The modern information technology (IT) professional is expected to have multiple cross-functional competencies. The days of one-dimensional technocrats have come and gone. An IT professional is expected to be a master of all trades and a jack of none.
The demands are no different to those placed on a professional football (soccer) player who is presumed to be fit, good with both feet, solid in the air, a strong tackler, good passer, goal scorer, and reader of the game.
Accounting, the language of business, is one of key competencies expected in an IT professional. Unfortunately, many have an accounting phobia instilled by a combination of mental Ctrl+Alt+Del reflex actions to accounting jargon and perceived complexity of accounting software. To be fair, some legacy accounting systems are not logically structured, though accounting itself is logical and structured.
This book was written by an IT professional to present a view of the mechanics of accounting through a database lens. A simple data model is used to illustrate application of concepts in processing transactions and creating accounting data.
Predetermined logic ordinarily held in the minds of accounting practitioners is stored in database tables, enabling automation of repeatable processes and eliminating the need to memorise basics.
Examples of TSQL code are included to illustrate data retrieval for preparation of standard reports. TSQL (Transact-SQL) is Microsoft's and Sybase's proprietary extension to the SQL used to interact with relational databases.
This is not a gateway to a career change neither is it a blueprint of the mother of all accounting systems—intricacies are omitted to magnify core concepts. The primary goal is to debunk the notion that accounting is complex and hopefully redress IT’s underrepresentation in the middle ground shared with accounting.
Chapter 1: Introduction
What is accounting?
Accounting is a data management system that transforms financial transactions into meaningful information for decision making. Raw data in the form of financial transactions is recorded, classified, and summarised into structured data stores from which financial information is prepared as depicted in the flowchart below.
Effects of transactions are recorded in chronological order in the journal data store and summarised by month in the ledger, from which financial information is retrieved as financial statements.
Usage of financial information
Managers use financial information to monitor performance and take measures required to improve results. Owners use the same information to assess the viability of their investment and decide course of action. Employees’ focus is job security and timing of pay-raise negotiations.
Suppliers’ primary concern is the creditworthiness of the business and its ability to pay for goods and services. Lenders use the information to gain an insight into the capability of the business to pay back loans. Tax authorities want to ensure the business is correctly taxed.
Examples in this book are based on a sole trader, the simplest legal structure for a business. A sole trader, also known as sole proprietorship, is a business owned and run by one person.
There is no legal distinction between the owner and the business. For accounting purposes business transactions are accounted for separately from the owner’s personal transactions.
A fictitious sole trader, D Kay, trading as Dee Kay Distributors, is the basis of illustrations in this book. The business buys and sells computer consumables and stationery and employs three people. Monthly expenses include premises rental, salaries, gas, and electricity.
Types of processes
Three types of processes are covered—transaction, month end, and year end. The transaction process relates to the immediate processing of financial transactions as they occur. It covers fourteen types of transactions that include buying and selling of goods, paying expenses, and so on.
The month-end process involves checking the validity of data processed in a month, closing the financial month, producing financial reports, and opening the following month for transaction processing.
The year-end process, which happens after the month-end process of the last month of the year, encompasses closing the year, producing year-end financial reports, and opening the first month of the following year for transaction processing.
A database is used to process transactions and store accounting data. It is designed with the following goals in mind:
Minimise ambiguity of application of accounting principles.
Enable consistent processing of financial transactions.
Support verification of data from summary to transactional detail.
Facilitate efficient retrieval of data to produce financial statements.
Allow retrospective production of financial statements.
Figure 1.2 shows the symbols used to portray the relationships between tables.
Anatomy of accounting data
Accounting data comes from transactions and is held in two forms—the journal and the ledger. The same data is expressed and stored in three different ways shown in Figure 1.3.
The transactions data store contains document-based data. As the basis of accounting data, the records are referred to as source documents. The data is like a set of manual files containing copies of invoices, receipts, expenses, payments, and so on.
Most accounting systems have a transaction table for each type of transaction. For simplicity, one multipurpose table is used in examples in the book.
The journal is a chronicle of dual effects of transactions recorded as either increases or decreases to balances of accounts. It is the equivalent of a journal used in manual accounting systems. The data store is considered the book of original entry because it contains the first record of transactions in accounting format.
The ledger is an aggregate of journal data. It contains monthly summaries of effects of transactions and resultant balances of each account. Update of the ledger from journal summaries is called posting. Verified ledger data is the primary source of financial statements.