Introduction to Accounting Information System

Accountants, consultants, business analysts, administrators, chief financial

officers (CFOs), auditors, regulators, and tax authorities can use an accounting
information system (AIS) to compile, store, handle, process, retrieve, and
disclose financial data.
Specially qualified accountants work effectively with AIS to ensure the highest
degree of consistency in a company's financial transactions and record-keeping,
as well as to make financial data readily accessible to those who need it—all
while maintaining data integrity and security.
 Essential takeaways
 Companies collect, store, monitor, process, retrieve, and report financial
data using an accounting information system (AIS).
 Accountants, consultants, market analysts, administrators, chief financial
officers, auditors, and regulators will all benefit from AIS.
 An AIS enables a company's various divisions to collaborate.
 An efficient AIS stores and retrieves data using hardware and software.
 An AIS's internal and external safeguards are important for safeguarding
a company's confidential data.

An accounting information system is a way for an organisation to keep track of

all accounting and business operation. People, procedures and orders, records,
applications, information technology infrastructure, and internal controls are the
six primary components of accounting information systems. 

Components of AIS
People
This includes anyone who uses the information system. It could include
accountants, managers, CFOs and other C-suite executives, financial analysts
and auditors. AIS helps different departments work together effectively.

For example, to streamline operations, management can set sales goals, which
can then inform staff about the amount of inventory that will be needed to meet
those goals. When the inventory order is placed, the accounting department is
notified about a new payable. Salespeople can enter their customer orders when
sales are made, and alert accounting to send invoices, tell warehouse employees
to package the order and the shipping department to mail it. The accounting
department, in turn, would be notified about a new receivable and the customer
service team can track the shipment. The AIS can create sales reports from
management, showing them the total sales as well as inventory, shipping and
manufacturing costs.

Procedures and instructions

This aspect of the AIS refers to how financial information is collected, stored,
processed and distributed. It also has to do with the direction and instruction
people who use it are given through employee training. These methods are both
manual and automated and can come from internal sources like employees or
external sources like online orders placed by customers. Procedures and
instructions should be coded into the software as well as implemented with
employees through training and documentation.

AIS data
The AIS must have a database structure like structured query language (SQL) to
store information. The accounting information system will store any
information relevant to the organization's business practices that could impact
its finances. While the data may vary depending on the nature of the business, it
may include:
 Inventory data
 Tax information
 Check registers
 General ledger
 Customer billing statements
 Sales orders
 Purchase requisitions
 Vendor invoices
 Payroll information
 Timekeeping information

The data can be used to prepare reports and accounting statements and having it
located in one central location facilitates record-keeping, reporting and
decision-making activities. Data that doesn't go into the AIS includes things like
manuals, memos and correspondence. While these things can be related to a
company's finances, they aren't considered part of financial record-keeping.
AIS software
The AIS has a software component that's essential to store, retrieve, process and
analyze financial data for the company. Though AIS used to be a manual-based
system, companies today use software like QuickBooks, tally, Sage 50
Accounting, Microsoft's Dynamics GP or Oracle's PeopleSoft, among others.
These types of software programs can be customized to meet the needs of each
business, although, for publicly-traded companies, the structure of the AIS is to
some extent dictated by Sarbanes-Oxley regulations.

IT infrastructure
This refers to the hardware that's used to operate the AIS. It includes things like
computers, servers, routers and other things that most businesses already have.
Most importantly, it must be compatible with the software selected for the AIS.
It should be able to run efficiently and be optimized for the software that you're
using. The infrastructure should also include contingency plans for things like
power outages, hardware failure and anything else that could impact the ability
of the system to run as designed.

Internal controls
Internal controls refer to the security measures you take to protect your system
and the data you store within it. Internal controls include everything from
passwords to biometric verification methods to encryption methods. It needs to
be able to filter out sensitive data for employees who don't have verified access
while still making all of the information readily available for employees with
full access. Internal controls are an essential component of the AIS, as it usually
contains sensitive employee and customer information like credit cards and
social security numbers as well as the company's financial data.
The Steps in an Accounting Information System

The three steps of an accounting information system are input, processing, and

output. Data is the raw ingredient used in these processes. Some of the data may
be obtained from a source document, and other data is obtained from the
database where it had previously been stored. When the data has been
processed, the final result is usually information. Information is more useful
than data. Take, for example, another process that a bakery might use to bake
chocolate chip cookies. While computers might not necessarily need to be
involved, we begin the process by assembling a bunch of raw ingredients such
as eggs, sugar, flour, chocolate chips, and oil, in a large bowl. Taking a spoonful
of what is in the bowl at the time is not very pleasing to the taste buds or
“useful” to someone craving a chocolate chip cookie. We process the raw
ingredients by mixing them well and turning them into dough, cutting them into
shapes, baking them, and glazing them. Similarly, raw data about a single sale
contained on the sales invoice, such as customer name, date of sale, and amount
of sale, is individually not very useful to a financial statement user such as an
investor. However, by processing the data related to the sale, making sure it is
correct by checking that the number of items ordered were in stock and actually
shipped, aggregating it with other sales for the period, and producing an income
statement containing the sales for the period is substantially more useful than
the individual pieces of data relating to a single sale.
Importance of AIS
Three main responsibilities of Accounting Information System are :
1. Receiving and keeping data, for later access:
To collect and store data about the organization’s business activities and
capture data about the transaction on source documents with effectivity
and efficiently. Later, recording of transactional data in journals to
ledgers under various accounts is required which can present a
chronological order of transactional events.
2. Converting data into information for decision making:
Providing management with information which will be useful for
decision making like planning, implementation and monitoring all the
accounting data for the betterment or the future aspects of an organisation
in terms of financial stability. In the manual systems, this information is
provided in the form of reports that fall into two main categories:
o Financial Statements
o Managerial Reports

3. Establishing the appropriate internal controls:

It is to ensure that the information produced by the accounting system is
reliable or not, if not then corrections required for the smooth accounting
system to prevent accounting errors like errors of commission, errors of
omission, so that the business activities are performed efficiently and in
accordance with management’s objectives and safeguard and proper
utilization of all the organizational assets.
4. Interdepartmental Interfacing
An accounting information system strives to interface across multiple
departments. Within the system, the sales department can upload the sales
budget. This information is used by the inventory management team to
conduct inventory counts and purchase materials. Upon the purchase of
inventory, the system can notify the accounts payable department of the
new invoice. An AIS can also share information about a new order so that
the manufacturing, shipping, and customer service departments are aware
of the sale.
How AIS works in an organization
The procedure of AIS is 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).
Procedures and instructions will be coded into the AIS software.

Real World Example of Accounting

Information Systems
The most important use of AIS is that, when a business is in trouble, the data in
its AIS can be used to uncover the story of what went wrong. The case
of WorldCom.
WorldCom
In 2002, WorldCom's internal auditors used the company's AIS to uncover
nearly $4 billion in fraudulent expense allocations and other accounting entries.

Lehman Brothers
When investigating the causes of Lehman's collapse, a review of its AIS and
other data systems was a key component, along with document collection and
review, plus witness interviews. The search for the causes of the company's
failure "required an extensive investigation and review of Lehman's operating,
trading, valuation, financial, accounting, and other data systems," according to
the 2,200-page, nine-volume examiner's report.

Lehman's systems provide an example of how an AIS should not be structured.

Examiner Anton R. Valukas' report states, "At the time of its bankruptcy filing,
Lehman maintained a patchwork of over 2,600 software systems and
applications... Many of Lehman's systems were arcane, outdated or non-
standard."

The examiner decided to focus his efforts on the 96 systems that appeared most
relevant. This examination required training, study, and trial and error just to
learn how to use the systems.

Valukas' report also noted, "Lehman's systems were highly interdependent, but
their relationships were difficult to decipher and not well-documented. It took
extraordinary effort to untangle these systems to obtain the necessary
information."