What is It? Deconstructring the Accounting Information System
For the vast majority of human financial history, accounting was done manually. Skilled and accurate accountants were in high demand, but still, any process that relies on humans is, by nature, inefficient and prone to errors at least part of the time. But as the 1970’s rolled around, the growth of computerized data processing allowed for the emergence of AIS (accounting information systems).
These first software efforts were developed in-house at major corporations. Unfortunately, they were tedious and expensive to maintain, and seemed barely better than crunching numbers with a pen, paper, and calculator. Today, pre-built accounting software packages are an industry to itself. In India alone, dozens of companies compete for the consumer dollar.
Defining the AIS
What does a modern AIS actually do? We first look to Investopedia for a definition: “…the collection, storage, and processing of financial and accounting data by internal users to report information to investors, creditors, and tax authorities.”
In other words, it’s a computer-based (or cloud-based) software program that uses modern information technology to perform accounting functions based on traditional accounting practices and GAAP (generally accepted accounting principles). While software features vary greatly among vendors, one can expect to find a handful of foundational modules such as the following:
Revenue and Expenses:
Using either the cash or accrual method, the AIS tracks and categorizes money received by sales of products or services or funds that are spent for inventory or in the pursuit of normal business operations.
Tracking customer demographics has become an important part of the AIS. Being able to identify the best customers and tailor your marketing more specifically towards them is great for business.
A good AIS allows the user to perform payroll and HR duties in a fraction of the time it used to take.
If it weren’t for tax requirements, there’s a good chance AIS wouldn’t have evolved to the extent it currently has. Automating the reports needed to collect and remit sales taxes, as well as calculate and pay income taxes are functions most modern business owners wouldn’t like to do without.
It’s All About the Database:
At the heart of any AIS lies a database. Think of it as a giant cyber bucket that holds all of your business information like sales orders, purchase requisitions, invoices, check registers, inventory, ledger, payroll, balances, and financial statements. Through the use of a specialized computer language, this information can be manipulated, reordered, segmented and more by user query. The system allows you to input new data as well manipulate old.
The Magical Output:
The magic (and power) of the system lies in its ability to produce data in varying ways depending upon a user’s needs. A few examples are in order. It’s easy to make use of customer information to generate accounts receivable aging reports and tell at a glance who owes you money and how long have they owed it. Do you need to know inventory levels at a warehouse several hundred miles away? Your AIS can tell you in moments. Likewise, it can create a variety of financial accounting statements in an instant like cash flow, an income statement, or balance sheet.
And there’s nothing complicated about it from the user standpoint. Most commercial accounting software programs are designed with the reality in mind that, often, the people who need to be able to use it are not advanced computer users.
Where a well-constructed AIS program really shines is in its ability to receive input from different departments (mostly medium and larger companies now) and coalesce it into the final output. Teams from sales, inventory, manufacturing, shipping, and customer service can interact with the software, upload data, download reports. The capabilities are light years away from the bad old days of a single accountant toiling away in a back room.
Which brings up another aspect of a well-designed AIS. We’re talking about internal controls or, more accurately, who can access what data? Since time immemorial, accountants have been concerned with the security and integrity of their company’s financial data. With an AIS, physical access limitations, login requirements, and segregation of duties across the company insure each employee only has access to the information relevant to completing their assigned duties.
The Bottom Line
It’s obvious from this discussion that accounting information systems have created incredible advances in the accounting field. Accountants and bookkeepers are able to accomplish more in less time and with fewer mistakes. For a business or entrepreneur looking to upgrade a system or buy one for the first time, take advantage of the free 30-day trial offered by most software vendors. That will give you a hands-on, real-world idea of how it will (or won’t) suit your needs.