Transaction Processing Systems

Learning Outcomes:
At the end of this chapter, you should be able to:
1) Understand what transaction processing systems are
2) Determine the objectives of transaction processing systems
3) Learn about the different transaction processing methods and their distinguishing
characteristics
4) Learn about whether or not a firm can integrate all its business activities into a
single transaction processing system
5) Identify the different transaction processing activities
6) Identify the different control and management issues
7) Identify the different traditional transaction processing systems.
8) To have a general understanding of the flow of processing in selected accounting
systems
a. The Revenue Cycle: Sales and Accounts Receivable
b. The Procurement Cycle: Purchases, Inventories, and Accounts Payable
c. The personnel/Payroll Cycle

Lesson 1: Transaction Processing Systems

A transaction processing system performs routine, day-to-day operation of a
business that helps a company add value to its products and services.

It requires a large amount of input data and produces a large amount of

output without requiring sophisticated or complex processing.

Examples are, order entry, inventory control, payroll, accounts payable,

accounts receivable, and general ledger.

An automated TPS consists of all the components of a CBIS such as

hardware, software, databases, telecommunication, people, and procedures.

A transaction processing system serves the foundation of other systems, such

as MIS, DSS, and AI/ES. These systems handle less input and output, but
more sophisticated and complex processing.

Lesson 2: Objectives of Transaction Processing Systems

Because of the importance of the transaction processing system, organizations
expect their TPSs to accomplish a number of specific objectives.
Process data generated by and about transactions
The primary objective of any TPS is to capture, process, and store
transactions and to produce a variety of documents related to routine
business activities.
Processing orders, purchasing materials, controlling inventory, billing
customers, and paying suppliers, result in transactions that are processed
by a TPS.
Ensure data and information integrity and accuracy
One objective of any TPS is error-free data input and processing.
Rules must be in placed and implemented in the programming to ensure
data accuracy before it is stored.
Another of a TPS is to ensure that all data and information stored in the
file or database are accurate, current, and appropriate.
Produce timely documents and reports
Transaction processing systems produce routine documents such as order
slip, shipping order, invoice, purchase order, inventory status report,
inventory on-hand report, customer list, paycheck, and so on.
These documents need to be produced in timely manner to perform
routine business transactions.
Increase labor efficiency
Transaction processing system can substantially reduce routine clerical
and other labor requirements.
An automated scanning device in a retail store can substantially reduce
the item processing time. This not only increases checkout efficiency but
also a reduction of the manual workforce.

Help provide increased and enhanced service

TPSs can provide services faster than humans, thus increasing the
number and varieties of services it can offer to customers.
Examples are, automated university registration system, automated billing
inquiries, automated bank account transfers, and so on.
Help build and maintain customer loyalty
TPS can be used to build customer loyalty.
Examples are, ease of use of the system, easy access of customer
account, timely reporting of information, automated telephone answering
and faxing, and web-based information processing, can help satisfy
customers.
Achieve competitive advantage
A competitive advantage provides a significant and long-term benefit for
the organization.
For example, UPS and FedEx systems keep track of a package at each
stage of its traversal. Customers can use a tracking number to find the
latest status of the package.
Some of the ways that companies can achieve competitive advantage are
mentioned below.

Lesson 3: Transactions Processing Methods

Transactions are commonly performed in batch or on-line.
Batch Processing

With batch processing, business transactions are accumulated over a

period of time and prepared for processing as a single unit or batch.

There is some delay between the occurrence of an event and the

processing of the event.

Examples are, payroll processing, billing, accounts payable, and accounts

receivable.

On-Line/Real-Time Processing (OLTP)

With this form of data processing, each transaction is processed

immediately, without the delay of accumulating transactions into a batch.

As soon as the input data is available, a program performs the necessary

processing and updates the records affected by the transaction.

Data in an OLTP always reflect the current status.

On-Line Entry with Delayed Processing

This type of transaction is a compromise between the batch and on-line

processing.

With this type of transaction, orders or transactions are entered into the
computer system when they occur, but they are not processed
immediately.

Example: A typical mail order system in which orders are accumulated and
then it is forwarded to a warehouse for shipment.

Batch vs. On-Line Processing

Lesson 4: Integrated Transaction Processing System
A firm may integrate all its business activities into a single transaction
processing system, as illustrated below.

It involves inventory control, order entry, shipping, invoice processing,

accounts receivable, purchase orders, accounts payable, payroll processing,
general ledger, and budget.

Lesson 5: Transaction Processing Activities

All transaction processing systems performs a common set of basic data
processing activities. TPSs capture and process data that describe fundamental
business transactions. This data is used to update databases and to produce a
variety of reports.

Lesson 6: Transaction Processing Cycle

The business data goes through a transaction processing cycle that includes:
A. Data Collection
B. Data Editing
C. Data Correction
D. Data Manipulation
E. Data Storage
F. Document Production
These are briefly described in the following.

A. Data Collection
The process of capturing and gathering all data necessary to complete
transactions is called data collection.
It can be manual such as completing a purchase order by hand. It can
also be automated via special input device such as scanners and
terminals.
Data collection begins with a transaction (such as customer order) and
results in the origination of data that is input to the transaction processing
system.
Data should be captured at its source and it should be recorded
accurately, in a timely fashion, with minimal manual effort, and in a manner
that can be directly entered to the computer rather than entering using
keys.
Automatic data collection is termed as source data automation. An
example is the use of scanning device at the grocery store to read UPC
code and hence the price of an item. Another example is an employee
badge used as a time card when going in and out of an office building.

B. Data Editing
An important step in processing data is to check for validity and
completeness of data. Controls must be placed in the data-entry form.
For example, quantity and cost must be numeric and names must be
alphabetic.
C. Data Correction
A data that is not entered properly needs to be entered correctly.
Data correction involves reentering miskeyed or misscanned data in the
data entry point.
For example, a UPC code not found in the retail store checkout, is given a
special code to complete the transaction for an item.
D. Data Manipulation
The process of performing calculations and other data transformations is
termed data manipulation.
Examples are, sorting data, summarizing data, finding price of five items,
calculating employee weekly pay, and so on.
E. Data Storage
Involves updating one or more database tables or files with new
transactions.

For example, inserting new customer information, updating customer

demographics, updating inventory transactions, creating new student
registration, and so on.

F. Document Production
TPSs produce important business documents such as sales receipts,
order entry list, customer list, invoices, purchase orders, inventory onhand report, paychecks, and so on.
Documents can be hard copy paper report or displayed on computer
screen.

Lesson 7: Control and Management Issues

Transaction processing systems are the backbone of any organizations
information systems.
Business Resumption Planning
It is the process of anticipating and providing for disasters. A disaster can
be a flood, fire, earthquake, intentional damage, labor unrest or erasure of
an important file.
Focus on maintaining the integrity of the corporation information and
keeping the information system running until normal operations can be
resumed.
Identify potential problems and prepare for the disaster.
Disaster Recovery
The implementation of the business resumption plan.
The primary tools are backups for hardware, software, databases,
telecommunication, and personnel.
Keep a backup copy of software and database to a remote location in a
safe, secure, fireproof, and temperature and humidity controlled
environment.
Always train backup personnel in case employees leave the company.
Transaction Processing System Audit
Auditing a TPS system, is an attempt to answer three basic questions:
Does the system meet the business need for which it is developed?
What procedures and controls have been established?
Are the procedures and controls being properly used?
An internal audit is conducted by employees of the organization and an external
audit is conducted by an outside firm.

The auditors inspects all programs, documents, control techniques, the

disaster plan, insurance protection, fire protection, and other system
management concerns such as efficiency and effectiveness of the disk
and tape library.
The audit trail allows the auditors to trace any out from the computer
system back to its source documents.

Lesson 8: Traditional Transaction Processing Systems

Traditional transaction processing systems include order processing, purchasing,
and accounting. Systems that support these processing are mentioned in the
table. We describe these systems in detail in the following.

ORDER PROCESSING SYSTEM

Order processing systems include order entry, sales configuration, shipment

planning, shipment execution, inventory control, invoicing, customer
interaction, and routing and scheduling.
Figure below is a system-level flowchart that shows various systems and the
information that flows between them.
A rectangle represents a system, a line represents a flow of information from
one system to another, and a circle represents any entity outside the system.
The systems that support an order processing system are described in the
following.

a. Order Entry

The order entry system captures the basic data needed to process a
customer order.
Figure below represents a data-flow diagram of a typical order entry system.
A single order-entry system as found by a rectangle in the system-level flowchart, is further expanded to include four processes.
A data-flow diagram shows various business processes and the flow of data
between the processes.
An arrow represents data flow (input, output), a rectangle with rounded corner
represents a process (computer program), and an open-sided rectangle
represents data storage (file or table).

b. Sales Configuration

Ensures that products and services ordered by a customer will work together
and are sufficient to accomplish customers objectives.
Example: when buying a computer and other peripherals, make sure the
peripherals are compatible to the computer.

c. Shipment Planning

A system that determines which open orders will be filled and from which
location they will be shipped.
The output of this system is a plan that shows where each order is to be filled
and a precise schedule for shipping with a specific carrier on specific date
and time.
The system also prepares a pick list for the warehouse personnel for
shipment of each order (containing item and quantity).

d. Shipment Execution
A system that coordinates the outflow of all products and goods from the
organization, with the objective of delivering quality products on time to
customers.
Warehouse operators pack items in the box and item number and quantity for
each item is entered in the system.
It also creates a packing document for each order, which is enclosed with the
shipping materials.
The system passes shipped information (item number and quantity) to the
inventory control system to update the inventory.
The shipped information is also passed onto the Invoicing system to create an
invoice.
e. Inventory Control
A system that updates the inventory records to reflect the exact quantity on
hand of each stock keeping unit.
When a shipment is made, the quantity of the item is deducted from the
current stock.
It creates inventory status report to reflect current stock and the need for
ordering. See figure.
Inventory Status Report
f. Invoicing
Generates customer invoices based on records received from the shipment
execution system.
The knowledge of order number, which contains customer and item
information, helps creating the invoice.
g. Routing
A system that determines the best way to get goods and products from one
location to another.
UPS and FedEx uses vans, trucks, and airplanes to physically deliver their
packages around the world. They also use information systems to keep track
of delivery status of each package using a tracking number for each package.
h. Scheduling
A system that determines the best time to deliver goods and services.
PURCHASING SYSTEM

The purchasing transaction processing system is used when an item (such as

a chair or software) is ordered to a supplier from a company. It includes
inventory control, purchase order processing, receiving, and accounts
payable. These systems are described in the following.

a. Inventory Control
Maintains stock of items such as raw materials, packing materials, spare
parts, and supplies that are used regularly.
As the items are used, the system updates the item quantity, and produces
reports.
b. Purchase Order Processing
A system that helps purchasing department complete transactions quickly and
efficiently.
From an employee request, a purchase order is created.

It looks into company policies such as charged account number, required

signatures, order limit, and so on, before issuing a purchase order.
Purchase order can be delivered electronically to the supplier.
A copy of the purchase order is forwarded to the receiving system to compare
with the invoice when items will be received.

c. Receiving
A system that creates a record of expected and actual received items.
A receiving system typically updates the inventory to keep the inventory
status current.
Received items are checked and a receiving transaction is forwarded to the
accounts payable system.
d. Accounts Payable
A system that increases an organizations control over purchasing, improves
cash flow, increases profitability, and provides more effective management of
current liabilities.
A bill from a supplier initiates the verification of received items and in turn the
system creates a check for the supplier.
The system also prints purchase journal which itemizes all purchases for a
period.

ACCOUNTING SYSTEMS

An accounting system includes budget, accounts receivable, payroll, asset

management, general ledger. These are described in the following.

a. Accounts Receivable
A system that manages the cash flow of the company by keeping track of the
money paid by the customers and other companies for goods and services
sold to them.
The major output of the accounts receivable system is monthly bills or
statement sent to the customers. See below.
Transactions created by accounts receivable system updates general ledger
accounts.
It is also used to generate reports for aged accounts, for which payments
are overdue by 30, 60, or 90 days. Reminder notices are created for these
accounts.
An important function of the accounting system is to identify bad credit risks.
Thus companies routinely checks customer credit before accepting a new
order.
b. Accounts Payable
A system that manages the cash flow of the company by keeping track of the
money paid to the company on purchases and services received..

Accounts Receivable Aging Report

c. Payroll

Generates payroll checks and stubs, as well as W-2 statements at the end
of the year for tax purposes.

This can be outsourced to an external company. In this case, the

employee file (with weekly hours and pay rate) is sent to the company and the
company deliver the checks.

In addition, payroll processing produces employee journal containing

various earning factors as shown in the figure.

Paycheck stub details (top) and payroll journal (bottom)

d. General Ledger
A system that produces a detailed list of business transactions designed to
automate financial reporting and data entry.

Lesson 2a: The Revenue Cycle: Sales and Accounts Receivable

I. The Revenue Cycle
A. Major activities in the revenue cycle include soliciting customer orders,
executing sales transactions, and delivering products and services.
Data processed in performing these activities comes from/goes to
customer sales orders, customers bills, product inventory records,
and customer account records.
The accounting information system is responsible for processing this
data and for providing key information which permits marketing
executives to manage effectively.
B. A typical manufacturing business has several interrelated business cycles
which generally include the revenue, finance expenditure (personnel/payroll
and procurement), and production cycles. Fundamentally, funds provided by
the revenue cycle are managed by the finance cycle until needed by the
expenditure cycle to acquire goods and services to enable to production cycle
to produce to produce goods which the revenue cycle sells to customers.
II.

The Sales Order Processing System.

A. Description of the System
The sales order processing system performs several functions.
a. Receives orders from customers.
b. Checks prospective customers credit worthless.
c. Fills and delivers product(s) ordered.
d. Bills customers and maintain a record of customer
indebtedness.
Orders for goods/services are generally received from customers by
telephone, by written purchase order, or through direct contact by a
salesperson.
A record of each order (customers identification, items ordered, and
delivery instructions) is maintained as a result of preparing a sales
order or a multicopy sale invoice.
Several data items are generally contained in a sales invoice.
a. Item codes, descriptions and quantities ordered.
b. Items shipped and items backordered.
c. Unit prices, extensions and footing.
d. Shipping and discount terms.
e. Date ordered, date shipped and date invoiced.
f. Customer name, code, and address.
g. Salesperson code.
h. Invoice number and customer order number.

B. The Accounting Transactions.

Companies which maintain a perpetual inventory system make the
following summary journal entries using a journal voucher.
Accounts Receivable
xxx
Sales
xxx
Cost of Goods Sold
xxx
Finished Goods Inventory
xxx
C. Transactions in the Marketing Data Base affect two groups of records:
finished goods inventory and customer data.
There are two relations (tables) for finished goods inventory data.
Each finished goods inventory record (row) owns one or more
records in finished goods transactions.
There are two relations (tables) for customer data. Each record
(tuple) in the customer table owns one or more records in the
customer transaction table.
Input related to transactions documents may affect more than one
table.

Production order
Sales Invoice
Credit Memo
Cash Receipts
Salesperson call report

III.

Finished Goods Transactions

X
X
X

Customer Transactions
X
X
X
X

Retrieval of data hinges upon the use of the transaction type code
and the document number.
Several basic reports are produced from data found in the customer
data portion of the database.
a. Statements of account.
b. Aged accounts receivable.
c. Information for credit approval purposes.
Several basic reports are produced from the inventory portion of the
database.
a. Stock status report.
b. Product turnover report.
c. Stock reorder report.

Manual System for Processing Sales Order

Sales and Credit Department

It begins with customer placing order. Then, the sales department

captures essential details on sales order form.
Transaction is authorized by credit department.
Sales information is released to: Billing, Warehouse, and Shipping.

Warehouse
Merchandise is picked from warehouse and sent to shipping with sales
order.
Memo to Inventory Control.
Other Sales Order filed in warehouse.
Shipping
Shipping reconciles merchandise received from Warehouse with sales
information on packing slip.
Merchandise, packing slip, and bill of lading are prepared by shipping and
sent to customer.
Copy of bill of lading and sales order are filed in shipping.
Billing
Shipping information is also sent to billing.
Billing compiles and reconciles relevant facts and issues invoice to
customer and updates sales journal.
Accounts Receivable
It records information in customers account in accounts receivable
subsidiary ledger and files invoice.
Inventory Control
It adjusts inventory subsidiary ledger and files memo.
General Ledger
Billing, Accounts Receivable, Inventory Control submits summary
information to General Ledger Department, which then reconciles data
and posts to control accounts in the general ledger.
IV.

Computer-based Sales Order Processing

A. Data Capture

Online terminal entry by sales personnel or data entry clerks keying in many
of the details such as Type of details.
Optical character recognition such as credit card embossed documents and
customer marked preprinted order documents.

Point-of-sale records (online cash registers) that may use optical scanners to
read universal product codes.
Direct entry by customers using touch-tone telephones and electronic data
interchange systems.

B. Transaction processing A set of transactions is prepared for processing

against a data base or master life.

Steps involved in preparing the data:

a. Assembly batches of transactions.
b. Checking validity and accuracy of data.
c. Correcting errors.
d. Preparing transaction listing.
e. Merging separate batches.
f. Sorting the final batch into sequential order.

Batch control totals reduce the risk that data is lost or that errors occur in key
items. They should be calculated and verified at each stage of processing.
a. Number of sales orders in the batch.
b. Count of the number of products ordered.
c. Hash total of customer account numbers, invoice numbers, and/or product
stock number.

A computer edit program can be used to identify common errors in sales input
data by using various programming techniques.
a. Check digit verification of salesperson number, customer account number,
and product stock number.
b. Field check on all number fields.
c. Limit check on quantity field.
d. Range check on order and delivery dates.
e. Completeness check on critical fields.

C. File Maintenance
Batch Processing Procedure
Additional validity checks.
a. Verify customer account and inventory record numbers against master
file records.
b. Compare quantities ordered to a predetermined reasonable range of
quantities.
c. Perform redundant data checks to verify that the customer and
inventory numbers keyed-in agree with customer and item names,
respectively.
Authorization for credit is determined by querying the customer master file.

a. The sale should be to an approved customer.

b. The pending sale will not extend the customers balance beyond the
approved credit limit.
c. The present indebtedness is not unreasonably past due.
Rejected orders are referred to the credit department and erroneous
transactions are referred to the sales department for correction.
Inventory record are queried for approved orders to determine whether
ordered items are available so that a backorder notice for stock outs and a
shortage for stock levels below reorder point can be sent to production and/or
purchasing.
The sales invoice is created, copies are distributed, the master file are
updated to reflect the completed transaction, and the general ledger is
updated for the batch of orders just processed.
Contents of the batch total report
a. Batch control totals for valid, rejected and all transactions (reconciled
to batch total from edit program)
b. Composite journal entry
c. Other summary information as desired.
Types of low volume data often entered into an online terminal by authorized
personnel.
a. Credit approval for new customers
b. Sales returns and allowances.
c. Adjustments and corrections to master files.

Online Processing Procedures

Advantages of online processing.
a. An immediate response is received from the computer indicating
whether the sale is approved.
b. Ready access is available to the status of customer accounts and
inventory levels.
c. Goods are shipped immediately upon approval of the order.
Programmed input validation routines reduce errors made by the individual
entering the order.
a. Unique user code and password required of each user prevents
unauthorized access.
b. Password authorization levels restrict user access to only specific files.
c. User is guided through entry process with a series of questions or
screens formatted like the document from which the data is being
entered.
d. Program validity checks, field checks, limit checks, range checks,
reasonableness tests, and redundant data checks identify invalid input.
e. Closed loop verification can be used.

D. Control objectives and procedures

V.

General authorization for initiating transactions that match specific criteria

established by management is programmed into the data processing
software.
Accountability for assets is maintained with computerized records for
inventory and accounts receivable. Access to inventory is restricted to stores
department personnel and transfers are documented.
Accurately recording, shipping, and billing all valid transactions is assure
through the use of batch total, edit programs and input validation routines.
Measures are taken to ensure accuracy of customer and inventory files.
a. Use internal and external file labels.
b. Maintain backup copies and data base.
c. Maintain a log on all transactions entered since last backup was made.
d. Require all users to have identifying numbers and passwords.

Reporting

A. Reports may be classified as either scheduled (i.e. prepared weekly or monthly)

or demand reports.
Several methods are available for producing demand reports.
a. Inquiry processing software.
b. Decisions support systems (DDS) software.
c. Downloading a portion of the database to a personal computer.
d. Expert systems software.
The sales analysis report is a typical scheduled report for the marketing
database. Key fields (e.g. territory number, salesperson number, inventory
item number, etc.) permit reporting total peso and / or unit sales information
by the category desired.
Inquiry processing software could be used to extract information such as
finding those employees who possess certain characteristics (e.g. speak a
foreign language, attained a specific degree, etc.).
DSS software provides statistical and quantitative decision models for
analysing data. For example, regression analysis can be used to evaluate the
effectiveness of various advertising appeals for a product.
Downloading portions of the database into microcomputer spreadsheet
software permits ad hoc or recurring manipulation of the data to suit users
need. Product profitability analysis can be performed using this technique.
Expert systems make decisions based on complex algorithms which weigh
factors relevant to that decision. A credit granting programs which emulates
the complex decision rules used by expert credit personnel is an example of
an expert system.

Lesson 2b: The Procurement Cycle: Purchases, Inventories, and Accounts Payable
I.

The procurement Cycle

A. Data processing activities in the procurement cycle
Requisitioning goods and services.
Preparing and issuing purchase orders.
Documenting receipt of inventories and services.
Maintaining records of raw materials or merchandise inventories on
hand and on order.
Maintaining records of accounts payable and vendor performance.
B. Inventories purchased by wholesalers and retailers are direct resale.
Inventories purchased by manufacturers are generally raw materials which
will be used to manufacture a finished product.
C. The purchasing and inventory management functions
The purchasing department makes several decisions.
a. What quantity of materials should be purchased
b. When should the purchase be made
c. From what vendor should the goods be ordered
Inventory control (deciding on the quantity and timing of purchases)
is aided by the use of mathematical models. These techniques are
applied to high-cost, high-usage items.
a. Selecting the appropriate point in time at which to place an
order requires a forecast
of required quantities and
estimates of vendor lead times
b. Carrying costs are composed of spoilage, breakage,
pilferage, obsolescence, insurance, taxes, space utilization,
and the opportunity costs of committed funds.
c. Ordering costs which vary with the number of orders placed
include order processing cost and shipping costs.
By scheduling production for several months into the future a
materials requirements planning (MRP) system allows the
purchasing department to buy reducing safety stocks.
A just-in-time system requires inventory to be delivered to work
centers at the precise time it is needed.
There are several factors to consider in selecting a vendor.
a. Price
b. Quality
c. Product reliability
d. History of vendor service
e. Product style and brand image

II.

The Purchasing and Inventory Data Processing Systems

A. Several documents are used to record events in this system.

PURCHASE REQUISITION
- Approved by someone with budget authority
- Documents authorization to purchase goods and services
- Informs purchasing that the buying process should be initiated

PURCHASE ORDER
Requests a vendor to sell specified goods or services under certain
conditions
a) Price
b) Quantity
c) Shipping terms
d) Discount terms

RECEIVING REPORT
Documents receipt of goods and multiple copies are distributed
a) Purchasing
b) Accounts Payable (after stores has signed)
c) Inventory Clerk
d) Receiving Department File

B. The Accounting Transactions

Journal Entries:
a) To record a purchase
Raw Materials Inventory
Accounts Payable

xxx
xxx

b) To record a return
Accounts Payable
Raw Materials Inventory

xxx
xxx

c) To record goods issued for production

Work in Process
Raw Materials Inventory

xxx
xxx

C. The Purchasing data base consists of records relating to raw materials and to
vendors
Each raw material inventory record owns one or more raw material
transaction records related to each by item number.

 Each vendor file record owns one or more vendor transaction records
related to each other by vendor number.
Input created by transaction documents may affect more than one
table.

Materials requisition
Purchase requisition
Price quotation
Purchase order
Receiving report
Purchase return
Purchase Allowance
Voucher payable
Cash Disbursement

Raw
Transactions
X
X
X
X
X
X

Materials Vendor Transactions

X
X
X
X
X
X
X

Transaction type code and document number are used to access

complete information for a transaction record.
Output produced from the inventory portion of the data base:
a) Stocks status report.
b) Exception reports regarding high and low activity items.
c) Purchase requisitions/orders to replenish inventory with levels at
or below reorder point.
Output produced from the vendor portion of the data base:
a) Checks to pay balances due to vendors.
b) Cash flow commitment schedules.
c) Vendor performance reports (history of price quotations, orders
placed, late shipments, early shipments, poor quality shipments,
incorrect quality shipments).
III.

A Manual System for Processing Purchase Transactions

A. Control Objectives and Procedures
Control Objective #1: All purchase transactions should be properly authorized.
Control Objective #2: Materials are safeguarded during receipt and transfer.
Control Objective #3: All valid purchases are accurately recorded and
processed.
Control Objective #4: Accurate records of raw material inventories and vendor
accounts payable are maintained.
B. Computer-based Purchasing and Inventory Data Processing
Data capture
Data regarding requisitions may be entered in several ways.
Data entry clerk keying from batched, hand-prepared documents.

Use of online terminals by authorized personnel.

Programmed into the inventory control system based on reorder point,
MRP, or JIT requirements.

Data regarding goods received may be entered in several ways.

Data entry clerk keying from batched, hand-prepared documents.
Use of online terminals by authorized receiving department personnel.
Use bar code scanners.
Vendor invoices data may be entered in several ways.
Data entry clerk keying entire data set from invoice.
Data entry keying purchase order number and the remainder of the
invoice not already in the database.
EDI telecommunications link with vendor computer.
C. Transaction Processing
Transactions may be processed in a batched mode, online mode or a mode
which combines both approaches. Several control features might be included
in a computerized system.
Personnel performing data entry and/or approval should be required to
use a unique user code number and password which should be
programmed to allow them to perform only those tasks for which they
authorized.
Simply data entry and ensure completeness of each entry by
prompting or preformatting the screen display.
Use close loop verification.
Make liberal use of edit checks in program design.
D. File Maintenance the process of updating the data base for inventory
transactions.
In batch processing, transactions which have successfully completed a
preliminary edit and validation check may be further validated by comparison
to master file data.
Check key fields.
Check reasonableness of quantities and prices.
Comparing vendor codes with list of approved vendor codes.
Transactions which pass these procedures update master file records.
New price quotations update the inventor master file.
New requisition added to the requisition file.
Goods received are added to the inventory file master file.
Approved invoices are added to the vendor master file.

Returns are deducted from the vendor master file and the inventory
master file.

Requisitions pass through several processing steps.

Change status codes from pending to approved.
Add quantity ordered to on-ordered field in inventory record.
Consolidate items ordered from the same vendor into one purchase
(required information is extracted from the file).
Print multiple copies of the purchase order for distribution as
appropriate.
Typical output from the database
Summary report containing batch totals, composite journal entry, and
other desired summary information.
Management reports.
Online processing procedures offer advantages over batch processing.
Purchase orders can be issued immediately after approval of
requisition.
The status of inventories is provided by online access pending
requisitions, outstanding orders and amounts on hand, vendor
performance, vendor account balance, and outstanding orders.
Wholesalers and retailers can use online techniques such as point of
sale (POS) terminals to maintain perpetual inventory records.
E. Control Objectives
The objectives in a computer-based system are the same but the procedures
necessarily differ from those of a manual system.
Authorization may occur through programming or through online
interaction with authorized personnel.
Safeguarding inventory at receipt and during transfer may be
enhanced with the use of bar code scanners but documentation is
essentially the same.
Accurately recording and processing all valid transaction is enhanced
with the use of bar code scanners, preformatted online input screens,
programmed input validation routines, and programmed retrieval of
already verified data in the database.
Accurate records of inventories and accounts payable is enhanced
through the security control such as internal and external file labels,
back up procedure, access controls.

F. Reports Scheduled, demand or triggered reports can be produced.

The stock status report is often scheduled for weekly distribution to

inventory stores and production planning personnel or made available
online.
The cash flow commitment report (invoices approved for payment plus
open purchase orders) for a three to six month period is generally
scheduled for weekly distribution to the controller or treasurer.
Alternatively, data can be downloaded to personal computer
spreadsheet software for further cash requirements analysis.
The open requisitions report is generally scheduled for daily
distribution to the purchasing department.
The vendor performance report summarizes factors considered
important in selecting one vendor from many. It might be printed
monthly for distribution to the purchasing department. In addition, data
could be downloaded to personal computer spreadsheet software for
further analysis.
The overdue deliveries report is triggered by the computer for all
orders not received on the scheduled due date. It would be distributed
to purchasing and to production planning.
The invoice due pending approval report is also triggered by the
computer on the date due for invoices not already approved. It is
distributed to accounts payable for disposition.

Lesson 8c: The Personnel/Payroll Cycle

I.

The Personnel Management Function

A. The Top Personnel Executive
Board responsibilities
a. Participates in planning allocation of corporate resources.
b. Recommends
companywide
personnel
policies
to
top
management.
c. Develops organization of personnel function.
d. Delegates authority to manage personnel activities.
e. Monitors and evaluates performance of those to whom authority
was delegated.
Information needs
a. Quantitative information needs include the following: number of
existing employees in various skill and experience categories,
trends in hours worked, efficiency, accident rates, turnover and

absenteeism, future staffing requirements, costs of alternative wage

and salary proposals, etc.
b. Qualitative information needs include measures of employee
motivation, morale, abilities, and interpersonal relationships.
II.

The Payroll Data Processing System

A. Key data processing operations
Collecting data on time worked by all employees (e.g., use of
employee clock cards for hourly employees.)
Collecting data on new hires, terminations, and changes in rates and
deductions.
Determining gross pay, deductions, and net pay.
Preparing and distributing paychecks.
Maintaining payroll history files for all employees.
B. The Accounting Transactions
The following is a representative entry to record payroll:
Payroll
xxx
Withholding Taxes Payable
xxx
SSS Premiums Payable
xxx
Pension Fund Withholding Payable
xxx
Cash
xxx
The following is a representative entry to record the distribution of
payroll costs to various expense and inventory accounts.
Work-in-Process Inventory
xxx
Manufacturing Overhead
xxx
General and Administrative Expense xxx
Selling and Administrative Expense
xxx
Payroll
xxx
C. The Employee Data Base the data base used by automated systems
integrates the information found in the payroll master file maintained
manually by accounting and the personnel master file maintained
manually by personnel.
The employee data base is updated at the end of each payroll period.
Typical output includes paychecks, earnings statements, and summary
reports.
The employee data base is used to prepare reports for management
and government.

III.

A Manual System of Processing Payroll

A. Control Objectives and Procedures
- All personnel and payroll transactions are properly authorized on the
basis of established criteria

a. Personnel department reviews and approves personnel

transactions (new hires, pay changes, terminations, etc)
b. Departmental supervisors review and approve time worked by
employees
c. Timekeeping reviews and approves clock cards

IV.

All employees are assigned to productive work that matches their

capabilities, and carry out that work effectively and efficiently.
a. Primarily, departmental supervisors discharge this responsibility.
b. Formal employee performance evaluation reports should be
prepared regularly.

All valid payroll transactions are accurately recorded and

processed. The following controls help accomplish this objectives:
a. Clock cards and job time tickets are reconciled.
b. The payroll control account has a zero balance check.
c. Payroll registers are crossfooted.
d. Personnel, timekeeping, and cost distribution activities are
assigned to separate parts of the organization.
e. Separate payroll bank accounts are used.
f. Internal audit occasionally performs a surprise examination of
payroll.
g. Payroll checks are used rather than cash.

Computer-based Payroll Data Processing

Computerized payroll accounting systems allow to process all normal payroll
tasks via a computerized system, rather than by hand. Essentials like name,
address, Social Security number and withholding rate for each employee are
automatically filled in for every pay period until the company make an
employees record inactive. Many different vendors offer computerized payroll
systems. Like different word processors or other computer programs, they
largely offer the same types of features with slightly different interfaces.
Although the smallest companies can pay their employees with a manual
payroll system, most organizations do payroll on a computer. A computerized
payroll system automatically calculates and prints paychecks based on a
variety of rates, deductions and taxes -- work that used to take a small army
of bookkeepers to do by hand. Companies can choose to have an in-house
system or have an outside company do it for them.

Report Generation
By keeping all payroll accounting records in a computer, it is easy
put reports together for the company and for employees. For example, the

company can pull together analyses of how many hours are being worked,
and at what rates of pay, by employees throughout the company, allowing
tweaking efficiency. At the end of the year, the company can easily
generate W-2 forms for employees without having to do a lot of extra
work.

Advantages
Instead of having to constantly battle with numbers, computerized
payroll accounting only requires to enter numbers correctly once. From
there, the payroll program does any necessary mathematical equations for
tasks like taking out taxes and other deductions. This allows less room for
human error, and theoretically greater accuracy in companys books. A
computerized payroll accounting system also takes up less storage space
than a lot of bulky binders or files.

Cost
The cost of a computerized payroll depends on your organization
and the type of software you need. For many organizations, the payroll
software may be integrated with other business applications that also
handle management and accounting functions. Smaller businesses can
invest in off-the-shelf, low-end software designed only for a few functions,
such as payroll, invoicing and financial reporting. Mid-market software
typically serves organizations that must comply with national accounting
standards. High-end payroll software may be part of a larger enterprise
resource planning software package that can be tailored to the needs of
the particular company.

Reporting
The employee data base experiences a heavy volume of scheduled
and demand reports.
Typical scheduled reports would include the following:
a. The payroll register
b. The deduction register
c. Taxes withheld
d. Other deductions (e.g., SSS, Pag-ibig, etc)
e. Employee performance reports
f. Departmental employee status and position reports
Demand reports may request information on a number of different
aspects of the employee data base.
a. Documentation of compliance with government laws and
regulations,

b. List of employees possessing certain characteristics;

e.g., electrical engineers who speak Spanish and have
10 years if experience.
c. Variables that can be used to evaluate the causes of
employee turnover.
d. Decision support systems are frequently used to assist
managers and labor negotiations in contract negotiators
with labor unions.

References
Cabrera, M. (2015). Management Consultancy: Principles and Engagement. Manila:
GIC Enterprises &Co., Inc.
Microsoft Encarta 2009, 1993-2008 Microsoft Corporation.
http://www.yourarticlelibrary.com/management/management-information-systemdefinition-and-objectives/25758/
accounting.utep.edu/tglandon/acct3320/ppt/spring09/ch04/ch04-tag.pptx