Chapter 2: Overview of Transaction Processing and ERP Systems

Common Source Documents: Business Activity and what Source Documents associated with it

*Revenue Cycle:* ¤ Take customer order → Sales Order ¤ Deliver/ship order → Delivery ticket/bill of landing ¤ Receive Cash → Remittance advice or remittance list ¤ Deposit Cash → 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 Card ¤ Record time spend on specific jobs → Job time tickets or time sheet

Audit Trail

*¤ A path that allows a transaction to be traced through a data processing system from point of origin to output or backward from output to point of origin. * • It is 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. • In short, it provides the means for locating and examining the appropriate source documents in order to verify that the transaction occurred and it was recorded accurately.

Updating Data

*¤ Batch Processing (Has paperwork)* • Group source documents into baches. Generate control totals → Enter baches at predetermined times or batch sizes. Sort file and edit data as appropriate → Store data in a temporary file → Process all batches. Update old master files with transaction data, creating a new master file. → Print of electronically display desired output. Also print or display error reports, transaction reports, and control total reports. *¤ Online Batch Processing (No paperwork)* • Enter transactions into the system as they occur → Store data in a temporary file → Process temporary file at a predetermined time. Update old master files with transaction data, creating a new master file. → Print of electronically display desired output. • An example would be card check-ins at your job. It is kept in the terminal and when payroll happens, it is transferred to the master file. *¤ Online Real-Time (No temporary files)* • Enter transactions into the system as they occur → Process transactions as they occur. Update old master files with transaction data. → Print of electronically display desired output. • No waiting ¤ Batch vs. Online Real-Time Processing • Both Batch processing systems are *cheaper and efficient*, however, the data are current and accurate only *after processing.* • Batch processing is *used for applications such as payroll only as that does not require frequent updates and naturally occur or are processed at fixed time periods.* • Online Real-Time Processing is always current thereby, it increases its important in decision-making usefulness. Unlike Batch processing, errors are fixed in real-time and are refused. *It is not cheap, but versatile. * • Due to the nature of being real-time, *transactions are updated when they occur immediately* unlike batch processing which provide significant competitive advantages because data is process to information immediately where users can make use of it and not wait unlike batch processing.

ERP Disadvantages

*¤ Cost: *ERP hardware, software, and consulting costs can range from millions to hundreds of millions of cost. *¤ Time-consuming to implement: *It usually takes several years to fully implement an ERP system detailing all the business modules, customization options, and customer inputting preferences. *¤ Changes to an organization's existing business processes can be disruptive.* *¤ Complexity: *Businesses have multiple departments with their own resources, processes, chain in command, and etc that all must be integrated into an ERP system. There will be a period of confusion as not everyone knows everything about the business. Eg. the customer service departments probably wouldn't know how the production department operates at first. *¤ Resistance to change: *Employees from one department probably wouldn't be interested in knowing the duties of other departments. Not only that, they will have to know what each department has in resources, processes, and etc. Blurring the company boundaries can cause problems with employee morale, accountability, and lines of responsibility. Essentially, ERP can cause information overload. *¤ An ERP is valuable and provides great benefits, but if implemented wrongly, can cause a business to literally turn upside down and cause multiple projects to fail.*

Paper-Based Source Documents

*¤ Data are collected on source documents* • Source Documents are documents used to capture transaction data at its source - when the transaction takes place. • Examples are sales orders, purchase orders, and employee time cards. • The data from the paper-based form will eventually need to be transferred to the AIS *¤ Turnaround Documents* *• Usually paper-based* • Are sent from organization to external party • Same document is returned by an external party to the organization *• An output of the system then returns back as input to the system.* • *Organization* ⇆ *Customer/Vendor* • Example of turnaround documents is the bills for utilities, car insurance, internet & cable services, and cell phones. All documents detail the money that needs to be paid and the customer either pays electronically or paper wise like check or cash which is then received as input from those companies to continue providing services to the customer.

Computer Based Storage Components

*¤ Entity:* Person, place, or thing (Noun) • Something an organization wishes to store data about *¤ Attributes:* Facts or characteristics of interest about the entity *¤ Fields:* Where attributes are stored • They are not the data value, they are the space where the data value can be put in. • They are the *columns in a spreadsheet* and *they separate attributes of each entity* *¤ Records:* Group of related attributes about an entity • They are the *rows in the spreadsheet* and they *separate each entity from one another* *¤ Data Value:* The value of a particular field *¤ File:* Group of related Records • Records are a group of attributes *¤ Database:* Group of Related Files

Journals

*¤ General Journal: Infrequent or specialized transactions* *¤ Specialized Journals: Repetitive transactions • E.g., sales transactions, purchases, cash payments, cash receipts*

Ledgers

*¤ General Ledger: Summary level data for each:* • Asset, liability, equity, revenue, and expense • General Ledger Accounts are Control Accounts *¤ Subsidiary Ledger: Detailed data for a General Ledger (Control) Account that has individual sub-accounts* • Accounts Receivable • Accounts Payable

Data Storage

*¤ Having data is important, but it is meaningless if there is no way to store it for usage nor having a method to organize it. *Not only that, users should be able to easily access that data as well. Accountants must know and understand how data is stored and organized in an AIS for maximum corporate usage. ¤ The importance of data storage is similar to how authors organize their textbook by chapters, titles, subtitles, and so on. Imagine the information of a textbook being unorganized and formatted like a normal book. just being lines and lines of text with no spacing ¤ Another example would be having drawers of folders and not labeling them, how long would it take for users to find the information they need? ¤ Types of AIS storage: 1. Paper-based o Ledgers o Journals 2. Computer-based

Enterprise Resource Planning (ERP) Systems

*¤ Integrate an organization's information into one overall AIS* ¤ Created by firms to better plan and allocate resources for production. This is due to the multiple departments and matching them to various business cycles. Actively trying to match activities with revenue, expenditure, production, and other cycles. • An example would be someone planning in advance on making dinner for their family, actively taking into account how much each person would eat, and so on. ¤ ERP modules: • Financial (General Ledger and Reporting System) • Human resources and payroll • Order to cash (Revenue Cycle) • Purchase to pay (Disbursement Cycle) • Manufacturing (Production Cycle) • Project management • Customer relationship management • System tools ¤ In general, the best way to implement ERP is in 3 separate instances. 1. Production, used to process daily activities 2. Testing and Development 3. Maintaining an online backup to the production system to provide *¤ ERP can effectively eliminate the need for the billing stage in the revenue cycle.*

ERP Advantages

*¤ Integration of an organization's data and financial information into a single view* thereby breaking down barriers between departments and streamlines the flow of information. *¤ Data is captured once,* no longer wasting time downloading data and entering data multiple times *¤ Greater management visibility increased monitoring.* Employees are more productive and efficient because they can quickly gather data from both inside and outside their own department. *¤ Better access controls.* An ERP can consolidate multiple permissions and security models into a single data access structure. *¤ Standardizes business operating procedures.* ERP can replace different multiple systems and instead have them all into one single unified system. Making management easier. *¤ Improved customer service.* ERP allows for quicker accessibility to access orders, availability of inventory, shipping information, and past customer transaction details. *¤ More efficient manufacturing.* ERP allows manufacturing plans, assembly lines, and other methods of production to receive new orders in real-time and allows the automation of manufacturing processes to quickly start. This leads to increases in productivity.

Coding Techniques

*¤ Sequence: Items numbered consecutively* *¤ Block: Specific range of numbers are associated with a category* • 10000-199999 = Electric Range • When given a number for an account, you'll know that what type of account is without even knowing it. Eg. 600s to 700 are expense accounts and someone says to add an account that is numbered 640. Base on the number, you know its an expense account. • This is important because *block accounts share patterns*, so an audit can notice outliers of accounts that go against shared patterns base on what block they are in and immediately seek information to ensure that it is correct. Say, for instance, an asset account has a credit balance or an expense account that is credited. *¤ Group: Positioning of digits in code provide meaning* • First two digits and Second two digits can mean several things for a business concerning their products. • Like the first two digits detailing the year that a product was produce and the second could be what type of attributes like color or size. *¤ Mnemonic* • Letters and numbers • Easy to memorize • Code derived from the description of an item • Energy drinks typically have these *¤ Chart of accounts* • Type of block coding • Also may use group coding *• List general ledger accounts in the order they appear in financial statements.* • In a chart of accounts where accounts are normally consecutive of 10s. *5's in the 3rd digit represents contra-accounts in their respective block.* For instance, Assets representing 100 - 199. 125 is a contra account, specifically Account of Doubtful Accounts against Accounts Receivable. *¤ Digit Position & Meaning (Common)* • 1 - 2: Product Line, size, and so on • 3: Color • 4-5: Year of Manufacture • 6-7: Optional Features ¤ Example: 1241000 12 = Dishwasher 4 = White 10 = 2010 00 = No Options *¤ Coding scheme or system:* • Once a firm or entity has a coding scheme, they are stuck with it. Those who design a coding scheme *must think long-term for many possibilities* to categories. Anything can have a coding scheme and have the ability to distinguish differences. • A driver's license block could detail what type of class and state it belongs to. So if someone is charged with a ticket, another person with the same name in another state wouldn't charge that ticket. • In a law firm, there could be a block detailing cases that they currently have. It would state which attorney that is managing it, what type of case it is, and other important details.

Data Output Types

*¤ Soft copy: Displayed on a screen or printed* • Query - Request for information. *¤ Hard copy: Printed on paper* • Report - Organized and used to make decisions. Contains headers, footers, and it is summarized.

Data Input—Capture

*¤ The first step in processing input.* ¤ As a business activity occurs, data is collected about it. Specifically (ERA): 1. Each activity of interest (*Events*) 2. The resources affected (*Resources*) 3. The people who are participating (*Agents*) ¤ For example, a sale has been made is the *event.* • The *resources* affected is the good that was sold, the time and date of the sale, how much was purchased, how much did the good cost, and the other costs like taxes used to calculate the total costs. • The *agent* would be the one on the checkout register. • If the sale was on credit and is to be delivered then other things like the customer's name, the billing and shipping address, and delivery instructions.

The Data Processing Cycle

*¤ The four operations (data input, data storage, data processing, and information output) performed on data to generate meaningful and relevant information* ¤ *Input* → *Process* → *Output* ↳ *Storage* ⤴ ¤ The Data Processing Cycle Determines: *1. What data is stored?* *2. Who has access to the data?* *3. How is the data organized?* *4. How can anticipated information needs be met? This is always implied* *5. How can unanticipated information needs be met?* ¤ This cycle is the same for any system whether it is ecological, mechanical, or biological. ¤ It is important to know who places the input, how the input is processed or stored, and then it gets reprocessed as output. In turn that output may become an input for another Data Processing Cycle. *¤ AIS must process the company transactions efficiently and effectively*, the Data Processing Cycle is a huge importance for any firm.

Data Input—Accuracy and Control

*¤ The second step in processing input.* ¤ Well-designed source documents can ensure that the data captured is: *1. Accurate: Picking items that are valid in the system* • Provide instructions and prompts by grouping them logically • Checkboxes • Drop-down boxes *2. Complete: Take account of everything needed * • Internal control support • Pre-numbered documents • Example of this is your checkbook *¤ The third step is that the processing input is following company policies. This directly happens after the information is accurate and complete.* • You would not make a sale of an item if that item is out of stock. • Another example would be selling to a customer with a bad credit history showing that the customer will not repay his/her debts. It will make no sense to allow that sale. ¤ Think of a patient's detailed medical history form that outlines everything from medicine taken before and current, preexisting illnesses, to allergies and family medical patterns.

File Types

*¤ Transaction File* • Contains records of business from *a specific period of time. * *• Acts like a journal entry of the Computer-Based Storage* • Examples would be customer/sales receipts files *¤ Master Files* *• Permanent records-exist across fiscal periods* • Updated by a transaction with the transaction file *• Acts like a Ledger of the Computer-Based Storage* • Examples would be Checking and Saving accounts

Ledgers versus Journals

¤ Detail-level information for *individual transactions* and associated accounts are stored in one of several possible journals, that *information in the journals is then summarized and transferred (or posted) to a ledger for any future transactions involving the account.* ¤ The posting process may take place quite frequently or could be as infrequent as the end of each reporting period. *The information in the ledger is the highest level of information aggregation, from which trial balances and financial statements are produced.* ¤ Typically, a user of financial information will review the *summary-level information stored in a ledger*, perhaps using ratio analysis or trend analysis, to locate anomalies that require further investigation. They then refer to the underlying journal information to access the details of what makes up the information in the ledger (which may result in an even more detailed investigation of supporting documents). Thus, information can be rolled up from journals to ledgers to produce financial statements and rolled back down to investigate individual transactions. *¤ It is important to know that transaction data along with the associated accounts is first posted in a journal before they are entered in the ledger to have a permanent record in the business.* Journals details a transaction with certain accounts, while a ledger is "a book" listing all accounts that the business has had a transaction with. A ledger is updated when a new transaction type and its associated account has occurred.

Data Processing (CRUD)

¤ Four Main Activities 1. *Creating* new records 2. *Reading* existing records or viewing existing records 3. *Updating* existing records 4. *Deleting* records or data from records ¤ Think of the UNF system. UNF has to be able to create new records for new students. When someone uses a resource of UNF via the library or checking in, there has to be a method to read the student's information. There has to be a method to update a student's record when they pass courses, moved locations, change contact information, and etc. When students graduate and cease attending UNF, the student records must be deleted to make room for more students, of course backups are kept to require them later.

Source Data Automaton

¤ Source data is captured in the *machine-readable form at the time of the business activity.* • E.g., ATMs; Point-of-sale (POS), scanners used in retail stores, and bar code scanners used in warehouses. ¤ Well-designed source data automation allows data entry from customers detailing what the company can provide in goods or services and if they are able to. This is convenient for both the customer and the company.