Introduction to Transaction Processing

1
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.

3
Learning Objectives

• Provide an overview description of the flow of
  transaction data in a manufacturing firm.
• Discuss the basic components of business
  processing systems.
• Describe the process by which a double-entry
  accounting system would be designed and
  implemented.

4
Learning Objectives

• Depict common coding systems that are used in
  transaction processing, with particular emphasis
  on coding an organization's chart of accounts.
• Discuss forms design and records retention
  requirements including federal electronic
  tax-records retention requirements.

5
Learning Objective 1

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

6
Transaction Flows in a Manufacturing Firm
1
7
Sales Order
Warehouse
2
8
3
Customer
Billing
Production
4
9
5
Accounts Receivable
Production Schedule
6
7
Transaction Flows in a Manufacturing Firm
Shipping
Warehouse
14
11
Customer
12
13
10
Production
Billing
15
16
Production Schedule
8
Transaction Flows in a Manufacturing Firm
20
Purchasing
Receiving
19
17
Production
Vendor
22
21
24
23
18
Payroll
Accounts Payable
25
9
Transaction Flows in a Manufacturing Firm
Payroll
Accounts Payable
27
Customer
Employee
26
28
29
Accounts Receivable
Accounting
30
10
Transaction Flows in a Manufacturing Firm
Receiving
31
Warehouse
11
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.

12
Transaction Cycles and Application Systems

• 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.

13
Transaction Cycles and Application Systems
Classification of the Transaction
Flows by Major Business Process
Process Sales Procurement
Operations Firm

Infrastructure 1-7 17 8-9 25 10-11
19-24 12-13 29-30 14 26-28 15-16
31 18
14
Learning Objective 2

• Discuss the basic components of business
  processing systems.

15
Components of the Transaction Processing System

• What are the principal components of a
  transaction processing system?
• inputs
• processing
• storage
• outputs

16
Components of the Transaction Processing System

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

17
Components of the Transaction Processing System

• 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.

18
Components of the Transaction Processing System

• 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

19
Components of the Transaction Processing System
Source Documents
Cash Receipts Journal
Cash Disbursements Journal
General Journal
Purchases Journal
Sales Journal
20
Components of the Transaction Processing System

• Ledgers and files provide storage of data in
  both manual and computerized systems.
• Ledgers provide summaries of a firms financial
  accounting transactions.
• A file is an organized collection of data.
• transaction file
• master file
• reference or table file

21
Components of the Transaction Processing System

• 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

22
Learning Objective 3

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

23
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

24
Designing Double-Entry Systems
Hierarchical Model of an Accounting System
Financial Statements
Chart of Accounts
Cycles Revenue Expenditure Production
Sales
Purchasing
Inventory
Application Systems
Payroll
Property
Accounts Receivable
Standard Journal Entries
Identify accounts affected by each application
system
25
Designing Double-Entry Systems
Hierarchical Model of an Accounting System
Financial Statements
Chart of Accounts
Cycles Finance Financial Reporting
Cash
General Ledger
Application Systems
Consolidation
Standard Journal Entries
Identify accounts affected by each application
system
26
Designing Double-Entry Systems

• What are the four stages involved in the design
  of an accounting system?
• Design a rough classification of accounts, or
  chart of accounts, and related financial
  statements and reports.
• Review this with management and operating
  personnel.

27
Designing Double-Entry Systems

• Finalize statements, chart of accounts, and other
  reports.
• Prepare a plan of journalizing and design the
  necessary business papers and procedures to
  implement and operate the system.

28
Designing Double-Entry Systems

• 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 organizations
  objectives for financial reporting and control.

29
Designing Double-Entry Systems

• A plan for journalizing and posting transactions
  involves several steps.
• Step 1 Analyze the natures of activities within
  the four basic transaction cycles.
• Revenue cycle
• Expenditure cycle
• Finance cycle
• Production cycle

30
Designing Double-Entry Systems

• 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.

31
Designing Double-Entry Systems

• 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.

32
Designing Double-Entry Systems

• 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.
• The accounts affected by the entry
• The source of the entry
• The date or period of the entry

33
Designing Double-Entry Systems
Journal and Journal-Entry Relationship
Sales Journal Page 1
Debits Credits Accounts
Receivable
Sales Date Reference Customers Other Class 1
Class 2 Services Tax Number
120 121 511 512 520
550 Standard
Journal Entry No.
15 Monthly DR. 120 Accounts
ReceivableCustomers DR. 121 Accounts
ReceivableOthers CR. 511 SalesClass 1 CR.
512 SalesClass 2 CR. 520 SalesServices CR.
550 SalesTax
34
Designing Double-Entry Systems

• 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.

35
Designing Double-Entry Systems

• 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.

36
Designing Double-Entry Systems

• 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.

37
Designing Double-Entry Systems

• 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.

38
Designing Double-Entry Systems

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

39
Designing Double-Entry Systems

• 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.

40
Designing Double-Entry Systems

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

41
Designing Double-Entry Systems

• 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.

42
Learning Objective 4

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

43
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?
• It provides a brief identification.
• It gives meaning to data in subsequent processing.

44
Coding Systems for Transaction Processing

• What are some examples of codes?
• numeric codes
• alphanumeric codes
• machine-readable codes
• The universal product code is an example of a
  bar code.

45
Coding Systems for Transaction Processing

• 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.

46
Coding Examples in Accounting Systems

• Codes are widely used in accounting systems.
• What are two common examples?
• Customer coding
• Chart of accounts

47
Coding Examples in Accounting Systems
Typical Account Coding Structure
XX
XX
XXX
Subunit Classification
Natural Account Classification
Activity Suffix
48
Coding Examples in Accounting Systems
Typical Account Coding Structure
X
X
X
Detailed account classification
Financial statement classification
Major account classification
49
Coding Examples in Accounting Systems
Typical Account Coding Structure
111
Checking account bank
Cash
Asset
50
Learning Objective 5

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

51
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.

52
Form Design and Records Retention Considerations

• 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.

53
Form Design and Records Retention Considerations

• 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.

54
Form Design and Records Retention Considerations

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

55
End of Chapter 4