The Traditional Accounting Information System Architecture CHAPTER 3 The Traditional Accounting Information System Architecture

The traditional accounting information system is based upon what is typically called the accounting cycle and is based on the accounting equation. Pacioli’s concept is a classification scheme know as the chart of accounts. Accounts summarized on the income statement are called nominal (or temporary) accounts, while accounts summarized on the balance sheet are called real (or permanent) accounts.

To keep the accounting in balance, Pacioli proposed a rigorous process for recording, maintaining and reporting accounting data. Pacioli suggested the use of three books: the memorandum book, the journal and the ledger Before examining the impact of modern IT we will review the basic nature of each of the accounting cycle steps

The purpose of this first step are to identify the business events that can be considered accounting transaction and to collect relevant economic data about those transaction. These events include: Exchange of resources and obligations between the reporting firm and outside parties. Internal events within the firm that affects its resources or obligations but that do not involve outside parties. Economic and environmental events beyond the control of the company. The purpose of this step is to measure and record the economic impact of transactions in a form that is consistent with the chart of accounts.

Process of transferring transaction data from the journals to individual ledger accounts is called posting. Accounting system usually include two types of ledgers: the general ledger and the subsidiary ledger. One summary ledger account per each account in the chart of accounts. Control account. An audit trail provides the capability to trace each individual transaction from its initial recording all the way through the accounting process to the financial figures published in the financial statements.

Summing the subsidiary ledger and comparing the total with the balance in the control account reconciling. Unadjusted trial balance is a list of general ledger accounts and their account balances. Adjusting journal entries are generally required when no source document exists to signal the need to recognize an event, or when a source document is not received in a timely manner. The purpose of the adjusted trial balance is to confirm debit-credit equality, taking all adjusting journal entries into consideration

Financial statement are the culmination of the accounting cycle. Closing entries reduce the temporary accounts (e.g., revenues, expenses, and dividends) to a zero (closed) balance. Post-closing trial balance. This step is taken to check for debit-credit equality after the closing entries are posted. The accountant may prepare and post reversing entries to compensate for the difference in timing between the occurrence of an actual economic reality and the recording of the economic event in the accounting system. The purpose if a financial statement audit is to determine whether the statements fairly presents the financial performance and position of the organization in accordance with generally accepted accounting principles (GAAP)

As organizations grew in size and complexity the dependence on human information processing and paper documentation became burdensome in three ways: Human error Human inefficiency Paper Although IT provides an opportunity to reduce the occurance and cost of these problems, some organizations continue to use some manual processes along with their computerized processes for two reasons: The technology does not exist The available technology is not yet cost effective

One criticism of the traditional architecture is a lack of integration across functional areas of the organization Other characteristics of the traditional architecture are also criticized. Some of the most significant criticism are summarized below: The architecture captures data about a subset of an organization’s business events (the accounting transactions) Data are not recorded and processed in real time (the business activity occurs) The architecture stores and processes only a limited number of characteristics about accounting transactions. The architecture captures and stores duplicate data in a highly summarized form. The architecture stores financial data to satisfy one primary view (perspective)

Accounting Data: A Subset of Business Data Data That Describe Business Activities Accountants Filter Data Accounting Data Limited Output Views/formats General Ledger (Limited view and limited data)

Traditional AIS architecture is often complex and costly, and it limits accounting’s efforts to enhance its value. Should the accounting architecture change to enhance the value of accounting? Three ways accounting can enhance its value to an organizations: Providing more useful information Helping to embed real time information process into business process Helping management define business process rules Prepare yourself to play an active role in enhancing the value of accounting information? First, you must understand all facets of traditional AIS design, including the criticism levied against the architecture. When you realize the traditional architecture can limit your ability to enhance the value of accounting, you realize that changing the architecture is sometimes the key to enhancing value

The traditional AIS architecture is view driven: the desired views of business data shape how business data are captured, stored and used view-driven IT application are designed to support specific function by providing a particular information perspective to those who manage it. To add value to the organization as described above, the accounting information system must collect and store a larger set of data for all business events that are important to management.

Event-Driven IT Application Architecture Business Events Processor business and information processing rules Enterprisewide Information customers Data Repository Reporting Facility (Information Processing Rules) Event data Useful

Reference Hollander, A. S. Eric L. Denna, J. Owen Cherrington.2000. Accounting Information Technology, And Business Solutions. Irwin McGraw-Kill, New York-USA.