TYPES OF ACCOUNTING INFORMATION SYSTEMS (STUDY OBJECTIVE 2)

There are very many different types of accounting information systems used in business organizations today. The size of the organization, the nature of its processes, the extent of computerization, and the philosophy of management all affect the choice of system. Simply to organize the study of accounting information systems, we have divided the systems in place into three categories, as follows:

1. Manual systems
2. Legacy systems
3. Modern, integrated IT systems

MANUAL SYSTEMS

Certainly, most large or medium-size organizations use computerized accounting systems rather than manual record-keeping systems. However, there are many small organizations that use manual systems, in whole or in part, to maintain accounting records. In addition, even those larger organizations that have computerized aspects of the accounting information system may still have parts of their processes that involve manual records. For example, even if the calculation and printing of a paycheck in an organization are computerized, the employee time card may be completed by hand.

Because small organizations often use manual record-keeping systems—and even computerized systems may rely on some manual record keeping—it is important to examine manual processes in accounting information systems. An entirely manual system would require source documents and paper-based ledgers and journals.

A source document is a record that captures the key data of a transaction. The data on a source document usually include the date, purpose, entity, quantities, and dollar amount of a transaction. Some examples of source documents are employee time cards, purchase orders, sales orders, and cash receipts. A source document usually serves three important functions in the accounting system: First, the source document provides the input data necessary for the accounting system to record the transaction. Second, the source document triggers business processes to begin. For example, a purchase order triggers the business processes that will fill the order and ship goods to the customer. Third, the source document serves as part of the permanent audit trail. If necessary, the organization can look up the source document of a transaction to determine the origin and validity of the transaction.

A turnaround document is an output of the accounting system that can be used as an input in a different part of the accounting system. An example is your credit card statement, which is a computer output of the system your credit card company uses. The part of that statement you return with your payment is an input that can be used by the company's accounting system to determine your account number. The computer system scans the document to read your account number, and it is not necessary for a person to manually type in your number. The turnaround document improves input efficiency and accuracy by eliminating human error.

These source documents become the inputs to record transactions in ledgers and journals. The general ledger provides details for the entire set of accounts used in the organization's accounting systems. Transactions or transaction summaries are posted to the general ledger from the general journal and special journals. The general journal is the place of original entry for any transactions that are not recorded in special journals. The general journal is used to record nonroutine transactions and adjusting and closing entries. Special journals are established to record specific types of transactions. For example, a sales journal records all sales. Other special journals could include a purchases journal, payroll journal, cash receipts journal, and cash disbursements journal. At regular intervals, such as at the end of each week or month, the subtotals of the special journals are posted to the general ledger. Subsidiary ledgers maintain detailed information regarding routine transactions, with an account established for each entity. For example, the accounts receivable subsidiary ledger maintains all detailed information regarding customer purchases, payments, and balances due. An account exists for each customer, and the total of those customer accounts equals the balance in the accounts receivable general ledger account.

The source documents, journals, and ledgers comprise the manual records in a manual accounting system. To record in these journals and ledgers, there must be established processes that employees follow in collecting source documents and entering information from source documents into the appropriate journals and ledgers.

As accounting information systems became computerized, the manual processes of record keeping and posting were transferred to automated systems. Automated systems maintain the same structure of subsidiary ledgers and general ledger accounts; however, the difference is that automated ledgers are computer files rather than paper records. Newer IT systems may not use the same structure and are much more likely to use fewer paper documents and records.

When IT is part of the accounting information system, it is important to understand that the hardware and software are not the entire accounting information system. In addition to the hardware and software, the human processes that capture, record, and process information are an integral part. The real-world example at the beginning of this chapter described a wireless order-taking system. However, even that advanced technology needs a human to enter the order. The established process of entering the order is part of the accounting information system because it is part of the business process that captures accounting data. Therefore, accounting information systems include human as well as IT processes.

Until the 1990s, most accounting software consisted of modules, or separate programs, for each business process. Accounting software usually has modules for accounts receivable, accounts payable, payroll, and possibly other processes. These modules achieve essentially the same purpose as special journals and subsidiary ledgers. For example, the accounts receivable module processes and records all credit sales and maintains detailed information about customer transactions, collections, and balances due. Traditional accounting software systems, often called legacy systems, are described in the next section.

LEGACY SYSTEMS

A legacy system is an existing system in operation within an organization. A legacy system uses older technology in which the organization has a considerable investment and that might be entrenched in the organization. Some legacy systems have been in place for many years; perhaps the organization spent much time developing, maintaining, and customizing the system. Often, legacy systems are based on old or inadequate technology. In large companies, many legacy systems run on host-based mainframe computers. “Host-based” means that all significant computer processing takes place on the mainframe host computer. Accounting software systems running on such computers are often written in programming languages that are nearing obsolescence. Examples of these software languages are COBOL, RPG, Basic, and PL1.

During the last couple of decades, even as technology advances have made these systems more outdated, many companies have been reluctant to abandon their legacy systems because they were customized to meet the specific needs of the organization and the process to replace them is expensive and time-consuming. Legacy systems may have served companies very well over many periods, and many organizations have legacy systems that they are still attempting to maintain. There are both advantages and disadvantages to maintaining these older systems. The advantages are that legacy systems

1. have often been customized to meet specific needs in the organization
2. often support unique business processes not inherent in generic accounting software
3. contain invaluable historical data that may be difficult to integrate into a new system
4. are well supported and understood by existing personnel who are already trained to use the system

There are also many disadvantages to maintaining older systems. The disadvantages are that legacy systems

1. are costly to maintain in both dollars and time
2. often lack adequate, up-to-date supporting documentation
3. may not easily run on new hardware, and the old hardware and parts needed for maintenance may become obsolete
4. are not usually based on user-friendly interfaces such as Microsoft Windows or Apple's Mac OS
5. tend to use software written in older computer languages, and fewer programmers are available for maintenance
6. are often difficult to modify to make them Web-based or user-friendly
7. become difficult to integrate when companies merge or acquire other companies, in which case consolidating subsidiary company information into one set of financial statements and reports can involve many manual and error-prone steps

THE REAL WORLD

Often, companies are faced with the decision whether to replace or update legacy systems. When the benefits outweigh the costs, organizations typically decide to replace legacy systems. Many large corporations replaced legacy systems just prior to the year 2000 in an effort to avoid a glitch known as the Y2K bug, which theoretically would misinterpret date-sensitive information when the computer's clock rolled over from 1999 to 2000.

Organizations do not always completely replace legacy systems with newer hardware and software systems, but they often try to use new technology to enhance the existing systems. One approach is to use screen scrapers, or frontware, which add modern, user friendly screen interfaces to legacy systems. There are limitations to this approach, because mainframe systems are not efficient as newer technology at handling data entry by multiple, simultaneous users.

A second approach to upgrading is to use software that bridges legacy systems to new hardware and software systems and interfaces. These interface bridges are called enterprise application integration, or EAI. EAI is a set of processes, software and hardware tools, methodologies and technologies to integrate software systems. When EAIs are implemented, they are intended to consolidate, connect and organize all of the computer applications, data and business processes (both legacy and new) into a seamlessly interfaced framework of system components. The EAI allows real-time exchange, management, and reformulation of all of the critical information and business processes. EAIs are developed and sold to companies to put a modern, advanced technology front on older legacy systems, accomplishing the necessary integration of legacy systems with user friendly and modern processing of data.

The third method is complete replacement of legacy systems. If the organization can afford the time and money required, the purchase and implementation of modern, integrated systems may be the best approach. Management must weigh the cost and benefits of these alternative methods when facing the decision to update or replace legacy systems.

MODERN, INTEGRATED SYSTEMS

In today's AIS environment, numerous accounting software systems are available for purchase that integrate many or all of the business processes within an organization. In the early days of computer automation of accounting, much of the accounting software was developed and written internally by the organization's IT staff. Today, companies more frequently purchase software rather than develop it internally. Often, purchased systems are modified by the IT staff to meet specific needs of the organization.

The new programs sold by software development companies are more user friendly than legacy accounting systems, typically utilize the latest technology in data storage and Internet interfaces, and offer clients powerful, technologically advanced systems that serve as an important part of the accounting information system.

There are many advantages to purchasing accounting software rather than developing software in-house. Purchased software has a lower cost, shorter implementation time, and fewer bugs. The cost is lower because the development cost can be spread across the many companies that purchase the software, rather than being absorbed completely by the company that developed the software. Implementation time is shorter because it is no longer necessary for the companies to design and program their own accounting systems. Finally, these software systems have fewer bugs because they are not sold until they are fully developed, tested, and proven reliable.

These modern, integrated systems usually run in one of two types of computer architectures, or models. One model is a client-server model, and the other is cloud computing. It is important to understand these two models of computer architecture because the choice has a tremendous impact on the software that is chosen, the cost of the IT system and software, and the risks and controls. The next sections describe client–server computing and cloud computing.