Accounting Information System

Welcome to the study of accounting information systems (AIS)! AIS is a critical important
area of study for future accountants. It ties together what accounting students often see as separate,
unrelated areas of accounting: financial, managerial, tax, and governmental. Additionally, AIS
brings in consideration from management, finance, and information systems. Finally, a deep,
fundamental comprehension of AIS is, a great help in the study of auditing.

Definition of AIS
AIS is a set of interrelated activities, documents, and technologies designed to collect data, process
it, and report in formation to a diverse group of internal and external decision makers in
organization.

Basic Concepts
• Accounting information system which is a subsystem of the Financial Information System,
refers to the orderly arrangement of procedures, personnel, records, equipment and devices
utilized for a logical and orderly gathering, processing and reporting of financial and other
information essential to the efficient conduct and evaluation of the activities of a business
enterprise.
• An accounting information system (AIS) is the information subsystem within an organization
that accumulates information from the entity’s various subsystems and communicates it to the
organization’s information processing subsystem.
• The AIS today is an enterprise-wide information system focused on business processes. It is
the combination of procedures, personnel, records, records, equipment and devices that a
business uses to meet its need for financial data. The word information in the title indicates
that a company can get more than the routine financial statements from their system. Special
management reports, such as sales by product, and cashflow projections provide valuable
information for business decisions.
• Accounting information system evolves over time and becomes more formalized as a firm
grows and support the other components of accounting information system.
• As there are principles followed in analyzing business transactions, four basic principles are
used in designing a good AIS: (cost benefit approach, internal control, compatibility,
flexibility)

a) Cost benefit Approach. Under this concept, the cost of putting up a system must be
measured against the benefits to be received from the system.
b) Internal control = plan of organization which includes all procedures, techniques, and
practices designed to provide an efficient AIS. Internal controls prevent or discourage the
commission of theft and errors and ensure that informations are accurate and reliable. It
helps the business organization to accomplish the following four broad objectives.
a. Safeguard its assets
b. Check the accuracy and reliability of its accounting data
 c. Promote operational efficiency and
d. Encourage adherence to managerial policies.
c) Compatibility. This principle simply reminds us that a good AIS must suit the needs of a
particular business
d) Flexibility Principles. This principle calls for a system that allows for changes or
improvements to be made considering the fact that the structure could be change from a
sole proprietorship to a corporation. One must consider the possibility of expanding
business operation and therefore the system should allow for the growth of more
transactions, departments, equipment and personnel.

Objective of an Accounting Information System

The basic objective of an accounting system is to collect, process and provide financial information
needed by management and other interested parties in conducting and evaluating the business
activities. The reports containing the financial information should be accurate, timely and prepared
at the lowest cost possible.

Understanding Accounting 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.

1. AIS People
The people in an AIS are the system users. An AIS helps the different departments within a
company work together. Professionals who may need to use an organization's AIS include:

• Accountants
• Consultants
• Business analysts
• Managers
• Chief financial officers
• Auditors

For example, management can establish sales goals for which staff can then order the appropriate
amount of inventory. The inventory order notifies the accounting department of a new payable.
When sales are made in a business, the people and departments involved in the sales process could
include the following:

1. Salespeople enter the customer orders into the AIS.

2. Accounting bills or sends an invoice to the customer.
3. The warehouse assembles the order.
4. The shipping department sends the order out to the customer.
5. The accounting department gets notified of a new accounts receivable which is an IOU
from the customer that's typically paid within 30, 60, or 90 days.
 6. The customer service department tracks the order and customer shipments.
7. Management uses AIS to create sales reports and perform cost analysis, which can include
inventory, shipping, and manufacturing costs.

With a well-designed AIS, everyone within an organization can access the same system and
retrieve the same information. An AIS also simplifies the process of reporting information to
people outside of the organization, when necessary.

For example, consultants might use the information in an AIS to analyze the effectiveness of the
company's pricing structure by looking at cost data, sales data, and revenue. Also, auditors use the
data to assess a company's internal controls, financial condition, and compliance with regulations.

The AIS should be designed to meet the needs of the people who will be using it. The system
should also be easy to use and should improve, not hinder efficiency.

2. Procedures and Instructions

The procedure and instructions of an AIS are the methods it uses for collecting, storing, retrieving,
and processing data. These methods are both manual and automated. The data can come from both
internal sources (e.g., employees) and external sources (e.g., customers' online orders). Procedures
and instructions will be coded into the AIS software. However, the procedures and instructions
should also be "coded" into employees through documentation and training. The procedures and
instructions must be followed consistently in order to be effective.

3. AIS Data
An AIS must have a database structure to store information, such as structured query language
(SQL), which is a computer language commonly used for databases. SQL allows the data that's in
the AIS to be manipulated and retrieved for reporting purposes. The AIS will also need various
input screens for the different types of system users and data entry, as well as different output
formats to meet the needs of different users and various types of information.

The data contained in an AIS is all of the financial information pertinent to the organization's
business practices. Any business data that impacts the company's finances should go into an AIS.

The type of data included in an AIS depends on the nature of the business, but it may consist of
the following:

• Sales orders
• Customer billing statements
• Sales analysis reports
• Purchase requisitions
• Vendor invoices
• Check registers
• General ledger
• Inventory data
• Payroll information
 • Timekeeping
• Tax information

The data can be used to prepare accounting statements and financial reports, including accounts
receivable aging, depreciation or amortization schedules, a trial balance, and a profit and loss
statement. Having all of this data in one place—in the AIS—facilitates a business's record-keeping,
reporting, analysis, auditing, and decision-making activities. For the data to be useful, it must be
complete, accurate, and relevant.

On the other hand, examples of data that would not go into an AIS include memos, correspondence,
presentations, and manuals. These documents might have a tangential relationship to the
company's finances, but, excluding the standard footnotes, they are not really part of the company's
financial record-keeping.

4. AIS Software
The software component of an AIS is the computer programs used to store, retrieve, process, and
analyze the company's financial data. Before there were computers, an AIS was a manual, paper-
based system, but today, most companies are using computer software as the basis of the AIS.
Small businesses might use Intuit's Quickbooks or Sage's Sage 50 Accounting, but there are others.
Small to mid-sized businesses might use SAP's Business One.4 Mid-sized and large businesses
might use Microsoft's Dynamics GP, Sage Group's MAS 90, or MAS 200, Oracle's PeopleSoft, or
Epic or Financial Management.

Quality, reliability, and security are key components of effective AIS software. Managers rely on
the information it outputs to make decisions for the company, and they need high-quality
information to make sound decisions.

AIS software programs can be customized to meet the unique needs of different types of
businesses. If an existing program does not meet a company's needs, the software can also be
developed in-house with substantial input from end-users or can be developed by a third-party
company specifically for the organization. The system could even be outsourced to a specialized
company.

For publicly-traded companies, no matter what software program and customization options the
business chooses, Sarbanes-Oxley regulations will dictate the structure of the AIS to some extent.
This is because regulations establish internal controls and auditing procedures with which public
companies must comply

5. IT Infrastructure
Information technology infrastructure is just a fancy name for the hardware used to operate the
accounting information system. Most of these hardware items a business would need to have
anyway and can include the following:

• Computers
• Mobile devices
 • Servers
• Printers
• Surge protectors
• Routers
• Storage media
• A back-up power supply

In addition to cost, factors to consider in selecting hardware include speed, storage capability, and
whether it can be expanded and upgraded.

Perhaps most importantly, the hardware selected for an AIS must be compatible with the intended
software. Ideally, it would be not just compatible, but optimal—a clunky system will be much less
helpful than a speedy one. One way businesses can easily meet hardware and software
compatibility requirements is by purchasing a turnkey system that includes both the hardware and
the software that the business needs. Purchasing a turnkey system means, theoretically, that the
business will get an optimal combination of hardware and software for its AIS.

A good AIS should also include a plan for maintaining, servicing, replacing, and upgrading
components of the hardware system, as well as a plan for the disposal of broken and outdated
hardware, so that sensitive data is completely destroyed.

6. Internal Controls
The internal controls of an AIS are the security measures it contains to protect sensitive data. These
can be as simple as passwords or as complex as biometric identification. Biometric security
protocols might include storing human characteristics that don't change over time, such as
fingerprints, voice, and facial recognition.

An AIS must have internal controls to protect against unauthorized computer access and to limit
access to authorized users, which includes some users inside the company. It must also prevent
unauthorized file access by individuals who are allowed to access only select parts of the system.

An AIS contains confidential information belonging not just to the company but also to its
employees and customers. This data may include:

• Social Security numbers

• Salary and personnel information
• Credit card numbers
• Customer information
• Company financial data
• Financial information of suppliers and vendors

All of the data in an AIS should be encrypted, and access to the system should be logged and
surveilled. System activity should be traceable as well.
An AIS also needs internal controls that protect it from computer viruses, hackers, and other
internal and external threats to network security. It must also be protected from natural disasters
and power surges that can cause data loss.