Let’s first come up with a definition of System:
A system is an organized set of policies and procedures that work together and interact to achieve a specific goal, perform a duty, or solve a problem. All systems have both inputs and outputs, with a set of independent but interrelated components that work together as part of a mechanism. Systems stay the same internally despite a changing external environment. Systems can be highly complex or simple.Many views can be taken on the definition of a system, as perspective can differ. An electrical engineer will look at set of integrated electronic components as a system, while a manager will look at a business plan's interrelated components as a system.
Miller argues that living systems, whether at the level of the cell, the organ, the organism, the group, the organization, the society, or the supranational system, all contain 19 subsystems. Explain accounting in general using these subsystems.

  1. The reproducer -is capable of giving rise to other systems similar to the one it is in. In the accounting profession it may be the partners in the firm that decide where to expand and build new branch offices. Another example is that every financial transaction gives rise to two accounting entries, one a debit and one a credit.
  2. The boundary -holds system components together. Accounting follows principles (GAAP) which allows each component to remain consistent and stay together.
  3. The ingestor -brings or receives input from the system environment. A physical or electronic mailing system, database, etc. that sends from its environment (e.g. sales department, purchasing department) to the accounting department invoices, receipts, estimate reports, or other documentation that contains information that can be used during the accounting cycle. Another example is a general ledger that receives summary information from all sub ledgers including Payroll, A/R, A/P, Order Entry, Inventory Control, and Fixed Assets.
  4. The distributor- carries information either between subsystems or from outside. A telephone line, instant messenger, fax machine, or e-mail system that carries incoming information from outside the accounting firm as well as internal information from different areas or departments (accounts payable, human resources, etc.) within the accounting firm.
  5. The converter - changes inputs based on system needs. For example, the summary of monthly journal entries prepared in Excel needs to be converted into text format to be loaded into the accounting information system used by the company (Cognos, SAP, Oracle). The invoicing system, which is a component of the Accounts Receivable Department, that produces invoices for customer billing based on the number and type of products sold and removed from inventory.
  6. The producer- Takes inputs and creates new forms to be used by system. To grow, repair, replace or provide energy to system; an example could be queries that pull data from all different information sources. For example, forecasting department collects data from other departments, applies historical trend analysis and forecasting techniques to generate forecasts. Many energy companies that hedge their cash flows, book accruals based on forecasts and then reverse these journal entries based on actuals that are available 1 month later.
  7. The matter-energy storage subsystem- the data entry system which places information at some location in the system, retains it over time, and retrieves it. This also could include hard copy storage. For example using Iron Mountain to store large amount of hard copies of daily work.
  8. The extruder -moves matter-energy out of a system in the form of products and waste. Examples of waste could be printed reports that were only needed for a temporary amount of time, used supplies, and used ink/toner cartridges.
  9. The motor- The business itself which is constantly running - creating accounting information to be processed in the other subsystems. The subsystem which relates parts of the system to its environment and moves parts around in relation to its environment as well.
  10. The supporter- maintains the proper spatial relationships among components of the system. The administrative assistant or scheduler in an accounting firm that coordinates schedules of the audit team and partners to facilitate the audit plan.
  11. The input transducer- A scanner in a paperless environment converts documents to appropriate types, such as PDF, and software that performs optical character recognition allows employees to have access to information that is in a standard format.
  12. The internal transducer- A member of an internal audit team that brings to the attention of a senior accountant any observations or accounting standards that help the senior accountant make important decisions regarding internal processes and accounting methods.
  13. The channel and net- Is single or multiple interconnected routes by which information is transmitted to all parts of the system. In an accounting office this may be inter-office mail, email, or verbal conversations.
  14. The decoder - Changes the code of information input through the transducer into a private code that can be used internally by the system
  15. The associator -Forms meaningful associations between information items in a system (This is the first stage of the learning process); an analyst, accountant or auditor who reconciles accounts, posts accruals and deferrals, performs analysis on the information derives from all subsystems such as sales performance reports and cost-benefit analysis.
  16. The memory- File storage of working papers or pertinent data/reports that is saved for a period of time designated by law depending on the type of document or data.
  17. The decider -receives information inputs from all other subsystems and transmits to them information outputs that control the entire system. The decider in a CPA firm would be the CPA who signs off on the final financial statements prepared from the information provided by the client.
  18. The encoder- the system that accumulates and posts all entries from various systems into GAAP compliant financial statements which can be disseminated to external environments; would produce GAAP income statements, audits and MDA (Management Discussion and Analysis)
  19. The output transducer - the system that serves as a channel for circulating accounting products (such as annual reports) of the accounting system; would likely contain subcomponents of XBRL, the internet, mail and company websites

Next, use the same sub-systems to describe the system for creating Financial Statements.

  1. The reproducer, - The information in a financial statement gives rise to another financial statement. For example, changes in assets and liabilities that are found on the balance sheet are used to create the income statement and contained in revenue and expenses.
  2. The boundary -The physical system where the information needed to create financial statements is stored and protected from unauthorized users; security and authorization system in place to assure that business records are free from misstatement, error and fraud
  3. The ingestor -The various departments of the system bring into the system materials and data such as raw materials, supplies or customer's orders. The record of all the materials and data that were brought into the system are complied to create financial statements.
  4. The distributor- E-mails, faxes or telephone message that relay financial data across the departments.
  5. The converter -The system which takes data such as products sold, price, cost of materials, etc. and converts to sales, revenue, cost of goods sold, etc.
  6. The producer-The grouping of certain items as assets, liabilities, and retained earnings. These groupings form associations for producing the financial statements.
  7. The matter-energy storage subsystem- the database used to maintain financial information in which information is retained and can be retrieved at any time.
  8. The extruder- Transmits matter energy (assets, liabilities, and retained earnings) out of the system in the form of products (Balance sheet, Income statement, Statement of cash flows)
  9. The motor- the database used to maintain financial information
  10. The supporter- maintains relationships among sub systems. This allows the systems to interact without weighing each other down or crowding each other.
  11. The input transducer -brings markers that bear information and change that information into matter-energy forms that can be used to transit information within the system.
  12. The internal transducer- receives markers bearing information from other subsystems or components, within the system, about significant changes and alterations to those subsystems or components. The markers are changed into other matter-energy forms of sort that can be transmitted within the system.
  13. The channel and net- a secure and private network infrastructure which the computers operate or physical financial statements are stored
  14. The decoder- alters the code of information that is inputted through the input transducer or internal transducer and converts it into a private code that can be used internally by the system.
  15. The associator- the mechanism (person or system) that takes all accounts (balance sheet items) and rolls it up into the income statement and statement of cash flows.
  16. The memory-The archived or completed databases used by engagement teams, comprised of auditors, to perform the audit of a company's financial statements.
  17. The decider- Audit partner on the engagement team who is ultimately responsibility for decision making
  18. The encoder-XBRL tags that allow financial data to be mapped into financial statements. Encoding with XBRL eliminates the need to manually re-key in the same financial information, thus eliminating redundancy and providing cost savings.
  19. The output transducer-Generate hard or soft copies of financial statement reports that are printed, e-mailed, or made available online for internal or external use.
  20. Transducer - device that accepts an input of energy in one form and produces an output of energy in some other form, with a known, fixed relationship between the input and output. The term transducer is sometimes applied to devices producing an output in the same form as their input, e.g., transformers and filters. We can apply this term to accounting information. We enter information in to the database (input transducer) and run reports off it by the application of query filters (output transducer).

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