Chapter 2: Overview of Transaction Processing and ERP Systems

Overview of Transaction Processing and ERP Systems

The Data Processing Cycle

This cycle describes the core activities involved in transforming raw data from business activities into meaningful information. It consists of four main steps:

• Data Input: Capturing transaction data.

• Data Storage: Organizing and maintaining the data.

• Data Processing: Performing operations on the data.

• Information Output: Presenting the processed data as useful information.

Business Activity and Source Documents (Revenue Cycle Example)

Each step in a business activity triggers the creation of associated source documents, which are critical for data input.

• Take customer order: Generates a Sales order.

• Deliver or ship order: Generates a Delivery ticket or Bill of lading.

• Receive cash: Generates a Remittance advice or Remittance list.

• Deposit cash receipts: Generates a Deposit slip.

• Adjust customer account: Generates a Credit memo.

Data Input

Processing input requires several critical steps to ensure accuracy, completeness, and adherence to company policies.

Steps in Processing Input

1. Capture transaction data: Data is captured as a direct result of a business activity or event.

2. Ensure accuracy and completeness: Verify that all necessary data points are correctly captured and present.

3. Ensure company policies are followed: This involves checking for appropriate approvals for transactions, credit limits, or other internal controls.

Data Capture

Information collected for any activity typically includes three key aspects:

• Activity of interest: What happened? (e.g., a sale).

• Resources affected: Which assets were involved? (e.g., inventory and cash).

• People who participated: Who was involved? (e.g., customer and employee).

This information is primarily derived from source documents.

Source Documents

Source documents are essential for capturing data at its origin when a transaction occurs. They can take various forms:

• Paper source documents: Traditional physical documents like sales invoices or purchase orders.

• Turnaround documents: Documents that are sent to an external party and then returned to the system as input (e.g., a utility bill that is returned with payment).

• Source data automation: Data captured automatically by machines (e.g., point-of-sale scanners at grocery stores recording sales data).

Data Storage

Understanding how data is organized is crucial for effective information systems. Key components include:

Chart of Accounts

A Chart of Accounts is a comprehensive list of all the numbers assigned to each general ledger account within an organization. It provides a structured framework for classifying financial transactions.

Transaction Journals

Transaction journals are chronological records of business transactions.

• General Journal: Records infrequent or non-routine transactions, such as adjusting entries or closing entries.

• Specialized Journal: Records frequent, similar types of transactions. Examples include:

  • Sales Journal: Records all credit sales transactions.

  • Cash Receipts Journal: Records all cash inflows.

  • Purchases Journal: Records all credit purchases.

  • Cash Disbursements Journal: Records all cash outflows.

Ledgers

Ledgers categorize and summarize transaction data from journals.

• Subsidiary Ledgers: Contain detailed individual accounts for a specific general ledger account. Examples include:

  • Accounts Receivable Subsidiary Ledger: Details amounts owed by individual customers.

  • Accounts Payable Subsidiary Ledger: Details amounts owed to individual vendors.

• General Ledger: Contains summarized balance data for every account used by the organization. It's often referred to as the control account for its respective subsidiary ledger. The balance in a control account (e.g., Accounts Receivable in the General Ledger) should equal the sum of the balances in its corresponding subsidiary ledger.

Audit Trail

One of the most significant benefits of this structured data storage is the ability to create an audit trail. This refers to the traceable path of a transaction from its origin (source document) through various intermediate records (journals and ledgers) to its final disposition in financial statements, and vice versa. An audit trail allows for verification of transactions, detection of errors, and forensic analysis.

Recording and Posting a Credit Sale Example (Audit Trail Illustration)

Let's trace Invoice #156 for $1,876.50$ sold to KDR Builders:

1. Sales Journal (SJ): The sale to KDR Builders for $1,876.50$ (Invoice #156) is recorded chronologically in the Sales Journal on Page $5$ of the journal. The account number for KDR Builders is $120-135$. The total sales for Oct. $15$ are $15,511.00$.

2. Accounts Receivable Subsidiary Ledger (KDR Builders): The individual sale of $1,876.50$ is posted to KDR Builders' specific account (Account Number $120-135$) in the Accounts Receivable Subsidiary Ledger, increasing their balance from $0.00$ to $1,876.50$. This posting is referenced back to SJ5 (Sales Journal Page $5$).

3. General Ledger (Accounts Receivable - Account $120$): The total amount of credit sales for Oct. $15$, $15,511.00$, is posted to the Accounts Receivable control account ($120$) in the General Ledger, increasing the overall Accounts Receivable balance from $57,555.00$ to $73,066.00$. This posting is also referenced back to SJ5.

4. General Ledger (Credit Sales - Account $502$): Similarly, the total credit sales for Oct. $15$, $15,511.00$, are posted to the Credit Sales account ($502$) in the General Ledger, increasing the total credit sales from $280,194.00$ to $295,705.00$. This activity is also referenced to SJ5.

This process shows how an individual transaction can be tracked from the source document (implicitly, the sales invoice) through the Sales Journal to both the detailed subsidiary ledger and the summarized general ledger accounts.

Data Storage Elements

Data is fundamentally stored in files, which are composed of organized elements:

• Master Files: Store cumulative information about an organization. They are relatively permanent and provide a snapshot of an organization's status at a particular point in time (e.g., inventory master file, customer master file).

• Transaction Files: Contain records of individual business transactions that occur during a specific period. They are temporary and are used to update master files.

Within these files, data is structured hierarchically:

• Entities: Something about which information is stored (e.g., Customer, Employee, Inventory Item).

• Records: All the fields containing data about one entity (e.g., all data for one specific customer).

• Attributes (Fields): Individual characteristics or pieces of data about an entity (e.g., Customer Number, Customer Name, Credit Limit).

• Values: The actual data stored in each field (e.g., $19283$, XYZ Company, $30,000$).

Example from slide: A master file for customers would contain records for each customer. Each record would have attributes like Customer Number, Customer Name, Address, Credit Limit, and Balance. The values would be the specific data for each customer, e.g., Customer Number $19283$ for XYZ Company with a Credit Limit of $30,000$ and a Balance of $24,750$.

Coding Techniques

Coding techniques are used to classify and organize data efficiently.

• Sequence codes: Items are numbered consecutively to ensure all items are accounted for. This helps in identifying missing items (e.g., pre-numbered sales invoices, checks).

• Block code: Blocks of numbers are reserved for specific categories of data. For example, asset accounts might be $1000-1999$, liability accounts $2000-2999$, etc.

• Mnemonic codes: Letters and numbers are used to identify an item, designed to be easy to remember due to their derived meaning. For example, DRY300W05 might mean a dryer (DRY), low-end model (300), white color (W), made by Sears (05).

• Group codes: Two or more subgroups of digits are used to code an item. Often used for complex items where multiple characteristics need to be identified within a single code (not explicitly detailed in the slide but mentioned as a type).

Data Processing

Data processing involves the operations performed on stored data. These operations are commonly summarized by the acronym CRUD:

• Create: Adding new records or data (e.g., adding a new customer to the database).

• Read: Retrieving or viewing existing data (e.g., checking a customer's balance).

• Update: Modifying existing records or data (e.g., changing a customer's address).

• Delete: Removing old or unused records or data (e.g., deleting a dormant customer account).

Processing Methods

Data processing can occur in different ways:

• Batch processing: Records are accumulated over a period of time and processed periodically in groups (batches). This is efficient for high-volume transactions that do not require immediate updates (e.g., posting all sales records at the end of the business day).

• Real-time processing: Transactions are processed as they occur, providing immediate updates to the master files. This is essential for activities requiring up-to-the-minute information (e.g., point-of-sale transactions).

Detailed Processing Flows

• Batch Processing:

  1. Group source documents into batches.

  2. Enter batches at predetermined times or batch sizes.

  3. Sort file and edit data as appropriate.

  4. Store data in a temporary file.

  5. Process all batches.

  6. Update old master files with transaction data, creating new master files.

  7. Generate control totals.

  8. Print or electronically display desired output, error reports, transaction reports, and control total reports.

• Online Batch Processing:

  1. Enter transactions into the system as they occur.

  2. Store data in a temporary file.

  3. Process the temporary file at a predetermined time.

  4. Update old master files with transaction data, creating new master files.

  5. Print or electronically display desired output.

• Real-time Processing:

  1. Enter transactions into the system as they occur.

  2. Process transactions as they occur.

  3. Update the master file with transaction data.

  4. Print or electronically display desired output immediately.

Information Output

The final step in the data processing cycle is to present the processed data as useful information. This output can be viewed in several formats:

• Online (soft copy): Information displayed on a screen.

• Printed out (hard copy): Information physically printed on paper.

Common types of information output include:

• Document: Transaction records, such as a sales invoice, purchase order, or paycheck.

• Report: Summarized information for management and other stakeholders, such as a monthly sales report, aging schedule of accounts receivable, or financial statements.

• Query: A request for specific information from a database, often asked on an ad-hoc basis (e.g., "Which division had the most sales for the month?").

Enterprise Resource Planning (ERP) Systems

An Enterprise Resource Planning (ERP) system is a comprehensive software package designed to integrate all aspects of an organization's operations into a single, unified database. This integration streamlines information flow and business processes across different functional areas.

Integrated Cycles in an ERP System

ERP systems typically integrate several key business cycles, all sharing a common database:

• Revenue Cycle (Chapter $14$): Processes related to selling goods and services and collecting payment.

• Expenditure Cycle (Chapter $15$): Processes related to buying goods and services and making payments.

• Production Cycle (Chapter $16$): Processes related to making finished products from raw materials, involving machines and employee time.

• HR/Payroll Cycle (Chapter $17$): Processes related to managing employees, their time, and payroll.

• General Ledger and Reporting System (Chapter $18$): Centralized system responsible for financial accounting and producing reports and financial statements.

All these cycles feed into and draw from a single, integrated ERP database, ensuring data consistency and real-time information sharing across the enterprise.

Advantages of ERP Systems

Implementing an ERP system offers numerous benefits for an organization:

• Integrated enterprise-wide single view of data: Provides a unified, consistent view of an organization's data, which significantly streamlines the flow of information across departments.

• Data captured once: Eliminates redundant data entry. For example, sales personnel input customer data, which is then directly accessible to accountants for invoicing, avoiding duplicate entries.

• Greater visibility and monitoring capabilities: Management gains enhanced insight into all aspects of operations, improving decision-making and oversight.

• Improved access control of data: Centralized control allows for more effective implementation of security settings, restricting data access based on user roles and permissions.

• Standardization of procedures and reports: Promotes consistent business processes and reporting formats across the organization.

• Improves customer service: Access to real-time, comprehensive customer data enables better responsiveness and service delivery.

• Increases productivity through automation: Automates many routine tasks, freeing up employees to focus on more strategic activities.

Disadvantages of ERP Systems

Despite the benefits, ERP implementation comes with significant challenges and drawbacks:

• Costly: ERP systems involve substantial initial investment in software, hardware, implementation services, and ongoing maintenance.

• Significant amount of time to implement: Implementation projects can take months or even years, disrupting ongoing operations.

• Customizing or standardizing a business process: Organizations often face tension between customizing the ERP to fit existing processes (which can be expensive and complex) or standardizing their processes to align with the ERP's best practices (which can require significant organizational change).

• Complexity: ERP systems are inherently complex due to their vast scope and intricate integrations, requiring specialized skills for management and operation.

• User resistance: Employees may resist learning new systems and procedures, leading to challenges in user adoption and requiring extensive training and change management efforts.

Key Takeaways and Self-Check

• Data Processing Cycle Steps: Recall that the four fundamental steps are Data Input, Data Storage, Data Processing, and Information Output. (Data collection is part of Data Input, not a separate distinct step).

• Real-time vs. Batch Processing: Recording and processing information about a transaction at the time it occurs is defined as real-time processing.

• Data Processing Activities: The four types of data processing activities are Creating, Reading, Updating, and Deleting (CRUD). Recording is typically part of the initial data input or capture and subsequently involves the 'Create' or 'Update' operations.

• Advantages of ERP Systems: An advantage of an ERP system is not simplicity and reduced costs. ERP systems are known for their complexity and high costs rather than simplicity or cost reduction. Key advantages include better access control, standardization, and improved monitoring capabilities.