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 information and presents them for the use of various stakeholders like an owner, shareholders, creditors, government, etc.
#2 – Data
Now, what do AIS records, reports? It is all about various accounting transactions, events, and other monetary items. Any information which does not have a monetary base will not be recorded by AIS. Data can be anything like sales ledger, customer account, vendors ledgers, financial reports like P&L and Balance sheet, cash flow statement, etc.
#3 – Established Procedures
To perform various functions as stated in the definition, AIS follows predefined steps, procedures. SO as to ensure consistency, this is one of the most basic need of an AIS. An action may be performed by AIS 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 which performs the stated functions. ERP can be described as a database software package system which supports business’s 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 controls are the basic need of every business organization. These are tools, checks, procedures, systems adopted by an organization to ensure the integrity of financial information, 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 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 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 practices.
- Problem – Owner is not in a position to understand his position of business i.e. all of the above-stated requirement.
- 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 have the ability to predict future trends of profits, cash flows, 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 to reduce 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 information system connected with 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 have an added advantage of accurate data.
- #1 – Initial Cost of Instalment and Traning – While we discussed that an AIS is cost-effective, the same may not be true in the case of small business enterprises. Cost of initial setup may be high and may not actually generate value to the organization.
- #2 – Manual Intervention – Although we discussed that AIS reduces manual intervention but the same cannot be completely eliminated. AIS needs manual intervention at a certain point of 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 which 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 transfer, 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 very fast 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, there are major changes 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, analysis 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 Accounting Information System (AIS) have already started reducing manual intervention and will grow at a very fast pace in the near future.
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 –