Accounting Information Systems (AIS)

 

 Introduction to Accounting Information Systems (AIS)

2: the Benefits of an Accounting Information System? 

3: User-wise Data Access Controls

 4: the Functions of AIS 

5: the Types of AIS

 6: How is AIS used 

7: Accounting Information System is Important for Growing Businesses?

8: the Components of AIS

 9: the Qualitative Characteristics of Accounting Information?

Introduction to Introduction to Accounting Information Systems (AIS)Accounting Information Systems (AIS) An accounting information system (AIS) is a structure that a business uses to collect, store, manage, process, retrieve, and report its financial data so it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax agencies.

Specially trained accountants work in-depth with AIS to ensure the highest level of accuracy in a company's financial transactions and record-keeping, as well as make financial data easily available to those who legitimately need access to it—all while keeping data intact and secure.1 Understanding AccountUnderstanding Accounting Information Systems (AIS)ing Information Systems (AIS)

An accounting information system is a way of tracking all accounting and business activity for a company. Accounting information systems generally consist of six primary components: people, procedures and instructions, data, software, information technology infrastructure, and internal controls. Below is a breakdown of each component in detail.2 All You Need to Know about Accounting Information Systems (AIS)? Let’s start with a question, what is the first thing that pops into your head while running a business? For any business, to run smoothly the first & foremost important thing is proper cash flow and reports. Irrespective of the size of the business appropriate cash flow is extremely important. Here comes into play the accounting information system. An accounting Information system (AIS) is the systematic process of collecting, storing, and processing financial & accounting data which is used by internal accountants to report the information to investors, creditors & tax authorities. The entire process is termed an accounting information system. 

This system disseminates the company-related information to the stakeholders for faster decision-making. It is the responsibility of an accountant to work in-depth with the AIS and ensure perfect accuracy in the company’s accounts & books. All financial records should beclean and recorded properly in the books.

 The information should be stored in a manner that is readily available & accessible to the users as & when required. What are the Benefits of an Accounting Information System? The accounting information system provides finance-related information across the organization, it also has several other benefits & advantages that help the business owners to run their business smoothly & effortlessly. Let’s discuss the benefits further: Improved Interdepartmental Communication AIS helps in building a proper & concrete flow of information path across various departments within a company. For instance, the sales department uploaded the sales budget, which can be readily accessible to the inventory department which is very important for further process. Now once the inventory is purchased, the sales department can be well informed that the stock is in. This way the information is communicated within all the departments. Having the important information on hand helps in better business planning & decision making.

User-wise Data Access Controls Unlike the manual method, which is likely to be a risk to outsiders, the business owners can set user-wise data access controls in AIS. It ensures that the data will be available to only responsible users and not to any outsider. AIS also commonly referred to as accounting software helps in disseminating crucial information to a specific user by providing secured data access. Business Insights Another very important benefit that accounting software brings in is displaying the actual business insights. Business insights are very important for business owners to know the exact good & worst performing areas of the business. This not only helps in better business planning but also ensures business growth. Having the key performing areas, the business owners can decide where, when & how much money to put in. This will keep the growth stats moving upwards. What are the Functions of AIS? There are basic 3 main functions of an AIS (accounting information system) i.e. 1. Efficient & effective storage of financial data. 2. Manage the data & produce information in form of useful reports.

3. Ensure 100% control over data & accurately process it. What are the Types of AIS? The accounting information system can be broadly categorized into three types, i.e. manual. Legacy, Integrated system Manual Systems These are primarily used by small businesses where the entire system is managed manually. The software is not integrated with hardware & accounting requires the support of documents. This is done because the business size is small, and it doesn’t need a complex system to work upon. However, the manual system must have documents, a general ledger, special journals, general journals, etc. Legacy Systems These were in use before the advent of the high-end technically advanced accounting systems. This system helps in knowing the historic data of the firm but lacks the flexibility & reliability of modern-day software. Modern Systems These are windows-based technologies that are more user-friendly than legacy accounting systems. They are cheaper as compared to legacy systems and can be installed quickly with very few bugs. How is AIS used? An accounting system is broadly used to collect, store & process the financial & accounting data of an organization. The data stored is accessed by the decision-makers. An accounting information system forms a centralized system where the financial

information is stored by authorized persons & disseminated among various departments of the organization. Crucial information like revenues, sales & purchase deeds, tax, employee information, customer data, etc is stored in an accounting information system. An accounting information system has an inbuilt structure to store the information. Since AIS includes multiple fields that require necessary inputs, it is crucial to maintain high-standard securities to prevent any malicious virus attacks. Accounting software like Marg ERP empowers the business owner with a complete digital solution. Apart from just storing the data, it helps you in handling multiple verticals of your business. You can easily generate most of the crucial financial reports, manage inventory, file GST return, and more. Why Using Accounting Information System is Important for Growing Businesses? AIS ensures a high level of accuracy within the organization, its financial records, and daily business operations. It also allows limiting the access of sensitive data by restricting user-defined roles, protecting the overall security of company data. An accounting system is also important to identify frauds and ensure the smooth running of the finances. An AIS makes the same data available to everyone in the company which reduces the chances of error. Also, the chances of data loss & data theft are almost nil.

For a fast-growing business, manually managing the business and accounting can be a tough job, therefore using an accounting information system simplifies the complexities and ensures the smooth running of the business. What are the Components of AIS? An AIS is made up of majorly six parts. These are listed below:

1. User This includes anyone who is using the accounting system. CFOs, accountants, managers, accounting executives, auditors, and so on. It helps in smooth working & coordination of different departments. 2. Procedure & instructions AIS is coded with certain procedures & instructions that regulate how financial information is collected, stored & processed. These are both manual & automated methods and can come from internal or external sources. 3. Data The accounting system has a database structure to store information in one central location to keep it easily accessible by all the departments. The system will save each & every piece of information relevant to the company’s finances. This may include: 1. Transaction data 2. Tax information

3. Inventory data 4. General ledger 5. Customer data 6. Invoices/ bills 7. Sales orders 8. Purchase requisition 9. Sales Analysis 10. Payroll information 11. Credit / outstanding data 4 Software AIS has a software component that’s essential to store & process the data, analyze it & disseminate the data among the organization. Though AIS comes with an inbuilt software system, some AIS provides the provision of customization. 5 IT Infrastructure This refers to the hardware that is essential to operate the AIS like a computer, server, router, barcode scanner, printer, and other components that are used in daily business operations. To be able to run the AIS smoothly, the IT infrastructure must be compatible with the software. 6 Controls This means the security measures used to store the data safely with the AIS. Internal controls include everything from passwords to biometric verification to encryption methods. It should be able to filter out restricted data to specific users while keeping it accessible to employees with full access. As AIS contains sensitive data, it is important to have safety measures in place.

What are the Qualitative Characteristics of Accounting Information? The demand for accounting information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are desirable in accounting information. There are six qualitative characteristics of accounting information. Two of the six qualitative characteristics are fundamental (must have), while the remaining four qualitative characteristics are enhancing (nice to have).

Fundamental (Primary) Qualitative Characteristics Qualitative characteristics of accounting information that must be present for information to be useful in making decisions: 1. Relevance 2. Representational faithfulness Enhancing (Secondary) Qualitative Characteristics Qualitative characteristics of accounting information that impact how useful the information is: 1. Verifiability 2. Timeliness 3. Understandability 4. Comparability We will look at each qualitative characteristic in more detail below. Relevance Relevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess: 1. Confirmatory value – Provides information about past events 2. Predictive value – Provides predictive power regarding possible future events Therefore, accounting information is relevant if it can provide helpful information about past events and help in predicting future events or in taking action to deal with possible future events. For example, a company experiencing a strong quarter and presenting these improved results to creditors is relevant to the creditors’ decision-making process to extend or enlarge credit available to the company.

Representational Faithfulness Representational faithfulness, also known as reliability, is the extent to which information accurately reflects a company’s resources, obligatory claims, transactions, etc. To help, think of a pictorial depiction of something in real life – how accurately does the picture represent what you see in real life? For accounting information to possess representational faithfulness, it must be: 1. Complete – Financial statements should not exclude any transaction. 2. Neutral – The degree to which information is free from bias. Note that there are subjectivity and estimation involved in financial statements, therefore information cannot be truly “neutral.” However, if a company polled 1,000 accountants and took the average of their answers, that would be considered neutral and free from bias. 3. Free from error – The degree to which information is free from errors. Verifiability Verifiability is the extent to which information is reproducible given the same data and assumptions. For example, if a company owns equipment worth $1,000 and told an accountant the purchase cost, salvage value, depreciation method, and useful life, the accountant should be able to reproduce the same result. If they cannot, the information is considered not verifiable. Timeliness Timeliness is how quickly information is available to users of accounting information. The less timely (thus resulting in older information), the less useful information is for decision-making. Timeliness matters for accounting information because it competes with other information. For example, if a company issues its financial statements a year after its accounting period, users of financial statements would find it difficult to determine how well the company is doing in the present.

Understandability Understandability is the degree to which information is easily understood. 

In today’s society, corporate annual reports are in excess of 100 pages, with significant qualitative information. Information that is understandable to the average user of financial statements is highly desirable. It is common for poorly performing companies to use a lot of jargon and difficult phrasing in its annual report in an attempt to disguise the underperformance. Comparability Comparability is the degree to which accounting standards and policies are consistently applied from one period to another. Financial statements that are comparable, with consistent accounting standards and policies applied throughout each accounting period, enable users to draw insightful conclusions about the trends and performance of the company over time. In addition, comparability also refers to the ability to easily compare a company’s financial statements with those of other companies. The qualitative characteristics of accounting information are important because they make it easier for both company management and investors to utilize a company’s financial statements to make well-informed decisions.

 Conclusion Accounting Information System is a modernized form of record keeping that merges hardware and software in order to provide an error free form of record keeping and processing. Almost all the business use AIS. The main concern of AIS is security. One should keep the security factor in mind before choosing an effective AIS.