What is an Accounting Information System?
Definition: An accounting information system consists of the people, records, and methods used to gather financial information about business events, record it, process it into a useful form, and communicate the information to end users and decision makers. In other words, an accounting system is everything and everyone involved in collecting, recording, and organizing financial transactions for the company.
An accounting information system (AIS) involves the collection, storage, and processing of financial and accounting data used by internal users to report information to investors, creditors, and tax authorities. It is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. An AIS combines traditional accounting practices, such as the use of Generally Accepted Accounting Principles (GAAP), with modern information technology resources.
What Does Accounting Information Systems Mean?
In essence, the goal of an accounting system is to record financial data and turn it into useful financial information.
There are many different parts and components to any accounting information system, but they can typically be broken up into five main categories: source documents, input devices, information processors, information storage, and output devices.
An accounting information system is typically comprised of several modules, each of which is designed to handle certain types of transactions. These modules include:
- Accounts payable.
- Accounts receivable.
- General ledger.
How an Accounting Information Systems (AIS) is Used
An accounting information system contains various elements important in the accounting cycle. Although the information contained in a system varies among industries and business sizes, a typical AIS includes data relating to revenue, expenses, customer information, employee information, and tax information. Specific data includes sales orders and analysis reports, purchase requisitions, invoices, check registers, inventory, payroll, ledger, trial balance, and financial statement information.
An accounting information system must have a database structure to store information. This database structure is typically programmed with query language that allows for table and data manipulation. An AIS has numerous fields to input data as well as to edit previously stored data. In addition, accounting information systems are often highly secured platforms with preventative measures taken against viruses, hackers, and other external sources attempting to collect information. Cybersecurity is increasingly important as more and more companies store their data electronically.
The various outputs of an accounting information system exemplify the versatility of its data manipulation capabilities. An AIS produces reports including accounts receivable aging reports based on customer information, depreciation schedules for fixed assets, and trial balances for financial reporting. Customer lists, taxation calculations, and inventory levels may also be reproduced. However, correspondences, memos, or presentations are not included in the AIS because these items are not directly related to a company’s financial reporting or bookkeeping.
Source documents are the original business documents that are used to track business transactions. Documents like invoices, purchase orders, and receipts all track and keep a record of the original transaction.
Input devices are tools used to enter financial transaction information into the accounting system. Devices like bar code scanners, keyboards, and modems all help employees enter source documents into the system.
Information processors, like computers and software programs, take the raw data from the input devices and post it to ledgers, journals, and reports that can be used by decision makers.
Information storage is the component of the system that stores the reports and ledgers that the information processors create. Since most modern accounting systems are computer based, these usually consist of servers and hard drives, but file cabinets are still considered storage devices.
Output devices like monitors, printers, and projectors are any devices that take information from the system storage and display it in a useful way, so that it can be used.
As you can see, the accounting information system is much more than a computer with Quickbooks installed on it. It’s the entire system put in place to take financial data and turn it into usable financial information.
Benefits of Accounting Information Systems
An accounting information system strives to interface across multiple departments. Within the system, the sales department can upload the sales budget. This information is used by the inventory management team to conduct inventory counts and purchase materials. Upon the purchase of inventory, the system can notify the accounts payable department of the new invoice. An AIS can also share information about a new order so that the manufacturing, shipping, and customer service departments are aware of the sale.
An integral part of accounting information systems relates to internal controls. Policies and procedures can be placed within the system to ensure that sensitive customer, vendor, and business information is maintained within a company. Through the use of physical access approvals, login requirements, access logs, authorizations, and segregation of duties, users can be limited to only the relevant information necessary to perform their business function.
Functions of an Accounting Information System
Accounting information systems have three basic functions:
- The first function of an AIS is the efficient and effective collection and storage of data concerning an organization’s financial activities, including getting the transaction data from source documents, recording the transactions in journals, and posting data from journals to ledgers.
- The second function of an AIS is to supply information useful for making decisions, including producing managerial reports and financial statements.
- The third function of an AIS is to make sure controls are in place to accurately record and process data.
Parts of an Accounting Information System
An accounting information system typically has six basic parts:
- People who use the system, including accountants, managers, and business analysts.
- Procedure and instructions are the ways that data are collected, stored, retrieved, and processed.
- Data including all the information that goes into an AIS.
- Software consists of computer programs used for processing data.
- Information technology infrastructure includes all the hardware used to operate the AIS.
- Internal controls are the security measures used to protect data.
The Reliability of Accounting Information Systems
Because an AIS stores and provides such valuable business information, reliability is vitally important. The American Institute of CPAs (AICPA) and Canadian Institute of Chartered Accountants (CICA) have identified five basic principles important to AIS reliability:
- Security – Access to the system and its data is controlled and limited only to those authorized.
- Confidentiality – The protection of sensitive information from unauthorized disclosure.
- Privacy – The collection, use, and disclosure of personal information about customers is done in an appropriate manner.
- Processing integrity – The accurate, complete, and timely processing of data done with proper authorization.
- Availability – The system is available to meet operational and contractual obligations.
Many large and SMEs are now adopting cost effective cloud-based accounting information system in recent years.
Looking back years ago, most organizations, even larger ones, hire outside consultants, either from the software publisher or consultants who understand the organization and who work to help select and implement the ideal configuration, taking all components into consideration.
The steps to implement an accounting information system are as follows:
Detailed Requirements Analysis
Where all individuals involved in the system are interviewed. The current system is thoroughly understood, including problems, and complete documentation of the system—transactions, reports, and questions that need to be answered—are gathered. User needs that are not in the current system are outlined and documented. Users include everyone, from top management to data entry. The requirements analysis not only provides the developer with the specific needs, it also helps users accept the change. Users who have the opportunity to ask questions and provide input are much more confident and receptive of the change, than those who sit back and don’t express their concerns.
Systems Design (synthesis)
The analysis is thoroughly reviewed and a new system is created. The system that surrounds the system is often the most important. What data needs to go into the system and how is this going to be handled? What information needs to come out of the system how is it going to be formatted? If we know what needs to come out, we know what we need to put into the system. The program we select will need to appropriately handle the process. The system is built with control files, sample master records, and the ability to perform processes on a test basis. The system is designed to include appropriate internal controls and to provide management with the information needed to make decisions. It is a goal of an accounting information system to provide information that is relevant, meaningful, reliable, useful, and current. To achieve this, the system is designed so that transactions are entered as they occur (either manually or electronically) and information is immediately available online for management.
Once the system is designed, an RFP is created detailing the requirements and fundamental design. Vendors are asked to respond to the proposal, to provide demonstrations of the product, and to specifically respond to the needs of the organization. Ideally, the vendor will input control files, sample master records, and be able to show how transactions are processed that result in the information that management needs to make decisions. An RFP for the information technology infrastructure follows the selection of the software product because the software product generally has specific requirements for infrastructure. Sometimes, the software and the infrastructure is selected from the same vendor. If not, the organization must ensure that vendors will work together without “pointing fingers” when there is an issue with either the software or the infrastructure.
As the system is being designed, it is documented. The documentation includes vendor documentation of the system and, more importantly, the procedures or detailed instructions that help users handle each process specific to the organization. Most documentation and procedures are online and it is helpful if organizations can add to the help instructions provided by the software vendor. Documentation and procedures tend to be an afterthought but is the insurance policy and the tool used during testing and training—before launch. The documentation is tested during the training so that when the system is launched, there is no question that it works and that the users are confident with the change.
Before launch, all processes are tested from input through output, using the documentation as a tool to ensure that all processes are thoroughly documented and that users can easily follow the procedures: They know it works and that the procedures will be followed consistently. The reports are reviewed and verified, so that there’s no garbage in-garbage out. This is done in a test system not yet fully populated with live data. Unfortunately, most organizations launch systems before thorough testing, adding to end-user frustration when processes don’t work. The documentation and procedures may be modified during this process. All identified transactions must be tested during this step. All reports and online information must be verified and traced through the audit trail so that management is ensured that transactions will be handled consistently and that the information can be relied upon to make decisions.
Before launch, all users need to be trained, with procedures. This means a trainer using the procedures to show each end user how to handle a procedures. The procedures often need to be updated during training as users describe their unique circumstances and the “design” is modified with this additional information. The end user then performs the procedure with the trainer and the documentation. The end user then performs the procedure with the documentation alone. The end user is then on his or her own with the support, either in person or by phone, of the trainer or other support person. This is before data conversion.
Tools are developed to convert the data from the current system (which was documented in the requirements analysis) to the new system. The data is mapped from one system to the other and data files are created that will work with the tools that are developed. The conversion is thoroughly tested and verified before final conversion. There’s a backup so it can be restarted, if necessary.
The system is implemented only after all of the above is completed. The entire organization is aware of the launch date. Ideally, the current system is retained and often run in “parallel” until the new system is in full operation and working properly. With the current mass-market software used by thousands of companies and fundamentally proven to work, the “parallel” run that is mandatory with software tailor-made to a company is generally not done. This is only true, however, when the above process is followed, the system is thoroughly documented and tested, and users are trained before launch.
Online resources are available to assist with strategic planning of accounting information systems. Information systems and financial forms aid in determining the specific needs of each organization, as well as assigning responsibility to principles involved.
The end users and managers have ongoing support available at all times. System upgrades follow a similar process and all users are thoroughly apprised of changes, upgraded in an efficient manner, and trained.
Many organizations chose to limit the time and money spent on the analysis, design, documentation, and training, and move right into software selection and implementation. If a detailed requirements analysis is performed with adequate time being spent on the analysis, the implementation and ongoing support will be minimal. Organizations that skip the steps to ensure the system meets their needs are often left with frustrated end users, costly support, and information that is not current or correct. Worse yet, these organizations build the system three times instead of once.
Advantages of Accounting Information System (AIS)
Below are the advantages of Accounting Information System (AIS):
- 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.
- 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.
- 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.
- 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.
Disadvantages of Accounting Information System (AIS)
The main disadvantages of Accounting Information System (AIS) are:
- 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.
- 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.
- 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.
- 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.
- Virus Attack – Any data stored on AIS can be infected with a virus which may lead to disruption, modification of financial information stored on AIS.