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Foundations of accounting ONTOBRAS-2013 The industrial application of ontology: Driven by a foundational ontology A paradigm shift case study
© 2013 BORO Solutions Topics Background Themes Background New foundations Original foundations Why Pacioli? A true and fair representation 2
Themes Themes to bear in mind 3
© 2013 BORO Solutions Themes to bear in mind Paradigm Shift Shift in information technology A nice example of how a shift in technology creates an opportunity for a new conceptual structure 4
© 2013 BORO Solutions History Epilogue to book: Business Objects (Partridge 1996) See §2 – The accounting paradigms debit and credit pattern, §3 – Accountings ledger hierarchy, and §4 – Developing a new object-oriented accounting paradigm This drew upon almost a decade of commercial work re-engineering enterprise systems using the BORO methodology A new foundation for accounting (Partridge 2002) LOA Technical Report 23/02 - A new foundation for accounting: Steps towards the development of a reference ontology for accounting LOA - LADSEB-CNR, Padova, Italy, December 2002. Abstract: This paper firstly reviews the need for a radical shift in the foundations and framework of accountings conceptual scheme. It, secondly, proposes that the foundations of the new scheme should be a reference ontology. It outlines a process – ontological analysis – for building this and illustrates how it will work with some examples Shifting the ontological foundations of accountings conceptual scheme (Partridge 2003) Paper presented at the Sixth European Conference on Accounting Information Systems, Seville, Spain, 1 April 2003. Abstract: The purpose of this paper is to establish the nature of the need for a new accounting conceptual scheme and provide the framework for taking a managed approach to this change. This paper firstly reviews the nature of the need for a radical shift in the foundations and framework of accountings conceptual scheme. It touches upon how the existing uses of ontological analysis within accounting information systems research do not address this need. It then outlines how a more philosophical approach to ontological analysis provides a process for starting the shift in the foundation. And illustrates how the process will work with some examples
© 2013 BORO Solutions New foundations; not a new idea Some early references Goetz, B. E. (1939). "What's wrong with accounting." Advanced Management (Fall): pp. 151-57 Schmalenbach, E. (1948). Pretiale Wirtschaftslenkung, Band 2: Pretiale Lenkung des Betriebes. Bremen, Dorn
© 2013 BORO Solutions Modern initiatives There are two modern ontological analysis initiatives within accounting information systems Wand/Weber Wand and Weber (1989) An Ontological Evaluation of Systems Analysis and Design Methods The Wand/Weber initiative explicitly draws upon the work of Mario Bunge (Bunge1974). Its focus is on the needs of conceptual modelling and is not directed towards a specific model of accounting McCarthy/Geerts McCarthy (1982) The REA Accounting Model The McCarthy/Geerts initiative has developed a specific model of accounting called (in (McCarthy 1982)) the REA Accounting Model Geerts and McCarthy (2002) An Ontological Analysis of the Primitives of the Extended-REA Enterprise Information Architecture say on p.2 many scholars consider it [their REA model] a more solid foundation for the enterprise information systems of the future than the traditional double-entry framework it attempts to supplant Similar points are made in Walker and Denna (1997) Arrivederci, Pacioli? A new accounting system is emerging. and Andros, et al. (1992) Reengineer your accounting, the IBM way 9
The original foundations 10
© 2013 BORO Solutions Accounting - bookkeeping Based upon old information technology The emergence of accounting (and its conceptual scheme) is closely associated with the emergence of writing (an early information technology) Historians tell us that writing developed in Ancient Mesopotamia millennia ago to help people manage the accounts of the developing city- states. (e.g. Nissen, et al. (1993) Archaic bookkeeping) 11
© 2013 BORO Solutions The current accounting conceptual scheme The current accounting conceptual scheme has its roots in a more recent development. The introduction of printing in the late fifteenth century prompted a number of books on accounting – describing various different systems It also prompted Europes standardisation on the one of these most suited to the then current technology – the system described in the chapter Particularis De Computis Et Scripturis (Details of Accounting and Recording) in the book Summa de Arithmetica, Geometria, Proportioni et Proportionalita by Pacioli printed in 1494) The system is one that, as Pacioli noted, had been used by Venice merchants for hundreds of years. So printing was not a key factor in its development – just in the standardisation upon it 12
© 2013 BORO Solutions A paper and ink system The influence of paper and ink technology is plain in the books text. For example, in Chapter 2, Pacioli writes The businessman must then prepare his Inventory in the following way: First of all, he must write on a sheet of paper or in a separate book … Further on he says: In the left margin, next to the [journal] entry place the page numbers where the debit and credit entries are to be found, the debit above the credit below. Immediately enter the debit and credit account in the index, each under its own letter. Cash will be placed under the letter C as follows Cash, page 1. Place Capital also under C, Capital of my own, page 2. In this way, continue entering in the Index all the debit and credit accounts under their respective letters, in alphabetic order. When this is done the accounts can easily be located in the Ledger. 13
© 2013 BORO Solutions The competition In the first 50 years of printing, there were a significant number of books on accounting, each describing different schemes Paciolis scheme became the standard This is despite the fact that many of the other competing schemes had features that were missing from Paciolis 14
© 2013 BORO Solutions Example of a different scheme One such scheme is (Manzoni 1534) who notes that the four principal things appertaining to buying, selling, receiving, paying, exchanging, lending and gifts are The one who gives The one who receives The thing given The thing received 15
© 2013 BORO Solutions Difference between the schemes The Manzoni scheme differs from the Pacioli scheme in a couple of important ways Firstly is recognised the non-monetary element of the transaction Secondly, it explicitly recognises the proprietor, which is implicit in Paciolis Littleton (Accounting evolution to 1900 (1933)) noted (on p.51) a Manzoni-type approach was better The simple logic of the early Italian manner became much obscured when the conscious inclusion of the proprietor in every transaction fell into neglect. 16
Why Pacioli? 17
© 2013 BORO Solutions Why Pacioli? Why the Venetian method? Why did the Venetian merchants prefer their approach Information technology It was simpler and easier to implement on paper and ink systems Manzonis scheme may be a fairer and truer reflection of the transaction, but it was more difficult to implement 18
© 2013 BORO Solutions Depreciation At the time, the lack of precision in recording the transaction did not cause problems However, as accounting became more widespread and tightly controlled a problem revealed itself: depreciation When goods were held in stock for a time, their value could go down. However, they were recorded in the Pacioli-based system at book cost. Keeping track of this began to emerge as a problem in the 18 th century Additional systems of valuation and depreciation were developed to handle this 19
A true and fair representation 20
© 2013 BORO Solutions Mr Smith buys a car 21
© 2013 BORO Solutions A true and fair picture 22
© 2013 BORO Solutions A model-based view 23
© 2013 BORO Solutions Aristotles causes view 24 Aristotle used "cause" (in Greek, aition) to mean "an explanation for how a thing came about So, the idea is, that if you can identify the causes you are giving an explanation
© 2013 BORO Solutions Summary The structure of the current accounting scheme reflects its roots in paper and ink technology The structure was simplified to facilitate implementation in that technology As a new technology has emerged, the original requirement is now redundant An opportunity for improvement has emerged A top ontology provides a mechanism to flesh out that opportunity
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