Introduction to Transaction Processing

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Introduction to Transaction Processing

Chapter 4

2

Overview

The term transaction processing encompasses the variety of activities an organization most undertake to support its day-to-day operations.

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Learning Objectives

1 Provide an overview description of the flow of transaction data in a manufacturing firm.

2 Discuss the basic components of business processing systems.

3 Describe the process by which a double-entry accounting system would be designed and implemented.

4

Learning Objectives

4 Depict common coding systems that are used in transaction processing, with particular emphasis on coding an organization's chart of accounts.

5 Discuss forms design and records retention requirements including federal electronic tax-records retention requirements.

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Learning Objective 1

Provide an overview description of the flow of

transaction data in a manufacturing firm.

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Customer

AccountsReceivable

Billing

SalesOrder Warehouse

Production

ProductionSchedule

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2

3

4

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7

8

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Transaction Flows in a Manufacturing Firm

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Customer

Billing

Shipping Warehouse

Production

ProductionSchedule

14 11

1210


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15 16

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Purchasing

Production

Payroll

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18 AccountsPayable

Receiving

Vendor21

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22

23

24

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Payroll AccountsPayable

Customer

AccountsReceivable Accounting

Employee26

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2829

30

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Receiving

Warehouse

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Transaction Cycles and Application Systems

Even though no two organizations process transactional data in exactly the same manner, most organizations experience and process similar transaction flows.

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Operational transaction flows can be grouped according to common business processes.Most organizations have a sales order process, a billing process, an accounts receivable process, and all other business processes.

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Classification of the Transaction Flows by Major Business Process

ProcessSales Procurement Operations Firm Infrastructure1-7 17 8-9 2510-11 19-24 12-13 29-3014 26-28 15-16 31 18

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Discuss the basic components of business

processing systems.

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Components of the Transaction Processing System

What are the principal components of a transaction processing system?

– inputs– processing– storage– outputs

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What are some examples of inputs?– customer orders– sales slips– invoices– purchase orders– employee time cards

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Processing involves the use of journals and registers to provide a permanent and chronological record of inputs.Journals are used to record financial accounting transactions.Registers are used to record other types of data not directly related to accounting.

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Special journals are used to record similar and recurring transactions.What are examples of special journals?

– sales journal– purchase journal– cash receipts journal– cash disbursements journal

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SourceDocuments

Cash Receipts Journal

Cash Disbursements Journal

General Journal

Purchases Journal

Sales Journal

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Ledgers and files provide storage of data in both manual and computerized systems.Ledgers provide summaries of a firm’s financial accounting transactions.A file is an organized collection of data.

– transaction file– master file– reference or table file

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What is an output?It is any document generated in the system.What are some examples of outputs?

– trial balance– financial reports – operational reports– paychecks

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Describe the process by which a double-entry

accounting system would be designed and

implemented.

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Designing Double-Entry Systems

An accounting system must “fit” a particular organization.What must be taken into account in designing an accounting system?

– the nature and purpose of the organization– its structural and functional characteristics– its physical layout, products, and services– the personnel who operate the system

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Hierarchical Model of an Accounting SystemFinancial Statements

Chart of Accounts

Cycles Revenue Expenditure Production

Application Systems

SalesAccounts Receivable

PurchasingPayroll

InventoryProperty

Standard Journal Entries

Identify accounts affected by each application system

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Hierarchical Model of an Accounting SystemFinancial Statements

Chart of Accounts

Cycles Finance Financial Reporting

Application Systems

Cash General Ledger

Standard Journal Entries

Identify accounts affected by each application system

Consolidation

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What are the four stages involved in the design of an accounting system?

1 Design a rough classification of accounts, or chart of accounts, and related financial statements and reports.

2 Review this with management and operating personnel.

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Designing Double-Entry Systems3 Finalize statements, chart of

accounts, and other reports.4 Prepare a plan of journalizing and

design the necessary business papers and procedures to implement and operate the system.

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The chart of accounts is a listing of all asset, liability, revenue, expense, and equity accounts used in an accounting system.It is used to achieve an organization’s objectives for financial reporting and control.

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A plan for journalizing and posting transactions involves several steps.Step 1: Analyze the natures of activities within the four basic transaction cycles.

1 Revenue cycle2 Expenditure cycle3 Finance cycle4 Production cycle

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It is common to identify a fifth major transaction cycle to group accounts that are not directly affected by transactional activity.The financial reporting cycle does not process transactions involving external parties.

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Step 2: Group activities within each major transaction cycle into application systems.An application system processes a logically related set of transactions.Step 3: Develop a complete set of standard or recurring journal entries.

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What are standard journal entries?They are pro forma or hypothetical entries that are expected to occur in the normal operation of the system.They should indicate three items.

1 The accounts affected by the entry2 The source of the entry3 The date or period of the entry

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Journal and Journal-Entry Relationship Sales Journal Page 1 Debits CreditsAccounts

Receivable SalesDate Reference Customers Other Class 1 Class 2 Services Tax Number 120 121 511 512 520 550 Standard Journal Entry No. 15 MonthlyDR. 120 Accounts Receivable–CustomersDR. 121 Accounts Receivable–OthersCR. 511 Sales–Class 1CR. 512 Sales–Class 2CR. 520 Sales–ServicesCR. 550 Sales–Tax

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The flow of processing in a manual accounting system is from source documents to journals, journals to ledgers, and from ledgers to financial statements.Multiple transaction techniques become essential as the volume of transactions grows.

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What is a one-write system?It is a device that both posts a transaction and journalizes it in the same operation.A writing board is designed to allow simultaneous recording on several documents arranged and held on a special board.

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What is ledgerless bookkeeping?It is a form of processing in which source documents are sorted and filed rather than posted to ledgers.The file of source documents replaces a separate ledger.

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Accounts receivable and accounts payable systems are typically best suited for ledgerless bookkeeping applications.Ledgerless bookkeeping systems have less redundancy, and therefore less inherent control.

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When computers are used to process transactions, two different modes of processing accounting transactions are possible.

1 Batch processing2 Direct processing

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Batch processing is a form of processing in which batches of transactions are accumulated and processed as a group.Direct processing is a form of processing in which individual transactions are processed separately.

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What is data validation?It is the process of reviewing transaction details for accuracy and completeness during input.

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The basic double-entry accounting model contains just three accounts: assets, liabilities, and equity.Block coding is a way to organize a chart of accounts.It sets aside a “block” or group of sequential account numbers for each major group of accounts.

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Depict common coding systems that are used in transaction processing,

with particular emphasis on coding an organization's

chart of accounts.

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Coding Systems for Transaction Processing

A coding system consists of a character set; that is, a set of admissible predefined symbols that are used to identify the object of interest.What are the two purposes of a code?

1 It provides a brief identification.2 It gives meaning to data in subsequent

processing.

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What are some examples of codes?– numeric codes– alphanumeric codes – machine-readable codes

The universal product code is an example of a bar code.

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What is a block code?It classifies objects into certain groups.A group of hierarchical code is a block code in which subclassifications are implemented within each block of the code.

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Coding Examples in Accounting Systems

Codes are widely used in accounting systems.What are two common examples?

1 Customer coding2 Chart of accounts

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Typical Account Coding Structure

XX

SubunitClassification

XXXXX

Natural AccountClassification

ActivitySuffix

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X

Detailed account classification

Major account classification

Financial statement classification


XX

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111

Checking account – bank

Asset

Cash


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Discuss forms design and records retention

requirements including federal electronic tax-

records retention requirements.

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Form Design and Records Retention Considerations

Accounting-related forms and papers serve several functions.What are these functions?They serve as a physical medium to store and transmit data.They transmit authority and responsibility.They assist employees by indicating what data should be recorded.

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The fundamental consideration in form design is the user.Concerning paper forms, optional design features such as multiple colors, prenumbering, and rigid specifications for size and quality of the paper stock are often desirable.

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Records retention requirements must be considered in the design of an accounting system.Various government and tax regulations set specific guidelines and legal requirements over records retention.

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Records retention must also be considered from the internal viewpoint of information storage and usage.

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End of Chapter 4

Introduction to Transaction Processing

Documents

transaction processing

accounting9 transaction

flow of transaction

warehouse10 transaction

doubleentry accounting

accounts receivable

transaction file master

principal components