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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
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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
(Limited view and limited data)
Data That
Describe
Business
Activities
Business
Activities
Accounting
Data
Accountants
Filter Data
General
Ledger
Limited Output
Views/formats
 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
Enterprisewide
Information
customers
Business
Events
Business
Event
data
Business
Events
Processor
business
and
information
processing
rules
Business
Data
Repository
Reporting
Facility
(Information
Processing
Rules)
Useful
Information
Reference
 Hollander, A. S. Eric L. Denna, J. Owen
Cherrington.2000. Accounting
Information Technology, And Business Solutions. Irwin
McGraw-Kill, New York-USA.