Key Elements of Accounting Information System Functions (With Examples)
Managing finances is one of the most challenging tasks involved in business operations. Every business regardless of its size needs an accurate flow of financial and accounting information across multiple channels. That’s why you need to have a systematic and automated process of gathering, storing, and processing these data to create reports for the stakeholders. This is when the accounting information system functions play a vital for any business nowadays.
That’s simply because it helps businesses by ensuring optimal accuracy in their financial reporting and transactional record-keeping. This information is readily available to the respective authority whenever they need it. Thus, an accounting information system facilitates the decision-making process of a company.
In this article, we’ll look deeper into the functions of an accounting information system. Before that let’s quickly scan through the definition of an accounting information system and what its key elements are.
What Is an Accounting Information System?
An accounting information system aka AIS refers to the tool businesses use to keep track of their finances, transactions, reports, and other accounting data. It enables the decision-makers to understand the overall health of a company and act accordingly.
A well-structured AIS collects, stores, and processes data to generate intelligible financial reports. Accountants, managers, financial officers, business analysts, tax agencies, and other relevant parties can track all accounting-related activities from the AIS. A competent AIS software provides accurate and timely data and limits the circulation of sensitive data by employing optimal security practices.
The Key Components of Accounting Information System
An accounting information system mainly consists of seven key elements. These components are discussed below in the following sections.
1. AIS People
People who use an AIS fall under this point. From C-suite executives like CFOs to accountants and managers, whoever uses this system is considered AIS people. For example, higher management can set sales targets for the staff. Relevant departments get notifications about it, and salespersons can input their sales orders to the AIS. This information is passed to the accounting department and they create invoices.
Then the warehouse employees process these orders and arrange for shipment. The customer support team tracks the shipment and remains informed about the order status. During this whole process, the AIS manages all procedures and creates sales reports comprising inventory, delivery, and production costs.
Consultants, business analysts, and audit departments can access these data to analyze the total cost, revenue, and profits. In this manner, an AIS includes a wide range of people in its operation.
2. Procedures and instructions
The AIS system needs to follow a set of rules when collecting and processing data. Otherwise, there will be discrepancies and inconsistencies. Precise methods are a must to ensure the proper flow of information. Both manual and automated methods are integral parts of these procedures and instructions.
You need to create proper documents explaining the processes your accounting information system follows. Train your employees to follow the procedures. Conduct repetitive training to habituate them to follow the instructions minutely. Only then your accounting information system will produce accurate results consistently.
3. Source Data
Usually, accounting information systems use SQL- structured query language to manage a database. Any information that affects the company’s money matters should be included in the AIS database. An AIS database generally consists of the following types of data.
- Sales orders
- Inventory data
- General ledger
- Purchase orders
- Transactional invoices
- Analytics and reports
- Tax information
- Payroll data
- Timekeeping and more.
Keep your AIS database clutter-free as much as possible. Avoid storing data that arent related to the company’s financial accounting. Too much information may overwhelm you when accessing the required data.
4. Hardware & Devices
You’ll need many input and output devices to run an account information system smoothly. All these devices and the IT infrastructure must be compatible with the AIS software you will be using. Otherwise, you won’t get a seamless experience while using the AIS for your business.
The infrastructure should include backups for power shortage and outage, hardware failure, internet connectivity, and any other devices that have an impact on the AIS. Here is a list of some of the input and output devices that facilitate the AIS processes.
- Bar code scanners
- Mobile devices
- Backup power supply
5. Information Processors (Software)
Once you have all the hardware and devices ready at your disposal, it’s time to integrate software into your system. This software processes all relevant data and posts them to ledgers, reports, and journals, and makes them available for use. Decision-makers can analyze the outputs and make decisions based on that information.
6. Information Storage
The information processor or software doesn’t have physical storage where it can store the data. It usually depends on a server or storage devices like hard drives. Make sure that you have secure storage devices that are easily accessible only to people who have the authority.
Almost all AIS-generated data are confidential information. You must have internal control over the circulation of these sensitive data. The security measurements can range from simple numeric passwords to complex biometric identification like fingerprints, voices, facial recognition, and retina scans.
A top-notch accounting information system can prevent data breaches and protect your data from unauthorized computers. Your AIS should permit individuals with proper authorization to access the database. Because it usually contains confidential information of both the company and its customers. Some of the sensitive data are as follows.
- Salary information
- Personal details
- Social security numbers
- Company’s financial data
- Customer information
- Credit card numbers
- Financial information of other stakeholders
You must have a contingency plan to save your data from natural disasters, unexpected power surges, computer viruses, and any other threats that may cause you to lose data.
Accounting Information System Functions
A competent AIS makes sure that all your company’s financial information is recorded within the system with the highest level of accuracy and confidentiality. It also enables the respective employees to access and retrieve these sensitive data when required. All the functions of an accounting information system have been broken down in the below section.
1. Collect and process information
In this phase, an accounting information system accumulates data from cash sales and cash purchases. Receivables, payables, payroll, invoices, and more. The computerized system processes all data of debits and credits and converts them into meaningful pieces of information.
2. Generate reports for Management
People from management such as sales managers, production managers, financial analysts, and other heads of departments can make decisions based on the reports generated by an AIS. They can analyze the company’s financial performance and current position. Thus, they can set attainable business goals aligned with the available resources.
3. Interconnect multiple departments
An AIS can create a common dashboard for multiple departments that are interrelated. For example, the sales department can upload their sales budget for the inventory team. Then they can take steps to stock products or purchase materials. Then the respective department will create invoices. This information will be available to any department that needs it.
4. Have control over the circulation of data
An accounting information system deals with sensitive information of the customers, vendors, suppliers, and the company itself. You can regulate the level of data circulation with it. An AIS helps business owners define who gets how much access to the company’s financial data. You’ll get complete internal control over the data available across the AIS.
5. Detect fraudulent activities
Since an AIS keeps track of all the financial transactions of a company, you can easily detect any unauthorized and unnatural flow of money. This allows businesses to investigate any discrepancy before it’s too late. You can save millions of dollars by investing in a quality accounting information system.
Advantages of Accounting Information System
We’ve summed up the advantages of using an accounting information system in this section to help you.
- Automated and streamlined work process
- Efficient collection and storage of financial information
- Intelligible data to be used in decision-making
- Internal control over all accounting information
- Better communication among interconnected teams
- Improved customer experience
- Prevention of loss of sensitive information
3 Practical Accounting Information System Examples
Now that you know the elements and functions of an accounting information system, let’s develop a deeper understanding by relating your learning to real-life situations. We compiled three practical examples here to help you get insights into the utility of an AIS.
- For distributors: Distributors usually depend a lot on credit terms when dealing with their customers. That’s why they need precise information about accounts receivable. Several employees from different departments can access the payable reports so they can follow up on due and overdue payments.
- For construction companies: A construction company runs multiple projects simultaneously. An accounting information system helps it keep track of the costs and progress of its projects. It produces reports about the material costs spent on each building, remaining man-hours for the laborers, and completion rate. Moreover, it also tracks credit lines and the due payment dates of loans.
- For non-profit organizations: Non-profit organizations handle their finances in a different way. They keep track of the donors who give them money. These organizations need to forward yearly statements of the fund to their donors with tax filings. These data are also presented to the board of directors, regular donors, and the government.
Pick a Reliable ERP Software to Make The Best Use of Accounting Information System Functions
Businesses are now using all-encompassing software to handle all their operations. Such a tool is called ERP- Enterprise Resource Planning solutions. An ERP software automates and streamlines all departments of a company. All aspects of a business are managed through ERP software.
From HR management to sales data generation or from customer relationships to accounting management, an ERP tool has everything to run a company smoothly at the same time. An accounting information system is just a small fraction of a full-fledged ERP system. So, if you get a reliable ERP solution for your business that has an advanced accounting module that aligns with your business’s needs to fulfill all its primary goals.
In this regard, WP ERP can be an ideal pick for WordPress users. It is a great plugin that enables you to integrate a complete accounting information system within your ERP software. It comes with integrated but separate HR, CR & Accounting management modules to satisfy your growing business’ needs.
Moreover, it comes with 20+ essential extensions that make your business management process smoother than you can ever imagine. And that’s now all, on top of all that it also enables you to integrate with a powerful project management tool that helps keep track of all your project’s progress so that you can get your task done in an organized & orderly manner.
This post is written by Md. Tanvir Faisal, who is a Content Writer with 4+ years of experience in Content Writing, Copywriting, Proofreading, and Editing. He focuses on writing informative content that draws social media attention and enhances search engine visibility. To date, he has successfully developed useful content for many websites across all formats.