Maybe you just landed a big account and need to stay on top of your finances to exceed expectations. Maybe you’ve got a new project on the way and want a better way to keep your money organized through the changes. Or maybe, you’ve just started a brand new business, and you need the most basic way to track your revenue and expenditures. In any of these situations, your business needs a well-matched and high-quality accounting information system.
This article (and the experts at Paro) should help you understand the basics of accounting information systems (AIS) and get you on track to pick out, or switch to, the perfect AIS.
What are accounting information systems?
At their core, accounting information systems collect, store, and process accounting or financial data. By utilizing the right AIS, routine or low skill work falls away, and data is translated into information that can help make decisions sooner than if done manually.
The flow of financial data through an accounting information system is simple. Data is entered by different departments, stored in a database contained in the AIS, then processed into reports and other representations when requested.
Accounting information systems are made up of six basic parts: people; procedures or instructions; the data; software; IT infrastructure; and internal controls. Each of these parts contributes to the efficient and effective use of an AIS.
The people — users of the system — input data and access it. This includes people inside the organization, like staff and managers, and those outside, like customers and external analyzers. When the system is working well, everyone who’s authorized can access the same information, which makes it easy to pass data to whoever needs it.
An AIS’s procedure is the instructions that outline how data is collected, stored, and processed. This should come built into the software and should be second nature to well-trained employees. The data the system collects covers a wide range (like payroll, expenses, revenue, and the general ledger) but, essentially, if it’s relevant to a business’s finances it should be entered into the system.
Software is the program that processes the data. In small businesses, this may be a manual spreadsheet program, but it can scale up to out-of-the-box programs or a more customized solution. The IT infrastructure is made up of things your business likely already has, like computers and modems. If it allows the software to work and people to interact with it, it’s a part of this category.
Finally, the internal controls of an accounting information system are how data stored in the system is kept safe. This covers a lot of ground but can be as simple as passwords or as complicated as fingerprint scanning. Whatever you use to keep your business information safe and accurate is a method of controlling that information, and is essential to a healthy AIS.
What does an AIS do?
An efficient AIS connects all departments to the same source of data. Inventory staff can enter purchases and returns into the system, which can be viewed by sales. Accounting staff can check the numbers. And all the information can be analyzed to set goals, intuit the health of your business, and make changes. If your business runs into trouble, outside consultants or auditors can see how the money moved through your business to figure out what went wrong.
That movement is broken down into three subsystems. The Transaction Processing System keeps track of day-to-day actions like sales and purchases. The General Ledger and Financial Reporting System report in the short term. Lastly, the Management Reporting System represents data in the long term to allow for broad decisions, like setting budgets.
Those long-term reports can also be useful for compliance. As of 2002, all businesses are required to include their assessment of their internal controls in their annual reports. Some accounting information systems can be used to create reports that do just that.
Examples of accounting information systems include Intuit’s Quickbooks, SAP’s Business One, or Oracle’s Peoplesoft. Each of these represent a different type of AIS, but each one can be useful for a specific kind of business, so it’s important to know what the types of AIS are and what their strengths are.
The AIS range
The types of accounting information systems are most commonly broken down by the age of the system and by design. Manual systems, like Excel, are usually found in very new businesses. Legacy systems are found in older business as leftovers from when AISs were first introduced. Integrated systems are the most modern, the easiest to implement, and more user-friendly.
Divided by design, AISs can be manual, out-of-the-box, an enterprise resource planning software (ERP), or custom. Manual systems are generally very low cost and can work fine for small businesses. However, spreadsheets tend to be inaccurate thanks to human errors like entering data in the wrong place.
Out-of-the-box software like Quickbooks is a little more expensive and can lack flexibility, but it can be upgraded in small steps to remain scaleable through many stages of growth. It also tends to offer more error checking and create more standardized reports.
ERP software is a better fit for larger organizations, like those with sales exceeding $500 million and more than 500 employees. However, these systems also allow programs across departments to be integrated and increase communication.
Custom systems are the most expensive and the most intensive to integrate. These systems are built from the ground up to meet the exact needs of a business that cannot find a good fit in any other form.
In addition, any of these systems may be cloud-based. Cloud-based accounting eliminates the need for desktop software and increases shareability. Any data stored in the system is updated as it happens and is accessible by anyone with credentials anywhere they can connect to the internet. Cloud-based AISs offer automatic updates and backups of data and, as an added bonus because they require less hardware, can save money on upfront and maintenance IT costs.
With so much variety in the types of AISs, how do you choose?
Choosing an AIS
There are a number of different strategies for finding the right accounting information system, but the easiest way is to ask questions in three different areas: your organization, your team, and your problems.
Take in the scope of your business and consider the following:
- How large is your organization?
- How many people will need to use your system?
- What is your budget? (Include more than just acquisition costs because, as stated in Core Concepts of Accounting Information Systems, “such transition costs as training, implementation, and software modifications add to the total.”)
- How much time do you have to train new users?
- What system do others in your industry use?
- What is your projected growth?
Think about (or talk to) your current team and ask the following questions:
- What do your accountants need?
- What functions would make your accountant’s job simpler?
- What sort of system can your tech department install and maintain?
- What system does your team already have experience with?
Finally, take a look at your actual finances and system. Consider the roadblocks you are running into:
- What trouble regularly comes up? (Efficiency? Processing data into information? Shareability?)
- What kinds of information do you need to make your best decisions?
- When do you need the new system in place?
- What do you find yourself dreading about working with your finances?
- What do you need your AIS to do?
In order to best meet your needs, your new system should meld with your current practice. You shouldn’t be bending to meet the system, and the program should be as simple as possible.
Understanding what you want your system to do and what problems you’re trying to solve will serve as your main compass points.
Switching it up
If you are currently using an AIS, the most important thing to remember is that a well-matched system will feel like a natural extension of your business. If you don’t think much about your accounting information system, it’s probably working just fine. However, organizations tend to stick with their system too long simply because it is familiar, so it doesn’t hurt to double-check.
Here are some questions you can ask to make sure your AIS is still working for you:
- What is currently working in your system?
- Does your AIS match your business’s size? Is it scalable?
- Does your AIS have elements customized to you? Does it need them?
- What do you wish your system could do that it can’t currently?
- What criteria did you first use to pick an AIS? Do you have the same problems then as you do now?
Now take that information and look for a system that fills in any gaps.
If you feel a little lost there’s nothing wrong with seeking guidance. The world of accounting information systems can be confusing, and talking with someone who has experience in the field can be a big help. Seeking out software consultants, who help businesses through transitions like this all the time, can make the process smoother.
If you want the perspective of accounting experts, Paro’s team can answer any questions you might have about accounting information systems and offer insightful opinions on which systems we prefer.
Once you’ve found a system that’s a good fit for your business, it’s hard to be without it. Accounting information systems are critical, thanks to accounting’s reliance on digital systems. AISs are deeply ingrained in how your business does business, but when they’re working well, the only thing you’ll notice is increased efficiency, perspective, and unity between departments.
Hopefully, with this new knowledge, you can take control of your business’s accounting information system to make better use of your data. Want to learn more? Get the best advice from experts at Paro.