SYSTEM CONCEPTS

The word system is derived from the Greek word “system” which means a Organized
relationship among the following unit or component.

“A system is an orderly grouping of interdependent components linked together

according to a plan to achieve a specific goal.”

The word component may refer to physical parts (engine, wheels of cars),
Management steps (planning, organizing, controlling) or a sub subsystem in a
Multi level structure. It is to be noted that a system is not a randomly arranged
Set. It is arranged with some logic governed by rules, regulation, principles and
Policies.

“A system can be described as collection of processes that have inputs and produce
outputs”.

Input Process Output

Eg: - Garment manufacturing system

Input: Fabrics, labor etc Process: Sewing Output: shirt, pant etc
- Accounting system
Sales data input is processed into cash flow statement

The key features of a system are:

 All systems are made up of component parts and/or subsystems, and can only be
described in terms of the whole.
 A system must be designed to achieve a predetermined objective.
 The components/subsystems of a system work towards a collective goal.
 Interrelationships and interdependence must exist among the components.
 The objectives of the organization as a whole have a higher priority than the
objectives of its subsystems.
For example, computerizing personnel applications must conform to the
organization’s policy on privacy, confidentiality and security, as well as making selected
data (e.g. payroll) available to the accounting division on request.
 SUB-SYSTEMS
These refer to parts/building blocks of larger systems. The parts of a system may
themselves constitute different systems with all of a system’s characteristics. Lower-level
systems are called subsystems

For example the sub-systems of a Business System are as follows:

Business systems

Finance sub-system HR sub-system

Equity division Banking division Payroll Training Basic

Supra systems: Formed by a system and equivalent systems with which it interacts.
Ex : Any Bank can be looked up as a supra-system it interacts with various other
Banks
Characteristics of System :
Following characteristics are present in all systems:
 Organization
 Interaction
 Interdependence
 Integration
 Central Objective
 Organization : Organization implies structure and order. It is the arrangement of
components that helps to achieve objectives. Hierarchical relationship starting
with the president on top and leading down ward to the blue collar worker
represent the organization structure
 Interaction : Interaction refers to the procedure in which each component
interact with other components of the system. In an organization, for example
purchasing must interact with product, advertising with sales and payroll with
personnel.
 Interdependence : Independence is concerned with how a system is tied
together; it is more than sharing a physical part or location. It means that parts of
the system part or location within the system, even through each part
Performance. A unique function successful integration will typically produce a
better request as whole rather than if each component works independently.
  Integration: Integration is concerned with how a system is tied together. All the
parts of the system work together within a system even though each part performs a
unique function.
 Central Objective: Objective may be real or stated. Objective is determined by
higher management and user must be aware about the central objective well in
advance.

Elements/Components Of System
 Outputs & Inputs
 Processor(s)
 Control
 Feedback
 Environment
 Boundaries and Interfaces

Outputs & Inputs

 A major objective of a system is to produce an output that has value to its user.
Whatever the nature of the output (goods, services, or information), it must be in
line with the expectations of the intended user
◦ Inputs are the elements (material, human resources, and information) that
enter the system for processing
◦ Output is the outcome of processing.
 A system feeds on input to produce output in much the same way that a
◦ business brings in human, financial, and material resources
◦ to produce goods and services.
Processor
 The processor is the element of a system that involves the actual transformation of
input into output.
 It is the operational component of a system.
 Processors may modify the input totally or partially, depending on the specifications
of the output
Control & Feedback
 The Control element guides the system. It is the decision – making subsystem that
controls the pattern of activities governing input, processing, and output.
 Control in a dynamic system is achieved by feedback
 Feedback is defined as the return of part of the output of a system into the output
for purpose of modification.
Boundary
Defines & delineates a system or subsystems within a system from its environment
• Every system has boundaries within which it operates. Beyond these limits the system
has to interact with other systems
Example: Personnel system in an organization has work domain with defined
procedures. If the financial details of the employee are required, the system has to
interact with the accounting system to get the required details
Environment
External world which is outside the system boundary
 The collection of elements that surround the system and interact with it as well
 System functions within the environment and it has to adapt itself to its environment
E.g.: Humans leave in a particular environment. As we move to other places, there are
changes in the surroundings but our body gradually adapts to the new environment
Interfaces
 Interconnections and interactions among the sub-systems are called Interfaces.
 Interfaces occur at the boundary and take the form of inputs and outputs.
Black-Box
The transformation process in certain sub-system, especially at the lowest level may not be
defined. However, the inputs and outputs are known. Such a sub-system, whose processes
are not defined, is called a black box system.
Types of System

System

Degree of
Interactive
Elements human
behavior
intervension

Abstrac Automat Determi Probabili

physical open closed manual
ed
t nistic stic

1. According to elements, systems can be

 Abstract systems:
◦ Orderly arrangement of interdependent ideas
◦ Are theoretical and explanatory in the nature.
◦ Provide the much needed clarification.
◦ Provide theoretical framework for which there may or may not be any real
life counterpart.
◦ E.g. of such systems can be philosophy, theology-(arrangement of ideas about
god) etc.
 Physical systems:
◦ Are very practical, specific and also very operational in the nature.
◦ Can be based on the conceptual system.
◦ E.g. Examination system, surgery, motor car act as very good examples of the
Physical systems.
2. According to interactive behavior, systems can be:
 Open systems:
◦ Involve continuous interaction with the environment.
◦ So exchanges the information, material, energy with the environment.
◦ Is also adoptive or adaptive to the changing environment as it is flexible. E.g.:
Human beings, plants, information system
 Closed systems:
◦ Does not interact with the environment
◦ Does not change with the change in environment, remain isolated
◦ Relatively shorter life-cycle because it decays for not having any
input/interaction from environment.
◦ E.g.: computer program, accounting system.
3. According to degree of human intervention, systems can be
 Manual Systems
◦ Systems made up of people may be viewed purely as manual systems
◦ Where data collection, manipulation, maintenance, and final report are
carried out absolutely by human efforts.
 Automated systems
◦ Are made up of machines or machines only
◦ Such systems would have to obtain their own inputs and maintain themselves
◦ It involves a close man-machine interaction.
◦ E.g. computers, microprocessors.
4. According to working/output, Systems can be
 Deterministic systems
◦ They are perfectly predictable
◦ Interaction among the parts is known with certainty
◦ Future state can be predicted without error
◦ E.g. A correct computer program
 Probabilistic systems
◦ Based on the predictability of the behavior or the outcome.
◦ Future state cannot be predicted without error.
◦ E.g. Inventory system, average stock can be predicted but exact values cannot
be known
Accounting as a System
A well-designed accounting system is a relatively closed system. This system has processes
that convert inputs to outputs and utilizes internal control to limit the effects of its
environment on the system.
The inputs are the economic events (e.g. selling goods for cash/ on credit, incurring an
expense).
The processes in an accounting system record an event as a transaction; journalize post
and summarize transactions in various reports.
The outputs of this system are accounting documents and reports (financial statements,
responsibility reports).

The Accounting system has component parts that are themselves systems. It is
composed of Application systems (processing personnel’s view) or it is a set of Transaction
cycles (auditor’s view).
 An Application system is a set of procedures and computer programs that perform
a specific accounting objective .
e.g. the process of calculating amounts owed to suppliers and then printing checks
for those amounts is a cash disbursements application.
 Transaction cycle describes economic events that normally follow each other in a
cyclical way. There are four transaction cycles:
 Revenue cycle - accounting transactions resulting from economic events that
produce revenue.
 Expenditure cycle - accounting transactions caused by the economic events
necessary to acquire material and suppliers for the accounting entity.
 Conversion cycle - accounting transactions recorded when converting purchased
inventory into salable finished products.
 Financial cycle - accounting transactions that record the acquisition of capital from
owners and creditors, and the use of that capital to acquire property necessary for
generating income

 Environment
 ◦ Customers
◦ Vendors
◦ Government
◦ Owners
◦ Creditors
 Interfaces Provided by
◦ Documents
◦ Computer Records
◦ General Ledger Accounts
 (Offline Storage or Filing)
◦ Documents
◦ Storage media

Accounting as a Subsystem
Accounting information systems are subsystems of the management information system
(MIS). MIS can be defined as a set of organized procedures that provides information to
support decision making and control in the organization.