Accounting Information Systems
Effective financial management is a very important aspect in modern organizations because of its significance in ensuring smooth flow of operations. For this reason, companies need to specify and design their accounting information systems in such a manner that they will serve the needs of all users in the organization. Accounting information system refers to a structure that an organization uses to collect, store, manage, analyze and retrieve its financial data for use by auditors, accountants, consultants, chief financial officers, and tax agencies. The high volume of financial data collected by organizations calls for creation of databases that can be used to store and retrieve useful accounting information. These databases need to be defined in such a manner that they will clearly represent all aspects of the company, including how the organization interacts with the environment. Entity-relationship (ER) diagrams and resources-events-agents (REA) diagrams are the two important tools that facilitate data modeling (Poels et al., 2004).
An entity-relationship (ER) diagram is called so because it is a graphical representation of a database which shows individual entities as well as the relationships among those entities. Rectangles are used to represent entities and the relationships among them are represented using lines that connect the rectangles. Conversely, an REA diagram adopted its name from the three entities; resources, events, and agents. REA is a graphical representation of a database designed to identify three kinds if entities that are relevant to business transactions namely; resources, events, and agents
Entity relationships (ER) diagrams and REA diagrams have got a number of similarities and differences. For instance, both diagrams are used to design accounting information systems databases. In addition, both ER and REA diagrams consist of entities that are relevant to transaction processing systems. Moreover, both ER and REA diagrams have some impact on financial statements of companies. The two diagrams however differ in terms of classes of entities they contain, arrangement of entities, and in the sequencing of events. For instance, ER diagrams contain only one class of entities while REA diagrams contain three classes of entities. Furthermore, entities in ER diagrams are arranged in a manner that will allow determination of readability and cardinality while entities in REA diagrams are organized into constellations of class. Additionally, sequencing of events in ER diagrams is static while REA diagrams contain events arranged in chronological sequence of business processes (Poels et al., 2004).
ER and REA diagrams have some impacts on financial statements of companies. ER diagrams show dependencies among financial statements of a company and ensures clear representation of entities in those financial statements. On the other hand, REA diagrams enable companies to produce financial statements that contain links among events alone, events are resources, and among events, resources, and agents. Therefore, the implications for using ER and REA diagrams are always different. The use of ER diagrams produces data modeling and information systems design that is too oriented towards the user’s views. This results into duplication of data and poor decision making. On the contrary, the use of REA diagrams results into formalized data modeling and information systems design which allows collection of specific financial and non-financial data for improved decision making. Additionally, the use of REA diagrams supports views of multiple users as well as enterprise-wide planning (Rosli, Ahmi and Mohamad, 2009).