Discuss in general terms the database approach to satisfying accounting

Discuss in general terms the database approach to satisfying accounting

Chapter 1: Introduction

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ACCOUNTING INFORMATION SYSTEMS: A DATABASE APPROACH by: Uday S. Murthy, Ph.D., ACA and S. Michael Groomer, Ph.D., CPA, CISA

Introduction

Learning Objectives

After studying this chapter you should be able to:

• discuss the impact of the information revolution on the accounting function • explain the purpose of accounting and the role of the accounting professional

in organizations • describe the information customers served by accounting • describe the traditional accounting model and the manual accounting process

and the drawbacks of this traditional view • indicate the process of computerized bookkeeping and its advantages and

limitations • explain in general terms the database approach to satisfying accounting

information and the advantages of the database approach • discuss concepts of events orientation and the enterprise repository • describe the roles that the future accounting professional can play

The business world and society in general are undergoing phenomenal and sometimes turbulent change. The “new economy” driven by the Internet has seen the rise of entirely new businesses like Amazon.com, Yahoo, eBay, and of course Google. Most traditional “bricks and mortar” businesses have been forced to transform themselves into some form of an “e-business” simply to survive in this new era. The old cliché, that the only constant in business is change, is still true except that changes occur at “Internet speed.” Information technology is at the core of these radical Internet-driven changes. What implications does the “new economy” have for accounting? Whether in an “old economy” business or a “new economy” business, accounting information is intrinsic in most business processes. All businesses must still capture, process, store, and report accounting and other information about business processes to assess performance.

Beginning in the mid-1950’s, the developed countries moved from being primarily industrial oriented societies to information oriented societies. Currently, a significant percentage of the jobs in many of the developed countries focus on some aspect of the management of information rather than the production of goods. We are indeed in an “information age.” Advances in information technology lie at the heart of these colossal changes. The information superhighway, once merely a buzzword, is now very much a

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reality as is evident in the delivery of this “textbook.” As a future accounting professional you stand at the threshold of a potential revolution in accounting. The forces of information technology continue to produce dramatic changes. However, to fully harness the power of information technology, we must cast away our centuries-old notion of what accounting and accountants are all about. If we do not, we stand the risk of being cast aside as impediments to progress in the new information age. The fundamental question is this: will the accounting professional in the 21st century be the main “information provider” in an organization? Or will that role be fulfilled by some other professional, perhaps an “information systems” professional?

In this introduction, we will first discuss the why organizations exist and the role of accounting in organizations. We will then briefly review the traditional accounting model. Although this traditional view is probably still held by many, there are growing signs that its demise is imminent. We then present a more modern view of accounting—as a system for capturing all relevant information about business processes and storing it in one integrated repository. This organizational repository stores a multitude of financial and non-financial information about the significant events occurring within the business. The role of the accounting professional is in deciding:

• which events to capture data about, • what data relating to each event should be captured, • how that data is to be captured while preventing input errors, • how the data should be stored to optimize its usability while maintaining its

integrity, and • how meaningful reports can be generated on demand in real-time.

The traditional “bookkeeping” view of accounting is thrown by the wayside. In the new view, the accountant’s focus is on the design, control, and use of the enterprise-wide repository of data. The ultimate goal is for the accounting professional to serve as the provider of information within the organization. A little later, and in the chapters to come, we will discuss details about exactly what the design, control, and use of the enterprise repository entails.

Organizations and the role accounting Why do organizations exist? Think about the organizations you have been and are currently associated with—the university you attend, student organizations you belong to, the business you work for. Every organization, including for-profit businesses and not-for-profit organizations, was started with the objective of adding value for those who belong to it and/or interact with it. Organizations that do not add value cannot survive in the long term. A university providing education in exchange for tuition provides value. A business providing needed goods and services provides value. Virtually all organizations that survive in the long term have clearly stated goals and objectives that in some way speak to “value adding activities” involving the organization.

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Organizational leaders and managers need information about its value adding activities as a basis for determining whether the organization is achieving its goals. Given that even non-profit organizations incur costs, an essential aspect of running an organization and ensuring its long term survival involves recording, tracking, and reporting information about both value adding activities and cost incurring activities. As you undoubtedly have guessed, this information about organizational value adding and cost incurring activities is the domain of the accounting function in the organization.

In business organizations, the role of accounting has always been to provide information useful for decision making. In business organizations, the information provided by the accounting function is typically used to make economic decisions as they relate to the “value adding” activities for the organization. Information about sales revenues, purchases of materials, wages and salaries paid to employees are all examples of accounting information useful for making economic decisions about what to buy and sell, etc. Accounting involves processing raw data in some manner to convert it into information that must then be communicated to interested parties. In essence, accounting can be viewed as a system of communicating information. In its most general sense, a system accepts inputs, performs some processing, and generates meaningful outputs. Accounting takes business transactions as data inputs and ultimately generates a variety of financial reports as information outputs.

This view of accounting, as a system that converts transaction data into useful financial reports, says nothing about the methodology of accounting. Your exposure to accounting through the courses you have taken to date have probably led you to think about debits and credits and the double-entry accounting model when you think about “accounting.” Although the double-entry accounting system developed by the Franciscan monk Luca Pacioli in 1494 has stood the test of time, its utility is increasingly being questioned. The double-entry accounting model focuses exclusively on the financial and most easily measurable aspect of transactions, that is, the monetary amount involved. However, given the broader definition of accounting—as a system to provide information useful for decision making—it is easy to see that the double-entry model can fall short of completely meeting the needs of users. We will discuss the limitations of the traditional accounting model a little later in this chapter. The users of accounting information can be considered “information customers.” To understand the various kinds of information output that can be generated by the accounting system let us first examine the many information customers served by accounting.

Information Customers Information customers are either internal or external. Internal information customers, within the organization, would include employees at all levels from top management to the lowest level worker who has a legitimate need for information. The overriding criterion in deciding whether to satisfy an internal request for information is cost-benefit. If the benefits of producing information outweigh the costs of producing that information, then it would be advantageous to make that information available to the user. Meeting internal information needs has been the domain of management accounting or

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managerial accounting. Activities such as budgeting, cost-volume-profit analysis, variance analysis, and product costing are some examples of management accounting activities designed to meet internal information needs. The Institute of Management Accountants IMA has a web site that provides additional information about management accounting.

External information customers comprise investors, stockholders, creditors, customers, government and regulatory agencies, and financial institutions. For the most part, especially for publicly held companies, providing audited information in the form of financial statements to external users is mandatory. Furthermore, generally accepted accounting principles (GAAP) dictate the standards and practices to be followed in external financial reporting. Although the task of external financial reporting is important, it is also necessary to recognize that the annual financial statements are only one source of information about a company’s financial condition. Analysts on Wall Street and other industry experts constantly track the performance of major corporations. In fact, research has found that the release of annual financial statements has very little impact on stock prices, especially of larger companies. The finance site at Yahoo provides a wealth of information including earnings reports, stock quotes, analyst research, and earnings news.

The paper annual report is slowly becoming obsolete, with almost all publicly traded companies making their annual report available on their web site. Additionally, most companies provide additional financial information, such as quarterly reports, on their corporate web sites in the “investor relations” section. In January 2000, the Financial Accounting Standards Board published a 94 page report detailing practices in Internet reporting of financial information. Over the last several years, a technology called XBRL has been developed to facilitate the “tagging” of financial statement line items with the goal of enabling Internet reporting and electronic exchange of such information. After initially encouraging companies to report their financial results using XBRL technology on a voluntary basis, the Securities and Exchange Commission now requires publicly held companies to report financial statement information in the XBRL format. You will learn about XBRL technology in Chapter 4.

Whether information customers are internal or external to a

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