Accounting Information System (AIS)

A system that collects, stores, and processes financial and accounting information through digital means

Today's businesses and organizations of all sizes need consistent, live, reliable, and accurate insight into their performance. This need is essential for decision-making and also to be able to realize their market position in terms of performance and resources. It is one of the available tools today for such needs. 

Accounting Information System (AIS)

An accounting information system is a system that collects, stores, and processes financial and accounting information through digital information system infrastructure and tools. 

The system provides its users with financial analysis reports for decision-making. Moreover, it is a financial tool for entities to evaluate businesses and organizations before any engagement. 

Traditionally, accounting and financial analysis were conducted through a manual approach. This has burdened organizations in terms of the need for very experienced finance teams and accountants to ensure low rates of error and inefficiency. 

These systems have enabled organizations to go fully digital in the accounting and finance departments, increasing their efficiency and accuracy in conducting financial reports and financial analyses. Thus it has allowed them to have an accurate insight into their financial performance.

In the early days, these systems were not provided service by large IT solutions companies; instead, they were in-house built, often creating financial and operational complications. 

Today accounting information systems are provided through many software provider giants like Microsoft, Oracle, and SAP

Types of Accounting Information Systems

It comes in three types, and each type has a specific set of abilities and serves organizations based on their sizes. 

The three types are manual, legacy, and modern integrated systems. As the sizes of companies vary, the level of their complexity and type is also a variable element. 

1. Manual Systems

Tiny, home-based businesses usually adopt this system. It is a fully manual system. 

It is a manual system without any technological integrations. Therefore, it does not require a high level of complexity to be operated. Still, it requires documents like a general ledger, general journal, and special journal to ensure the accuracy of bookkeeping. 

2. Legacy systems 

These systems were the trend before information technology reached this level of advancement today. 

NOTE

Legacy systems may appear outdated, but they provide definite advantages to firms through their historical data. In addition, they are known for their easy-to-use features. 

3. Modern/Integrated Systems 

This is a windows-based technology system; they are known to be more user-friendly than legacy systems and provides sophisticated features. In addition, these systems are cost-effective, easy to implement, and have fewer bug issues. 

Components

These systems operate based on five basic principles, which serve as a foundation to ensure their value and accuracy. These five principles collectively satisfy the General Accepted Accounting Principles (GAAP).

The five principles are:

  1. Control 
  2. Relevance. 
  3. Compatibility 
  4. Flexibility 
  5. Cost-benefit 

In addition to these items, the systems have significant components associated. These components draw the needed information and data to satisfy the five basic principles. The components are:

  • Source documents: these are physical evidence of a business's commercial activity and contain the business transactions' records. Some examples of source documents are purchase orders, invoices, and receipts. 
  • Devices to capture input data: These are input devices that capture transactions for accounting purposes. They capture data accurately through specific mechanisms and enable users to store and process it. 
  • Processing devices for information: These devices are usually connected to the devices that capture input data, and it receives raw data from them and saves it in a digital format as a ledger, report, or journal. 
  • Storage devices for information: This component saves the ledgers and reports generated by the processed accounting data.

File cabinets were utilized as storage devices, yet today many such systems are based on computers, and the files are saved on hard disks, flash drives, memory cards, and the cloud. 

Output media: AIS processes data into information to assist top management in decision-making. 

This set of information is displayed via the output media component of the Accounting Information System. Examples of output media include monitors, projectors, and printers as well. 

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Parts 

This type of system requires a set of parts to existing for it to perform its functions accurately and for it to be able to deliver the expected value.

These parts may vary for different systems, but for such systems, they are six. 

  • People who use the system include accountants, managers, and business analysts. This part is the human interaction part in storing and using the generated reports and analysis from the system. 
  • Procedure and instructions are how data is collected, stored, retrieved, and processed. This is the specific set of guidelines that the system follows to execute its functions and deliver its assigned tasks. 
  • Data includes all the information that goes into an AIS. This part is simply the data collection element, which is the source of constructing the outcome of these systems. 
  • The software consists of computer programs used for processing data. In addition, the software is responsible for analyzing the collected data to produce or generate reports. 
  • Information technology infrastructure includes all the hardware used to operate the system. This infrastructure layer is vital for the system's activities and for the people to feed the data into the system. 
  • Internal controls are the security measures used to protect data. This part is simply the security layer that ensures the protection of all the steps the AIS takes to collect, store, analyze and generate the desired financial reports.

It is also a crucial element as it will be responsible for the security and safety of the data. This means an eye should be kept on it. 

Functions

Accounting information systems are designed to support and enhance departments' functions together. It allows them to perform in a more direct approach, and it assists them in reaching their objectives collectively.  

The idea of the functions is not only to allow departments to work together smoothly but also to ensure efficiency, supply of information, and control over data. 

This data will then allow managerial decision-making, which stems from the collected financial data. 

We could conclude the functions as follow:

  • Efficiency and effectiveness are ensured in the first function of the system, which is collecting and storing data regarding an organization's financial performance and transactions. This includes retrieving the transaction history from source documents.  
  • Secondly, the system provides information crucial for decision-making. This information includes management reports and financial performance reports and statements. 
  • Finally, the system will control it accordingly and accurately to ensure flawless recording and data processing.  

Benefits

This accounting system has many benefits, as it allows the seamless flow of information across an organization and helps departments work more efficiently and reach collective goals. Let's look at some of these benefits in the last paragraph. 

Better interdepartmental communication: Accounting Information System allows one to carry information across various departments within the organization. 

For instance, the inventory department submitted the inventory budget for the year. This information is vital to the finance department for better budget planning and expense recording. 

Once the inventory budget is utilized based on the inventory department's inputs and analysis, this information is shared with the finance department whenever new inventory is purchased for an invoice to be raised. 

Benefits

Data access control: the system will allow users to place many security settings based on their needs.

Not all departments need access to information regarding the overall activities of the company or its overall performance. Therefore this is one of the benefits of this accounting and finance system.

It ensures that only the needed information is displayed and given to a particular user by allowing controlled data access. 

NOTE

Many and various stages of security authorizations need grants to access information, and this system limits the information shared based on the grants given to users by the central authority.

How is AIS used

The system is like an organization's abstract form of management as it collects, analyzes, and stores financial and accounting data for decision-making.

It develops a centralized system that is stored and managed by the personnel in charge. Then it is displayed to the stakeholders of the organization.

The system stores crucial data like revenue, purchases, employees, customers, tax, and many other data sets. 

All this data collectively helps decision-makers and stakeholders plan their next step through a scientific approach when presented and accessed. 

The system is designed to save data in a database. The database has a query language that permits data manipulation and analysis. 

Since the system has many fields that require crucial inputs (whether current or historical), it is essential that the security is ultimately strong to avoid any harmful virus attacks.

Accounting software enables you to manage many verticals of an organization. Aside from just storing the data, it allows you to generate the most critical financial reports, manage inventory, and be tax compliant. 

Should I use an AIS?

The world is rapidly changing, and financial transactions are becoming more complex and broad. This change will pressure organizations or individuals who still conduct financial analysis or manage their accounting activities through the traditional approach. 

This will ensure not only the accuracy of the reports but also allow better decisions to be taken, providing increased performance by the departments within an organization. It will also enable these departments to work together better and more transparently. 

Decision-making has to be based on facts and accurate information, especially today in a world where markets of different sectors and other regions are becoming more saturated and busy. 

Not to forget that in this competitive environment in business, only managers that can make decisions based on facts and accurate data will have better efforts and chances to sustain their organizations and enhance their performance. 

Hence, decision-makers need accurate information, reports, and analysis of their performance and financial performance to make better, sound decisions based on facts. 

Moreover, management may need to make decisions on short notice or frequently, and AIS can be good support for such frequent changes and needs. 

It is a dynamic approach to managing accounts and monitoring financial performance. The different providers and systems allow companies of various sizes to find suitable AIS for their activities and size. 

In addition, AIS is cost-effective and lowers the burn rate for organizations vs. the need to have the workforce conduct the same tasks done by the AIS. 

You can learn more about accounting and finance foundation and data analytics through our online courses, which will give you a great insight into accounting and the importance of data analytics.

Finally, it will allow you to realize the value of accounting and finance systems which you can use for your start-up or career. 

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Researched & Authored by Ahmed FagiryLinkedIn

Edited & Reviewed by Colt DiGiovanni | LinkedIn

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