Transaction Processing System (TPS)

• Transaction Processing System (TPS) applications process financial transactions
• A financial transaction impacts a firm's assets and equities, is reflected in its accounts, and is measured in monetary terms

Common Financial Transactions

• Economic exchanges with external parties, such as sales, purchases, discharging obligations, and receiving cash from customers
• Internal events are also included like depreciation, application of labor/raw materials/overhead, and inventory transfers

Transaction Cycles

• Business firms group similar transactions into transaction cycles to manage high volumes efficiently
• Economic activities can be categorized into three cycles: expenditure, conversion, and revenue which exist in both profit and non-profit seeking businesses
• Expenditure cycle: Incurring expenditures in exchange for resources
• Conversion cycle: Providing added value through products or services
• Revenue cycle: Receiving revenue from external sources
• These cycles are interrelated with resource flows between them

Expenditure Cycle

• Business activities start with acquiring materials, property, and labor for cash via the expenditure cycle
• Cash flows from the organization to resource providers, often with credit terms between trading partners where payment happens after receiving goods/services
• Physical component: Acquiring goods or services
• Financial component: Cash disbursement to the supplier
• Purchases/accounts payable (AP) system: Recognizes the need to acquire physical inventory, places orders, records receipt by increasing inventory, and establishes accounts payable
• Cash disbursements system: Authorizes payment when obligations are due, disburses funds, and records the transaction by reducing cash and accounts payable
• Payroll system: Collects labor data, computes payroll, and disburses paychecks
  • It is a special case of purchases and cash disbursements due to accounting complexities
• Fixed asset system: Processes transactions related to acquiring, maintaining, and disposing of fixed assets
  • These assets are relatively permanent representing the largest financial investment

Conversion Cycle

• It has two subsystems:
  • Production system for planning, scheduling, and controlling physical products through manufacturing
  • Cost accounting system monitors costs like labor/overhead/raw materials providing data for inventory valuation, budgeting, and decisions
• Manufacturing firms convert raw materials into finalized goods through formal conversion cycle operations
• Service and retailing sectors conduct added-value conversion activities, readying products and allocating resources
• Merchandising firms do not track costs to specific goods unlike manufacturing but some service firms like accounting or law firms track costs to client accounts similarly

Revenue Cycle

• Firms sell goods/services to customers using the revenue cycle that includes cash/credit sales and cash receipt after credit sales
• Transactions have physical and financial components that are processed separately
• Sales order processing is relevant when sales occur on credit, it includes various tasks including preparing sales orders, credit checks, shipping products, billing, and recording transaction details
• Cash receipts processing collects and deposits the cash, recording details in accounts after a credit sale

Accounting Records

• Accounting records are either manual or digital
• Accounting records are used for manual systems
• Documents are used for several proposes; initiating transaction processing, being an output of a process or providing an audit trail.
• Types of documents
  • Source documents Economic events create source documents to capture and formalize transaction data within the cycle for processing
  • Product documents These result from transaction processing An example includes payroll checks, or customer invoice
  • Turnaround documents Product documents that become source documents for another system For example, remittance advice, a perforated part of a bill Customers return the remittance advice with payment, helping cash receipts systems process the payment accurately
• Journals Chronological record of financial transactions that are recorded when all facts are known Primary data for journals comes from documents Special journals record specific transaction classes in high volume to increase efficiency
• Special journals list
  • Cash receipts journal
  • Cash disbursements journal
  • Purchases journal
  • Payroll journal
• Registers Denotes types of special journals as well as logs like a receiving register, or shipping register
• General Journals Used for infrequent and dissimilar transactions like depreciation and closing entries, with nonspecific columns Replaced with journal vouchers that authorize every transaction, containing a number, date, amount, accounts and authorized signatures
• Ledgers Ledgers reflect financial effects firms' transactions and are posted from journals, showing activity by account type and providing balances This info is used to provide financial statements, and internal records.
• Ledgers are in two categories
  • General ledgers Contain summarized control account data
  • Subsidiary ledgers Contain details supporting a specific control account, for example for Accounts Receivable
• General ledgers provide a single number for each control account for financial reporting but is not useful for supporting daily operations
• Subsidiary ledgers are used to provide better information like customer payments etc.
• Subsidiary ledgers are kept in different departments like inventory or accounts payable providing support and control.
• The total balances within subsidiary ledger should equal the general ledger account balance allowing for verification
• Accuracy and completeness can be assessed by reconciling journals and controlling accounts

Audit Trail

• Provide the ability to trace balances to source documents
• The external auditor reviews parts of the ledger and transactions for accuracy
• Trace the AR to ensure its reliability etc.

Digital Accounting Records

• Contain four different digital computer files

Master Files

• Contain the account data
• Examples are general and subsidiary ledgers
• Data is updated with transactions

Transaction File

• Temporary file used to update data
• Sales orders and receipts are transaction tiles.

Reference File

• Stores data as standards for processing transactions
• Payroll tax table is shown as an example.

Archive File

• Records stored from previous transactions for future use
• Journals are included.

Digital Audit Trail

• Begins with capturing the economic event.
• Example is sales being recorded manually on source document.
• Editing takes place during the update to detect errors like incorrect information
• All valid transactions are copied to an archive file that is used for sales.
• Reconciling subsidiary accounts can be used to show accuracy.