An efficient accounting information system is essential for better control over your business finances. Why do we say that? Inefficient recording and processing of your business’s financial transactions can make your outflow surpass your inflow, which leads to depleting capital and rising debt.
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Do you know companies lose over 20-30% of revenue annually due to mismanagement? Yes, that’s another reason why financial data management should be a priority.
So, ensure that your business’s financial health is at its best. For that, you must have an accounting information system in place. It helps your business analysts track and record all your transactions and audit reports annually without fail. Doing so will alert you of any discrepancy and allow you to solve it immediately.
We have curated this guide for you to understand the Accounting Information System in detail, including its components, benefits, functions, types of accounting information systems, and how you can leverage it.
When implementing an accounting information system, I recommend carefully planning and integrating it to fit your business needs. Investing in user training is important for maximizing efficiency and accuracy in financial management.
What is an Accounting Information System (AIS)?
Accounting Information Management System is a method businesses use to assemble, store, and process financial data so that the internal management and stakeholders can use it to their benefit.
This computer-based accounting system strives to furnish accurate financial and accounting information for the company’s internal users to make a report. Based on this report, the stakeholders–creditors or investors, and the company’s management–top managers, Chief Financial Officers (CFOs), or auditors, make business decisions.
For outsiders, the decisions are regarding potential investment, whereas for insiders, it’s about improvising the company’s future operations.
For instance, you are expanding your online grocery delivery store. For that, you require details regarding the company’s financial transactions, annual profit earned over the past years, estimated profits for the next financial year, and so on. But the problem is that you’ve been recording transactions manually, making it supremely challenging to collect information and predict future profit based on the same. Also, your business’s internal controls are not streamlined, which might lead to losses in the future.
Here’s when an AIS comes in. With this system, your business’s financial information is just a click away, and that too in an organized manner. Predicting future profit and revenue trends are also a part of the deal. You see how using an AIS streamlines the company’s financial data and allows you to access it without wasting time searching for it.
How Businesses Use An Accounting Information System (AIS)?
Businesses need an Accounting Information System (AIS) to properly manage their financial operations. Here’s how businesses use an accounting information system:
1. Financial Transactions
An AIS ensures accuracy and efficiency that stores and automates financial transactions. It simplifies the financial reporting process and reduces manual error rates by processing sales, purchases, payroll, and other transactions.
2. Financial Reporting
Businesses use accounting information system software to provide comprehensive financial reporting, including cash flow, income, and balance sheets. These reports support decision-making by offering insights into financial performance.
3. Budgeting And Forecasting
Through the analysis of historical financial data and the projection of future financial scenarios, an AIS aids in forecasting and budgeting. This makes it easy for companies to manage resources and plan more efficiently.
4. Compliance and Auditing
By keeping accurate and updated records, an accounting information system ensures that regulatory requirements are met. Offering easily accessible and transparent financial data, also makes auditing easier.
5. Internal Controls
An AIS guarantees the integrity of financial data and guards against fraud through internal controls and security measures. It keeps data accurate, imposes access rules, and keeps an eye out for irregularities in transactions.
Suggested Read: Key Internal Control Checks for Your Accounting Software
What Are The Components Accounting Information System (AIS)?
The components of an accounting information system (AIS) are integral to its functionality, supporting various aspects of financial management within a business. Let’s take a look at the components:
1. People
People are an essential part of an accounting information system as they use and interact with it. Various users, including managers, IT personnel, accountants, and financial analysts, are included in this group. Every one has a distinct part to play in how the system works.
Managers use the results to make well-informed choices, and accountants and financial analysts are generally in charge of entering and analyzing accounting data. IT professionals take care of the system’s upkeep and troubleshooting to make sure everything functions properly.
2. Procedures and Instructions
Procedures and instructions are the operational principles governing the usage of AIS. Data entry, transaction processing, and reporting protocols are among them. Data input procedures ensure the accuracy and consistency of financial transaction recording.
Managing a variety of transactions, including payroll and sales and purchases, is a part of transaction processing. Financial report structure, frequency, and distribution are all determined by reporting methods. Procedures that are precise and thoroughly documented simplify system operations and maintain data integrity.
Interesting Read: Single Entry and Double Entry Bookkeeping Systems: Features & Advantages
3. Data
The accounting information system AIS is built around data, which includes all of the transactional and financial information that the system processes. It contains financial information that is kept track of in ledgers and journals, such as sales, purchases, and expenses.
For the purpose of handling accounts receivable and accounts payable, customer and supplier data—including contact information and transaction histories—is essential. Historical data is also utilized for forecasting, budgeting, and trend research to help companies make decisions based on prior performance.
4. Software
The application layer that enables efficient financial activity management is accounting information system software. Each of its key modules—general ledger, accounts payable, accounts receivable, and payroll—manages a different set of financial operations. Together, these modules offer a complete solution for financial management.
To guarantee smooth data flow, the software’s integration features are also essential. These enable it to interface with other systems, like inventory management software or CRM systems. The software’s user interface needs to be simple to use and intuitive so that all users can access it.
5. Information Technology Infrastructure
An information technology infrastructure provides the network infrastructure and hardware required to enable the accounting information system. Servers, PCs, and other hardware needed to effectively run the accounting information system software are included in this infrastructure.
To manage the demands of the system and provide consistent performance, reliable hardware is necessary. Network technologies, including switches, routers, and internet connections, facilitate inter-AIS communication. To safeguard against data loss and maintain business continuity, backup systems are also essential because they provide solutions for data recovery and backup.
6. Internal Controls and Security Measures
For the accounting information system to be protected and data integrity to be guaranteed, internal controls and security measures are essential. Access controls are put in place to prevent unwanted access by limiting access to sensitive financial information based on user roles and permissions.
Information is protected from illegal access and manipulation during transmission and storage using data encryption techniques. Transactions can be tracked and examined for accuracy and compliance via audit trails, which keep track of system events and modifications. All of these steps work together to guarantee the accounting information system’s reliability and safety (AIS).
6 Benefits of Accounting Information Management System
60% of businesses are unsatisfied with their Accounting and Finance processes. Does this sound relatable? If yes, shifting to an accounting information system will be profitable. It can streamline all your financial statements in one place for better control, accurate reports, and higher satisfaction.
Here are 6 benefits of an accounting information system:
1. Data Security
If you’ve been relying on manual accounting processes, you must reconsider. We say this because manual processing puts your sensitive data at varying risks. Shifting to an Accounting Information System can keep the company’s internal controls intact, wherein only authorized personnel can access financial data.
This system has levels of security that disseminate data based on your permissions, protecting your company’s internal controls.
For instance, the inventory management team can access only the sales data, not the payroll data or income statements, as it’s irrelevant to them. Accounting Information Systems, thus, keep your sensitive data in the right and safest hands, helping prevent identity theft by limiting access to authorized personnel only.
2. Enhanced Internal Communication
With AIS, all departments can access centralized accounting. They can perform their respective tasks based on their individual budgets. This enables relevant departments to have a real-time update on the tasks and reduces the communication gap (which occurs in the absence of an integrated AIS).
For instance, the sales department prepares and lists the budget for the inventory management team to follow. The inventory team can take note of the budget, order the stock accordingly and update it on the database, making it easier for the accounts department to clear the accounts payables. So, you see how AIS manages your company’s financial data easily.
3. Cost Minimization
Adopting integrated AIS to keep a record of all your business finances in one place reduces the need for separate employees managing accounts for different departments. This drastically reduces your resource costs.
For instance, if you employ different accountants to record different business data–sales and inventory management data, create sales reports, and more—you have to pay them salaries, increasing your costs. An integrated AIS centralizes your accounting and reduces your personnel needs, lowering your costs significantly.
4. Time Conservation
As a business owner, hundreds of tasks are waiting to be ticked off your to-do list—customer relationship management, for instance. To remove that extra accounting burden off your shoulder, you can rely on modern AIS to record, sort, and organize financial information. It automates your repetitive tasks, allowing you to focus on strategic tasks better.
Imagine how many hours an accountant would take to prepare different accounting ledgers, P&L accounts, cash flow statements, etc. It wouldn’t take a fraction of that time for AIS to perform the accounting and business activity. How? Because AIS eliminates the need to select the basic additions–Tax codes and Xero categories for every transaction entry.
It auto-fills the same for you, which saves time. The accounting systems also automatically make changes in the accounting sheets if there are changes in the transactions, saving tremendous time and effort.
5. Increased Accessibility
You cannot take your physical books of accounts everywhere you go, or it might just slip from your mind to carry it along. An integrated AIS eases this hassle. You can quickly walk through your business’s finances even on a flight, as you can access these accounting systems via the internet on your phone or laptop.
Suppose you meet with the investors and forget to bring the physical books of accounts. In that case, you cannot go ahead with the meeting due to your reliance on the conventional method of accounting. But with an integrated Accounting Information System, you can instantly access your data anywhere and save time and effort.
6. Higher Data Accuracy
A modern integrated accounting system runs on predefined instructions and involves minimum human intervention, leaving no room for errors in the financial reports. Why do we say that? This accounting information system software alerts you if a difference in new entries and related past data is found. You can simply change the same system before moving ahead, leading to accurate reports and more informed business decisions.
For instance, an accountant who caters to your business’s bookkeeping needs manually misinterprets your inventory costs as $2483 instead of $2843. They may use the wrong figure in the financial statements, leading to inaccurate results. An AIS solves this and ensures the utmost data accuracy; you can modify it in seconds if needed.
Don’t Miss to Read: 12 Key Advantages of Accounting Software
What Are the Functions of an Accounting Information System?
An Accounting Information System essentially extracts the business’s accounting data from the company’s records and organizes it on the database. Here are four crucial functions of an Accounting Information System in detail.
1. Data Collection and Organization
The principal functions of an Accounting Information System include gathering and storing data about sales and purchases through receivables, payables, accounting bills, etc. Once the system has all the transactional details, it processes the same and organizes it in journals and ledgers. This gives you complete information about the debits and credits in your organization.
2. Curating Reports
Uses of accounting information software are not limited to storing all the financial data in a structured manner. It also extracts reports based on that data. These AIS-generated reports are essential for the management team–sales managers, business analysts, and other department heads to analyze the organization’s financial health.
Not just that, these reports enable them to make business decisions that align with available resources and the company’s predetermined goals.
3. Keeping Data Accuracy and Security Intact
To ensure data safety, your accounting department must strategically limit data access. You can do it using Accounting Information Systems to save yourself from adding to the trillion-dollar industry of fraud and financial crime.
For instance, you can choose associates like top managers, chief financial officers, and auditors who can view your financial reports and restrict accountants or bookkeepers from doing the same. This ensures no unnecessary modification while maintaining data accuracy and security.
4. Cross-departmental Data Sharing
One of the major functions of an accounting information system is to interconnect different company divisions for a smooth flow of relevant information. You can simply create a dashboard on the AIS consisting of all the useful information for related departments to access and further their processes. For example, the marketing team can enter the invoices for different marketing verticals like content, graphic designing, etc., and the accounting department can access and clear them at once.
Types of Accounting Information Management Systems
Multiple types of Accounting Information Systems are floating in the market, but businesses often choose the one that suits their business type, size, and needs. Here are three major kinds of AIS:
1. Manual Systems
A manual system is one where all the accounting processes are done with human effort and have no technological integration. Small businesses with simple operations that accountants can effectively manage still rely on this system.
However, with the introduction of modern accounting information system software, the use of manual systems has significantly dropped. Why? Because 56% of executives say they owe their high-profit margins to digital improvements. So, you see how adapting to the new is highly significant in a business’s growth.
To work with this system, you must have documents–general ledger and journals, special journals, etc. to record the data systematically.
Manual systems are comparatively cheaper than integrated Accounting Information Systems (AIS) software and don’t disrupt work in power or internet outages. But they are highly susceptible to errors and require extensive manual work, increasing time and cost expenditure.
2. Legacy Systems
A legacy system is a type of AIS that stores the company’s historical data using information technology, which can be accessed when needed. This system was adapted by businesses as an upgraded version of the manual system when information technology was not as developed.
Legacy systems use software, hardware, and a computer language to operate smoothly, which is hard to find today. Although this system’s performance has deteriorated due to a lack of maintenance, businesses still use it as one of the security measures to keep their historical data safe.
Legacy systems used to lend flexibility in customizing the system according to your business-specific needs. But now its disadvantages far outweigh its advantages. For example, today, you cannot update a legacy system according to your company’s accounting procedures and instructions.
3. Modern Systems
A modern integrated AIS stores and processes your business’s entire financial data in one place. It is considered far better than a legacy system for the data accuracy and security it brings to medium to large publicly traded companies. This system needs no additional key components(add-ons), is easy to adapt for the user, and can run smoothly on your computer system.
Modern accounting information systems truly save your time while accelerating your business processes and growth. The market will be flooded with efficient accounting software in 2024. Here’s one of the best real-world examples:
Using a top modern Accounting Information Systems (AIS) software like FreshBooks saves 553 hours and up to $7000 billable hours annually. With modern solutions like these, you can free up time to do what you are skilled at instead of struggling with something that can easily be automated.
Also, businesses using the modern system do not need to maintain separate records for different accounting purposes. Customizing the software according to your business’s accounting procedures and instructions is an added advantage.
Conclusion
As we’ve reached the end of this informative guide, we are certain that you understand accounting information systems better. Now you know why investing and using an AIS should be a part of your organization’s business practices. It’s truly a win for you. It does not just streamline your accounting processes by storing and processing data but also generates reports and helps you abide by laws that tax agencies require you to follow. Most importantly, AIS gives you better control over your business.
Pratiiek Mavani is a seasoned professional in accountancy, taxation, audit, and finance, boasting over 16 years of industry expertise. He specializes in conducting audits for diverse entities including banks, optimizing their core processes through cost management and budgeting. With a focus on income tax and GST, he has represented various clients in cases and appeals concerning direct and indirect taxes across different levels.
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