1.

Meaning of AIS
Accounting information system is a subsystem of management information system and
accounting and is also a part of information system of an entity.

Accounting information system is a combination of people , equipment , policies, and procedures

that work together to collect data and transform it into useful information.

Hence accounting information system can be used to record the financial transaction of an
organization .

The accounting information system consists of methodology, controls and accounting technique
with the IT to track transaction provide internal reporting data , external reporting data and
financial statement and trend analysis capability to affect an organization performance .

AIS is a system that provides people with either data or information relating to an organization's
operation to support the activities of employees, owners, customers, and other stakeholders in the
organization's environment by effectively supplying information to authorized people in a timely
manner. Accounting Information System is a system that collects and processes data which is
measured in terms of money.

AIS process accounting transactions and supplies information for the interested users which is
used to take effective decision making process, to help management for performing business
activities properly and finally to measure the performance of the company .

Accounting Information System (AIS) is vital to all organizations and perhaps, each organization
either profit or non profit-oriented need to maintain the AIS. The output of an Accounting
Information System is financial reports and statements that enhance its effective role in
managerial policymaking and figuring out future plans .

AIS is the whole of the related components that are put together to collect information, raw data
or ordinary data and transform them into financial data for the purpose of reporting them to
decision makers.

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To better understand the term ‘Accounting Information System’, the three words constitute AIS
would be elaborated separately.

Firstly, literature documented that accounting could be identified into three components, namely
information system, “language of business” and source of financial information

Secondly, information is a valuable data processing that provides a basis for making decisions,
taking action and fulfilling legal obligation.

Finally, system is an integrated entity, where the framework is focused on a set of objectives .

In managing an organization and implementing an internal control system the impact of

accounting information system (AIS) is crucial. Benefits of accounting information system can
be evaluated by its impacts on improvement of decision-making process, quality of accounting
information, performance evaluation, internal controls and facilitating company’s transactions .

The appropriate design of AIS supports business strategies in ways that increasing the
organizational performance

Organizational performance is the concept of how effective an organization is in achieving its

goals. Every employee in a company contributes to organizational performances .

Taking into account skills, experience, motivation and rank, some employees play a bigger role
than others. These are the people who contribute to the development of organization mainly with
their knowledge .

Organizational effectiveness was succinctly defined as “the degree to which an organization

realized its goals” . Organizations pursue multiple goals, and such goals must be achieved in the
face of competition limited resources, and disagreement among interest groups.

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organizational effectiveness is the ability to produce desire results. There are many ways to
measure the effectiveness of an organization, which include different criteria such as
productivity, profits, growth, turnover, stability and cohesion.

Rational perspectives focus on the achievement of previously set goals and on output variables
such as quality, productivity and efficiency.

Natural system perspectives focus on the support goals of the organization such as employee
satisfaction, morale and interpersonal skills. Open system perspectives focus on the exchanges
with the environment; this includes information processing, profitability, flexibility and
adaptability.

It also helps them to know how well their stock has been utilized, and how much stock they have
nationally and per hub and how long the current stock will last. This is why the researcher
decided to check the impact of the accounting information system they use on the organization
performance.

1.1Functions of an Accounting Information System

Accounting information systems have three basic functions:

1. The first function of an AIS is the efficient and effective collection and storage of data
concerning an organization’s financial activities, including getting the transaction data
from source documents, recording the transactions in journals, and posting data from
journals to ledgers.
2. The second function of an AIS is to supply information useful for making decisions,
including producing managerial reports and financial statements.

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 3.The third function of an AIS is to make sure controls are in place to accurately record and
process data.

1.2 Parts of an Accounting Information System

An accounting information system typically has five basic parts:

1. People who use the system, including accountants, managers, and business analysts
2. Procedure and instructions are the ways that data are collected, stored, retrieved, and
processed
3. Data including all the information that goes into an AIS
4. Software consists of computer programs used for processing data
5. Information technology infrastructure includes all the hardware used to operate the AIS

1.3 The Reliability of Accounting Information Systems

Because an AIS stores and provides such valuable business information, reliability is vitally
important. The American Institute of CPAs (AICPA) and Canadian Institute of Chartered
Accountants (CICA) have identified five basic principles important to AIS reliability:

1. Security - Access to the system and its data is controlled and limited only to those
authorized.
2. Confidentiality - The protection of sensitive information from unauthorized disclosure.
3. Privacy - The collection, use, and disclosure of personal information about customers is
done in an appropriate manner.
4. Processing integrity - The accurate, complete, and timely processing of data done with
proper authorization.
5. Availability - The system is available to meet operational and contractual obligations

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Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by users of the information.

Accounting information system is a transaction based information system as it deals with the
economic events taking place in the enterprise. Most of these economic events take place in the
course of day-to-day operations of the business enterprise.

In the past, accounting information systems were designed primarily for reporting to statutory
bodies such as tax authorities, regulatory authorities and investors. Very little information was
generated to meet the information needs of managerial decision making. The focus of accounting
information has changed. It focuses more on generation of information for use in managerial
decision making process.

1.4 The main characteristic features of accounting information systems

are:
(a) Accounting information system deals with transactions which are of financial nature and can
be expressed in terms of money.

(b) Accounting information system caters to the information needs of both external and internal
users. The external users include customers, vendors, shareholders, investors, statutory
authorities, stock exchanges, trade promotion bodies, etc.

The internal users are the managers at various levels who make use of accounting information,
both for planning and control. Since different groups of people are interested in accounting
information, it is necessary to use standard definitions for accounting terms in order to ensure
consistency in the information.

c. It is quite simple and well structured information system . the principle and procedure
involved in processing of accounting data are defined by professional bodies .

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d. the accounting information system use mainly historical data but may also include future data
in the form of budget and forecasts

e. the source of data is mainly internal to the enterprise and thus , data bases are well defined
,integrated and controlled.

A good accounting information system need to provide easy-to-understand information about the
business that can then be used to make better business decisions. It have the following features:

Reliable

The information itself needs to be error free. If you’re second guessing your accounting system,
there’s a major problem. Before you blame the system itself though, make sure your have firstly
set everything up correctly and your entries are correct; the system can only work with the
information it’s fed.

Relevance

Information is relevant if it influences business decisions. For an accounting system to provide

relevant information the information must be available on time and have a level of detail
significant enough to show trends, comparisons and other information that fuels business
decisions.

Easy-to-Understand

The more guesswork involved in an accounting system, the more prone a company is to error. If
the accounting system is user friendly and easy-to-understand, the more chance the accounting
system has of being implemented to its full capacity.

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Comparability

A great accounting system has easy to access reports that can are comparable across business
units and periods to identify trends. To be comparable, accounting reports must belong to a
period, use common unit of measurement and a common format of reporting.

Software

Being organised is one thing, but the less effort it takes to be that way, the better.

Accessible

When running your business, it is essential that you’re able to quickly and efficiently access data
to troubleshoot and map out future plans for not only efficiency but also success.

Usability

Employees and managers need to be able to use the accounting system with minimal effort and a
small learning curve. An otherwise good system that is counter-intuitive to your accounting
needs can hinder productivity. Communicate with your employees as to what would work best.

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1.5 Wealth maximization

Wealth maximization refers to all the efforts put in for maximizing the presnt value of any
particular course of action which is just the difference between the gross present value of its
benefits and the amount of investment required to achieve such benefits .

Wealth maximization principle is also consistent with the objective or maximizing the economic
welfare of the proprietors of the firm .

This in turn , calls for an all out bid to maximize the market value of share s of that firm which
are held by its owners . the markets price of the share of a company serves as a performance
index or report card of its progress . it indicates how well management is doing on the behalf of
its share holders .

Net present value or wealth of a course of action is the difference between the present value of its
benefits and the present value of its costs . the objective of wealth maximization is an appropriate
and operationally feasible criteria to chose among the alternatives financial actions.

The wealth maximization objective serves the interests of suppliers of loaned capital, employees,
management and society. This objective not only serves shareholders interests by increasing the
value of holding but also ensures security to lenders also. According to the wealth or value
maximization objective, the primary objective of any business is to maximize share holders
wealth. It implies that maximizing the net present value of a course of action to shareholders.

The management of an organization maximizes the present value not only for shareholders but
for all including employees, customers, suppliers and community at large.

This goal for the maximum present value is generally justified on the following grounds:

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(i)It is consistent with the object of maximizing owners economic welfare.
(ii)It focuses on the long run picture.
(iii)It considers risk.
(iv) It recognizes the value of regular dividend payments.
(v) It takes into account time value of money.
(vi) It maintains market price of its shares
(vii) It seeks growth is sales and earnings.

Maximizing the shareholders’ economic welfare is equivalent to maximizing the utility of their
consumption every time. With their wealth maximized, shareholders can afford their cash flows
in such a way as to optimize their consumption.

From the shareholders point of view, the wealth created by a company through the actions is
reflected in the market value of the company’s shares

It provides an unambiguous measure of what financial management should seek to maximize in

making investment and financing decisions on behalf of shareholders.

However , while pursuing the objective of wealth maximization ,all effort must be employed for
maximizing the current present value of any particular course of action .it implies that every
financial decision should be based on cost benefit analysis . the share holders who obtain great
benefits , would not like a change in the management .

This approach is also known as Value Maximization or Net Present Wealth Maximization.
Wealth maximization means maximizing the net present value (NPV) of a course of action.

The NPV of a course of action is the difference between the gross present value (GPV) of the
benefits of that action and the amount of investment required to achieve those benefits.

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The GPV of a course of action is found out by discounting or capitalizing its benefits at a rate
which reflects their timing and uncertainty. A financial action which has a positive NPV creates
wealth and therefore, is desirable.

A financial action resulting in negative NPV should be rejected. Between a number and desirable
mutually exclusive projects, the one with the highest NPV should be adopted. The wealth or
NPV of the firm will be maximized if this criterion is followed in making financial decisions.

1.6 Wealth Maximization Criteria

This is also known as value maximization criteria or net present worth maximization. Its
operational features satisfy all the three requirements suitable for the operational objective of
financial courses of action.

The value of assets should be viewed in terms of the benefit it can produce. The worth of the
course of action can similarly be judge in the terms of value of the benefits it can produce.

Features

(1)Wealth maximization is based on the concept of cash flows generated by the decision rather
than the accounting profit

(2) The second important feature of the wealth maximization criteria is that it considers both
quantity and quality die mentions of benefits at the same time it incorporates the time value of
money.

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 However the important issues related to the value/ share price maximization are

Economic Value Added Criteria

Market Value Added Criteria

1.6.1 Economic Value Added Criteria

It is a popular measure currently being used by several firms to determine whether an
existing/ proposed investment positively contributes to the owners/ share holder’s wealth.
The EVA is equal to after-tax operating profits of a firm less the cost of fund used to finance
its operations.

For e.g. after tax profit of 40 crore and associated cost of financing the investment of 38
crore then EVA=40-38=2 Crore.

With appositive EVA the investment would add value and increase the wealth of the owner
and should accepted.

1.6.2 Market Value Added

It is the market value of the invested capital less the book value of the invested capital.

MVA=Market value of debt + equity - Book value of debt + equity

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 Companies that consistently have high EVA should have positive MVA. If a company
consistently has negative EVA should have a negative MVA too.

In formulating the goal of maximization of shareholders' wealth, we are doing nothing more than
modifying the goal of profit maximization to deal with the complexities of the operating
environment.

 We have chosen maximization of shareholders' wealth, that is, maximization of the

total market value of the existing shareholders' common stock, because the effect of all
financial decisions is reflected through these prices.

 The shareholders (or investors) react to poor investment or dividend decisions by

causing the total value of the firm's stock to fall and they react to good decisions by
pushing the price of the stock up.

Obviously, there are some series practical problems in direct use of this goal and evaluating the
reaction to various financial decisions by examining changes in the firm's stock value.

 In reality, different factors/aspects affect stock prices.

 To employ wealth maximization as the goal of your business firm, therefore, you need
not consider every stock price change to be the market interpretation of the worth of
your decision.

 Other factors such as economic expectations, also affect stock price movements.

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Apparently, what you do focus on is the effect that your decision should have on the stock price
if every thing else where held constant.

 The market price of the business firm’s stock reflects the value of the firm as seen by
its owners.

 The wealth maximization as the goal of a business firm takes into account uncertainty
or risk, time, and other factors that are important to the owners of the firm.

 Thus, again, the framework of maximization of shareholders' wealth allows for a

decision environment that includes the complexities and complications of the real
world.

Wealth means its value. Value of firm means its market price that is market price of
company’s common stock, common stock means its share, so where the objective of the firm is
to maximize its market price is called wealth maximization objective.

The market price of a share of a company serves as a performance index.

Performance index means it’s a report card of the firm, its progress, it indicates how hand where
profit maximization widens the gap between management and share holders, wealth
maximization works as a coordinator between management and share holders.

wealth maximization is preferred because it consider

(1) wealth for the long term,

(2) risk or uncertainty.

(3) The timing of return

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(4) the "shareholders' return.

1.7 Impact of accounting information system on wealth maximization

1.7.1Cost effectiveness
Accounting information system makes the maintenance of bloated financial department
irrelevant.

The software does most of the work of that would otherwise require several employees . the
accounting software can journal and prepare documents such as the trial balance . journal and
ledgers are recorded I the computer data base . there is also a software that perform the function
such as billing and preparing payroll .

1.7.2 Improved organizational communication

An important use of technology in business is for communication through different platforms
allow business to easily hold virtual meeting with staff and clients around the world with out
having spend time and money on travel.

At the same time employees can access and share information and collaborate on their work
regardless of location ; employees can even work remotely so that company can save on cost .

1.7.3 More efficient daily operation

Another role of accounting information system is to improve the efficiency of the operation so
that the company can complete the tasks quicker and cheaper.

Rather than having to get workers to count and monitor inventory, company can use inventory
management software that checks real time levels , provides helpful reports to managers and can
even triggers orders when the supply is low .

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Customer relationships and management software has automated common sales and marketing
tasks such as generating leads , sending promotion and tracking metrics .

Company can also takes advantage of fully featured enterprise resource planning software to
make to make it easier to do accounting tasks , manage human resource , monitor the supply
chain , generate invoices and make purchase .

1.7.4 Better customer experience

Accounting information systems also make it easier to provide a good customer experience
through improved customer services , easier customized marketing and ecommerce .

Rather than only being able to reach the company during business hours , customers can
conveniently interact with the company on its website and through social media ,email and
custom instant messaging services .

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