What Is Accounting Information System?
Accounting Information System refers to the computer-based method used by the companies to collect, store and process the accounting and the financial data, which the internal users of the company use to give a 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 so that they can be retrieved for decision making by the internal management, accounts, CFOs, auditors, etc. For example, AIS may be a very simple ledger for various accounting, costing, and financial reports like Statement of Profit and Loss, Balance Sheet, etc.
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Accounting Information System Explained
Accounting information system refers to the process of collecting, processing and storing the data related to fiannce and accounts in a systemmatic manner. Such maintainence of data is extremely important for the company because they are used by the management to take decisions as well as communicate to the stakeholders regarding financail health of the company.
There is a strong usage of computer software and updated information technology in the process, keeping in mind the tradition rules, accounting regulations and practices. There are various elements that are used in the process, including employee data, taxation related and customer satisfaction related information, revenues, profits or expenses. They are typically derived from sources like the payroll system, financial statements, reports, sales and purchase data, invoices, inventory , etc.
A user friiendly database structure is designed to store related information, which has the facility of addition and alteration. However, it is necesaary to make the platform highly secured and free from cyber attaks, viruses and hackers, who attempt to collect useful and confidential data and misuse them for their own interest.
The role of cybersecurity has increased considerable ever since businesses have started shifting their data to electronic form and taking the help of softwares and technology to get the jobs done. Even though it has undoubtly increased the speed and accuracy levels of work, external threat have also increased alone with it.
The AIS is a process that can generate reports based on the data provided that can be used further for deriving conclusion and decision making regarding investments and projects.
The AIS is considered to have the following three types, as explained in details below:
- Manual – As the name suggests, the system is managed on a manual basis, with the use of documents like journal, ledger, invoices, bills, sales and purchase order details, subsidiary and special journals, etc. There is no influence of technology and there is no integration of hardware and software in the process. Small businesses mainly use this method, since their transaction and operational procedures are not very vast, widely spread and complex.
- Legacy – This system is named so due to the fact that is has been in existence in the accounting system before the influence of technological procedures were introduced. Its main benefit and positive side lie in the fact that it is very easy to use and implement historical data plays a major role in it. But in terms of reliability and flexibility, ir cannot match the levels of modern software and advanced technology. It can be customized according to the firm’s needs and requirements. This flexibility usually not found in standardized software, which are typically used by many businesses. However, it should be noted that it is not easy to find or update the software and hardware used in the system, which may over the time become obsolete.
- Modern – They are considered easy to handle and install in the business and is more user-friendly that the Legacy System. They are Windows based, which can be used and interpreted by many, as well as cheap from the costing point of view. Th security measures can also be implemented on them very easily.
Thus, the above are the various types of AIS that are prevalent in the market. However, they have evolved over time and lot of more major, interesting and useful changes can be expected in the years to come.
#1 – Person ( Stakeholders)
The starting and ending of every accounting aspect. There is a stakeholder who feeds information into the system, collects, analyses, reports, etc., and another person(stakeholder) 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 baseMonetary BaseThe monetary base refers to a measure of money supply in the economy consisting of Federal Reserve System (Central Bank) issued currency circulating outside of Treasury and Federal Reserve through the public and Federal Reserve balances of depository institutions. It is also known as MB or M0.. 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 a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. like P&L and Balance sheet, cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business., etc.
#3 – Established Procedures
As stated in the definition, AIS follows predefined steps and procedures to perform various functions. Ensure consistency; this is one of the most basic needs of an AIS. AIS may act 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 is 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 a consortium of various IT & IS hardware, tools, and accessories. For 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.
Let us understand the concept with the help of a suitable example as given below:
- 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 able 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 can 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.
The system has some advantages and disadvantages of its own. Let us learn the advantages first.
- #1 – Cost-Effectiveness – In the era of digitalization and artificial intelligence, each organization is moving towards cost-cutting using artificial intelligence. AIS has helped 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, and reporting any financial information. AIS can complete a large quantum of manual work with much less effort and time.
- #3 – Easy Access(Portability) – Data stored in AIS can be retrieved via an information system connected to 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 discussed earlier in this article, 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.
Some noteworthy disadvantages of the concept are as given below:
- #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 initial setup cost 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, which may bring inefficiency to the system.
- #3 – Error Cannot be Completely Eliminated – We discussed that AIS reduces the 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, generating an error.
- #4 – Confidentiality – Although we discussed the 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 can disclose sensitive financial information.
- #5 – Virus Attack – Any data stored on IS can be infected with a virus that may disrupt and modify 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.
It is necessary to understand the advantages and disadvantages of the concept in detail so that the system can be implemented and used as per the nature and size of the business and also its requirements.
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 more convenient than the old ways of accounting. Advancement has reached a level that records, classifies, analyses, and reports figures and 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, and limitations of AIS, there is software that secures the organization’s AIS from viruses, hackers, and other attacks.
Artificial Intelligence, an extended version of the Accounting Information System (AIS), has already started reducing manual intervention and will grow at a breakneck pace soon.
This has guide to what is Accounting Information System. We explain it with example, types, components, advantages, disadvantages & changes in AIS. Here are the other articles in accounting that you may like –