Chapter 2

Overview of Transaction Processing and Enterprise Resource

Planning (ERP) Systems

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE

Accountants and other system users play a significant role in the data processing cycle. They interact
with systems analysts to help answer questions such as:

a. What data should be entered and stored by the organization, and who should have access
to them?
b. How should data be organized, updated, stored, accessed, and retrieved?
c. How can scheduled and unanticipated information needs be met?

One important AIS function is to process company transactions efficiently and effectively.

• In manual (non-computer-based) 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.

Data Processing Cycle – the four operations (data input, data storage, data processing, and
information output) performed on data to generate meaningful and relevant information.

The Data Processing Cycle

Data Storage

Data Input Data Processing Information

Output

DATA INPUT
Step 1: The first step in processing input is to capture transaction data and enter them into the system.
The data capture process is usually triggered by a business activity. Data must be collected about
three facets of each business activity:

1. Each activity of interest

2. The resource(s) affected by each activity
3. The people who participate in each activity
Source Documents – documents used to capture transaction data at its source – when the
transaction takes place.

Common Business Activities and Source Documents

BUSINESS ACTIVITY SOURCE DOCUMENT
Revenue Cycle
• Take customer order → Sales order
• Deliver or ship order → Delivery ticket or bill of lading
• Receive cash → Remittance advice or remittance list
• Deposit cash receipts → Deposit slip
• Adjust customer account → Credit memo
Expenditure Cycle
• Request items → Purchase requisition
• Order items → Purchase order
• Receive items → Receiving report
• Pay for items → Check or electronic funds transfer
Human Resources Cycle
• Collect employee withholding data → W-4 Form
• Record time worked by employees → Time cards
• Record time spent on specific jobs → Job time tickets or time sheet

Turnaround documents – records of company data sent to an external party and then returned to
the system as an input.

- Are in machine readable form to facilitate their subsequent processing as input record.

Source data automation – the collection of transaction data in machine-readable form at the time
and place of origin

Step 2: 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:

a. providing instructions or prompts about what data to collect,

b. grouping logically related pieces of information close together,
c. using check-off boxes or pull-down menus to present the available options, and
d. using appropriate shading and borders to clearly separate data items

Control:

Users can improve control either by using prenumbered source documents or by 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.
Step 3: The third step in processing input is to make sure company policies are followed, such as
approving or verifying a transaction.

DATA STORAGE

The mere existence of relevant data does not guarantee that they are useful. 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.

Ledgers – cumulative accounting information is stored in general and subsidiary ledgers.

General ledger – contains summary-level data for every asset, liability, equity, revenue, and expense
account of the organization.

Subsidiary ledger – a ledger used to record detailed data for a general ledger account with many
individual sub accounts, such as accounts receivable, inventory, and accounts payable.

Control account – a title given to a general ledger account that summarizes the total amounts
recorded in a subsidiary ledger.

Coding Techniques

Data in ledgers is often organized logically using coding techniques.

Coding – the systematic assignment of numbers or letters to items to classify and organize them.

Sequence codes –items are numbered consecutively to account for all items. Any missing items
cause a gap in the numerical sequence.

- items are numbered consecutively so that gaps in the sequence code indicate missing items
that should be investigated.

Example: prenumbered checks, invoices, and purchase orders

Block code – blocks of numbers that are reserved for specific categories of data, thereby helping to
organize the data

Examples:
✓ chart of accounts
✓ ledger account numbers (blocked by account type)
✓ employee numbers (blocked by department)
✓ customer numbers (blocked by region)
✓ product categories
Product Code Product Type
1000-1999 Electric range
2000-2999 Refrigerator
3000-3999 Washer
4000-4999 Dryer
Users can identify an item’s type and model using the code numbers

Group code – two or more sub group of digits used to code items

- are often used in conjunction with block codes

Mnemonic codes – letters and numbers are interspersed to identify an item

- the mnemonic code is derived from the description of the item and is usually easy to
memorize

Guidelines for a Better Coding System

The code should:

• Be consistent with its intended use, which requires that the code designer determine desired
system outputs prior to selecting the code
• Allow for growth.
Example: don’t use a three-digit employee code for a fast-growing company with 950
employees
• Be as simple as possible to minimize costs, facilitate memorization and interpretation, and
ensure employee acceptance
• Be consistent with the company’s organizational structure and across the company’s
divisions

CHART of ACCOUNTS

- A great example of coding

- A list of the numbers assigned to each general ledger account
- These account numbers allow transaction data to be coded, classified, and entered into the
proper accounts
- They facilitate the preparation of financial statements and reports, because data stored in
individual accounts can easily be summed for presentation

Chart of Accounts – a listing of all the numbers assigned to balance sheet and income statement
accounts. The account numbers allow transaction data to be coded, classified, and entered into
the proper accounts. They also facilitate financial statement and report preparation.

• Data stored in summary accounts cannot be easily analyzed and reported in more detail.
• It is important that the chart of accounts contain sufficient detail to meet an organization’s
information needs.
• The accounts are assigned numbers to match the order of their appearance in financial
statements (in order of decreasing liquidity)

Example:

Consider the consequences if a company were to use only one general ledger account for
all sales transaction.

→ It would be easy to produce reports showing the total amount of sales for a given time
period but it would be very difficult to prepare reports separating cash and credit sales
→ The only way to produce these latter reports would be to go back to original sales records
to identify the nature of each sales transaction
→ If the company used separate general ledger accounts for cash and credit sales, then
reports showing both types of sales could be easily produced.
→ Total sales could also be easily reported by summing each type of sale
 Sample Chart of Accounts
ACCOUNT ACCOUNT NAME ACCOUNT ACCOUNT NAME
CODE CODE
100-199 Current Assets 400-499 Equity Accounts
101 Checking Account 400 Ordinary Shares
102 Savings Account 410 Retained Earnings
103 Petty Cash 500-599 Revenue
120 Accounts Receivable 501 Cash Sales
125 Allowance for Doubtful Accounts 502 Credit Sales
130 Notes Receivable 510 Sales Returns & Allowances
150 Inventory 511 Sales Discounts
160 Supplies 520 Interest Revenue
170 Prepaid Rent 530 Miscellaneous Revenue
180 Prepaid Insurance 600-799 Expenses
200-299 Noncurrent Assets 600 Cost of Goods Sold
200 Land 611 Salaries Expense
210 Buildings 612 Commissions Expense
215 Accumulated Depreciation – Buildings 613 Government Contributions
230 Equipment 620 Rent Expense
235 Accumulated Depreciation – 630 Insurance Expense
Equipment
240 Furniture and Fixtures 640 Supplies Expense
245 Accumulated Depreciation – Furniture 650 Bad Debts Expense
and Fixtures
250 Other Assets 701 Depreciation Expense –
Buildings
300-399 Liabilities 702 Depreciation Expense -
Equipment
300 Accounts Payable 703 Depreciation Expense –
Furniture & Fixtures
310 Wages Payable 710 Taxes and Licenses
321 Withholding Payable - Compensation
322 Withholding Payable – Expanded
323 SSS Contributions Payable
324 Philhealth Contributions Payable
330 PAG-IBIG Contributions Payable
360 Other Liabilities

Considerations in Creating Chart of Accounts

• A chart of accounts is tailored to the nature and purpose of an organization.

• It is necessary to leave gaps in the chart of accounts to allow for additional accounts.
• Subsidiary accounts often have longer account codes than general ledger accounts.

JOURNALS

Journal entry – shows the accounts and amounts to be debited and credited

General journal – used to record infrequent or nonroutine transactions, such as loan payments and
end-of-period adjusting and closing entries.

Specialized journal – records large numbers of repetitive transactions such as sales, cash receipts,
and cash disbursements.
 Sample Sales Journal
Sales Journal PAGE 5
DATE INVOICE ACCOUNT DEBITED ACCOUNT POST AMOUNT
NUMBER NUMBER REF
Oct 15 151 Brown Hospital Supply 120-035 ✓ 798.00
Oct 15 152 Greenshadows Hotel Suites 120-122 ✓ 1,267.00
Oct 15 153 Heathrow Apartments 120-057 ✓ 5,967.00
Oct 15 154 LMS Construction 120-173 ✓ 2,312.50
Oct 15 155 Gardenview Apartments 120-084 ✓ 3,290.00
Oct 15 156 KDR Builders 120-135 ✓ 1,876.50
TOTAL 120/502 15,511.00

AUDIT TRAIL

Audit trail – a path that allows a transaction to be traced through a data processing system from
point of origin to output or backwards from output to point of origin.

- Used to check the accuracy and validity of ledger postings and to trace changes in general
ledger accounts from their beginning balance to their ending balance.

COMPUTER-BASED STORAGE CONCEPTS

Data Storage Elements

Entity – the item about which information is stored in a record.

Example: employees, inventory items, customers

Attributes – the properties, identifying numbers, and characteristics of interest of an entity that is
stored in a database

- Each type of entity possesses the same set of attributes

- The specific values for those attributes will differ

Example:

→ all employees possesses an employee number, pay rate, name, and address
→ one employee’s rate might be 240.00 per hour whereas another’s might be 250.00

Field – the portion of a data record where the data value for a particular attribute is stored.

Example: in a spreadsheet each row might represent a customer and each column is an attribute of
the customer. Each cell in a spreadsheet is a field.

Record – a set of fields whose data values describe specific attributes of an entity, such as all payroll
data relating to a single employee

Example: a row in a spreadsheet

Data value – the actual value stored in a field. It describes a particular attribute of an entity.

Example: the customer name field would contain “ZYX Company” if that company was a customer

File – a set of logically related records, such as the payroll records of all employees.
Master file – a permanent file of records that stores cumulative data about an organization. As
transactions take place, individual records within a master file are updated to keep them current.

Transaction file – a file that contains the individual business transactions that occur during a specific
fiscal period.

- Is conceptually similar to a journal in a manual AIS.

Database – a set of interrelated, centrally controlled data files that are stored with as little data
redundancy as possible.

- Consolidates records previously stored in separate files into a common pool and serves a
variety of users and data processing applications.

DATA PROCESSING
Once business activity data have been entered into the system, they must be processed to keep
the databases current.

Types of Data Processing Activities (CRUD)

1. Creating new data records, such as adding newly hired employee to the payroll database.
2. Reading, retrieving, or viewing existing data.
3. Updating previously stored data.
4. Deleting data, such as purging the vendor master file of all vendors the company no longer
does business with

Batch processing – accumulating transaction records into groups or batches for processing at a
regular interval such as daily or weekly. The records are usually sorted into some sequence
(numerically or alphabetically) before processing.

Online, Real-time processing – the computer system processes data immediately after capture and
provides updated information to users on a timely basis.

Online Batch processing – a combination of the two approaches

INFORMATION OUTPUT
• When displayed on a monitor, 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:
1. Document – a record of a transaction or other company data such as checks, invoices,
receiving reports, and purchase requisitions
2. Report – system output, organized in a meaningful fashion, that is used by employees to
control operational activities, by managers to make decisions and design strategies, and by
investors and creditors to understand a company’s business activities
3. Query Response – a request for the database to provide the information needed to deal with
a problem or answer a question. The information is retrieved, displayed or printed, and/or
analyzed as requested.
ENTERPRISE RESOURCE PLANNING SYSTEMS
Enterprise Resource Planning (ERP) System – a system that integrates all aspects of an organization’s
activities – such as accounting, finance, marketing, human resources, manufacturing, inventory
management – into one system.

ERP systems are modular. This modular design allows businesses to add or delete modules as needed.

Typical ERP Modules

1. Financial general ledger, accounts receivable, accounts payable, fixed assets,
(general ledger and budgeting, cash management, and preparation of managerial
reporting system) reports and financial statements.
2. Human Resources human resources, payroll, employee benefits, training, time and
and Payroll attendance, benefits, and government reporting.
3. Order to Cash sales order entry, shipping, inventory, cash receipts, commission
(revenue cycle) calculation
4. Purchase to Pay purchasing, receipt and inspection of inventory, inventory and
(disbursement cycle) warehouse management, and cash disbursement
5. Manufacturing engineering, production scheduling, bill of materials, work-in-process,
(production cycle) workflow management, quality control, cost management, and
manufacturing processes and projects
6. Project Management costing, billing, time and expense, performance units, activity
management
7. Customer sales and marketing, commissions, service, customer contact, and call
Relationship center supports
Management
8. System Tools tools for establishing master file data, specifying flow of information,
access controls, and so on

Advantages of an ERP System

• An ERP provides an integrated, enterprise-wide, single view of the organization’s data and
financial situation
• Data input is captured or keyed once,
• Management gains greater visibility into every area of the enterprise and greater monitoring
capabilities
• The organization gain better access control.
• Procedures and reports are standardized across business units.
• Customer service improves
• Manufacturing plants receive new orders in real time, and the automation of manufacturing
processes lead to increased productivity.

Disadvantages of an ERP System

• Cost
• Amount of time required
• Changes to business processes
• Complexity
• Resistance

“The person who deserves most pity is a lonesome one on a rainy day who doesn’t know how to
read.” - Benjamin Franklin