Transaction Processing System

Updated on April 12, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Transaction Processing System?

A transaction processing system or TPS refers to an information processing system used for business transactions that involve the retrieval, collection, and modification of transaction data. It offers an execution environment that ensures data availability, security, and integrity. Moreover, such a system ensures fast response time and accuracy.

Transaction Processing System

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This system maintains the control and balance of a company’s buying process. Moreover, it coordinates product distribution, processes payroll and sales, manages transactions from the payment accounts, and benefits organizations when monitoring online purchase or sale transactions. There are two types of transaction processing systems — batch and real-time processing.

Key Takeaways

  • Transaction processing system meaning refers to a business tool that stores, modifies, retrieves, and accumulates transaction data. It has four components — storage, processing system, inputs, and outputs.
  • Batch processing and real-time processing are the two types of transaction processing systems. In the case of the latter, all transactions are processed instantly.
  • Controlled access, reliability, rapid response, and inflexibility are noteworthy features of a TPS.
  • There are various benefits of transaction processing systems. For example, they offer increased transaction speeds, better cost efficiency, automated management, and reliability.

Transaction Processing System Explained

Transaction processing system meaning refers to an information processing system that processes all transactions taking place within the business. Such transactions include modification, collection, and retrieval of transaction data. A TPS is highly consistent, efficient, and dependable. It is the same system that online businesses utilize for e-commerce.

A TPS has the following four components. One must understand them to know how the system works.

  1. Inputs: Inputs are original requests for payments or products outside parties send to an organization’s TPS. Typically, inputs include bills, coupons, custom orders, and invoices.
  2. Output: Outputs are the documents a TPS generates after it processes all inputs, for example, the receipts stored by companies in their records. Such documents help validate transactions and offer crucial reference details for tax and multiple official purposes.
  3. Storage: A TPS’s storage component is where organizations keep their output and input data. Some businesses store the documents in a database. This component ensures the security, accessibility, and organization of all documents for late use.
  4. Processing System: The processing system goes through every input and establishes a useful output, for example, a receipt. It helps outline the input data and defines what the outputs must be. One must remember that the processing time varies depending on the type of TPS an organization uses.

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Features

The following are some crucial features of a TPS:

  • Controlled Access: TPSs are powerful business tools. Hence, only authorized employees can access it. In other words, it allows only certain employees to control and process transactions.
  • Connection With The External Environment: TPS establishes a relationship with the external environment by distributing information to suppliers and customers.
  • Fast Response: This feature is crucial for a TPS as organizations cannot afford to keep their customers waiting long before completing a transaction.
  • Inflexibility: A TPS processes all transactions in the same way, irrespective of the time of day, user, or customer, to maximize efficiency.
  • Reliability: A TPS must be reliable as customers do not tolerate errors; it must have adequate security and safety measures.
  • Distribution Of Details To Other Systems: A TPS produces and distributes information to different systems. For instance, sales processing systems provide information to general ledger systems.

Types

TPSs are of two types. Let us look at them.

#1 – Batch Processing

A TPS interprets batches or sets of data by categorizing items by similarities via batch processing. This can cause delays as it involves reviewing various data sets simultaneously. However, the delay is acceptable as the TPS does not interpret the sets regularly.

Businesses may customize the batches according to their requirement. For example, a company may want to process its workers’ wages once every two weeks.

#2 – Real-Time Processing

This type of TPS processes transactions with immediate effect, thus preventing delays. This is an ideal technique when businesses deal with singular transactions.

Examples

Let us look at a few transaction processing system examples to understand the concept better.

Example #1

Suppose David purchased a t-shirt from Amacon, an online apparel and clothing retailer. He used his credit card to pay for the item. The company’s TPS collected the credit card details, communicated with its bank, and approved the purchase based on David’s account balance.

Example #2

Let us say that John pays for a Chill TV subscription at the beginning of every month to watch the latest TV shows and movies. Chill TV’s TPS processes all transactions as a set as they occur simultaneously. Since the system processes a set of transactions once every month, it requires high computing power. Hence, a delay in processing the transactions is acceptable in this case.

Advantages And Disadvantages

Let us look at the benefits and limitations of a TPS:

Advantages

  • A TPS helps organizations save funds by minimizing their need to improve their system or utilize multiple systems to fulfill demand.
  • Companies can use a TPS to process transactions accurately and quickly.
  • A TPS automates a significant part of a company’s revenue management and internal resources. Because of this, employees can review transactions faster. Moreover, this gives them more time to focus on critical thinking tasks.
  • It allows businesses to carry out operations in multiple segments by working remotely. This enables organizations to explore new markets that are full of opportunities.

Disadvantages

  • A TPS does not have a standard format.
  • Companies have to incur a high set-up cost initially for TPS.
  • Sometimes, hardware and software have compatibility issues.
  • A TPS may stop working or slow down due to many transactions.

Transaction Processing vs Analytical Processing

Individuals often find the concept of transaction processing and analytical processing systems confusing. To avoid such confusion, one must know their critical differences. So, let us look at a tabular representation of their distinct features.

Transaction ProcessingAnalytical Processing
A TPS aims to manage large amounts of transaction data involving various users.The purpose of an online analytical processing system or OLAP is to process many transactions quickly.
A TPS stores the data in a relational database optimized to manage large amounts of data funneled into the system.Its multidimensional schema is suitable for complex queries drawn from multiple data sets.  
A TPS has a faster response time.The response time is slower.
This system has lower data storage requirements.OLAP systems must have significant data storage capacity to function.

Frequently Asked Questions (FAQs)

What are the three cycles of transaction processing systems?

As an activity, a TPS consists of three cycles. They are as follows:
– Revenue cycle
– Conversion cycle
– Expenditure cycle

How do BI systems differ from transaction processing systems?

Business intelligence or BI systems are complete solutions involving processes, technologies, and applications. In contrast, a TPS is an information processing system responsible for processing every transaction occurring within an organization. The main purpose of BI systems is to improve a company’s operations using relevant data. On the other hand, a TPS’s purpose is to process every transaction occurring within an organization.

What are the functions of transaction processing system?

A TPS processes an organization’s transactions, thus supporting its operations. The system records non-inquiry transactions with all their effects in the database. Moreover, it produces documents that are related to the transactions.  

Is transaction processing system a software?

A TPS combines hardware and software to manage all business transactions.

This has been a guide to what is Transaction Processing System. Here we explain its examples, types, features, advantages, and disadvantages. You can learn more about accounting from the following articles –

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