What is Accounting Information System ?
An Accounting Information System (AIS) is a structured system designed to collect, store, process, and communicate financial and accounting information within an organization. It encompasses a combination of people, processes, and technology to facilitate the recording, analysis, and reporting of financial transactions and activities. The primary goal of an AIS is to provide timely, accurate, and relevant financial information to support decision-making processes within the organization and to meet external reporting requirements.
Accounting Information System helps the accounting operation of the firm and involves a high amount of data processing. This comprises of four major tasks of data gathering, manipulation, storage and document preparation. AIS collects data and helps decision makers like investors, creditors and managers rely on them to make informed decisions. It is a system of records which a business maintains for its accounting system that includes purchase, sales and other financial processes.
The structure and operation of the planning and control processes are studied by AIS which aims at the following:
- Providing information to internal and external stakeholders for decision making and accountability. This should comply with quality specifications.
- Making available the right conditions for effective decision-making.
- Making sure that no assets of the company illegally exit the company.
Model of Accounting Information System
Figure illustrates the AIS model. At the bottom of the firm are the input, transformation and output elements of the physical system.
The data is collected from the physical system as well as the environment. This data is then processed by software which transforms it into information for use by the management as well as individuals and other organisations within the firm's environment.
Components of Accounting Information System
Here are the components of AIS:
- Data Input: This involves collecting financial data from various sources like invoices and receipts.
- Data Processing: The collected data undergoes classification, summarization, and validation to convert it into meaningful information.
- Data Storage: Processed data is stored in databases or other structured storage systems for easy retrieval.
- Data Analysis: Financial data is analyzed to identify trends, patterns, and anomalies.
- Internal Controls: Mechanisms are in place to ensure the accuracy, reliability, and security of financial information.
- Reporting: Financial reports such as balance sheets and income statements are generated for internal and external stakeholders.
- Output: Processed information is presented in various formats such as printed reports or electronic documents.
- Software: Specialized accounting software packages are used to perform accounting functions efficiently.
- Security Measures: Security measures like encryption and user authentication protect financial data from unauthorized access.
- Integration with Other Systems: AIS may be integrated with other business systems to streamline operations and data flow across departments.
Types of Accounting Information System
AIS are of following types:
1) General Ledger System:
This module helps companies to control its GL processing speed, restructure accounting processes and lessen the period-end close cycle. This also generates the company's income statement and balance sheet and manages the old as well as new accounts.
2) Asset Management:
This maintains stock of the company's long term assets. It helps in simplifying tracking, depreciation and maintenance scheduling of assets. This further helps in improving productivity with simplified access to important information and reduces risk of loss or damage to capital assets. Asset management also assists in deriving maximum tax benefits.
3) Order-entry System:
This stores and helps in managing various kinds of data pertaining to a transaction like number of units sold, customer billing, etc.
4) Account Receivables and Payable System:
This module helps in the automation e the purchase process. k bills customers automatically through any sales channel, simplifies accounts receivables processing and automates invoicing. It stores and processes data like creditor and customer billing information, payments received. credit conditions, account balances and payment plans. The procurement life cycle of any organisation is reduced up to 25% as well as it ensures automatic payment of invoice on receipt, reduction in transaction processing cost and better cash management.
5) Inventory Control System:
This captures processes and handles all concerns pertaining to the company's inventory like what is the current stock, inventory cost, lost and damaged items.
6) Payroll System:
This captures and processes data pertaining to salaries including taxes, deductions, benefits, overtime and other associated data.
7) Cash Management:
This module assists the company in predicting cash flows in any currency in several time periods, simplifies the reconciliation process, supervises exceptions and fraud and handles the cash cycle proficiently.
Advantages of Accounting Information System
1) High Speed:
The major advantage of the use of information systems in accounting is the speed with which tasks are accomplished which is not possible in a manual accounting system. Data once entered can be used and reused for various reports in future as and when required. Even if a transaction requires correction, that can also be done very easily.
2) Safety:
Data once entered into a computer is safe as chances of losing data are negligible because of regular system backups. Even if the system crashes, back-up of data can also be saved on the internet from where data can be accessed from anywhere, anytime which is not possible in manual systems as papers can be lost or damaged easily.
3) Classification:
Whenever data is entered in an accounting system whether manual or computerized, it needs to be classified. For example, a transaction could be a sales or interest revenue. The classification process is easily accomplished by the drop down menu to select appropriate category while entering data. Generation of reports is also faster with the use of information systems as opposed to manual system.
4) Efficiency: AIS automates many accounting tasks, such as data entry, calculations, and report generation, which increases efficiency and reduces the time required for completing accounting processes.
5) Accuracy: By minimizing manual data entry and calculations, AIS reduces the risk of human error, leading to more accurate financial records and reports.
Disadvantages of Accounting Information System
1) Cost: Implementing and maintaining an AIS can be expensive, requiring investments in software, hardware, training, and ongoing support.
2) Complexity: AIS systems can be complex, especially for organizations with unique accounting requirements or complex business processes. Complexity may lead to challenges in implementation and customization.
3) Dependency: Organizations become dependent on AIS for their accounting functions, making them vulnerable to disruptions caused by system failures, technical issues, or cyber threats.
4) Training Needs: Employees require training to effectively use AIS, especially if the system is sophisticated or customized. Training costs and time can add to the overall investment in AIS implementation.
5) Security Risks: AIS systems store sensitive financial data, making them potential targets for cyberattacks and data breaches. Adequate security measures must be in place to protect the integrity and confidentiality of financial information.