An accounting information system is the system of methods and processes companies use to maintain information relating to business or financial transactions. Historically, this system involved paper ledgers, journals, and other financial reports. Business owners and accountants were responsible for actively using these ledgers and journals to maintain accurate financial records when running their business operations. The advancement of information technology has allowed companies to transform this accounting information system into an automated process using computers, servers, and accounting software.
The accounting cycle is a driving force in most company’s accounting information systems. This cycle includes identifying and analyzing transactions, creating and posting journal entries to the general ledger, preparing a trial balance, creating adjusting entries, preparing an adjusted trial balance, creating financial statements, finalizing accounts with closing entries, and generating a final trial balance and financial statements for the accounting period. These basic steps help companies develop their accounting information system, whether manual or computerized.
Accounting software packages usually consist of several different modules based on the traditional manual accounting process. Modules include general accounting, fixed assets, accounts payable, accounts receivable, payroll, and other special modules. Each individual module creates a system where companies can move information through the accounting cycle steps. The ability to transfer this information electronically can improve the company's accuracy and timeliness for reporting financial information.
Computerized accounting systems often require company employees to focus more on reviewing the information gathered from various business departments rather than inputting business data. This system allows individual accountants to process more information in less time than traditional paper ledgers. Accounting software may also have automatic internal safeguards that check the accuracy and validity of financial information using an internal review process. This process often limits the amount of basic data entry errors and other nonsensical information from entering the accounting information system.
Companies may choose to use a hybrid accounting information system involving both manual and computerized accounting processes. Certain types of business or financial information, such as vendor invoices, payroll timesheets, and contractual agreements, may need to be reviewed by an accountant. Using a hybrid system can provide a better review process since accounting employees can question financial information and seek feedback before entering information into the accounting system. The manual review process may also be required by the company's internal controls. These internal controls ensure that no information is entered into a company's accounting software that is inaccurate or represents higher financial obligations than previously anticipated.