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Module 1: A Journey to the Transaction Process

Introduction
Transaction sounds familiar in the organizations. It is a common term that every decision maker
within and outside the organization can easily understand. But, what is a transaction? Why is
there such a thing?
Transactions are events or activities, which are usually financial in nature that affect the
economic resources controlled by the organization. These events have an impact on the assets,
liabilities and equity of the company.
Processing transactions may take the form of either manual or automated or computerized. In a
computerized and internet based environment, it could be batch, on line or real time
processing. The process usually involves the recognition, measurement, presentation and
disclosure, and the subsequent derecognition of the effects of the transaction to the accounting
equation.
With todays technological change, transaction processing transcends among business units
and functional boundaries. If Alice in Wonderland were alive today, and she makes an
appointment with Mr. Manny Pangilinan of PLDT regarding operational efficiency and
effectiveness of its subsidiaries, what could be the starting point of the conversation? Similarly,
with the occurrence of a particular business transaction, are you aware of what lies ahead of the
transaction processing; where it should begin and how it will start?
This module will cover different transaction cycles, various accounting records effects of
technologies under the batch and real time processing on traditional versus computer based
systems.
Learning Outcomes
At the end of this module, you should be able to:

1. Summarize the fundamental objective of transaction cycles, together with the various accounting
documents and records.
2. Compare and contrast batch and real time processing technologies in terms of their implication in
transaction processing system.
3. List the documentation techniques used in Accounting Information Systems.

Required Reading:
Hall, J. (2010). Introduction to Transaction Processing. Accounting Information Systems (pp. 45 - 82).
Philippine Edition. Cengage Learning.
Hurt, R. (2010). Accounting Information Systems: Concepts and Current Issues. 2 nd Edition. McGraw Hill
/ Irwin.
http://en.wikipedia.org/wiki/Process_map#cite_note-1. Retrieved on August 18, 2013.
Last modified: Wednesday, 30 October 2013, 12:44 PM
Lecture Notes
I Transactions and Transaction Cycles
Organizations, whether profit oriented or not, either private or public, government and non government
alike conduct activities on a day to day basis. These activities range from making a sales order,
answering a phone call, talking to a customer or attending a meeting. It can also be payment of debts,
purchase of equipment, collection of cash from customer, and acquisition of goods for sale. These
activities are called transactions. Transactions are any event or activity that occurs within or even outside,
which affects the organization. It can be classified as financial or non financial transaction. Examples of
non financial transactions are making a phone call to a manager, talking to a supervisor, celebrating the
birthday of a friend and even making a sales inquiry. On the other hand, financial transactions are those
that affect the resources, obligations and residual interests of the firm. These involve economic resources
that are of value to the organization and measured in terms of money.
The activities of an organization usually involve exchanging of economic resources (money, goods and
services) between two (2) entities, in an arms - length manner, wherein one will give up something and
the other will receive something. This give and receive setup of activity, commonly referred to as
economic duality, is what we call financial transaction.
Business entities, regardless of the size and structure regularly engaged in financial transactions. These
involve purchasing and acquiring raw materials either for sale or use in the manufacturing process,
transforming raw materials into saleable goods (for manufacturing firms), selling goods to customers (in
the case of retail - merchandising), and services to customers for service companies (such as financial
institutions, BPOs). Since a bulk of the business transactions are encountered every now and then,
companies to be efficient in transaction processing classify these into three (3) transactional cycles.

Among the three (3) transactional cycles, most firms usually begin with expenditure cycle. Of course,
every transactional cycle has two subsets; namely, financial flow and physical flow. Physical flow pertains
to the movement of goods while financial flow refers to the accounting information direction as it moves in
the organization. Looking at Figure 1-1, usually the start of transactions is the acquisition of goods for
sale by a merchandising company or the purchase of raw materials for use in the production process by a
manufacturing firm. Firms acquire or obtain goods from suppliers on credit terms. As such, there is time
lag between acquisition of goods and payment of goods. Remember that when companies acquire goods
on credit, payment will generally await the maturity of the obligation, unless cash discounts are provided
by the suppliers. In this scenario, the customer company pays in cash, thus, the effect on the cash flow
of the supplier. The cash and accrual basis in accounting must be taken into consideration in every
Accounting Information System (AIS). Normally, small business organizations use the cash basis of
accounting, with simple AIS; while in contrast, large corporations use the accrual method; making their
AIS complex.
Noteworthily, firms also include in the expenditure cycle the payroll flow and the acquisition of capital
assets or long term assets such as property, plant and equipment items. So, in other words, the
expenditure cycle involves routine transactions that require cash disbursements, even if cash payment is
not concurrent with the occurrence of the transaction.
For most of the manufacturing firms, acquisition of raw materials is just the first step. After obtaining the
raw ingredients, the firm converts the raw materials into finished products. This process of converting raw
materials into saleable goods is called production. In the production process, companies apply labor,
machinery and factory plants to produce outputs. In this transaction cycle, cost flows are tracked, together
with the physical movement of the production process. Normally, information relating to raw materials
requisition and authorization of works in the production are part of production planning, while information
relating to costs accumulation, budgeting and costs control are part of cost accounting.
After transforming the product into a marketable condition, the company then sells it. Revenue cycle
begins when a customer places an order for the product. This cycle involves sales order processing and
cash receipts subsystems. In the sales order processing, activities relating to granting of credit, picking of
goods from the warehouse and shipping them to the customer, billing the customer and recording the
transactions in the accounts, are included. Cash collections, on the other hand, is under the subset of
cash receipts subsystem that usually begin when the company collects from the customer when the credit
granted has already become due and collectible.

The overall transaction processes are geared towards providing customers satisfaction and added value.
Essential in these cycles is the recognition that customer is in both ends of the process and that
companies continuously seek process improvements to enhance value proposition among customers.

II Accounting Documents and Records


Let us recall that the first step of the accounting process is documentation of transactions and gathering
of source documents. This processing phase is similar to both manual and computer based accounting
systems. The difference lies on the actual processing of transactions.
In the manual system, when financial transactions (simply transactions) occur, relevant and appropriate
documents are gathered and compiled before commencing the recording phase. Such documents can
either be a processing initiator, like the summary of an employees biometric time log which is used for
payroll computation, or it can also be a customer order for the sales order processing. These documents,
known as source documents allow the particular process to begin.
The documents that are actually products of a process are called product documents. Examples include
payroll check for the payroll process and sales order for the sales ordering process. If a document can
both serve as a process initiator and process output, it is called hybrid document or the turnaround
document. The statement of account that we usually receive from utility companies (MERALCO,
Maynilad, SMART, GLOBE, Sun Cellular and credit card companies), is actually a two fold document,
the first half serves as the bill of customers account (product document) and the other half is the
remittance advice (source document).
Consequently, the documents are considered in processing the transaction that occurs. Underlying
business documents are then recorded through the journalizing process. Figure 1 3 illustrates the
process.

The journalizing phase starts when transactions are recorded in the respective journals or books of
original entry, either general or special. The general journal is used for the companys non recurring,
non routine transactions such as acquiring of fixed assets, providing of adjusting entries, closing entries,
reversing entries and correcting entries. When transactions are voluminous and occur regularly, say for
example on a daily basis, in order to be efficient in the recording of the transactions, special journals are
created. Special journals can be provided for all sales transactions (sales journal), all purchase
transactions (purchases journal), cash collections (cash receipts journal), cash payments (cash
disbursement journal), petty cash expenses (petty cash journal), payroll registers, cash registers and
check registers.
After the transactions are recorded as journal entries, they are then posted to the ledgers, commonly
known as book of final entry. Note that every account formed from a transaction has its own general
ledger, as set out in the companys chart of accounts. There are two (2) kinds of ledger, namely, general
ledger, which summarizes the effects of the transactions to a particular account and the subsidiary ledger,
which in turn, provides the details of the summarized impact of the transactions to an account. An
example of this is the accounts receivable. Sales transactions are recorded in the sales journal, after
which, they are posted, and summarized amount goes to the general ledger balance of the accounts
receivable. The details of the outstanding balance can be found in each customer subsidiary ledger or
record. It can be observed that the total of all customers subsidiary ledger balances is equal to the
accounts receivable general ledger balance. This is the thing. The presence of subsidiary ledgers
provides control is so far as the accuracy of the records is concerned, because independent verification
procedure may be performed anytime.
When the means of processing change from manual system to computer based processing, the
accounting records are replaced with magnetic files. In the modern world of digital technology, these data
and transactions are captured and stored in digital form such as CD DVD, hard discs and the like.
Technically, there are four (4) types of magnetic file. These can be transaction file, master file, reference
file and archive file.

While the records may change depending on the manner by which accounting information is being
processed, the links between the processes remain the same. Although in computer based processing,
these links or connections can be less observable, still they exist. Hence, the audit trail, which establishes
the flow of either the origination or the destination of the information, is present in all accounting
information processing. These are nevertheless more observable in the manual processing because
underlying business documents readily exist in their original source and functions are segregated in the
information processing stage.

III Accounting Information Systems Documentation Techniques


The system of processing accounting information should be clear and easy to understand. As such,
documentation techniques that will provide an effective visual representation of the system are
necessary. The following are some of the useful techniques in laying out and conceptualizing the system:

1. 1. Data Flow Diagram (DFD)

According to Wikipedia, it is a graphical representation of the "flow" of data through an information


system, modelling its process aspects. Often this is the preliminary step used to create an overview of
the system which can later be elaborated.Data Flow Diagram can also be used for
the visualization of data processing (structured design). A Data Flow Diagram shows what kinds of
information will be input to and output from the system, where the data will come from and go to, and
where these will be stored. It does not show information about the timing of processes or any
information about whether processes will operate in sequence or in parallel.

1. 2. Entity Relationship (ER) Diagram

As the name suggests, this diagram shows the relation between entities of an organization. Entities
are resources, events and agents. Resources are those properties, items of value or simply assets
of the organization. Events on the other hand, are activities that affect the resources, such as buying
goods, selling goods and ordering inventories. Lastly, agents are those that participate in the event
either internal or external. In a give - and - receive transaction, the one who gives is usually the
internal agent while the one that receives is the external agent. For example, in a sales transaction,
the seller is the internal agent and the buyer is the external agent.
The relationship among entities is expressed in terms of their occurrences within the organization.
The degree of occurrence or degree of association is called cardinality. Cardinality may be one is
to - one occurrence (1:1), one to - many occurrence (1:M) or many - to - many occurrence (M:M).

1. 3. Flowcharts

A visual representation of a systems process which can represent manual processing, computerized
processing and even the system programming process.

1. 4. Process Map

Also known as process chart is used to identify the process, the objectives, risks and controls of the
process, to understand the point of perspectives of persons in the process and to those processes.

IV Timing of Accounting Information Processing


The time frame of processing transactions can be classified into two (2) groups. The first is batch
processing system wherein, transactions are grouped or assembled into batches before they are
processed. The actual processing will await the completion of the batch size. An example of this is the
payroll processing system wherein employee data and summary of employee time cards are grouped
together before commencing the actual processing. The second type is real time processing system
where there is no time lag between the occurrence and the processing of the transaction because as it
occurs, it is also processed. Online transactions like purchasing a reservation of airline tickets and making
cash withdrawals with Automated Teller Machines (ATMs) belong to this type.
Relative to the resources allocation, since concurrency is applied in both occurrence and processing in
real time processing system, more resources will be required to be effective in making information
currently available in this system. This is especially true because this system needs storage capacities
that can support its smooth operations. The batch processing is effective even in limited resources
because it requires simpler procedures in processing the transactions.
1. Among the companies that you know, choose only one company and identify it whether it is
engaged in a service, merchandising or manufacturing business.
2. With this company, identify as many transactions as you can in each of the three (3) transaction
cycles.
3. Draw a data flow diagram (DFD) for the expenditure cycle of that company. List the documents
associated with the information flow in the dataflow diagram.
4. Does the company use the batch data processing or real time data processing? Identify as many
transactions as you can that most likely be processed by the processing system the company
employs.