important part of the audit trail. Archive
files include journals, prior period payroll
information, lists of former employees, records of
accounts written off, and prior-period ledgers.
 Digital Audit Trail
1. Compare the accounts receivable balance in the balance sheet with the master file AR
control account balance.
2. Reconcile the AR control figure with the AR subsidiary account total.
3. Select a sample of update entries made to accounts in the AR subsidiary ledger and trace
these to transactions in the sales journal (archive file).
4. From these journal entries, identify specific source documents that can be pulled from
their files and verified. If necessary, the auditor can confirm the accuracy and propriety of
these source documents by contacting the customers in question.
 Documentation Techniques
The old saying that a picture is worth a
thousand words is very applicable when it
comes to documenting systems. A written
description of a system can be wordy and
difficult to follow.
 Symbol Description
Input source or output destination of
Entity Name data

A process that is triggered or

N
____________ supported by data
Process
Description

Data Store
A store of data such as a transaction
Name file, a master file, or a reference file

Direction of data flow

 Data Flow Diagram
Uses symbols to represent the entities,
processes, data flows, and data stores that
pertain to a system.
 Data Flow Diagram of Sales Order Processing System
Credit Sales Shipping Log

Sales Order Stock Release

Customer Approve Ship Packing Slip
Customer
Customer Customer
Sales Goods

Approved
Sales Order
Shipping
Customer Notice
Bill

Bill Prepare
Customer Pasting Data AR

Sales Order Customer AR

Records
 Entity Relationship Diagram
Is a documentation technique used to represent the
relationship between entities. Entities are physical
resources (automobiles, cash, or inventory), events
(ordering inventory, receiving cash, shipping goods),
and agents (salesperson, customer, or vendor) about
which the organization wishes to capture data.
 Entity Relationship Diagram Symbol

1 Assigned 1 Company
Sales Person
Car

1 Places M
Customer Sales Order

M Supply M
Vendor Inventory
 System Flowchart
Is the graphical representation of the physical relationships
among key elements of a system. These elements may
include organizational departments, manual activities,
computer programs, hard-copy accounting records
(documents, journals, ledgers, and files), and digital records
(reference files, transaction files, archive files, and master
files).
 Flowcharting Manual Activities
• A clerk in the sales department receives a hard-copy customer
order by mail and manually prepares four hard copies of a sales
order.
• The clerk sends Copy 1 of the sales order to the credit
department for approval. The other three copies and the original
customer order are filed temporarily, pending credit approval.
 Flowcharting Manual Activities
• The credit department clerk validates the customer’s order against
hard-copy credit records kept in the credit department. The clerk
signs Copy 1 to signify approval and returns it to the sales clerk.
• When the sales clerk receives credit approval, he or she files Copy
1 and the customer order in the department. The clerk sends
Copy 2 to the warehouse and Copies 3 and 4 to the shipping
department.
 Flowcharting Manual Activities
• The warehouse clerk picks the products from the shelves, records
the transfer in the hard-copy stock records, and sends the
products and Copy 2 to the shipping department.
• The shipping department receives Copy 2 and the goods from the
warehouse, attaches Copy 2 as a packing slip, and ships the goods
to the customer. Finally, the clerk files Copies 3 and 4 in the
shipping department.
 Rules to be Observed
• The flowchart should be labeled to clearly identify the
system that it represents.
• The correct symbols should be used to represent the
various entities in the system.
• All symbols on the flowchart should be labeled.
 Rules to be Observed
• Lines should have arrowheads to clearly show the process
flow and sequence of events.
• If complex processes need additional explanation for
clarity, a text description should be included on the
flowchart or in an attached document referenced by the
flowchart
Symbol Set for Representing Manual Procedure

Terminal showing source or

Calculated batch total
destination of documents
and reports

On-page connector
Source document or report

Off-page connector
Manual operation

Description of process or
File for storing source comments
documents and reports

Accounting records (journals,

Document flowline
registers, logs, ledgers)
 Batch Processing
Permits the efficient management of a large
volume of transactions. A batch is a group of
similar transactions (such as sales orders) that
are accumulated over time and then processed
together.
Symbol Set for Representing Computer Processes

Hard copy (source Terminal input/ output

documents and output) device

Computer process (program

Process flow
run)

Direct access storage device

(disk pack) Real-time (online) connection

Magnetic tape (sequential

Video display device
storage device)
 Difference Between Batch and Real-
Time System
Batch systems assemble transactions into groups
for processing.
Real-time systems process transactions individually
at the moment the event occurs
 Characteristic Difference Between Batch and Real-time System

Data Processing Method

Distinguishing Feature Batch Real-time

Lag exists between time when the Processing takes place when the economic event
Information Time
economic event occurs and when it is occurs.
Frame
recorded.

Generally, fewer resources (e.g., hardware, More resources are required than for batch
Resources
programming, training) are required. processing.

Certain records are processed after the All records pertaining to the event are processed
Optimal Efficiency
event to avoid operational delays immediately.
 Record Structures for Sale, Inventory and Accounts Receivable File
Record Structure for Sales Order
(PK) (SK) (SK) Transaction File
Sales
Account Inventory Quantity Unit Invoice
Order
Number Number Sold Price Amount
Number

Record Structure for AR

(PK) Master File
Last
Account Current Credit Billing
Name Address Payment
Number Balance Limit Date
Date

Record Structure for

(PK) Inventory Master File
Quantity
Inventory Recorder Vendor Standard Total
Number
Description on Point
EOQ
Number Cost Cost
Hand
 Numeric and Alphabetic Coding
Scheme
Sequential Codes represent items in some
sequential order (ascending or descending).
Numeric Block Codes represent whole classes of
items by restricting each class to a specific range
within the coding scheme.
 Numeric and Alphabetic Coding
Scheme
Alphabetic Codes may be assigned sequentially (in
alphabetic order) or may be used in block and group
coding techniques.
Mnemonic Codes are alphabetic characters in the
form of acronyms and other combinations that
convey meaning.
 Introduction to
Transaction Processing
Dan Henley Gellido & Litania Alcantara