Integrated Financial Management Information Systems: A ... - Frp2.org

Box 1. Double-entry bookkeeping and modern financial management
Financial management information systems are not a new phenomenon. On the contrary, the recording of financial
information is the oldest known form of record keeping, dating back thousands of years. Yet financial information
has long presented problems, particularly since the invention of money. It was only late in the 15th century when
Luca Pacioli, an Italian mathematician, set out to codify the “double-entry” accounting system that modern
financial management began to develop.
All modern financial management information systems—including those used in the private sector and in the
public sector—are based on Pacioli’s technical innovation. The system is called “double-entry” because each
transaction involves an exchange between two accounts: debits and credits. For every debit, there is an equal and
opposite credit; the sum of all debits must therefore equal the sum of all credits. This balancing requirement is
critical, as it makes it easier to detect errors or discrepancies in the recording of transactions. Moreover, because it
provides a full picture of the financial situation of an organization, double-entry accounting also facilitates the
preparation of financial reports directly from the accounts.
To illustrate the double-entry concept, consider a simple transaction involving the purchase of a laptop computer
on January 1 for a cash payment of $1,000. In a “single-entry” bookkeeping system, the buyer would simply enter
the $1000 in his books as an “expense”. The vendor would record the same $1,000 in its books, but as “revenue.”
Here, only the change in income (money coming in, or money going out) is reflected.
By contrast, the double-entry method considers the entire financial position of an entity—that is, not only changes
in cash balances, but also the change in assets and liabilities (e.g., accounts receivable, accounts payable,
inventory, debt, etc.). Accordingly, in a double-entry system the buyer would enter the transaction as follows:
Date Accounts Debit Credit
Jan 1 Expense 1,000.00
Cash
Note: Purchased one laptop computer
1,000.00
The vendor would record the same transaction (from its perspective) with the same values, but in reverse:
Date Accounts Debit Credit
Jan 1 Revenue 1,000.00
Cash 1,000.00
Note: Sold one laptop computer
This example demonstrates a simple cash transaction. Had the buyer not paid cash but instead was extended credit,
he would have entered a $1,000 credit to “accounts payable,” rather than to “cash.” Likewise, the vendor would
have entered a $1,000 debit to “accounts receivable”, rather than to cash.
The permutations on this simple example are innumerable. The way financial transactions are recorded, whether in
government or in the private sector, can vary depending on the nature of the transaction, method of payment (e.g.,
cash vs. credit), method of accounting (e.g., cash vs. accrual), and myriad other factors. Notwithstanding these
factors, the fundamental principle of double-entry accounting always holds: the debit and credit accounts must
balance. Where the accounts are not in balance, close scrutiny will reveal any errors or irregularities.
A testament to the ingenuity of the double-entry methodology is that it has not been fundamentally changed since
it was invented. Whether in government, banks, small or large businesses or non-governmental organizations, the
same concept forms the basis of today’s modern computerized accounting systems. It is important to understand
this concept before embarking on an analysis of the reasons why IFMIS systems sometimes succeed, but more
often fail when implemented by developing country governments. For such a robust system to falter, the problems
faced must be related to factors external to the system itself. This paper highlights some of these factors.
4 INTEGRATED FINANCIAL MANAGEMENT INFORMATION SYSTEMS: A PRACTICAL GUIDE