Accounting Information Systems (AIS)

Introduction

What is an Accounting Information System?

An Accounting Information System (AIS) collects, stores, retrieves and structurally processes financial
data using sufficient information technology resources.

Companies and businesses have well-structured financial systems for reporting financial transactions
and tracking accounting activity. Small businesses may rely on manual and traditional bookkeeping
methods, but information technology infrastructure has become an inevitable component of accounting
information systems.

Professional accountants use this computer-based method for accurate data entry to make a company’s
financial books available to legitimate users. These include the tax authorities, business analysts,
external auditors, the chief financial officer, and other interested parties using these reports for financial
analysis and audits.

Accounting information systems are seamlessly integrated with major functional areas of a business and
are thus enterprise-wide information systems.

AIS aims to provide financial information and reports in real-time and on an “on-demand” basis for
internal and external users.

Traditional accounting and bookkeeping aim to record and classify business transactions and generate
periodic (quarterly, bi-annually, annual) reports.

AIS provides all the features of traditional bookkeeping and accounting and additionally provides reports
on a real-time basis which encompasses a large set of data covering multiple business domains, product
lines, etc., to enable decision-making and planning by providing relevant, reliable, “on-demand,” and
tailored reports.

AIS supports a wide array of financial reporting domains and integrates company-wide data covering
accounting, bookkeeping, auditing, management accounting, taxation, payroll, financial budgeting, etc.
The massive collaboration helps to link data and read patterns, trends, and deeper insights, enabling the
decision-makers to view the information more qualitatively.

For external users, the AIS follows GAAP or IFRS-based accounting methodologies and principles. For
internal users, the AIS data processing can be easily tailored according to management needs or the
objective of decision-making.

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Importance of Accounting Information Systems
1. Automation

Your financial records keep compiling as you input data into your accounting information system. It
eliminates the manual preparation of books and complex computations, which have become inevitable
now that businesses have evolved so much.

2. Accuracy

Accounting information is safer, more reliable, and more accurate with information technology
resources than with manual bookkeeping and calculations. So, one reason an effective AIS is essential
for a business is accurate and reliable financial information.

3. Data Security

Soft copy accounting reports are less susceptible to loss and theft, especially with all the cyber security
laws and regulations. Also, accounting information systems AIS come with authorized access, not only
for computer programs but also for specific files and identities.

4. Speed

Financial reports assemble according to the fed algorithm in the AIS, and the management does not
have to wait for manual preparation of the financial statements. The process stays seamless and
efficient as long as the daily transaction entries are made.

5. Cost-effectiveness

A structured accounting system reduces the company’s cost in hiring more workforce for individual tasks
or rectifying accounting errors afterward. The accuracy, speed, efficiency, and security of financial data
by the AIS make the whole process cost-effective for the company.

6. User-friendliness

Accounting information systems come with easy navigation and a straightforward interface so that the
company spends minimum resources on the training of accountants. A user-friendly AIS also streamlines
the process as it is also used by customers, investors, creditors, and stakeholders.

7. Scalability

An effective accounting information system is scalable with upgrades and additional storage media. So
that whenever a company decides to take a step further, the system also takes a step further along with
all the previous accounting data, audit reports, and financial statements.

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8. Expandability

Accounting systems with a high-end IT infrastructure should be able to accommodate global expansion,
such as multi-lingual and multi-currency features. With manual accounting, international expansion or
even national-level scalability would have been a more difficult task.

9. Cloud-ready

Firms and businesses using cloud-based accounting systems receive five times more clients than
comparable businesses that are not yet cloud-ready and experience considerably better annual growth
as well.

Components of an AIS

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1. People

AIS people are the users of the accounting information system. Professionals who may use a company’s
AIS include:

 Consultants
 Certified Public Accountant (CPO)
 Auditors, including the government agencies such as IRS
 Chief Financial Officers
 Business Analysts
 Managers

2. Procedures and Instructions

Procedures and instructions of an Accounting Information System (AIS) refer to the methods the system
uses for collecting, storing, retrieving, and processing data. For example, the method can be manual or
automated, and the source can be internal or external. Currently, most companies use computer-based
methods and programs for a streamlined process of recording and processing data, as the American
Accounting Association (AAA) recommended.

3. Data

The data in the accounting information system (AIS) includes all the financial information related to a
business, and its nature depends upon many factors. This data will include the inventory, customer
receipts, and production costs for the sales business. This data will then be used to prepare financial
statements for future audits, bank loans, business tracking, and by consulting firms for expert advice.

4. Software

The fourth component of the AIS is the type of AIS software a company uses for financial reporting.
Since the advent of computers, software has become an essential component of accounting
information, replacing paper-based manual systems. Some large-scale companies prefer to design their
software using input from end-users to suit their specific needs.

For public companies, Sarbanes-Oxley Law dictates the format and structure of the Accounting
Information system. So, these won’t have much of choice here. The companies must comply with some
auditing regulations, internal controls, and public financial statements, and the AIS software ensures
that.

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5. Information Technology Infrastructure

The hardware used by the accounting information system (AIS) refers to the IT infrastructure. An
optimum IT infrastructure should have the following characteristics:

 Speed
 Sufficient storage capacity
 Expandable
 Upgradable

The IT infrastructure includes computers, servers, routers, printers, a backup power supply, and storage
media. Companies with integrated financial accounting information systems prefer a hardware and
software plan with upgrades, maintenance plans, and IT waste disposal services.

6. Internal Controls

The sixth element of an AIS is the internal controls, which refer to the security measures and procedures
it includes for the authenticity of the financial data. An authentic accounting information system should
feature authorized computer and file access for sufficient protection of the financial data.

Computer programs in the AIS must be equipped to safeguard the user data such as the buyer’s
information, social security numbers, salary information of the employees, and details of the financial
transactions of the firm.

Types of Accounting Information Systems

An information system for recording fiscal data can be classified in various ways, but mainly, there are
three types:

1. Small and medium-sized businesses use manual accounting systems with pretty straightforward
finances. Everything is managed manually without any integrated software.
2. Legacy systems are the accounting information systems most firms have used since basic
technology and software came into accounting. These are hard to abandon by the old
companies and organizations because of the historical data these accounting systems have been
storing.
3. Modern or integrated accounting information systems are high-end, sophisticated accounting
information software considered more user-friendly and reliable than legacy systems.

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Real-World Examples: A Sales Business AIS
With a well-designed accounting information system, the same system will be used at different steps by
different people for automated financial bookkeeping.

To achieve the sales goals the management sets, the staff orders a proportionate amount of inventory.
The accounting department receives a new payable for the inventory order, and the rest of the
accounting steps can go in the following way:

1. Sales staff enters the customer orders

2. The customer receives the accounting bills
3. The warehouse staff assembles the order
4. Order gets marked ‘shipped’ in the system
5. The accounting department gets a new receivable
6. The accounting department and decision-makers then use the accounting data for financial
reporting, cost projections, financial analysis, etc.