Overview of Transaction Processing and Enterprise Resource Planning Systems Chapter 2

Data Processing Cycle Input Process Output Storage

THE DATA PROCESSING CYCLE An important function of the AIS is to efficiently and effectively process the data about a company’s transactions. In manual systems, data is entered into paper journals and ledgers. Source documents stored in files In computer-based systems, data entered into computers and stored in files and databases. Operations performed to transform data into relevant information referred to as the data processing cycle

The Data Processing Cycle Determines What data is captured/stored? Encryption? Who has access to the data? Data protection issues How is the data organized? How can unanticipated information needs be met? Adaptable

Data Input Steps in Processing Input are: Capture transaction data triggered by a business activity (event). Make sure captured data are accurate and complete. Ensure company policies are followed (e.g., approval of transaction).

Data Capture Information collected for an activity includes: Activity of interest (e.g., sale) Resources affected (e.g., inventory and cash) People who participated (e.g., customer and employee) Information comes from source documents.

Data Input—Capture Example- sales transaction Date and time of day the sale occurred  Employee who made the sale and the checkout clerk who processed the sale  Checkout register where the sale was processed  Item(s) sold  Quantity of each item sold  List price and actual price of each item sold  Total amount of the sale  For credit sales: delivery instructions, customer bill-to and ship-to addresses, customer name

Source Documents Captures data at the source when the transaction takes place Paper source documents Turnaround documents Source data automation (captured data from machines, e.g., Point of Sale scanners at grocery store) It is important to emphasize Table 2-1 in the text as this sets the stage for understanding the transaction cycles and the source documents associated with those activities in the transaction cycle. A solid foundational understanding of: Activities Source documents associated with the activity Information flows (i.e., debit and credit postings in the ledger) This helps the student understand how to establish controls for this information in the subsequent chapters. For example, the text in Chapter 2 does mention that prenumbering documents is a good control, a good question to ask students is why do they think prenumbering of the source documents would be important to have in an organization? This gets them thinking more intuitively based on their own experiences as a consumer and it may not make learning controls seem like memorizing a list and seem more like something that a student can think about as they understand the details and fit it to a bigger picture. Another good class discussion is thinking about all the data that is collected using sensors (e.g., RFID tags). How much of this data would be important for the organization to capture?

Source Data Automaton Source data is captured In machine-readable form At the time of the business activity Examples ATM’s POS in retail stores Bar code scanners or RFID tags in warehouses

Data Input—Accuracy and Control Well-designed source documents or data entry screens can ensure that data captured is Accurate Provide instructions and prompts Check boxes Drop-down boxes Complete Internal control support Prenumbered documents

Data Storage Types of AIS storage: Paper-based Ledgers Journals File cabinets Computer-based Electronic

Data Storage Important to understand how data is organized Chart of accounts Coding schemas that are well thought out to anticipate management needs are most efficient and effective. Transaction journals (e.g., Sales) Subsidiary ledgers (e.g., Accounts receivable) General ledger Note: With the above, one can trace the path of the transaction (audit trail). The importance of data storage cannot be stressed enough. Many organizations change and evolve, but rarely do accountants have the luxury to really think ahead to organize how they want the information to be stored. Yet many AIS allow you to run special reports based on the coding schemas in the chart of accounts. For example, if your organization is expanding, is it important to have individual location financials as well as roll them up into regional financials? The coding schema of the chart of accounts, if not well thought out, can limit an organization and cause additional work; however, if the schema is well thought out, it can be more efficient to get the information to management.

Audit trail for Invoice #156 for $1,876.50 sold to KDR Builders Figure 2-2 from the text shows how the different ledgers and journals are used to trace the path of one transaction found in Table 2-3 (invoice # 156 from KDR Builders). This example, should also reinforce the accounting knowledge for the student as they may understand the debit and credit of a sale transaction but not necessarily understand how the AIS would store that transactional data. A good question to ask the students is why are there transactional journals and subledgers and not just one big general ledger? As they may have learned in their introductory accounting class, this becomes a very large file and it is easier to parcel out the information that is specific to the transaction (e.g., sales or purchasing) and the associated subsidiary ledgers.

Coding Techniques Sequence Block Group Mnemonic Chart of accounts Items numbered consecutively Block Specific range of numbers are associated with a category 10000–199999 = Electric Range Group Positioning of digits in code provide meaning Mnemonic Letters and numbers Easy to memorize Code derived from description of item Chart of accounts Type of block coding Digit Position Meaning 1–2 Product Line, size, and so on 3 Color 4–5 Year of Manufacture 6–7 Optional Features 1241000 12 = Dishwasher 4 = White 10 = 2010 00 = No Options

Coding Techniques Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

Journals General Specialized Infrequent or specialized transactions Repetitive transactions E.g., sales transactions

Sales Journal Figure 2-2 from the text shows how the different ledgers and journals are used to trace the path of one transaction found in Table 2-3 (invoice # 156 from KDR Builders). This example, should also reinforce the accounting knowledge for the student as they may understand the debit and credit of a sale transaction but not necessarily understand how the AIS would store that transactional data. A good question to ask the students is why are there transactional journals and subledgers and not just one big general ledger? As they may have learned in their introductory accounting class, this becomes a very large file and it is easier to parcel out the information that is specific to the transaction (e.g., sales or purchasing) and the associated subsidiary ledgers.

Computer Based Storage Entity(table in a DB) Something an organization wishes to store data about Customers, employees, inventory items, etc. Attributes Facts about the entity Fields Where attributes are stored Data value Contents of field Records Group of related attributes about an entity File Group of related Records

Computer-Based Storage Data is stored in master files or transaction files. Its important to understand how the data aggregates as this will be useful in subsequent chapters for designing query (questions) of the data or reports. Students should be thinking about what information is in master files and what would be in transaction files. It is helpful to refer to slide 2-5 such that master files usually include “resource” and “people” data and the transaction file is the activity or event data that is captured. Thus, there is the following hierarchy: Database includes Files (master/transaction) which include Records (entities) which include Attributes (individual fields)

File Types Master Transaction Database Cumulative Permanent records(exist across multiple time periods) Updated by transaction with the transaction file (Ledger in a manual system) Transaction Contains records of a business from a specific period of time (journal in manual system) Database Set of interrelated files Transaction File Master before Update Updated Master File

Data Processing Four types of processing (CRUD): Creating new records (e.g., adding a customer) Reading existing data Updating previous record or data Deleting data Data processing can be batch processed (e.g., post records at the end of the business day) or in real-time (process as it occurs).

A/R record update

Data Processing Batch processing: Source documents are grouped into batches, and control totals are calculated. Periodically, the batches are entered into the computer system, edited, sorted, and stored in a temporary file. The temporary transaction file is run against the master file to update the master file. Output is printed or displayed, along with error reports, transaction reports, and control totals.

Data Processing Online batch processing: Transactions are entered into a computer system as they occur and stored in a temporary file. Periodically, the temporary transaction file is run against the master file to update the master file. The output is printed or displayed.

Data Processing Online, real-time processing Transactions are entered into a computer system as they occur. The master file is immediately updated with the data from the transaction. Transaction log produced that consists of chronological record of all transactions Output is printed or displayed.

Information Output The data stored in the database files can be viewed Online (soft copy) Printed out (hard copy) Document (e.g., sales invoice) Report (e.g., monthly sales report) Query (question for specific information in a database, e.g., What division had the most sales for the month?) Queries are shown in Chapter 4 and a are a very useful tool used in accounting to get specific information out of a database.

Data Output Types This output can be in the form of: Documents Reports Source(beginning) Operational(end) Reports External users Financial statements Internal users Queries

Enterprise Resource Planning (ERP) Systems Integrates activities from the entire organization Production Payroll Sales Purchasing Financial Reporting Major Players for the Highp-End Apps Oracle SAP This is a good place to emphasize that good internal controls are necessary as an integrated database has the benefit of inputting data once in the system, if that input is inaccurate, it will be useless. That is why most people only have access to certain portions of the system and that good data entry controls are necessary.

ERP Systems

Advantages of ERP System Integrated enterprise-wide allowing for better flow of the information as it’s stored in a centralized database and can be accessed by various departments which also improves customer service. Data captured once (i.e., no longer need sales to enter data about a customer and then accounting to enter same customer data for invoicing) Improve access of control of the data through security settings Standardization of procedures and reports

Disadvantages of ERP System Costly Significant amount of time to implement Complex User resistance (learning new things is sometimes hard for employees)