Chapter 2

Overview of Transaction Processing and

Enterprise Resource Planning Systems

Learning Objectives
 Objective 1: Describe the four parties (steps) of the
data processing cycle.
 Objective 2: Describe how organizations use
enterprise resource planning (ERP) systems to
process transactions and provide information.
Objective 1: Describe the four parties (steps) of
the data processing cycle
 Accountants and other system users play a significant role in the
data processing cycle.
 For example, they interact with systems analysts to help
answer questions such as these:
 What data should be entered and stored by the organization,
and who should have access to them?
 How should data be organized, updated, stored, accessed, and
retrieved?
 How can scheduled and unanticipated information needs be
met?
 One important AIS function is to process company transactions
efficiently and effectively .
 In manual systems, data are entered into journals and
ledgers maintained on paper.
 In computer-based systems, data are entered into
computers and stored in files and databases.
 The operations performed on data to generate meaningful and
relevant information are referred to collectively as the data
processing cycle.
 As shown in figure 2-1, P. 52 the data processing cycle consists of
four steps.
 1- Data input.
 2- Data storage.
 3- Data processing.
 4- Information output.
 1/1- Data Input:
 Processing inputs include the following three steps:
 The first step in processing input is to capture transaction
data and enter them into the system.
 Data must be collected about three facets of each business activity:
 a- Each activity of interest.
 b- The resource(s) affected by each activity.
 c- The people who participate in each activity.
- Historically, most businesses used paper source
documents to collect data about their business
activities. They later transferred that data into the
computer.
- When the data are entered using computer screens, they
often retain the same name and basic format as the
paper source document it replaced.
- Data are entered into the system through the following:
1- Turnaround documents:
- They are company output sent to an external party, who
often adds data to the document, and then are returned
to the company as an input document.
- They are in machine-readable form to facilitate their subsequent
processing as input records.
Example: A utility bill that is sent to the customer, returned with
the customer’s payment, and read by a special scanning device
when it is returned.
2- Source data automation:
 They are devices capture transaction data in machine- readable
form at the time and place of their origin.
 Examples:
 ATMs used by banks.
 Point-of-sale (POS) scanners used in retail stores.
 Bar code scanners used in warehouses.
 The second step in processing input is to make sure
captured data are accurate and complete.
 One way to do this is to use:
 ** source data automation, or
 ** well designed turnaround documents. and
 ** data entry screens.
 Well-designed documents and screens improve accuracy
and completeness by:
 ** providing instructions or prompts about what data to collect,
and
 ** grouping logically related pieces of information close
together, and
 ** using appropriate shading and borders to clearly separate
data items.
Users can improve control either by :
 ** using prenumbered source documents, or

 ** having the system automatically assign a sequential number

to each new transaction.

 Prenumbering simplifies verifying that:
 ** All transactions have been recorded, and
 ** None of the documents has been misplaced.
 The Third step in processing input is to make sure
company policies are followed, such as approving or
verifying a transaction.
 For example, the company would not to:
 ** sell goods to a customer who was not paying his bills. Or
 ** sell an item for immediate delivery that was out of stock.
 These problems are prevented by programming the system to
check:
 a customer’s credit limit and payment history.
 inventory status.
 This must be done before confirming a customer sale.
1/2- Data Storage:

 A company’s data are one of its most important resources.

 To function properly, an organization must have ready and easy
access to its data.
 Therefore, accountants need to understand:
 ** how data are organized and stored in an AIS, and
 ** how they can be accessed.
 The basic data storage concepts and definitions will
be explained as follows:
1- Ledgers.
2- Coding.
3- Chat of accounts.
4- Journals.
5- Audit trail.
6- Computer-based Storage Concepts.
1- Ledgers:
 Cumulative accounting information is stored in general and
subsidiary ledgers.
 Ledgers can be classified into:
 a- General ledger:
 It contains summary-level data for every asset, liability, equity, revenue,
and expense account.
 b- Subsidiary ledger:
 It contains detailed data for any general ledger account with many
individual subaccounts.
 For example, the general ledger has an accounts receivable account that
summarizes the total amount owed to the company by all customers.
 Subsidiary ledgers are often used for accounts
receivable, inventory, fixed assets, and accounts
payable.
 The general ledger account corresponding to a subsidiary ledger
is called a control account.
 The relationship between the general ledger control account
and the total of individual subsidiary ledger account balances
helps maintain the accuracy of AIS data.
2- Coding Techniques:

 Data in ledgers is organized logically using coding

techniques.
 Coding is the systematic assignment of numbers or letters to
items to classify and organize them.
 There are many types of coding techniques, such as:
a- Sequence Codes:
 With sequence codes, items are numbered consecutively to
account for all items.
 Any missing items cause a gap in the numerical sequence.
 Examples of sequence codes include: prenumbered checks,
sales invoices, and purchase orders.
b- Block code:

 With a block code, blocks of numbers are reserved for

specific categories of data.
 Example: ABC Company could reserve a specific range

of code for major account categories as follows:

Account Code Account Type
001 - 100 Assets
101 - 200 Liabilities
201 - 300 Owners’ Equity
301 - 400 Revenues
401 - 500 Expenses
C- Group Codes:
 With group codes:
 ** two or more subgroups of digits are used to code items, and
 ** subgroups of digits are often used in conjunction with block
codes.
 Users can sort, summarize, and retrieve information using one
or more subcodes.
 This technique is often applied to general ledger account
numbers.
Examples:

 Example 1:
 Design a group code to classify the transaction by:
 1- The responsibility center controlling the transaction ( 9 centers).
 2- The type of amount ( actual / budgeted).
 3- The financial statement account ( block codes are used to represent
each major category as follows: 100s for assets 200s for liabilities, 300s
for owners’ equity ………………..).
 Solution:
 X -X- XXX
 Responsibility Center Type of amount Account
Code Code Code
Example 2:

 Design a group code for a company that is using four digits chart
of accounts.
 The company wants to summarize its data by the branch (5
branches), the product (550 products), the responsibility center
controlling the transaction ( 25 centers), and the type of amount
(actual / budgeted).
Solution:
 X XXX XX -X- XXXX
 Branch Product Responsibility Type of Account
 Code Code Center Code amount Code Code
Guidelines for designing a good coding system:

 The following guidelines result in a better coding system. The

code should:
1- Be consistent with its intended use.
 This requires that the code designer determines desired system

outputs prior to selecting the code.

2- Allow for growth. For example, don’t use a four-digit employee
code for a fast-growing company with 9950 employees.
3- Be as simple as possible to:
** minimize costs.
** facilitate memorization and interpretation, and
** ensure employee acceptance.
4- Be consistent with the company’s organizational structure and
across the company’s divisions.
3- Chart of Accounts:

 A great example of coding is the chart of accounts.

 The chart of accounts is a list of numbers assigned to each
general ledger account.
 These account numbers:
 ** allow transaction data to be coded, classified, and entered,
into the proper account.
 ** facilitate the preparation of financial statements and
reports.
 However, data stored in summary accounts cannot be easily
analyzed and reported in more detail.
 Consequently, it is important that the chart of accounts
contain sufficient detail to meet an organization’s
information needs.
 Table 2-2, P. 55 shows the chart of accounts for a

company. Each account number is three digits long.

It Should be noted that:
1- A chart of accounts is tailored to the nature and
purpose of an organization.
 For example, the chart of accounts in (table 2-2)

indicates that the company is a corporation because it

contained accounts for common stock and retained
earnings.
2- In contrast, a partnership would include separate
capital and drawing accounts for each partner,
instead of common stock and retained earnings.
3- Likewise, a retail organization has only one type of
general ledger inventory account.
4- A manufacturing company, in contrast, would have
separate general ledger accounts for raw materials,
work in process, and finished goods inventories.
4- Journals:
 Transaction data are often recorded in a journal before
they are entered into a ledger.
 Journals can be classified into:
 a- general journal: It is used to record infrequent or non
-routine transactions, such as:
 ** loan payments, and
 ** end-of-period adjusting and closing entries.
 b- specialized journal records large numbers of repetitive
transactions such as: sales, cash receipts, purchases, and cash
disbursements.
 5- Audit Trail:
 An audit trail is a traceable path of a transaction
through a data processing system from:
 ** point of origin to final output, or
 ** backward from final output to point of origin.
 It is used to check the accuracy and validity of ledger
postings.
 For example, the sales journal lists the invoice numbers for
each individual entry.
 This provides the means for locating and examining the
appropriate source documents in order to verify the
transaction occurred and it was recorded accurately.
6- Computer-based Storage Concepts:
 The basic computer-based storage concepts are:

a- Entity:
 An entity is something about which data is stored.
 Examples of entities include:
 employees, inventory items, suppliers, and customers.
b- Attribute:
 Each entity has attributes, or characteristics of interest that are
stored.
 Example: Some attributes that the AIS typically stores
about the customer entity are:
 Customer number, name, address, credit limit, and
current balance.
 The specific values for those attributes will differ.
 For example, one customer’s credit limit might be L.E.
250,000, whereas another’s might be L.E. 600,000.
c- Field:
 A field is the physical space where an attribute stored.
 Example: The space where the customer number stored is the
customer number field.
d- Record:
 A record containing data about entity attributes.
 Example: The combination of attributes stored for a customer is
the customer record.
e- Data Value:
 Each intersecting row and column is a field within a record, the
contents of which are called a data value.
f- File:
 A file is a group of related records.
 Example: The collection of records about all customers at the
organization might be called the customer file.
g- Master File:
 The main characteristics of a master file are:
1- A master file, like a ledger in a manual AIS, stores cumulative
information about an organization.
 For example,

 ** The accounts receivable, inventory and equipment master files

store information about important organizational resources.

 ** The customer, supplier, and employee master files store

information about important agents with whom the

organization interacts.
2- Master files are permanent; they exist across fiscal periods.
- However, individual master file records may change frequently.
 For example, individual customer accounts balances are

updated to reflect new sales transactions and payments

received.
3- Periodically, new records are added to or removed from a
master file.
 For example, when a new customer is added or a former

customer deleted.
h- Transaction File:
 The main characteristics of a transaction file are:
1- A transaction file contains records of individual business
transactions that occur during a specific time.
2- It is similar to a journal in a manual AIS.
 For example, a company will have a daily sales transaction file
and a cash receipts file.
3- Transaction files are used to update master files.
4- Transaction files are not permanent and may not be needed
beyond the current fiscal period.
 However, they are usually maintained for a specified period for

backup purposes.
i- Database:
 A database is a set of interrelated, centrally coordinated files.
 For example, the accounts receivable file might be combined with
customer, sales analysis, and other related files to form a
customer database.
1/3- Data Processing:

 Once business activity data have been entered into the system, they
must be processed to keep the databases current.
 The four different types of data processing activities,
referred to as CRUD, as follows:
 1- Creating:
 It means creating new data records, such as adding a newly customer
to the customer database.
 2- Reading:
 It means retrieving, or viewing existing data.
 3- Updating:
 It means updating previously stored data.
 For example, updating accounts receivable record with sales
transaction to get a new current balance.
4- Deleting data:
 It means deleting data such as purging the vendor master file of
all vendors the company no longer does business with.
It should be noted that, updating process can be done using
one of three types of data processing systems. They are:
1- Batch processing System:
- Updating done periodically, such as daily, weekly, or monthly, is
referred to as batch processing.
 Its main advantages is that, batch processing is cheaper and

more efficient.
 The main disadvantages of batch processing is that, the data

are current and accurate immediately after processing.

 For that reason, batch processing is used only for applications,
such as payroll, that:
** do not need frequent updating, and
** naturally occur or are processed at fixed time periods.
2- Online, Real-Time Processing System:
 Most companies update each transaction as it occurs.
 This process is referred to as online, real-time processing,
 The main advantages of online processing are:
** the stored information is always current, thereby increasing its
decision-making usefulness.
** it is more accurate because data input errors can be corrected
in real time or refused.
** It is also provides significant competitive advantages.
3- Online batch processing system:
 A combination of the two systems (batch, and online, real-

time) is referred to as online batch processing, where:

 ** transaction data are entered and edited as they occur, and

 ** stored for later processing.

1/4- Information Output:

 The final step in the data processing cycle is information

output.
 When displayed on a monitor (screen), output is referred to as
 “ soft copy”.
 When printed on paper, it is referred to as “ hard copy”.
 - Information is usually presented in one of three forms:
a document, a report, or a query response.
1- Documents:
- Documents are records of transaction or other company data.
 Some documents, such as checks and sales invoices, are
transmitted to external parties.
 Others, such as receiving reports and purchase requisitions are
used internally.
 Documents can be:
 ** printed out, or
 ** stored as electronic image in a computer.
2- Reports:
 Reports are used by internal users such as:
** Employees to control operational activities. and
** Managers to make decisions and to formulate business
strategies.
Reports are used by external users to:
 ** evaluate company profitability,

 ** judge creditworthiness. or

 ** comply with regulatory requirements.

 Reports can be prepared on:

(a) a regular basis such as financial statements and sales

analyses reports.
(b) an exception basis to call attention to unusual conditions.
 For example, a company could have its system produce a report
to indicate when product returns exceed a certain percentage of
sales.
(c) On demand:
 For example, the system could produce a report to

identify the salesperson who sold the most items

during a specific promotional period.
 The need for reports should be periodically assessed,

because they are often prepared long after they are

needed, wasting time, money, and resources.
 3- Query Response:
 A database query is used to provide the information to deal
with problems and questions that need rapid actions or
answers.
 A user enters a request for a specific piece of information; it
is retrieved, displayed, or analyzed as requested.
 Query response can be classified into:
 Repetitive queries: They are often developed by
information systems specialists.
 One-time queries: They are often developed by users.
 Some companies, allow suppliers to access their databases
to help them better serve their needs.
Objective 2: Describe how Organizations Use Enterprise
Resource Planning (ERP) Systems to Process
Transactions and Provide Information.
To understand enterprise resource planning systems
the following aspects should be considered:
1- The need for ERP systems.
2- ERP components.
3- Advantages of ERP systems.
4- Disadvantages of ERP systems.
2/1- The need for ERP systems:

 Traditionally, the AIS has been referred to as a transaction

processing system because:
 ** its only concern was financial data and accounting
transactions, and
 ** provides financial information.
 Other potentially useful nonfinancial information would
traditionally be collected and processed outside the AIS.
 Consequently, many organizations developed additional
information systems to collect, store, process and report
information not contained in the AIS.
 ** The existence of multiple systems creates numerous
problems and inefficiencies.
 For example, the same data must be captured and stored by
more than one system, which result in:
 ** data redundancy across systems,
 ** data discrepancies if data are changed in one system but
not in others, and
 ** difficulty to integrate data from the various systems.
 Therefore, Enterprise Resource Planning (ERP) systems
overcome these problems as they:
 ** integrate all aspects of a company’s operations with a
traditional AIS.
 ** coordinate and manage data, business processes, and
resources.
 ** collect, store, and process data and provide the
information managers and external parties need to assess the
company.
- As shown in Figure 2-6, P. 62 ERP system uses a centralized
database to share information across business processes
and coordinate activities.
 This is important because an activity that is part of one
business process often triggers a complex series of
activities throughout many different parts of the
organization.
 For example, a customer order may necessitate:
 ** scheduling additional production to meet the
increased demand.
 ** This may trigger an order to purchase more raw materials.
 ** It may also be necessary to schedule overtime or hire
temporary help.
 Note: Well-designed ERP systems provide
management with easy access to up-to-date
information about all of these activities in order to
plan, control, and evaluate the organization’s
business processes more effectively.
2/2- ERP components:

 ERP systems are modular, with each module using best business
practices to automate a standard business process.
 This modular design allows businesses to add or delete modules as
needed.
 Typical ERP modules include:
1- Financial, it includes:
** general ledger and reporting system ( general ledger).
** accounts receivable.
** accounts payable.
** fixed assets.
** budgeting.
** cash management, and
** preparation of managerial reports and financial statements.
2- Human resources and payroll.
3- Order to cash (revenue cycle).
4- Purchase to pay ( disbursement or expenditure
cycle).
5- Manufacturing (production cycle).
6- Project management.
7- Customer relationship management.
8- System tools.
2/3- Advantages of ERP systems:

 An ERP system, with its centralized database,

provides significant advantages such as:
1- An ERP system provides an integrated, enterprise-wide, single
view of the organization’s data and financial situation.
2- Storing all corporate information in a single database breaks
down barriers between departments and streamlines the flow
of information.
3- Data input is captured or keyed once, rather than multiple
times, as it is entered into different systems.
4- Management gains greater visibility into every area
of the enterprise and greater monitoring capabilities.
5- The organization gains better access control.
6- Procedures and reports are standardized across
business units.
7- Customer service improves because employees can
quickly access:
** orders,
** available inventory,
** shipping information, and
** past customer transaction details.
8- Manufacturing plants receive new orders in real time, and
the automation of manufacturing processes leads to increased
productivity.
2/4- Disadvantages of ERP systems
ERP systems also have significant disadvantages:
1- Cost:
For example:
- ERP hardware, software, and consulting costs for large
companies range from $ 50 to $ 500 million and upgrades can
cost $ 50 million to $ 100 million.
- Midsized companies spend between $10 and $20 million.
2- Amount of time required:
 It can take years to select and fully implement an
ERP system depending on:
 ** business size,
 ** number of modules to be implemented,
 ** degree of computerization, and
 ** the scope of the change.
 As a result, ERP implementations have a very high
risk of project failure.
3- Changes to business processes
- Modules must adapt to standardized business processes as opposed
to adapting the ERP package to existing company processes.
 The failure to map current business processes to existing ERP
software is a main cause of ERP project failures.
4- Complexity
 This comes from integrating many different business activities and
systems, each having different:
 ** processes,
 ** business rules,
 ** data semantics,
 ** authorization hierarchies, and
 ** decision centers.
5- Resistance:
 Organizations that have multiple departments with
separate resources, missions, profit and loss, and
chains of commands may believe that a single system
has few benefits.
 It also takes considerable training and experience to
use ERP system effectively , and employee resistance
is a major reason why many ERP implementation do
not success.
 End of Chapter Two