The Core Functions of Accounting Information Systems

the core functions of accounting information systems

Before the digital age, small businesses, the American accounting association, and others had no choice but to use manual accounting methods to collect, store, and manage financial data.

Entire rooms were designed to hold thousands of tax documents, transactional data, or employee files. The human resource and accounting teams had to verify timesheets, track hours manually, and spend time calculating overtime. Because all of these methods were ripe for human error, it was essential for staff members to be meticulous and detailed.

As time progressed, it became more important for employers to ensure accuracy when handling financial data. Laws to protect employees have increased and become more complicated, the tax code is more intricate, and it's much easier to make a mistake.

Because there is now technology available to automate manual processes and minimize paperwork, more organizations are using information systems to handle all of their financial data and ensure compliance with regulators.

Read ahead for a comprehensive overview of the components of an accounting information system and how the data used by an organization increases accuracy and efficiency in the workplace.

  • In 1978, the first spreadsheet software system was developed to enable financial modeling on a computer
  • In early 2000, the financial world experienced the birth of Financial Data Capture technology which automated the accounts payable process
  • Today, the vast majority of all accounting tasks are entirely automated by both small and large businesses

The Major Functions of AIS

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A computer basedaccounting information system is used to gather, store, organize and report financial data. Professional accountants use an AIS to make certain each financial statement is secure and audit trails are accurate and reliable. It is also employed to handle the cash flow of an organization throughout the entire supply chain process.

It also provides a user-friendly and intuitive way for everyone who needs financial data and financial reports to access it. Organizations need to make certain to safeguard the internal and external controls of an accounting information system due to the sensitive and confidential data held within it.

To effectively track all business and financial-related activities, all six components of an AIS must work together and function properly. These components include-

1. People

All of the individuals who use information in an AIS are included in the people component. Because AIS handles and stores all of the accounting-related data, many different departments can work together to accomplish financial goals or projects.

Accountants, business consultants, analysts, accounts receivable, enterprise leaders, auditing teams, CFO's, and other departments may use the AIS to complete one or more tasks.

For example, a sales team member may enter an order into the system, triggering the accounting department to send an invoice to that particular client. The warehouse will be notified to begin producing the product, and the shipper sends the item to the client.

In summary, an information system AIS allows an organization to streamline activities by housing relevant data that everyone can access to complete a task.

2. Procedures

Procedures include the methods utilized to gather, store, and process financial data and financial statements so everyone can access it. Data sources vary depending on the particular business needs or type of industry. It is important to collect accurate and relevant data so stakeholders can extract actionable and accurate insights from the information.

A specialist will code instructions into the AIS software so it knows how to function properly. Employees should also be well-trained in how to use the AIS to derive the most benefit from it. If an AIS is programmed effectively and employees are versed in how to utilize it, the organization will be able to increase productivity and ensure an accurate outcome.

3. Data

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There must be a well-coded database structure so the AIS can properly handle the main content inside the system. Most analysts use SQL language coding so the data within the system can be easily retrieved and made into reports.

Various input screens are necessary to ensure every user can input data and view it, along with specific outputs that address user and information needs. AIS accounting information should include any financial information handled by different people every day in an organization. This may include sales orders, a balance sheet, vendor invoices, inventory information, payroll data, or tax data.

All of this data in an AIS accounting information network is utilized to generate accounting statements, profit and loss statements, and more. If data is relevant and accurate, employees can collaborate to complete tasks.

4. Software

The accounting system software component includes the computer programs utilized to gather, handle, process, and assess all organization-related financial information. Though small and large businesses may have different AIS systems, it's essential for all of them to be high-quality, reliable, and secure.

An organization can improve decision-making, pinpoint inefficiencies, and ensure accuracy in payroll and tax documents if it invests in a highly functional and reliable software for their AIS system.

5. IT Infrastructure

This component encompasses all of the hardware utilized to ensure an AIS operates effectively. It may include computers, routers, servers, printers, and more. Though many organizations focus on finding the most cost-effective hardware solution, they should remember that speed and storage capacity are the most critical factors.

An efficient and quick AIS with a high storage capacity allows a growing company to ensure it can handle new quantities of external and internal data without losing its ability to be user-friendly and intuitive. There should also be a strategy to maintain, service, and upgrade the hardware in case a system breaks down.

6. Internal Controls

The internal controls include all of the information security measures utilized to ensure data is kept safe and secure. IT may create specific passwords or generate biometric identification requirements to make certain that the person handling the information is who he/she claims to be.

There must also be internal controls put in place to ensure that only authorized individuals can access sensitive data, such as social security numbers, salary data, or the financial information of a vendor.

It's also essential to make sure that the hardware is protected from a potential natural disaster, such as a hurricane or fire. If information or hardware is damaged, hacked, or stolen, it can result in a ruined reputation, bankruptcy, or litigation.

  • Separation of duties (no person can hold sole control over a lifetime of a transaction)
  • Pre-approval of actions and transactions
  • Access controls, such as passwords
  • Physical controls (locks and safes)

Key Takeaways

In conclusion, here are the key takeaways to remember about accounting information systems-

  • An accounting information system is used by an organization to collect, store, and report sensitive financial-related data. Businesses use an AIS accounting information system to optimize efficiency and ensure workers can collaborate to complete essential tasks. It also helps to ensure information is accurate, reliable, and up-to-date.
  • There are six components of accounting systems that work together to ensure the network is functional.
  • The people component are all of the users who handle the data, the procedures are the methods used to collect and store the information, the data component includes both internal and external financial sources, the software component encompasses all of the computer programs used to make the system functional, IT infrastructure is all of the hardware of accounting software, and internal controls encompass all of the security measures to protect the information.

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