What is the Accounting Information System?
Accounting Information System refers to the computer-based method used by the companies in order to collect, store and process the accounting and the financial data which is used by the internal users of the company in order to give report regarding various information to the stakeholders of the company such as creditors, investors, tax authorities, etc.
In simple words, it is a system to collect and store all information related to financial transactions and events in such a way that they can be retrieved for decision making by the internal management, accounts, CFOs, auditors, etc. AIS may be a very simple ledger to various accounting, costing, financial reports like Statement of Profit and Loss, Balance Sheet, etc.
Components of Accounting Information System (AIS)
#1 – Person ( Stakeholders)
The starting and ending of every accounting aspects. There is a stakeholder who feeds information into the system, collects, analyses, reports, etc., and there is another person(stakeholder) who needs information. For example, an accountant records various financial data and presents them for the use of multiple stakeholders like an owner, shareholders, creditors, government, etc.
#2 – Data
Now, what do AIS records, reports? It is all about various accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. , events, and other monetary items. AIS will not record any information which does not have a monetary base. Data can be anything like sales ledgerSales LedgerA sales ledger is a ledger entry that records any sale in the book of records, even if the payment is received or not yet received. It records the sales and the cash when received and the amount owed to the business., customer account, vendors ledgers, financial reportsFinancial ReportsFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. like P&L and Balance sheet, cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities., etc.
#3 – Established Procedures
To perform various functions, as stated in the definition, AIS follows predefined steps, procedures. To ensure consistency, this is one of the most basic needs of an AIS. AIS may perform an action either with manual intervention or automatically. This action needs to be instructed to the person processing data or coded in the system in case of automatic systems.
#4 – Software (ERP)
A software or, in broader terms, ERP is a computer-based program that performs the stated functions. ERP can be described as a database software package system that supports business processes and operations, including manufacturing, marketing, financial, human resources, etc. It forms one of the main components of the Accounting Information System (AIS).
#5 – Information System Infrastructure
In simple terms, IT Infrastructure can be said a consortium of various IT & IS hardware, tools, accessories. Example, computers, printers, scanners, etc
#6 – Internal Controls
Internal controlsInternal ControlsInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company. are the basic need of every business organization. These are tools, checks, procedures, systems adopted by an organization to ensure the integrity of financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc., prevention of frauds, errors, safeguarding of assets, etc.
Case Study Based on Examples of AIS
- Case – Martin Inc., owner of London well-known supermarket retail chain used the conventional method of recording transactions on paper, now with the view of expanding business wants to know the details of customers, vendors, profits earned in the past, future estimated profit-earning capacity, details of working capital engaged in its business but is not in a position to predict same due to manual-based accounting practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements..
- Problem – The owner is not in a position to understand his place of business i.e., all of the above-stated requirements.
- Solution – Had there been AIS in use, Martin Inc. would have easily extracted details of customers, vendors, profits earned during the past, working capital engaged in business, etc. Not only past figures, but AIS also has the ability to predict future trends of profits, cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. , and other positions.
Advantages of Accounting Information System
- #1 – Cost-Effectiveness – In the era of digitalization and artificial intelligence, each organization is moving towards cost-cutting with the use of artificial intelligence. AIS has helped to reduce manual efforts and can perform the same operation more cost-effectively.
- #2 – Time Effectiveness – AIS has assisted business organizations in reducing the amount of time involved in recording, classifying, reporting any financial information. A large quantum of manual work can be completed by AIS with much fewer efforts and time involved.
- #3 – Easy Access(Portability) – Data stored in AIS can be retrieved via an information system connected with the internet anywhere and at any time. Where manually prepared books of accounts cannot be carried easily, AIS data can be.
- #4 – Accuracy – With the involvement of AIS, the reliability of data is increased. As we had discussed earlier in this article that an AIS follows a predefined set of instructions. Therefore chances of error-prone information are less, and therefore AIS has an added advantage of accurate data.
- #1 – Initial Cost of Instalment and Training – While we discussed that an AIS is cost-effective, the same may not be accurate in the case of small business enterprises. The cost of the initial setup may be high and may not generate value for the organization.
- #2 – Manual Intervention – Although we discussed that AIS reduces manual intervention, the same cannot be eliminated. AIS needs manual intervention at a certain point in time, which may bring inefficiency in the system.
- #3 – Error Cannot be Completely Eliminated – We discussed, AIS reduces chances of error, but there are chances of wrong coding in software, which may lead to error-prone results. Also, manual intervention is still present here, which can also generate an error.
- #4 – Confidentiality – Although we discussed portability of AIS data, the same can also be disastrous for an organization If such information is hacked i.e., stolen. An intruder may amend the information, or he can disclose sensitive financial information.
- #5 – Virus Attack – Any data stored on IS can be infected with a virus that may lead to disruption, modification of financial information stored on AIS.
- Cost: We already discussed the cost of AIS as a disadvantage.
- Training: There is a need to train users to feed, retrieve, or use AIS in the desired manner. If the concerned person does not get trained well, it can lead to inaccurate data preparation and presentation. Also, there are frequent transfers, promotions, resignations, retirement in a large organization. In all these cases, there is a regular need for training for replacements.
- Obsoletion: In the era of digitalization, technology is changing at a swift pace. It takes very few moments for technology to get obsolete. This generates needs for an organization to adopt the changes at the earliest. Otherwise, it may lead to error-prone data.
Change in Accounting Information System (AIS)
In the era of rapidly changing technology and adaptation of technological advancements, significant changes are occurring in AIS. The latest changes include cloud computing, cloud accounting, real-time accounting, or mobile accounting.
This has made accounting much easier and convenient as compared to old ways of accounting. Advancement has reached a level which not only records, classifies, analyses, and reports figures but also predicts future trends, which may help to face an actual situation with much preparedness.
Accounting Information System (AIS) can be described as a boon to any organization as we studied both advantages and disadvantages, limitations of AIS. However, overall it is very beneficial for an organization to migrate from manual accounting to AIS based accounting. For overcoming various disadvantages, limitations of AIS, there is software which secures the organization’s AIS from virus, hackers, and other attacks.
Artificial Intelligence, an extended version of the Accounting Information System (AIS) have already started reducing manual intervention and will grow at a breakneck pace soon.
This has been a guide to What is Accounting Information System and its definition. Here we discuss its components along with examples, advantages and disadvantages & limitations. Here are the other articles in accounting that you may like –