Chapter 1: The Information System: An Accountant’s Perspective

Discussion Notes

●​ The Nature of Accounting Information Systems (AIS)​

1.​ Unlike other accounting subjects, AIS lacks a strictly defined body of
knowledge, leading to controversy among educators about its content.
2.​ The Sarbanes-Oxley Act (SOX) of 2002 has helped shape the AIS
curriculum by establishing new corporate governance regulations and internal
control standards for public companies.
■​ Sarbanes-Oxley Act (SOX) of 2002 (Technical Term Definition): A
significant law passed in the United States after major accounting
scandals (like Enron and WorldCom). It sets strict rules for how public
companies should be run, especially regarding their financial reporting
and internal controls, to protect investors.
■​ Internal Control (Technical Term Definition): The processes and
procedures a company puts in place to safeguard its assets, ensure
its financial records are accurate, promote efficient operations, and
make sure company policies are followed.
■​ Public Companies (Technical Term Definition): Businesses whose
shares are bought and sold on a stock exchange and whose financial
information is available to the public.
●​ The Information Environment​

1.​ Information is considered a vital business resource, similar to raw materials,

capital, and labour.
2.​ Information Flows (Figure 1-1):
■​ Figure 1-1: Internal and External Flows of Information
■​ Explanation: This pyramid diagram illustrates how information
moves both within a company (internally) and between the
company and outside parties (externally).
■​ Business Operations form the base, representing day-to-day
product-oriented work like manufacturing and sales.
■​ Above operations, there are three management tiers:
Operations Management (day-to-day control), Middle
Management (short-term planning), and Top Management
(longer-term planning and objective setting).
■​ Horizontal Flow: Information flows across different
departments at the same level, supporting daily operational
tasks with detailed transaction information (e.g., sales, material
usage).
■​ Vertical Flow: Information moves down from senior
management as instructions and budgets, and summarised
performance information flows up to managers at all levels for
planning and control.
 ■​ External Users: Information also flows out to trading
partners (like customers and suppliers) and stakeholders
(like shareholders, financial institutions, and government
agencies) who have an interest in the company.
■​ Trading Partners (Technical Term Definition): Other
businesses or individuals with whom a company
regularly exchanges goods, services, or information,
such as customers who buy products or suppliers who
provide materials.
■​ Stakeholders (Technical Term Definition): Any
individual or group, inside or outside a company, that
has a direct or indirect interest in its performance and
actions. This includes employees, owners
(shareholders), customers, suppliers, and even the
government.
■​ Different user groups require different types and levels of detail
in information; for example, management needs summarised
reports, while operations need highly detailed transaction data.
●​ Understanding Systems​

1.​ A system is a group of two or more interconnected parts (components or

subsystems) that work together to achieve a common goal.
■​ System (Technical Term Definition): A set of connected parts that
work together for a specific purpose. For example, your body is a
system of organs, and a car is a system of mechanical parts.
■​ Subsystem (Technical Term Definition): A smaller system that is a
part of a larger, overall system. For instance, the circulatory system is
a subsystem of the human body.
2.​ Elements of a System:
■​ Multiple Components: A system must have more than one part.
■​ Relatedness: All parts must serve a common purpose, even if they
function independently.
■​ System vs. Subsystem: These terms are relative; a system can be a
subsystem of a larger system, and a subsystem can be viewed as a
system itself.
■​ Purpose: Every system must serve at least one purpose.
3.​ Example: An Automobile (Figure 1-2)
■​ Complex Topic: System Decomposition and Subsystem
Interdependency Simplified:
■​ Imagine a car: it's a big system with one main purpose – to get
you from one place to another.
■​ System Decomposition is like taking that car and breaking it
down into its main parts, like the fuel system, engine
(propulsion system), electrical system, and brakes. Each of
these is a subsystem.
■​ Subsystem Interdependency means these smaller parts rely
on each other. If the fuel pump (a part of the fuel system)
breaks, the whole car can't move. But if the radio (part of the
 electrical system) breaks, the car can still get you where you
need to go. This shows that some parts are more critical than
others, and designers need to plan for these failures.
■​ Figure 1-2: Primary Subsystems of an Automobile
■​ Explanation: This diagram visually breaks down an
automobile (the main system) into its four primary
subsystems: Fuel System, Propulsion System, Electrical
System, and Brake System. Each of these is further broken
down into smaller components (e.g., Fuel System includes
Fuel Tank, Fuel Pump, Fuel Injector). It illustrates how a
complex system can be understood by examining its
constituent parts and their relationships.
4.​ Designers of systems, including information systems, need to identify critical
subsystems and plan for their potential failure with appropriate controls.
●​ Information Systems Framework​

1.​ An Information System (IS) is a set of formal procedures for collecting,

processing raw facts (data) into meaningful insights (information), and
distributing it to users.
■​ Information System (IS) (Technical Term Definition): The
organized setup of procedures and resources (like people, computers,
and software) that collect, process, store, and distribute data to create
information for decision-making and operations within an organization.
2.​ Complex Topic: Data vs. Information Simplified:
■​ Data are just raw facts, like a list of numbers or words, that don't
directly tell you what to do.
■​ Information is when those raw facts are processed or organised in a
way that helps you make a decision or take an action you wouldn't
have otherwise. For example, a list of raw material inventory levels is
data. If that list is processed to show that certain items are low and
need ordering, and it makes a purchasing agent place an order, then it
becomes information for that agent. The same report might be just
data to someone in personnel, as it doesn't prompt them to act.
3.​ Framework for Information Systems (Figure 1-3):
■​ Figure 1-3: A Framework for Information Systems
■​ Explanation: This hierarchical diagram shows that a
company's overall Information System (IS) can be divided
into two main categories: the Accounting Information
System (AIS) and the Management Information System
(MIS).
■​ Accounting Information System (AIS) (Technical Term
Definition): A part of the larger Information System that
specifically focuses on collecting, storing, and processing
financial and nonfinancial data related to economic events that
directly affect a company's assets and finances. It helps
produce financial statements and reports.
■​ Management Information System (MIS) (Technical Term
Definition): Another part of the Information System that
 provides information to managers for decision-making. It
usually handles nonfinancial transactions or data that isn't
directly part of traditional accounting, such as market research
or production planning.
■​ Both AIS and MIS are essential parts of the broader
Information System that help an organisation function.
4.​ Transactions Processed by the Information System (Figure 1-4):
■​ A transaction is any event that affects or is of interest to the
organization and is processed as a unit of work by its information
system.
■​ Transaction (Technical Term Definition): Any business event
or activity that is recorded and processed by a company's
information system. This could be selling a product, buying
supplies, or hiring a new employee.
■​ Financial Transaction: An economic event that changes a company's
assets and ownership stakes (equities), is recorded in its accounts,
and can be measured in money (e.g., sales, inventory purchases,
cash receipts).
■​ Financial Transaction (Technical Term Definition): A
specific type of business event that has a direct impact on the
company's money, assets, or liabilities, and is recorded in its
accounting books. Examples include selling goods, buying
inventory, or paying employees.
■​ Nonfinancial Transaction: Events that don't fit the narrow definition
of a financial transaction (e.g., adding a new supplier to a list).
■​ Nonfinancial Transaction (Technical Term Definition): A
business event that is important to the company but does not
directly involve money or immediately affect its financial
accounts. An example is updating a customer's address or
changing an employee's job title.
■​ Figure 1-4: Transactions Processed by the Information System
■​ Explanation: This diagram shows that the overall Information
System takes in two types of transactions: Financial
Transactions and Nonfinancial Transactions. It then
processes these transactions to produce Information that
helps Users make Decisions. The distinction is important
because financial transactions have legal and regulatory
implications.
5.​ AIS Subsystems:
■​ The AIS processes financial transactions and nonfinancial
transactions that directly affect financial transaction processing (e.g.,
updating customer addresses impacts billing).
■​ It consists of three major subsystems:
■​ Transaction Processing System (TPS) (Technical Term
Definition): The core part of the AIS that handles the
day-to-day business operations. It collects, processes, and
stores data about common financial transactions (like sales,
 purchases, and payroll) and provides essential reports and
documents.
■​ The TPS supports daily business operations with
reports, documents, and messages.
■​ It converts economic events into financial transactions,
records them, and distributes financial information.
■​ It groups similar transactions into three transaction
cycles: revenue, expenditure, and conversion.
■​ General Ledger/Financial Reporting System (GL/FRS)
(Technical Term Definition): This AIS subsystem is
responsible for producing the company's main financial
reports, such as income statements and balance sheets, which
are usually required by law for external users like investors and
tax authorities.
■​ Produces traditional financial statements and legally
required reports for external users (non-discretionary
reporting).
■​ Management Reporting System (MRS) (Technical Term
Definition): This AIS subsystem provides special, customised
financial reports and information to internal managers. These
reports (like budgets and performance analyses) help
managers make decisions, and the company has flexibility in
what and how it reports (discretionary reporting).
■​ Provides internal management with special-purpose
financial reports for decision-making (discretionary
reporting).
6.​ Management Information System (MIS):
■​ Processes nonfinancial transactions that are not typically handled by
traditional AIS.
■​ Table 1-1: Examples of MIS Applications in Functional Areas
■​ Explanation: This table provides examples of how the
Management Information System (MIS) supports different
departments (functional areas) within a company. For instance,
in Finance, MIS might include Portfolio Management
Systems (tools to manage investments), while Marketing
might use MIS for Market Analysis or New Product
Development. This shows how MIS provides specialized
information for various departmental needs beyond traditional
accounting.
●​ Why Distinguish AIS and MIS?​

1.​ SOX legislation requires management to design and implement internal

controls over the entire financial reporting process, including the financial
reporting, general ledger, and transaction processing systems.
2.​ This distinction helps management and auditors identify critical processes
and areas of legal responsibility, ensuring compliance with SOX requirements.
●​ A General Model for AIS (Figure 1-5)​
1.​ This model describes all information systems regardless of their technology.
2.​ Figure 1-5: General Model for Accounting Information System
■​ Explanation: This diagram presents a high-level view of how an
Accounting Information System (AIS) works within a business. It
shows that Data Sources (both internal and external) feed into Data
Collection, then Data Processing, which interacts with Database
Management. This leads to Information Generation for End Users
(internal and external), and the process includes Feedback that can
alter system operations. It's a foundational model for understanding
how information flows and is managed within an organisation.
3.​ Elements of the General Model:
■​ End Users: Individuals or groups who receive information from the
system.
■​ External Users: Creditors, stockholders, regulatory agencies,
customers, suppliers.
■​ Internal Users: Management at all levels, operations
personnel.
■​ Data Sources: Financial transactions originating from internal or
external sources.
■​ Data Collection: The first operational stage, aiming to ensure data is
valid, complete, and free from material errors.
■​ Rules: Collect only relevant data (contributes to information)
and collect data efficiently (only once to avoid redundancy
and inconsistency).
■​ Data Processing: Tasks that convert collected data into information,
from simple (posting, summarising) to complex (algorithms, statistical
techniques).
■​ Database Management: The organization's central storage location
for financial and nonfinancial data.
■​ Database (Technical Term Definition): An organised
collection of related data, stored electronically in a structured
way, that can be easily accessed, managed, and updated.
Think of it as a central digital filing cabinet for all of a
company's information.
■​ Data Hierarchy (Figure 1-6):
■​ Complex Topic: Data Hierarchy Simplified:
■​ Imagine a filing cabinet for customer
information.
■​ The smallest useful piece of information, like a
customer's name, address, or account balance,
is called a Data Attribute.
■​ All the data attributes for one specific customer
(e.g., John Smith's name, address, and
balance) form a Record.
■​ A collection of all the records for all customers
in the company makes up an Accounts
Receivable File.
■​ Figure 1-6: The Data Hierarchy
 ■​ Explanation: This diagram shows how data is
organised from the smallest piece to larger
collections. At the lowest level are Attributes
(individual facts like "Customer Name,"
"Customer Address"). A collection of these
attributes for a single item forms a Record (e.g.,
all details for one customer). A collection of all
similar records forms a File (e.g., all customer
records in the Accounts Receivable File). It
illustrates the structured nature of data storage.
■​ Primary Key (PK) (Technical Term Definition): A
unique identifier for each record in a file or database.
For example, a "customer account number" is a primary
key because no two customers will have the same
number, making it easy to find a specific customer's
record.
■​ Secondary Key (SK) (Technical Term Definition): A
non-unique attribute used to categorise or retrieve data,
but not to identify a single record. For example, in a
customer file, "customer name" could be a secondary
key because multiple customers might have the same
name, but it could be used to find all customers with
that name.
■​ Database Management Tasks: Storage, retrieval, and
deletion of records.
■​ Information Generation: Compiling, arranging, formatting, and
presenting information to users.
■​ Characteristics of Useful Information: Relevance,
timeliness, accuracy, completeness, and summarisation.
■​ Feedback: Output sent back into the system as data to initiate or
modify a process.
■​ Feedback (Technical Term Definition): Information or data
from a system's output that is sent back into the system as
input. It helps adjust or improve how the system operates, like
an inventory report triggering a new order.
●​ Information System Objectives: All systems share three fundamental objectives:​

1.​ Support Stewardship Function: Management's responsibility to manage

company resources properly.
■​ Stewardship (Technical Term Definition): Management's
responsibility to properly look after and manage the assets and
resources of the company on behalf of the owners.
2.​ Support Management Decision-Making: Provide information needed for
decisions.
3.​ Support Day-to-Day Operations: Provide information for efficient daily
tasks.
●​ Acquisition of Information Systems: Organizations acquire systems by:​
 1.​ In-house Development: Custom-built systems.
2.​ Commercial Systems: Purchased from software vendors.
■​ Turnkey Systems (Technical Term Definition): Software systems
that are completely finished, tested, and ready to be used immediately.
They often come with standard business practices built-in and might
be customised for a specific industry.
■​ Backbone Systems (Technical Term Definition): Software systems
that provide a basic, pre-programmed structure or core logic, but allow
the buyer to design and build their own user interfaces to fit unique
needs. It's a middle ground between buying off-the-shelf and building
from scratch.
■​ Vendor-Supported Systems (Technical Term Definition):
Customised software systems that a client company buys from a
vendor, who then designs, implements, and maintains the system for
them. This is like outsourcing the entire software management to an
expert provider.
●​ Organizational Structure​

1.​ Organizational structure shows how responsibility, authority, and

accountability are distributed.
2.​ Figure 1-7: The Flows of Responsibility, Authority, and Accountability
Through the Organization
■​ Explanation: This organisational chart illustrates the lines of
command and reporting within a company. Responsibility and
Authority typically flow downward from the President to Vice
Presidents and Managers. Accountability (being answerable for
performance) flows upward from lower-level managers to senior
management. This helps assess who needs what information.
3.​ Business Segments: Firms organise into segments for efficiency and
specialisation. Common methods include:
■​ Geographic Location
■​ Product Line
■​ Business Function (most common)
4.​ Functional Segmentation:
■​ Divides the organization based on specialised tasks (e.g., marketing,
production, finance, accounting).
■​ Table 1-2: Functions From Resources
■​ Explanation: This table shows how different resources (like
Materials, Labor, Financial Capital, Information) are managed
by specific business functions within an organisation. For
example, "Materials" are managed by Inventory Management,
Production, Marketing, and Distribution. This highlights the
interrelation between resources and functional areas.
■​ Figure 1-8: Functional Areas of a Firm
■​ Explanation: This detailed organisational chart illustrates the
typical functional areas of a manufacturing firm. It breaks
down the main business functions (like Materials Management,
Production, Marketing) into their specific sub-functions (e.g.,
 Materials Management includes Purchasing, Receiving,
Stores). It provides a comprehensive view of how tasks are
departmentalised.
■​ Key Functional Areas:
■​ Materials Management: Planning and controlling inventory
(Purchasing, Receiving, Stores).
■​ Production: Conversion of raw materials into finished
products (Planning, Quality Control, Maintenance).
■​ Marketing: Product promotion, advertising, market research,
sales order entry.
■​ Distribution: Getting products to customers (Warehousing,
Shipping).
■​ Personnel: Managing human resources (Recruiting, Training,
Benefits, etc.).
■​ Finance: Managing financial resources (Banking, Treasury,
Credit, etc.).
■​ Accounting Function: Manages financial information, records
financial effects of transactions, distributes information to
operations personnel.
■​ Complex Topic: Accounting Independence
Simplified:
■​ Accounting Independence means that the
people who record a company's financial
activities (the accountants) should not also be
the ones who actually handle the money or
goods, or directly approve payments for those
goods without an independent check.
■​ For example, the person who records inventory
going into production shouldn't also be the one
physically moving the inventory. This separation
helps ensure that records are accurate and
prevents fraud, because if someone could steal
goods and then change the records to cover it
up, that would be a problem. Accountants' role
is to monitor and record, not to actively
participate in the physical acts that create the
financial transactions.
■​ Information Technology (IT) Function: Associated with the
information resource. Can be structured in two main ways:
Centralized or Distributed.
●​ The Information Technology (IT) Function​

1.​ Centralized Data Processing:

■​ All data processing is performed by large computers at a single central
location, serving users across the organization.
■​ Centralized Data Processing (Technical Term Definition):
An approach where all computer processing and data storage
for an entire organisation are handled by one or more large
 computers located at a single, central site. All users connect to
this central system.
■​ Figure 1-9: Centralized Data Processing Approach
■​ Explanation: This diagram shows a centralised data
processing model where the IT Services department acts as
a central hub, providing data and information to various
functional departments like Finance, Marketing, Production,
Distribution, and Accounting. The arrows indicate the flow of
information and a "Cost Chargeback" from IT Services,
meaning departments are often billed for the IT resources they
use. This highlights the concentration of IT resources in one
place.
■​ IT Areas of Operation (Figure 1-10):
■​ Figure 1-10: Organization of IT Function in a Centralized
System
■​ Explanation: This diagram expands on the IT function
within a centralised system, showing its internal
structure. It typically includes Systems Development
(creating new systems and maintaining existing ones),
Database Administration (managing and securing the
company's data), and Data Processing (running daily
computer operations like data control, conversion, and
managing data libraries). This illustrates the specialized
roles within a central IT department.
■​ Database Administration: Responsible for security and
integrity of the central database.
■​ Database Administrator (Technical Term Definition):
The person or team responsible for the security,
integrity, and efficient operation of a company's central
database, especially in a system where data is shared
across many users.
■​ Data Processing: Manages computer resources for
day-to-day transaction processing (Data Control, Data
Conversion, Computer Operations, Data Library).
■​ Systems Development and Maintenance: Analysing user
needs, designing new systems, and keeping them current.
■​ Systems Professionals (Technical Term Definition):
Experts like systems analysts, database designers, and
programmers who design, build, and maintain
information systems.
2.​ Distributed Data Processing (DDP):
■​ Reorganises the IT function into smaller Information Processing
Units (IPUs) distributed to and controlled by end-users.
■​ Distributed Data Processing (DDP) (Technical Term
Definition): A system design where computer processing and
data are spread out among different locations or departments
within an organisation, often under the control of the local
 users, rather than being managed by a single central IT
department.
■​ Information Processing Unit (IPU) (Technical Term
Definition): A small, self-contained computer processing unit
or team that is distributed to a specific end-user department or
location, giving them direct control over their information
processing needs.
■​ Figure 1-11: Organizational Structure for a Distributed Processing
System
■​ Explanation: This diagram contrasts with the centralised
model by showing a distributed processing system. The
central IT function is eliminated, and instead, various
operational areas like Production, Administration, Marketing,
and Finance each have their own Information Processing
Unit (IPU). This decentralises IT control, allowing individual
departments to manage their own computing needs.
■​ Complex Topic: Centralized vs. Distributed Data Processing
(DDP) Simplified:
■​ Imagine a company's computer operations like a restaurant's
kitchen.
■​ Centralised Data Processing is like having one very large,
professional kitchen that cooks all the food for all the
restaurant's different dining areas. It's efficient because it uses
big, powerful equipment, but if one dining area needs
something special, it might have to wait, and if the main
kitchen breaks down, no one gets food.
■​ Distributed Data Processing (DDP) is like giving each dining
area its own small kitchen to cook its specific menu items. This
means food comes out faster for that area, and they have
more control over their menu. But, if each small kitchen buys
different equipment or ingredients, they might not be able to
share easily, and some might waste resources or make
mistakes because they're not as specialised as the central
kitchen.
■​ Disadvantages of DDP: Loss of control, inefficient use of resources,
hardware/software incompatibility, data redundancy, destruction of
audit trails, inadequate segregation of duties, increased programming
errors/system failures, lack of standards.
■​ Data Redundancy (Technical Term Definition): When the
same piece of data is stored multiple times in different places
within a system. This can lead to inefficiencies, inconsistencies
if one copy is updated but others aren't, and increased storage
costs.
■​ Audit Trail (Technical Term Definition): The sequence of
documents and records (physical or digital) that allows a
financial transaction to be traced from its origin (e.g., a sales
order) through all its processing steps to its final entry in the
financial statements. It's like a complete historical record.
 ■​ Advantages of DDP: Cost reductions (smaller, specialised systems),
improved cost control responsibility, improved user satisfaction
(customised support), and better backup capabilities (if one IPU fails,
others can take over).
●​ The Evolution of Information System Models​

1.​ Information systems have evolved over 50 years, with newer models
addressing limitations of predecessors, but older systems often coexist.
2.​ Manual Process Model: The oldest and most traditional accounting system,
relying on physical documents and human record-keeping. Useful for
understanding basic accounting principles and internal controls.
3.​ Flat-File Model:
■​ Often associated with legacy systems from the 1960s-1980s, still
used today.
■​ Legacy Systems (Technical Term Definition): Older
computer systems or applications that are still in use because
they perform essential functions for a company, even though
they may use outdated technology and are often complex and
difficult to update.
■​ Individual data files are not linked to other files; users "own" their data
files.
■​ Figure 1-12: Flat-File Model
■​ Explanation: This diagram illustrates the flat-file model,
where different departments (Accounting, Marketing, Product
Services) each have their own separate and distinct sets of
customer data. This means the same customer information
might be stored in multiple places, tailored to each
department's specific needs (e.g., Accounting has "Current
Accounts Receivable," Marketing has "Historic/Demographic
Orientation"). The problem is that these separate files are not
integrated, leading to data duplication and potential
inconsistencies.
■​ Complex Topic: Flat-File vs. Database Model Simplified:
■​ Imagine a small shop before computers.
■​ In a Flat-File Model, the sales clerk keeps a notebook of all
customer sales for billing. The marketing person has a
separate notebook for customer addresses and demographics
for promotions. The service team has another notebook for
product details and service dates. If a customer changes their
address, everyone has to update their own notebook. This is
inefficient, prone to errors, and makes it hard to get a complete
picture of the customer.
■​ In a Database Model, all this information would be in one
central digital file that everyone can access and share. If the
address changes, it's updated once. A special software, the
Database Management System (DBMS), controls who can
access what information and ensures it's always current and
 consistent. This makes operations smoother and information
more reliable for everyone.
■​ Problems with Flat-File Model:
■​ Data Storage: Data is duplicated, incurring costs for multiple
collection and storage procedures.
■​ Data Updating: Changes must be made separately in each
user's file, increasing management costs.
■​ Currency of Information: If updates are not disseminated
(shared) properly, different users will have inconsistent and
outdated information.
■​ Task-Data Dependency: Users are limited to the data they
possess, making it difficult to share data or get new information
when needs change.
■​ Limited Data Integration: Files are structured for specific
users, often excluding data attributes useful to others,
preventing integration across the organization.
4.​ Database Model:
■​ Overcomes flat-file problems by centralising data into a common
database shared by all users.
■​ Figure 1-13: Database Model
■​ Explanation: This diagram shows the database model, which
contrasts with the flat-file approach. Here, all customer data
(and other entity data) is pooled into a Shared Database.
Departments like Accounting, Marketing, and Product Services
access this common database through a Database
Management System (DBMS). This centralisation eliminates
redundancy and ensures everyone works with the most current
information.
■​ Database Management System (DBMS) (Technical Term
Definition): A specialized software program that acts as an
interface between users (or applications) and a database. It
manages and organises the data, allowing users to store,
retrieve, update, and manage information while controlling
access and ensuring data security.
■​ Access is controlled by a Database Management System (DBMS),
which knows what data each user can access.
■​ Advantages: Elimination of data redundancy (stored once), single
update (reduces cost/time), current values (changes available to all
users immediately).
■​ Relational Database Model: A flexible database approach that allows
integrated system applications capable of supporting multiple users
from common, integrated tables.
■​ Relational Database Model (Technical Term Definition): A
type of database where data is organised into one or more
tables (or "relations") with columns and rows. These tables can
be linked together using common data points, making it flexible
for different users to combine information and create integrated
reports.
5.​ REA (Resources, Events, Agents) Model:
■​ Complex Topic: REA Model Simplified:
■​ The REA Model is a different way of thinking about and setting
up accounting systems. Instead of just focusing on traditional
accounting accounts (like "Cash" or "Accounts Receivable"), it
models the fundamental parts of a business:
■​ Resources: What the company has (like cash,
inventory, equipment).
■​ Events: What the company does (like selling products,
buying supplies, receiving cash).
■​ Agents: Who participates in those events (like
customers, sales clerks, vendors).
■​ By capturing detailed information about these three elements
and their relationships in a relational database, the system
can create many different kinds of reports—both traditional
accounting reports and other reports for management—without
losing important details. It's more flexible and provides richer
data than older accounting methods.
■​ An accounting framework for modeling an organization's critical
Resources, Events, and Agents and their relationships.
■​ Resources (Technical Term Definition): The economic
assets of an organisation, which are valuable, scarce, and
controlled by the company. Examples include cash, inventory,
equipment, and buildings.
■​ Events (Technical Term Definition): Significant business
activities or occurrences that affect a company's resources.
These can be economic events like sales, purchases, or
production, or operational events like shipping goods.
■​ Agents (Technical Term Definition): Individuals or
departments, both inside and outside the company, who
participate in economic events and have the authority to use or
dispose of resources. Examples include customers, vendors,
sales clerks, and production workers.
■​ Example: Classic vs. REA Accounting (Figure 1-14 & 1-15)
■​ Figure 1-14: Classic Accounting Records in a Non-REA
System
■​ Explanation: This diagram shows how sales and cash
receipts (from the example in the text) would be
recorded in a traditional, non-REA system. It uses
classic accounting records like an "Accounts
Receivable File" and "Sales File." The key takeaway is
that these records summarise information and are
independent of each other, meaning much of the
detailed transaction data is lost or not captured.
■​ Figure 1-15: Event Database in an REA System
■​ Explanation: This diagram illustrates how the same
sales and cash receipts events would be captured in an
REA-based relational database. Instead of
 summarised accounts, there are separate tables (like
CUSTOMER, INVOICE, PRODUCT, CASH REC) for
each entity and event. These tables are linked by
primary keys (PK) and foreign keys (FK), allowing for
detailed data capture and flexible retrieval of
information for multiple users, promoting integration.
■​ Database Tables (Technical Term Definition): In a relational
database, these are structured collections of data organised
into rows and columns, similar to spreadsheets. Each table
stores information about a specific type of entity or event (e.g.,
a "Customer" table or an "Invoice" table).
■​ Primary Key (PK) (Technical Term Definition): A field in a
database table that uniquely identifies each row (record) in that
table. For example, a customer ID number would be the
primary key for a customer table.
■​ Foreign Key (FK) (Technical Term Definition): A field in one
database table that links to the primary key in another table. It
establishes a relationship between the two tables, allowing
information to be combined across them. For example, a
"customer ID" in an "Invoice" table might be a foreign key that
links to the "Customer ID" primary key in the "Customer" table.
6.​ Enterprise Resource Planning (ERP) Systems:
■​ Complex Topic: ERP Systems Simplified:
■​ Think of a company like a human body with different organs
(sales, accounting, HR, manufacturing) that need to work
together.
■​ An ERP System is like a super-smart brain and nervous
system that connects all these organs with one unified
software. It automates and integrates the company's key
business processes into a single, comprehensive system.
■​ Instead of each department having its own separate software,
ERP uses modules (like different apps on your phone) for
functions such as financial accounting, human resources, or
production planning.
■​ The big advantage is that information flows seamlessly across
the entire company, breaking down departmental barriers and
making everyone work from the same up-to-date data.
■​ However, they are very complex and expensive to implement,
often requiring companies to change how they do business to
fit the ERP's standard processes.
■​ An information system model that automates and integrates key
business processes across an organization.
■​ Breaks down traditional functional barriers by facilitating data sharing,
information flows, and common business practices.
■​ Sold in modules that support standard processes (e.g., Financial
Accounting, Human Resources, Production Planning).
■​ Modules (Technical Term Definition): Standardised,
independent software components within a larger ERP system,
 each designed to manage specific business functions (e.g., a
"Financial Accounting" module or a "Human Resources"
module).
■​ Often requires modifying business processes to fit the ERP or
modifying the ERP itself, and sometimes adding bolt-ons (additional
software).
■​ Bolt-ons (Technical Term Definition): Extra software
applications that are added to an existing ERP system to
handle specific or unique business functions that the core ERP
modules don't cover. They are "bolted on" to enhance
functionality.
●​ The Role of the Accountant​

1.​ Accountants play three key roles in relation to information systems:

2.​ Accountants as Users:
■​ The accounting function is typically the largest user of IT.
■​ Accountants must clearly define their information needs to system
designers (e.g., accounting rules, controls, algorithms).
3.​ Accountants as System Designers:
■​ Traditionally, accountants were responsible for key aspects of system
design (user needs, report format, data sources, accounting rules,
controls).
■​ With computers, this role became controversial, but today it is
recognised that accountants are responsible for the conceptual
system, and IT professionals for the physical system.
■​ Complex Topic: Conceptual vs. Physical System Design
Simplified:
■​ Imagine building a house.
■​ The Conceptual System is like the architect's initial
idea and detailed blueprints. It defines what the house
should do, what rooms it needs, what materials are
ideal, and what functions each area serves. For an
information system, this means defining what
information is required, its sources, where it goes, and
the accounting rules that apply. Accountants are critical
here, specifying the business logic and information
needs.
■​ The Physical System is how the house is actually built
using specific construction techniques, tools, and
hardware. For an information system, this is the actual
technology (computers, software, networks) used to
capture and present the information. IT professionals
determine the most economical and effective
technology to make the conceptual design a reality.
■​ System design should be a collaborative effort between accountants
and IT professionals.
4.​ Accountants as System Auditors:
■​ Auditing (Technical Term Definition): An independent examination
performed by an expert (the auditor) to express an opinion on the
fairness and accuracy of a company's financial statements.
■​ Attest Function (Technical Term Definition): The primary service
provided by external auditors, which involves independently verifying
the fairness and reliability of a company's financial statements or other
financial information. Public confidence relies on this validation.
■​ External Auditing: Performed by independent Certified Public
Accounting (CPA) firms, representing third-party stakeholders.
■​ Assurance Services (Technical Term Definition):
Professional services offered by auditors that go beyond
traditional financial statement audits. They are designed to
improve the quality of information (financial and nonfinancial)
used by decision-makers, such as opinions on product quality
or system effectiveness.
■​ IT Auditing (Technical Term Definition): A specialized part of
auditing that focuses on evaluating the effectiveness of a
client's information technology (IT) controls. This is crucial in
modern companies where many internal controls are
computerised, helping ensure data accuracy and system
security.
■​ Internal Auditing: An appraisal function within the organization,
performing a wide range of activities for management, including
financial statement audits, compliance, efficiency evaluations, fraud
detection, and IT audits.