What Is an Accounting Information System? (Brief Guide)

By Indeed Editorial Team

Published June 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Accounting is an essential part of business that increases in complexity as businesses grow in size and scope. By integrating an accounting information system into its model, a business can more efficiently handle accounting tasks. If you can gain proficiency in these types of systems, you can become a valuable asset to your team, one who may save them both time and money. In this article, we explain what an accounting information system is, list its key functions, describe the six components that make up an AIS, and then describe the benefits of using such a system.

What is an accounting information system?

An accounting information system (AIS) is a business tool that can collect, store, process, and report various pieces of financial and accounting data. By centralizing this data on a digital system, a company can simplify the work of an organization's financial professionals. These systems have a broad array of use cases and can help accountants, managers, CFOs, auditors, regulators, and tax agents. When used by trained employees, an AIS can reduce an organization's rate of error, fraud, and time waste. For larger companies, an AIS may be essential to financial data management.

Related: Finance vs. Accounting: Understanding the Differences

Key functions of an AIS

Generally, an AIS serves three key functions:

Data collection and storage

An AIS can automatically pull financial data from source documents, such as transaction records, putting that data into an organization's larger pool of financial information. It can also post this information as appropriate, adding it to the relevant company ledgers with minimal human input. An efficient AIS may handle hundreds or more transactions daily, depending on the scale of a company. Properly integrated, an AIS can log many or even most of a company's transactions in close to real-time.

Related: Data Governance: Definition, Benefits, and Best Practices

Supplying information for decision making

Using the pool of information it stores, an AIS can also produce key financial information in an easily actionable format. For example, it can produce managerial and financial statements for key decision makers. This allows these individuals, or the employees under them, to avoid needing to process raw financial data themselves and speeds up the decision-making process. Users can also afford to generate more thorough reports, as it may only take minutes to generate even very complex reports that might have taken human hours or days to create.

Protection from error and crime

When properly utilized, an AIS acts as a type of control over the behaviour of an organization's human members. Assuming the information put into the system is accurate, an AIS can always store and process financial data according to the law and basic mathematics. This makes it more difficult for financial errors to occur, as many of the most complicated parts of accounting become automated. It can also make criminal activity more difficult, as an AIS can potentially detect unusual or outright fraudulent activity.

Related: How to Become a Forensic Accountant (With Crucial Skills)

The 6 components of an AIS

An AIS is made of six broad parts that contribute to the flow and accuracy of data, including:

1. People

Anyone with access to an AIS is a part of the system. These people can alter how effective the AIS is, meaning that a company benefits by keeping all relevant members trained and knowledgeable in its use. This way, an organization's members know how to input data and utilize an AIS for planning and interdepartmental communication.

For example, to streamline operations, management can set sales goals, which can then inform staff about the amount of inventory available to meet those goals. Salespeople can enter their customer orders into the AIS, which alerts accounting to send invoices, tell warehouse employees to package orders, and the shipping department to mail them.

2. Procedure and instructions

AISs use procedures and instructions to regulate how an organization collects, stores, processes and distributes financial information. It can also help employees complete training on these procedures with tools and tutorials. These methods are both manual and automated and can come from internal sources like employees or external sources like online orders placed by customers. An organization can code procedures and instructions into the AIS software. Then they can develop short onboarding courses and documentation to help ensure these procedures get followed.

3. AIS data

An AIS system often has a database structure to store information in one central location. This helps with convenient record-keeping and reporting. The structure, in a way similar to structured query language (SQL), allows data in the AIS to be sorted and retrieved for reporting purposes. The AIS stores any information relevant to the organization's business practices that might impact its finances.

Any business data that impact the company's finances generally goes into an AIS. While the data may vary depending on an organization's model, it typically includes:

  • Inventory data

  • Tax information

  • Check registers

  • General ledger

  • Customer billing statements

  • Sales orders

  • Purchase requisitions

  • Vendor invoices

  • Sales analysis reports

  • Payroll information

  • Timekeeping information

Data that doesn't go into the AIS includes things like manuals, memos, and correspondence. These types of documents can serve an important purpose in a company's financial planning, but don't contain relevant data points for an AIS to use.

4. AIS software

An AIS has a software component that's essential to store, retrieve, process, and analyze financial data for the company. Though these systems used to be manual-based systems, companies today use customized software programs. This software can perform tasks humans might find difficult or impossible, and designers can optimize it to a company's specific model.

Customized software can automatically take in data from other programs a company uses and generate and send reports on a set schedule. The software can also generate alerts that get sent to the relevant employees if it detects inventory is low and if finances are above or below a certain benchmark.

5. IT infrastructure

An AIS requires physical hardware to function, with the necessary hardware scaling upward with the amount of data a company wants its system to process. Accessing and utilizing an AIS requires computers, servers, routers, and power. For larger companies, an AIS may hold vast amounts of financial data, especially if the company wants immediate access to multiple years worth of information.

IT infrastructure can also protect data from disasters such as fire or the natural deterioration all electronics experience over time with regular use. Regular backups to the cloud or similar save systems can help ensure the loss of more than a few days of data is very unlikely.

6. Internal controls

Internal controls refer to the security measures used to protect data stored within the AIS. Internal controls include everything from passwords to biometric verification methods to encryption methods. These controls can filter out sensitive data for employees without verified access while still making the information readily available for those with full access. Internal controls help guard sensitive employee and customer information like credit cards and Social Security numbers. One of the most important elements controls guard is a company's financial data.

Why do businesses use AISs?

One of the primary reasons a business might use an AIS is that accounting is an area computers excel in. As a series of positive and negative dollar amounts, the inputs in accounting are fairly straightforward. The complexity of accounting is primarily in the volume of transactions an organization is processing. A few incorrect inputs may cause a cascade of errors in areas relying on those inputs. Computers can automatically pull transaction data exactly as a source listed it. Then, if properly programmed, the software can perform tens of thousands of equations with either no or extremely little potential for error.

While an AIS still involves human input and oversight, it can help supplement a company's accounting in areas where a computer is superior to a human. The greater the amount of data a company is processing, the greater the advantage an AIS can offer. Over time, an AIS might save an organization hundreds of hours and thousands of dollars in reduced processing time and a lower error rate. This becomes even more true if an AIS helps a company avoid the potential lawsuits erroneous data entry and processing can sometimes cause.

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