What is an accounting information system?

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 evaluation tool for entities to evaluate businesses and organizations before any sort of engagement.

Traditionally, accounting and financial analysis were conducted through a manual approach. This has put a burden on 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 and it has allowed them to increase their efficiency and accuracy in conducting financial reports and financial analysis, thus it has allowed them to have an accurate insight into their financial performance.

In the early days, AIS systems were not a provided service by large IT solutions companies but rather they were in-house built which often created financial and operational complications. Today accounting information systems are provided through many software provider giants like Microsoft, Oracle, and SAP.

Types of Accounting information system (AIS)

AIS 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 systems, legacy systems, and modern integrated systems. As the sizes of companies vary the level of AIS complexity and type is also a variable element.

• Manual Systems

This type of system is usually used and adopted by very small, home-based businesses. It is a fully manual system.

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

• Legacy systems

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

Although legacy systems may appear a bit out of date, they provide definite advantages to firms through the historical data they contain. In addition, they are known for their easy-to-use features.

• Modern/Integrated Systems

This is a windows-based technologies system, they are known to be more user-friendly than legacy systems and provide sophisticated features. These systems are cost-effective, easy to implement, and have fewer bug issues.

Components of AIS

AIS 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 major components associated. These components serve to draw the needed information and data to satisfy the five basic principles. The components are:

• Source documents: this is physical evidence of the commercial activity of a business, and they contain the records of the business transactions. 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. Through specific mechanisms, they capture data accurately and enable users to store and process the data.
• 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, reports, or journals.
• Storage devices for information: This component is used to save the ledgers and reports that are generated by the processed accounting data.

File cabinets were utilized as storage devices, yet today many AIS is 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.

Parts of AIS

This type of system requires a set of parts to exist 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 the AIS they are six.

• People who use the system include accountants, managers, and business analysts. This part is the human interaction part in terms of storing and using the generated reports and analysis from the system.
• Procedure and instructions are the ways that data are collected, stored, retrieved, and processed. This is the specific set of procedures 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 AIS systems.
• The software consists of computer programs used for processing data. The software is responsible for analysing the collected data to produce or generate reports.
• Information technology infrastructure includes all the hardware used to operate the AIS. This infrastructure layer is important for the system to be able to conduct its activities and for the people to feed the data into the AIS.
• 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 that the AIS goes through or undertakes to collect, store, analyze and generate the desired financial reports and analysis.

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

Functions of AIS

Accounting information systems are designed to support and enhance departments’ function together. It allows them to perform in a more direct and clear approach and it assists them to reach 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 put control accordingly and accurately to ensure flawless record and data processing.

Benefits of AIS

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

Better interdepartmental communication: AIS allows to carry information across various departments within the organization.

For instance, the inventory department submitted the inventory budget for the year. this information is important to the finance department for better budget planning and expenses 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.

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

It is clear that 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 certain user by allowing controlled data access.

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

How is AIS used?

The system is like the abstract form of management in an organization as it collects, analyses, 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.

Crucial data like revenue, purchases, employees, customers, tax, and many other sets of data are stored in the AIS.

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

The system is designed to save data in a database. The database is equipped with 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 important 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 provides you the chance to generate the most important financial reports, manage inventory and be tax compliant, all together.

Should I use an AIS?

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

AIS will ensure not only the accuracy of the reports, but it will allow better decisions to be taken and it will provide increased performance by the departments within an organization. It will also allow these departments to work together through a better and a transparent approach.

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

Not to forget that in this competitive environment in business, only managers that can take 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 be able 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.

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

In addition, AIS is cost-effective and it lowers the burn rate for organizations vs the need to have the manpower to 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 in your career.

Researched and Authored by CEO of NeuralWize Ahmed Fagiry