Accounting Information System (AIS): Definition, Function & Types

An efficient accounting information system is essential for better control over your business finances. Why do we say that? Inefficient recording and processing of your business’s financial transactions can make your outflow surpass your inflow, which leads to depleting capital and rising debt.

Do you know companies lose over 20-30% of revenue annually due to mismanagement? Yes, that’s another reason why financial data management should be a priority.

So, ensure that your business’s financial health is at its best. For that, you must have an accounting information system in place. It helps your business analysts track and record all your transactions and audit reports annually without fail. Doing so will alert you of any discrepancy and allow you to solve it immediately.

We have curated this guide for you to understand the Accounting Information System in detail, including its benefits, functions, types of accounting information systems, and how you can leverage it.

What is Accounting Information System (AIS)?

Accounting Information System is a method businesses use to assemble, store, and process financial data so that the internal management and stakeholders can use it to their benefit.

This computer-based accounting system strives to furnish accurate financial and accounting information for the company’s internal users to make a report. Based on this report, the stakeholders–creditors or investors, and the company’s management–top managers, Chief Financial Officers (CFOs), or auditors, make business decisions.

For outsiders, the decisions are regarding potential investment, whereas for insiders, it’s about improvising the company’s future operations.

For instance, you are expanding your online grocery delivery store. For that, you require details regarding the company’s financial transactions, annual profit earned over the past years, estimated profits for the next financial year, and so on. But the problem is that you’ve been recording transactions manually, making it supremely challenging to collect information and predict future profit based on the same. Also, your business’s internal controls are not streamlined, which might lead to losses in the future.

Here’s when an AIS comes in. With this system, your business’s financial information is just a click away, and that too in an organized manner. Predicting future profit and revenue trends are also a part of the deal. You see how using an AIS streamlines the company’s financial data and allows you to access it without wasting time searching for it.

6 Benefits of Accounting Information System

60% of businesses are unsatisfied with their Accounting and Finance processes. Does this sound relatable? If yes, shifting to an accounting information system will be profitable. It can streamline all your financial statements in one place for better control, accurate reports, and higher satisfaction.

Here are 6 benefits of  Accounting Information System:

1. Data security

   If you’ve been relying on manual accounting processes, you must reconsider. We say this because manual processing puts your sensitive data at varying risks. Shifting to an Accounting Information System can keep the company’s internal controls intact, wherein only authorized personnel can access financial data.

   This system has levels of security that disseminate data based on your permissions, protecting your company’s internal controls.

   For instance, the inventory management team can access only the sales data, not the payroll data or income statements, as it’s irrelevant to them. Accounting Information Systems, thus, keep your sensitive data in the right and safest hands.

2. Enhanced internal communication

   With AIS, all departments can access centralized accounting. They can perform their respective tasks based on their individual budgets. This enables relevant departments to have a real-time update on the tasks and reduces the communication gap (which occurs in the absence of an integrated AIS).

   For instance, the sales department prepares and lists the budget for the inventory management team to follow. The inventory team can take note of the budget, order the stock accordingly and update it on the database, making it easier for the accounts department to clear the accounts payables. So, you see how AIS manages your company’s financial data easily.

3. Cost minimization

   Adopting integrated AIS to keep a record of all your business finances in one place reduces the need for separate employees managing accounts for different departments. This drastically reduces your resource costs.

   For instance, if you employ different accountants to record different business data–sales and inventory management data, create sales reports, and more—you have to pay them salaries, increasing your costs. An integrated AIS centralizes your accounting and reduces your personnel needs, lowering your costs significantly.

4. Time conservation

   As a business owner, hundreds of tasks are waiting to be ticked off your to-do list—customer relationship management, for instance. To remove that extra accounting burden off your shoulder, you can rely on modern AIS to record, sort, and organize financial information. It automates your repetitive tasks, allowing you to focus on strategic tasks better.

   Imagine how many hours an accountant would take to prepare different ledgers, P&L accounts, cash flow statements, etc. It wouldn’t take a fraction of that time for AIS to perform the accounting and business activity. How? Because AIS eliminates the need to select the basic additions–Tax codes and Xero categories for every transaction entry.

   It auto-fills the same for you, which saves time. The accounting systems also automatically make changes in the accounting sheets if there are changes in the transactions, saving tremendous time and effort.

5. Increased accessibility

   You cannot take your physical books of accounts everywhere you go, or it might just slip from your mind to carry it along. An integrated AIS eases this hassle. You can quickly walk through your business’s finances even on a flight, as you can access these accounting systems via the internet on your phone or laptop.

   Suppose you meet with the investors and forget to bring the physical books of accounts. In that case, you cannot go ahead with the meeting due to your reliance on the conventional method of accounting. But with an integrated Accounting Information System, you can instantly access your data anywhere and save time and effort.

6. Higher data accuracy

   A modern integrated AIS runs on predefined instructions and involves minimum human intervention, leaving no room for errors in the financial reports. Why do we say that? This accounting information system software alerts you if a difference in new entries and related past data is found. You can simply change the same system before moving ahead, leading to accurate reports and more informed business decisions.

   For instance, an accountant who caters to your business’s bookkeeping needs manually misinterprets your inventory costs as $2483 instead of $2843. They may use the wrong figure in the financial statements, leading to inaccurate results. An AIS solves this and ensures the utmost data accuracy; you can modify it in seconds if needed.

What Are the Functions of an Accounting Information System (AIS)?

An Accounting Information System essentially extracts the business’s accounting data from the company’s records and organizes it on the database. Here are four crucial functions of an Accounting Information System in detail.

1. Data collection and organization

   The principal functions of an Accounting Information System include gathering and storing data about sales and purchases through receivables, payables, accounting bills, etc. Once the system has all the transactional details, it processes the same and organizes it in journals and ledgers. This gives you complete information about the debits and credits in your organization.

2. Curating reports

   Uses of accounting information software are not limited to storing all the financial data in a structured manner. It also extracts reports based on that data. These AIS-generated reports are essential for the management team–sales managers, business analysts, and other department heads to analyze the organization’s financial health.

   Not just that, these reports enable them to make business decisions that align with available resources and the company’s predetermined goals.

3. Keeping data accuracy and security intact

   To ensure data safety, your accounting department must strategically limit data access. You can do it using Accounting Information Systems to save yourself from adding to the trillion-dollar industry of fraud and financial crime.

   For instance, you can choose associates like top managers, chief financial officers, and auditors who can view your financial reports and restrict accountants or bookkeepers from doing the same. This ensures no unnecessary modification while maintaining data accuracy and security.

4. Cross-departmental data sharing

   One of the major functions of an accounting information system is to interconnect different company divisions for a smooth flow of relevant information. You can simply create a dashboard on the AIS consisting of all the useful information for related departments to access and further their processes. For example, the marketing team can enter the invoices for different marketing verticals like content, graphic designing, etc., and the accounting department can access and clear them at once. 

Types of Accounting Information Systems 

Multiple types of Accounting Information Systems are floating in the market, but businesses often choose the one that suits their business type, size, and needs. Here are three major kinds of AIS:

1. Manual systems

   A manual system is one where all the accounting processes are done with human effort and have no technological integration. Small businesses with simple operations that accountants can effectively manage still rely on this system.

   However, with the introduction of modern accounting information system software, the use of manual systems has significantly dropped. Why? Because 56% of executives say they owe their high-profit margins to digital improvements. So, you see how adapting to the new is highly significant in a business’s growth. 

   To work with this system, you must have documents–general ledger and journals, special journals, etc. to record the data systematically. 

   Manual systems are comparatively cheaper than integrated Accounting Information Systems (AIS) software and don’t disrupt work in power or internet outages. But they are highly susceptible to errors and require extensive manual work, increasing time and cost expenditure.

2. Legacy systems

   A legacy system is a type of AIS that stores the company’s historical data using information technology, which can be accessed when needed. This system was adapted by businesses as an upgraded version of the manual system when information technology was not as developed.

   Legacy systems use software, hardware, and a computer language to operate smoothly, which is hard to find today. Although this system’s performance has deteriorated due to a lack of maintenance, businesses still use it as one of the security measures to keep their historical data safe.

   Legacy systems used to lend flexibility in customizing the system according to your business-specific needs. But now its disadvantages far outweigh its advantages. For example, today, you cannot update a legacy system according to your company’s accounting procedures and instructions.

3. Modern systems

   A modern integrated AIS stores and processes your business’s entire financial data in one place. It is considered far better than a legacy system for the data accuracy and security it brings to medium to large publicly traded companies. This system needs no additional key components(add-ons), is easy to adapt for the user, and can run smoothly on your computer system.

   Modern accounting information systems truly save your time while accelerating your business processes and growth. The market will be flooded with efficient accounting software in 2023. Here’s one of the best real-world examples:

   Using a top modern Accounting Information Systems (AIS) software like FreshBooks saves 553 hours and up to $7000 billable hours annually. With modern solutions like these, you can free up time to do what you are skilled at instead of struggling with something that can easily be automated.

   Also, businesses using the modern system do not need to maintain separate records for different accounting purposes. Customizing the software according to your business’s accounting procedures and instructions is an added advantage.

How Is an Accounting Information System (AIS) Used?

Accounting Information Systems are centralized databases businesses use to gather, store, and process their accounting information–revenue, purchases, tax, etc. Authorized personnel enters this financial and accounting data for further processing. The system prepares financial reports based on the processed information to gauge the company’s overall performance.

AIS stores important data like revenue, purchases, employee, customer, and tax. The best part of a modern integrated AIS is that it is created using computer programs (structured query language) that allow data modification.

Here’s a brief breakdown of 2 major types of Accounting Information Systems:

1. Manual AIS

   A manual AIS is a kind of bookkeeping that small businesses usually use to record finances. This type of AIS needs no information technology infrastructure (software or computer) to record transactions. Rather all the accounting information is compiled by passing the data entry and preparing separate physical records for different accounts using paper and pen. This system eliminates the need to acquire software, arrange for computers or train employees, leading to a significant cost drop. But it takes away a chunk of your time and effort in doing accounting manually. Also, the chances of error rise, leading to 10x more cost and effort.

2. Modern integrated AIS

   A modern integrated AIS software allows you to manage all your accounting needs efficiently. This software works effortlessly after procedures and instructions or transactions and mapping rules are fed into the system.

   For your convenience, you can link your business’s bank account for the software to pick up and process all the transactions automatically. It then syncs and updates the information automatically in the ledger and journal accounting sheets. You can even pre-define the tax codes for accurate accounts and reports.

   So, you see how software can streamline your accounting database structure and provide you with analytical charts and reports to gauge the company’s overall financial operations. Feel free to explore the various open-source accounting software available today.

Conclusion 

As we’ve reached the end of this informative guide, we are certain that you understand accounting information systems better. Now you know why investing and using an AIS should be a part of your organization’s business practices. It’s truly a win for you. It does not just streamline your accounting processes by storing and processing data but also generates reports and helps you abide by laws that tax agencies require you to follow. Most importantly, AIS gives you better control over your business.

Naina Khare

Naina Khare is a full-time freelance writer who fiercely believes in the power of storytelling and primarily holds expertise in creating content for B2B SaaS brands. She’s infinitely curious and happiest when reading, writing, or exploring spirituality and self-growth.