Accounting Information System

Accounting Information

Accounting is a service activity. As an information system, accounting collects financial data, records it in the books of accounts, classifies and summarises it to determine financial position of the business which is communicated to its users. This financial data is useful for users of accounting information system. Accounting begins with identification of transactions which are financial in nature and ends with preparation of Final Accounts(Income Statement and Balance sheet) which is prepared at the end of the financial year. Each step in the process of Accounting generates some information. Generation of information is not an end in itself, it is way to use further information and determine the net result which helps in communication of information to users of Accounting Information

Meaning of Accounting Information System(AIS)

Accounting is a method to communicate the financial information to the users such as Organisations, Governments, Stockholders, etc. Accounting information refers to the financial statements generated through the process of Book Keeping with GAAP(Generally Accepted Accounting Principles) which helps the users to arrive at the decisions about financial positions. The financial position are identified with the final accounts of the company i.e, Profit and Loss account tells about the Income Statement and Balance sheet says about the Position Statement.

Types of Accounting Information

Accounting is a tool to determine the status and financial position of the company, so that we communicate to the users about the financial position, and users are interested in the following information. Let's discuss this in detail:-

1. Information Relating to Profit or Surplus:-
In accounting language, Income Statement is made to determine the Profit earned or loss incurred as a result of Business operations or otherwise during an accounting period.

• A firm prepares Trading account which is a part of Profit and Loss account, which provides information about Gross Profit/Gross Loss and Profit and Loss account provides information about the Net Profit/Net Loss.
• A company prepares Statement of Profit and Loss according to Companies Act.
• A Not-For-Profit Organisation(NPO) prepares Income and Expenditure account in place of Profit and Loss account because NPO works for welfare and charitable activities and this is not a business. After preparing Income and Expenditure account Surplus/Deficit are determined in place of Net Profit/Loss.

2. Information Related to Financial Position:-

The Position Statement namely Balance sheet is prepared for determining the Financial Position of the company. The position statement provides information about the assets owned by the entity, amounts receivable and the cash and bank balance held by it and Balance sheet also shows the liabilities of the business like creditors, Loans etc.

3. Information about Cash Flow:-

Cash flow statement is a statement which shows the inflow and outflow of the cash during a specified period of the time. Here, Inflow means incoming of cash and Outflow means outgoing of cash. Cash flow statement helps in such decisions like payment of Liabilities, Payment of dividends etc. because payments are made on the availability of cash.

Characteristics of Accounting Information

1. Reliability- Reliability of information means it is verifiable, free from material error and bias. The information which is confident about its representation with no errors. Accounting information must be reliable.

2. Relevance- Accounting information must be relevant to the user, information is relevant if it meets the needs of the users in decision making.

3. Understandability-  Understandability means the information provided to users through the financial statements must be presented in the manner that the users are able to understand it. Users make the interest and willingness to study the information with reasonable due diligence.

4. Comparability- Users should be able to compare the accounting information of the enterprise.There are two types of comparisons, intra-firm comparison and inter-firm comparison. When users compare the information of the same enterprise with different accounting periods, it is known as intra-firm comparison but when the information of one enterprise compared with other enterprises it is called as inter-firm comparison.

Users of Accounting Information

Internal Users-

1. Owners- Owners invest capital in the business and thus are indulged` in maximum risk. Basically they are interested in profit earned or loss incurred by the business during a financial year besides the safety of their capital. The financial statements give the information about the profit/loss and financial position of the business.
2.  Management- The management uses the accounting information to reach at informed decisions such as determination of selling price, cost controls, investments into new projects etc.
3. Employees and Workers- Employees and workers are entitled to bonus at the end of the year which is linked to profit earned by an enterprise. Therefore, the employees are interested in financial statements.

External Users-

1. Banks and Financial Instituitions- Banks and financial instituitions are the important part of any business because they provide loans to businesses. So, they interested in the performance of the business to know whether it is making progress or not to ensure the safety of recovery of loan. They assess it by analysing the accounting information of the business.

1.  Investors- Investment involves risk and also the investors do not have direct control over the business affairs. Therefore, they connect to the accounting information available to them and seek answers to their questions.
2. Creditors- Creditors are those parties who supply goods or services on credit. Before sell their goods/services on credit they ensure themselves about the credit-worthiness of the business. The financial statements help them in making such an assessment about the business.
3. Government and it's Authorities- The Government uses financial information to calculate national income accounts of the economy and other information. The information available to it enables it to take policy decisions. Government authorities assess correct tax dues after the analysis of the financial statements of the business.
4. Researchers- Researches uses accounting information in their research work.
5. Consumers- Consumers require accounting information for establishing good accounting control so that cost of production may be reduced with the reduction in the prices of the products they buy. Sometimes, prices are fixed by the Government, so it needs accounting information to fix fair prices so that consumers and producers are not exploited
6. Public- When business was running in a positive manner, it makes a good contribution to the economy like, employment to peoples etc. Thus financial accounting provides useful financial information to various user groups for decision-making.