CHAPTER 2: TRANSACTION PROCESSING SYSTEM

-TPS applications process financial transactions.

Financial Transactions
- An economic event that affects the assets and equities of the firm, is reflected in its
accounts, and is measured in monetary terms.
- Economic exchanges with external parties.
- These include the:
o Sale of goods or services,
o The purchase of inventory
o The discharge of financial obligations
o The receipt of cash on account from customers.
- Financial transactions also include certain internal events such;
o Depreciation of fixed assets
o Application of labor
o Raw materials
o Overhead to the production process
o Transfer of inventory from one department to another
TPS Cycles:
 Expenditure Cycle- incurs expenditures in exchange for resources.
 Conversion Cycle- provides value added through its products or services.
 Revenue Cycle- receives revenue from outside sources.
The Expenditure Cycle
- Business activities begin with
the acquisition of materials,
property, and labor in exchange
for cash.
- Most expenditure transactions
are based on a credit
relationship between the trading
parties.
- The actual disbursement of cash
takes place at some point after
the receipt of the goods or
services.
The Conversion Cycle
- is composed of two major
subsystems: the production
system and the cost accounting
system.
- The production system involves the planning, scheduling, and control of the physical product
through the manufacturing process.
- The cost accounting system monitors the flow of cost information related to production.
The Revenue Cycle
- Firms sell their finished goods to customers through the revenue cycle, which involves
processing cash sales, credit sales, and the receipt of cash following a credit sale.
ACCOUNTING RECORDS
Manual Systems- 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.
- Three Types of Documents:

o Source Documents- economic events result in

some documents being created at the beginning
of the transaction.

o Product Documents- 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
- customer’s bill is a product document of
the sales system.

o Turnaround
Documents- are
product documents
of one system that
become source
documents for
another system. A
turnaround
document contains
important
 information about a customer’s account to help the cash receipts system process the
payment.

Journals
- is a record of a chronological entry.
- documents are the primary source of data for journals.
- Types of Journals:
o Special Journals
- used to record specific classes
of transactions that occur in
high volume.

o Register
- often used to denote certain types of special journals.
- For example,
 the payroll journal is often called the payroll register.
 receiving register is a log of all receipts of raw materials or merchandise
ordered from vendors.
 shipping register is a log that records all shipments to customers.
o General Journals
- Firms use the general journal to record nonrecurring, infrequent, and dissimilar
transactions.
- the columns are nonspecific,
allowing any type of
transaction to be recorded.
- the entries are recorded
chronologically.
Ledgers
- 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.
- Organizations use this information to prepare
financial statements, support daily
operations, and prepare internal reports.
- Types of Ledgers:
 o General Ledgers- which contain the firm’s account information in the form of highly
summarized control accounts.
o Subsidiary Ledgers- which contain the details of the individual accounts that constitute a
particular control account.

The Audit Trail

- The accounting records described previously provide an audit trail for tracing transactions from source
documents to the financial statements.

Computer-Based Systems
- Audit trails in computer-based systems are less observable than in traditional manual systems.
- Four different types of magnetic files:
o Master Files
- A master file
generally contains
account data.
- The general ledger
and subsidiary
ledgers are examples
of master files.
- Data values in master
files are updated from
transactions.
o Transaction Files
- A transaction file is a
temporary file of
transaction records
used to change or
update data in a
master file.
- Examples:
 Sales orders
 Inventory
receipts
 Cash receipts
o Reference Files
 -stores data that are used as standards for processing transactions.
-For example,
 payroll program may refer to a tax table to calculate the proper amount of
withholding taxes for payroll transactions.
 other reference files include price lists used for preparing customer
invoices, lists of authorized suppliers, employee rosters, and customer
credit files for approving credit sales.
o Archive Files
- contains records of past transactions that are retained for future reference.
- These transactions form an important part of the audit trail.

DOCUMENTATION TECHNIQUE
Data Flow Diagrams
- The data flow diagram (DFD) uses symbols to
represent the entities, processes, data flows, and data
stores that pertain to a system. DFDs are used to
represent systems at different levels of detail from
very general to highly detailed.

Entity Relationship Diagrams

- is a documentation technique used to represent the
relationship between entities.

System Flowcharts
- the graphical representation of the physical
relationships among key elements of a system.
Program Flowcharts
- shows the relationship between computer
programs, the files they use, and the outputs they
produce. T
 TRANSACTION PROCESSING MODELS

DATA CODING SCHEMES

- Within the context of transaction processing, data coding involves creating simple numeric or alphabetic
codes to represent complex economic phenomena that facilitate efficient data processing.
NUMERIC AND ALPHABETIC CODING SCHEMES
Sequential Codes
- As the name implies, sequential codes represent items in some sequential order (ascending or
descending). A common application of numeric sequential codes is the prenumbering of source
documents.
Block Codes
- A numeric block code is a variation on sequential coding that partly remedies the disadvantages just
described.
- This approach can be used to represent whole classes of items by restricting each class to a specific
range within the coding scheme.
- A common application of block coding is the construction of a chart of accounts.
Group Codes
- Numeric group codes are used to represent complex items or events involving two or more pieces of
related data.
- The code consists of zones or fields that possess specific meaning.
ALPHABETIC CODES
- Alphabetic codes are used for many of the same purposes as numeric codes.
- Alphabetic characters may be assigned sequentially (in alphabetic order) or may be used in block and
group coding techniques.
MNEMONIC CODES
- Mnemonic codes are alphabetic characters in the
form of acronyms and other combinations that
convey meaning.