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.
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.