SYSTEM

CONCEPTS &
ACCOUNTING
Chapter# 3

Muhammad Irshad
LECTURER, GCMS TIMERGARA
SYSTEM

A system is a set of interrelated and interdependent parts coordinated to accomplish a set

of goals.
According to this definition, any system, weather computer system or other has three main
characteristics, which are the following.

1. Component Parts: Every system is composed of several interrelated & interdependent parts,
required for the system to achieve its goals.
2. A Process: All the components of a system must be operated & coordinated in a specific way
or order to achieve its goals.
3. Goals: are those objectives toward which the component parts are coordinated. Every system
is created to accomplish certain goals. So before the development all goals of the system
must be well defined.

Examples of a system: in our daily life, we frequently encounter many different kinds of
systems. Some of which are the following.
i. The public transport system,
ii. The digestive system,
iii. The solar system,
iv. communication system

Sub-Systems & Super-Systems

Sub-system: is a component part of a system that is itself a system. Lower level systems
are called sub-systems, each of which also represents a process whereby component parts are
coordinated to achieve a set of goals. It is also a part of a higher-level super system.
Super-System: system of systems is called super system. the system itself and the
subsystems constitutes super system
Example: Public transport system is an example of super-system which consists of
several sub-systems such as an airline system, rail system, and a system of highways. Each one
objective is to move people by using specific form of technology. These subsystem goals are
consistent with the goals of the super-system that is to move people from one location to another.

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Boundaries & Interfaces
Boundaries: System are also characterized by the boundaries separated them from other
systems. The boundaries of subsystem identify the system’s component parts.
Interfaces: the connection b/w two systems occurring at the boundaries of the systems.
Where systems or components parts meets, system interface created, for example, interface b/w
highway & airline system is the airport terminal. This interface enables the public transport
system to move people from one place to another.

Types of Systems
There are four basic types of systems.
Closed Systems:
A closed system is a system which is totally isolated from its environment. The closed
system has no external interfaces, has no effects outside of its boundaries and has no effect on
the process within the system. closed system is a theoretical rather than a practical concept
because all systems interact with their environment in some way. For e.g. airline & bus system
are affected by weather, workers strike, accidents or congestion etc
Relatively Closed Systems:
A relatively closed system reacts with its environment in a known & controlled way. The
system contains interfaces with the environment, and it controls the effects of the environment on
its process. The interaction consists of system inputs if they flow from environment to the system
while interaction flowing in the opposite direction are called outputs.
Example: Radar system uses in airline system to operate in adverse weather and avoid
accidents, is a relative closed system. accounting information system is another example of
relatively closed system.
Open Systems
An open system is the one in which the system’s interaction with its environment is not
controlled. Besides having inputs & outputs, an open system has disturbances or uncontrolled
inputs & outputs that affect the process within the system. For example, disturbance in the airline
system may include the icy runways. Well design systems minimize the disturbances by creating
processes & interfaces to control them. for example, to prevent the buildup of ice, airport
runways can contain heating elements.
Feedback control systems
In feedback control systems, a portion of system output is returned as an input to the
system. the system is designed to provide feedback to help the system in order to attain its goals.
For example, automatic guidance systems in airplanes measures the airplane's current
heading, compare it to a desire heading, and adjust the plane’s correct for differences. Many

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accounting systems are designed to provide feedback for control purposes. For instance,
responsibility reporting systems provide feedback to mangers about their performance in
achieving org: objectives.

Accounting system as a relatively closed system

A well designed accounting system is an example of a relatively closed system. This
system has processes that convert inputs to outputs and utilizes internal control to limit the effect
of its environment on the system. Internal control measures help to prevent or detect disturbances
from the environment.
Accounting process as a relatively closed system is explained with the help of the
following diagram.

From the above diagram it is clear that an accounting system consists of three main
components;
1. Inputs: The inputs to an accounting system are the economic events that become
accounting transactions e.g. selling goods for cash, selling goods on credit or incurring an
expense.

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 2. Process: the processes in an accounting system record an economic event as a
transaction, journalize and post transactions and finally summarize transactions in various
reports.
3. Outputs: the outputs of this system are the accounting documents and reports such as
financial statements or responsibility reports.

Subsystems of the Accounting System

The accounting system is super system consisting of responsibility accounting system,
and a transaction processing system.
A transaction processing system is composed of transaction cycles subsystems.
A transaction cycle recording an organization economic events that normally followed each other
in a cyclical way. There are four transaction cycles;
Revenue Cycle: Accounting transactions resulting from economic events that produce revenue
for the accounting entity.
Expenditure cycle. Accounting transactions caused by the economic events necessary to acquire
material and supplies 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.
Each economic event generates an accounting transaction and this set of transactions
forms a transaction cycle. In the expenditure cycle, for example, XYZ Food Company needs a
raw material, corn for its manufacturing process. XYZ locates a grain company that sell grain on
credit. XYZ receives the corn and mails the grain company a check in payment. Consequently,
the grain company may sell to XYZ food company again, producing a cycle of economic events.

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 The illustration shown that expenditure cycle contains four major application systems:
purchasing, receiving, Voucher, and cash disbursements. these systems impact four major general
ledger account categories: cash, inventory, account payable, and asset or expense accounts.
Application system is a set of procedures and computer programs that perform specific
accounting objective. For example, the process of calculating amounts payables to suppliers and
then printing checks for those amounts is a cash disbursement application.
BOUNDARIES, INTERFACES & DECOUPLING
In accounting System is also characterized by the boundaries separated them from other
systems. For example, the following Illustration shows boundaries of the accounting transaction
processing system in a manufacturing firm. its boundaries separate this system from the other
systems in its environment. some of these include, vendors, employees, customers, stockholders
& creditors who provide capital/fund.

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 Sometime the boundaries of a transaction cycle are not clearly defined. For instance, many
auditors view property application system is a part of the financing cycle while other include it in
the conversion cycle. Similarly, some treat the payroll application system as a separate cycle rather
than including it in the expenditure cycle.
Interfaces
Interface is a link at which a transaction exits one system and enters another. an accounting
system, interface can be general ledger accounts, documents, or computer records that contain data
flowing b/w applications. For example, in the expenditure cycle, the receiving reports provides an
interface b/w the receiving system and the voucher system.
Decoupling
A feature that sometime exists at system interfaces, allowing the systems to operate
independently. Decoupling allows individual application system to operate independently, so that
an output of one system does not immediately become input to other system. Decoupling is often
provided by the files in an accounting system. For example, in expenditure cycle, the purchase
order is an interface that provide decoupling b/w the purchasing & receiving system. When an
order has been placed with a vendor by the purchasing system, information regarding that order is
stored in an open purchased order file and remains in the file until the merchandised requested in
the order is received. Similarly, in the illustration (3-4 above): Accounting transaction processing
system & its cycle components inventory & Cash accounts provides decoupling between
transaction cycles. Conversely, the receiving & voucher systems are tightly coupled by the
receiving report. Whenever a receiving report is issued by the receiving system, it quickly become
an input to the voucher system. Designer while developing accounting system must decide about
coupling & decoupling because too much decoupling can result inconsistent data.
ACCOUNTING AS A SUB-SYTEM
An organization information system (MIS) has objectives that extend beyond those
identified for accounting systems. Henry Lucas defined an information system as “ a set of
organized procedures that, when executed, provides information to support decision making and
control in the organization” From the definition it is clear that the goal of any part of information
system to help in decision making process.

Decision Making Activities

Analyzing decision making activities helps to understand the role of subsystems that make
up the information system. Robert Anthony identified the three levels of decision making activities
, and stated that decision making differs so significantly between these levels, that different
information systems are needed at each level. These three levels are;
1.strategic planning, 2. management control, 3. operational control.

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1. Strategic Planning
Strategic planning is the process of setting goals objectives of the organization and deciding
the resources and appropriate actions needed to achieve those objectives. strategic planning
activities are the primary concern of a top Management i.e. president or chief executive and V.
president of major divisions. They identify major markets & product lines during long-rang
planning process and communicate to lower-level managers. Information systems for strategic
planning help evaluate possible organization objectives and provide top-down information flows.
2. Management Control
Management control is the process by which managers assure that resources obtained and
use effectively & efficiently to accomplish the organization objectives. Management control
activities are primary concern of middle management of an organization, which includes factories
superintendents, sales regions, Admin & Engineering activities. The decisions made by middle
management are sometime called tactical decisions, because they implement strategy identified at
the higher level. Middle management rely on the budgeting & responsibility reporting systems of
the accounting system.
3. Operational Control
Operational control is the process of assuring that specific tasks are carried out efficiently
& effectively. operational control activities are implemented by the lower level managers in an
organization i.e. department heads & supervisors. The aim is to achieve those specific tasks
assigned by the middle mgt. For example the manager of an accounts payable department may
report to a chief accountant in middle mgt.one task of the a/c payable manager is to pay bill
promptly. For this the manager coordinate the activities of several a/c payables clerks. The manager
& clerks routinely use vouchers & cash disbursement systems of the accounting transaction
processing system.
The three level often illustrated as a hierarchy of decision making activities. Management
control activities are undertaken to achieve objectives identified during strategic planning.
Similarly, the task executed at operational control level are identified with specific management
control activities. on this way, operational control information system support management control
info system which in turn support those systems used for strategic planning.

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Decision Problems & the Activity Level
Various activities are performed at different Management levels an organization. At each level
managers faces different decisions. There are three categories of decision problems are;
1. Unstructured Problems,
2. Structured Problems,
3. Semi structured Problems.
Differences in decision problems between levels create differences in the kinds of information
systems that are needed.
1. Unstructured Decision Problems
Those decision problems for which many alternatives are available but there is little
guidance concerning the best one to pursue in order to solve the problems are called unstructured
problems. For example, among all the available new markets, top management decide to choose
which market is best for launching the product.
Top Management usually faced unstructured problems. Non-program decision
management use to solve unstructured problem- when a situation or problem is unique and there
are no previously established procedures that can be used as guides. Some unstructured problems
are faced at Management control level & Operational level but they are less frequent and less for
–reaching.
Because the decision making problem is unstructured, the information system must be able
to quickly adopt new decisions or data inputs. These kind of information systems are also called
decision support systems.
2. Structured Decision Problems
Those decision problems for which clear directions or procedures are available to solve
them are called structured decision problems. These decision problems are mostly faced by the
managers at lower level.

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 Managers at lower level are assigned tasks by middle management and are often given
clear directions about how to carry-out specific task. For example, an accounts payable manager
may be instructed to pay all bills when due but also avail purchase discount if offered. This problem
is structured one- determining the payment date according to the preceding rules. Other structured
problems are faced by middle & top management but less common at higher levels.
Information system needed for structured problems are different because they process
historical data. For example, Responsibility reporting system summarize historical data on periodic
basis and provide bottom up information flow is an example of highly structure information
system.
3.Semi-Structured Decision Problem

Those decision problems for which limited numbers of alternatives as well as some
guidance are available to solve it are called semi-structured decision problems.
Middle management frequently faced semi-structured problems. For example, top
management may assign production quotas and profit objectives to a middle level factory manager.
The manager acquires materials, hire & train workers and scheduled production to achieve these
objectives. The manager must also exercise his personal judgments. Semi- structure decisions also
exist at the operational & strategic planning levels.
Information systems used for Semi-structure decisions tend to combine the characteristics
of the systems used for structure & unstructured decisions. For example, the budgeting system
utilize both internal data (historical data) and external data (recent market survey) and involve
predictions or estimations for future outcomes which are frequently inaccurate. Thus it is used in
semi- structure decisions processing.

Illustration: Decisions Problems and Managerial Activity Level. This classification was adopted
from a framework for information systems developed by Anthony Gorry & Michael Scott: Morton. It
provides examples of structured decision problems at strategic planning level and of unstructured
problems at the operational level.

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A SPECTRUM OF MANAGEMENT INFORMATION NEEDS
like all systems, MIS is also composed of many subsystems designed to satisfy
management decision making needs. But each of them must be developed based on the problems
(structured, unstructured or semi structured) faced by the manager of each of the three level-
strategic planning, management control, operational control.
The two main sub-systems of MIS are;
1. Accounting Information Systems
2. Decision Support Systems

1. Accounting Information Systems

The three accounting information systems are;

I. The transaction processing system
II. The budgeting system
III. The responsibility accounting system.

The transaction processing system

The transaction processing system is the most structured of all other components. The
system provides information used by clerical & managerial personnel at the operational level.
Standard processes are prescribed for these systems because it is structured and because most
organization required transaction processing systems that are similar in nature.
The budgeting system
The budgeting system allows top management to communicate corporate objectives to all
managers in the organizations. The system utilized internal & external data, predictive in nature,
and involve estimates that are frequently imprecise. Hence used semi structured decision
processes.
The responsibility accounting system
The responsibility accounting system summarizes historical data on a periodic basis &
provide bottom-up information flows. It is an example of high structured information system that
is useful for management control.
The three AIS systems provides information for structured & Semi Structure decisions at
the operational & management control level

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 Accounting information systems are more highly developed in most organizations
because they are more structured & more standardized across different organization than other
systems.

Decision Support Systems

Whereas AISs are highly structured & most useful at the lower organizational levels,
DSS most useful at the high levels. At the Strategic level, decisions are unstructured, decision
styles may differ significantly among managers, and a specific decision may occur only once.
Hence, the information systems developed for this level often are “decision-specific”, once the
decision is made, the information system used for it is no longer applicable in its current form
and for further decision the system may be modified are discarded.
Considering the nature of decision problems & management activities, there is a
spectrum of management information needs. At the one end of the spectrum are the highly
structured, recurring and retrospective/backdated needs satisfied by the accounting transaction
processing systems. At the other end of the spectrum are the unstructured, nonrecurring and
prospective/future needs that must be met by decision support systems.
All other systems exist somewhere along this spectrum of management information needs as
shown in the illustration.

The System Approach/ The system approach to problem solving

The systematic process of problem solving which defines problems and opportunities in a
system context, develop alternative solutions, and the new system is designed according to the
best selected solution is called system approach.
In short, the systems approach to problem solving used a systems orientation to define
problems and opportunities and develop solutions.
Studying a problem and formulating a solution under the system approach involve the
following interrelated activities or steps:
1. Define the problem using systems thinking
2. Develop and evaluate alternate system solutions.
3. Select the system solution that best meets your requirements.
4. Design the selected system solution.
5. Implement and evaluate the success of the designed system.

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1.Define the problem
In the first step of the systems approach a problem is recognized and defined. A problem is the
condition due to which undesirable results occur in the system.
Example: Symptom: Sales of a company’s products are declining.
Problem: Sales persons are losing orders because they cannot get current information on product prices
and availability.
Systems thinking is to try to find systems, subsystems, and components of systems in any situation under
study. This is also known as using a systems context, or having a systemic view of a situation.
Example: The sales function of a business can be viewed as a system. poor sales performance
(output) caused by inadequate selling effort (input), out-of-date sales procedures (processing), incorrect
sales information (feedback), or inadequate sales management (control) as shown in the diagram.

2. Developing and evaluating alternate solutions

Develop all possible solutions and then carefully analyze the advantage & disadvantage, cost and
benefit of each alternative. In case of our example, computer-based solution for sales reps force be very
reliable and easy to use.
Alternative solutions can be generated from verities of sources such as, personal experiences i.e.
The solutions that have worked, or at least been considered in the past, should be considered again.
Another good source of solutions is the advice of others, including the recommendations of consultants
and the suggestions of expert systems.
The goal of evaluation is to determine how well each alternative solution meets your business and
personal requirements. Alternative solutions can be compared to each other because they have been
evaluated using the same criteria such as costs, , ease of use, and reliability. Criteria may be ranked or
weighted, based on their importance in meeting your requirements.

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3. Select the best Solution
After evaluating alternatives, select the best alternative to solve the problem

4. Designing and Implementing solution

Once a solution has been selected, it must be designed and implemented. You may have to
depend on other business end users’ technical staff to help you develop design specifications and an
implementation plan. For example, the following items might be included in the design specifications and
implementation plan for a computer-based sales support system:

 Types and sources of computer hardware, and software to be acquired for the sales reps.
 Operating procedures for the new sales support system.
 Training of sales reps and other personnel.
 Conversion procedures and timetable for final implementation.

5. Post implementation review and Control

The results of the solution implemented should be monitored and evaluated. The focus of this step
is to determine if the implemented solution has indeed helped the firm and selected subsystems meet their
system objectives. If not, the systems approach assumes you will cycle back to a previous step and make
another attempt to find a workable solution.

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