REA Accounting Framework
Note: Traditional(General Ledger, GL) or REA Accounting Frameworks have nothing to do with IFRS or GAAP Accounting Standards. GAAP or IFRS are 'Standards' for nationally or globally portable 'Reporting Systems', which all Business Stake-Holders can understand. Traditional(General Ledger) or REA Accounting Frameworks are the techniques for 'Recording' Business Process. So a parallelism or imaginary resemblance between GAAP or IFRS and GL or REA is there. GAAP or IFRS is the 'Cosmetic' layer, whereas GL or REA is the 'Execution' layer.
The World has invested heavily in producing Millions of Certified Accountants, Financial Management Professionals and Economists, who have learnt General Ledger. The Software Companies have invested Billions in GL based Software. No one will want this much effort and investment go waste. Besides, implementing REA based Software brings its own challenges.
- Why should we abandon Traditional Accounting Framework based on General Ledger? (Or Why should we migrate on to REA Accounting Framework?)
- GL was used since 400 years for Book-Keeping (before the advent of Computers). It has endured and passed the tests of Time. Business (ERP, Accounting and Finance) Software Vendors ported this concept to Computer. The GL based software too have matured. But, the very way GL works, is unable to cater two requirements arisen from the Business World, with changed Times and Technology:
- Trial Balance and Posting of Records has become unnecessary, since the Computers have become very powerful. But this is a Trivial problem. The big problem is mentioned below.
- All Business Process in every Software tend to converge and distill to GL module. The Management of Business Process has become the opposite requirement. The way GL behaves, leaves Business Software Vendors with two opposite choices: Either go for perfect GL implementation or go for perfect Business PROCESS Management. Note the word 'PROCESS', means something in Transit, that can not be 'Recorded' decisively. GL mandates 'Posted (Recorded decisively)' data.
- GL can NEVER be so perfected to avoid frauds (Cyclic Trade, misappropriation/miscalculation of Asset Valuations, Reserves etc). REA can avoid it.
VAANIK did it, since it was new and capable. We carry no burden of Past.