Q1.

Define Accounting Information System

Accounting information system (AIS) is an arrangement that an organization or an entity adopts to

collect, manage, process, retrieve, and report its financial data so that it can be used by accountants,
consultants, business analysts, managers, auditors, regulators, tax agencies, and other financial
officers.

Q2. What is Accounting Information System (AIS)?

It is a structured system where all the information of an organization (business entity or non-profit
organization) is collected, stored, and managed in the form of data which is thereafter processed to
prepare financial records of importance.

Q3. Users of Accounting Information and their needs.

There are two main users of accounting information. These include internal and external users. Let us
discuss each of them in detail.

1. Internal Users

They are involved in the day-to-day operations of the business as well as long-term strategic
planning. These professionals help in making decisions related to purchasing inventory, managing
supply, and deciding prices. These are the primary users of accounting that are further
subcategorized into three types.

1.1 Owners

These accounting information users use this information to assess how their business is going and
what is the level of risk involved in it. They use accounting information to determine the level of
stability in the business over years and the impact of economic factors on business.

Financial statements help them in understanding the profitability of the overall business and
products. By wisely using this information, they can decide whether they should invest in a business
or if they should use resources in other areas.

1.2 Employees

They use financial information to prepare and review financial reports such as the financial
statements. They also need to review the accounting information in the annual report to gain a
better understanding of the business. Using accounting information, they can also assess how their
company is performing.

1.3 Managers

Managers plan, monitor and make decisions that are relevant for the business. They allocate
resources to appropriate business activity to provide for the needs of business. These users of
accounting information monitor the performance of business by comparing against past
informations, KPI, industry benchmark and competitor analysis. These professionals use information
of accounting to make decisions related to financing, investing and pricing.
2. External users

They have varying interests for which they are categorised as users of accounting information. There
are different external accounting information users. Let us discuss these users.

2.1 Tax authorities

These bodies use business information to determine whether the amount of tax declared by the
business in its tax returns is correct. They also use this information to determine the tax liabilities of
an enterprise. To verify the information filed on tax returns, these authorities audit returns,
accounting records of customers and suppliers to prevent tax evasion.

2.2 Government

The apex governing body is one of the main users of accounting information. The use of this
information is based on the regulations that are meant to protect the interest of stakeholders who
use this information to make decisions. They can use this information to monitor the economy.

Using this information also helps them in monitoring and setting accounting thresholds to determine
the business size. This helps the government ensure whether the business is complying with relevant
regulations or not.

2.3 Creditors

Also known as lenders, these people use accounting information to decide whether they should offer
credit to the company. They also decide if there is any need to restrict credit flow to the company
based on the assessment of accounting information. Through this information, they can assess
whether the company is capable of repaying them.

If the company has been able to pay off its liabilities on time, then it indicates the good financial
health of the company, its securable assets and high profitability. In case, the company lacks assets,
has poor liquidity and is unable to pay liabilities on time; it indicates that the company’s financial
health is not good enough.

2.4 Suppliers

These people use accounting information to determine the credit-worthiness of the customers.
Based on this assessment, they decide whether they should offer goods and services on credit to its
customers. These users of accounting information indirectly assess the financial health of the
business based on its customers.

2.5 Auditors

These finance professionals audit the financial statements and accounting records. Their assessment
of the accounting information is used by third parties and investors who need to know the actual
financial status of the company. Since auditors provide an unbiased opinion through their reports,
their reports are mostly accurate.
Q4. Functions of the Accounting Information System

The three basic functions of an accounting information system are to collect and process data, to
report for the management, and to maintain accuracy and security.

They are detailed below.

1. Collection and Processing: The collection phase in an accounting information system is that
the accountants or bookkeepers collect and record the data from cash purchases, cash sales,
amount receivables, and payables and process them among other transactions. If it a
computerized system, the software program processes all the debits and credits into a
complete information management database.
2. Reports for Management: After collection of data, the Accounts personnel gives reports to
the higher officials responsible for making decisions, such as sales and marketing managers,
production managers, financial managers and all department heads in an organization. The
information thus generated from the accounting information system supports the
management to analyze the current operations and economic condition and make decisions,
plan, and set goals for the future.
3. Accuracy and Security: The third main function of the accounting information system is to
make sure that the company maintains accurate data securely. The management decides
that such data access is limited to authorized persons only.

Q5. Explain the Role of Accounting Information System in an Organization

1. Detailedents Analysis: In this, all end-users of the accounting information system are
examined by questions, to make sure that the system is fully understood, including the
complete documentation collected.

2. System Design: After the detailed analysis, a new system is formed. The system is so
designed that it incorporates relevant internal controls to provide the management with the
necessary information to make important decisions for the organizations.

3. Documentation: While the system is being made, it is ensured that data is well documented.
The detailed documentation provides the users with accurate instructions regarding the new
system. Documentation plays an important role and is used for testing and training before
rolling out the system.

4. Testing: The processes are tested before launching the system. The documentation collected
ensures the processes are well documented and procedures are followed. This phase is
considered a “trial and error” stage. At this stage, some system modifications can be done.
Ensure that all processes are tested.

5. Training: All the staff is provided training to implement the changes as per the AIS software.
Also, at this stage staff can give better input to improve the system. Since they are only going
to use it.

6. Data Conversion: In this stage, the existing data is transferred to the new system. Before
converting the data, it should be well tested and verified. And also, it is always advisable to
have a data backup at the time when it is needed to restart.
 7. Rolling Out the New System: The entire company must know the date of the launch of the
new system. And this will be the ideal time for the organizations to switch over from one
platform to the other.

8. Tools: The company should ensure that all possible online resources are made available to
the staff involved in using the new Account information system. The company should define
the responsibilities of each and every employee involved in this system. Requirem

9. Support: It should be ensured that the management and its end-users have on-going support
available at all times. Since the upper management depends on the AIS to meet the success
goals of the organization, system upgrades should be kept monitored at all costs.

Q6. What are the qualitative characteristics or features of accounting information.

The main qualitative features of accounting are as follows:

1. Relevance – The accounting information presented through financial statements and reports
must give a clear picture of both past events and future projections. It will help the
stakeholders make informed decisions. For example, A shipping company has managed to
earn decent profits over the past few quarters, and the future projections are also looking
good. If a company presents this accounting information to their creditors, they are more
likely to continue extending their line of credit to the company in the near future. And if a
company presents this information to shareholders, they might be tempted to invest more in
the company.

2. Reliability – The accounting information presented to different stakeholders in an

organisation must be factual, accurate and free from bias or errors. Representational
faithfulness of financial reports is crucial to gain the trust of stakeholders. It should not
exclude any transaction to hide the accurate picture of a company’s financial health. It
should not be biased towards the management or present an unrealistic picture of the
company. It should also be free from any mistakes due to omission, commission or both, to
not damage the credibility of the information coming from these reports.

3. Verifiability – One of the most important qualitative characteristics of accounting

information is that it must be verifiable. For example, suppose an accountant says that the
depreciation on an asset must be worth a certain amount based on certain calculations. In
that case, they must do those calculations based on sound accounting measurement used
without any bias or error. Any auditor who monitors an organisation’s accounts will also look
into this aspect while checking the books of accounts.

4. Timeliness – Timeliness is an essential qualitative characteristic. It talks about how swiftly

the accounting information is made available to users. Stakeholders need the latest financial
reports and statements to make informed decisions on several issues. For example, the
creditors and investors are waiting for a company’s financial reports this year to decide
whether to put more money into the firm’s operations. But the report gets delayed by six
months due to unforeseen circumstances. It would then be difficult for them to decide since
the information provided by the firm is not up to date.

5. Understandability – Understandability is the ease with which the stakeholders can grasp the
information in financial reports and statements. Organisations must disseminate information
 about the company in a way that others can understand without much effort. If the company
makes complex reports that are extremely difficult to understand, it would also affect the
decision-making of parties involved in the running of a business. Companies often use
excessive jargon and complex sentences or publish extremely lengthy reports to hide their
poor performance. It also hinders the decision-making process for parties like investors,
creditors, suppliers, etc.

6. Comparability – Comparability refers to the extent to which companies consistently apply

accounting policies and standards across multiple financial periods. Suppose the financial
statements of different years of a company are comparable to one another. In that case, it
helps the stakeholders see the trends and performance of the business over time.
Comparability of financial statements with other companies is also essential because it
allows the stakeholders to understand the overall industry trends and outlook in a better
way.