Accounting is often termed the “language of business.” It is an essential function that involves recording, classifying, and summarising financial transactions to provide stakeholders with accurate and timely financial information. However, accounting is not just a process of keeping financial records but also an information system that provides valuable insights to managers, investors, creditors, and other users. In Newcastle, the best accountants can be relied upon to handle financial transactions professionally and accurately.
What is an Information System?
Before delving into why accounting is called an information system, it is essential to understand what an information system is. An information system consists of hardware, software, and human resources that collect, store, process and distribute information to support decision-making and control in an organisation. It supports different functions, such as accounting, marketing, production, and human resources.
Why is Accounting Called an Information System?
Accounting is considered an information system because it meets the three primary functions of an information system: input, processing, and output. Below we’ll examine each of these functions in more detail.
Input
The input function of an information system involves capturing data from multiple sources and entering it into the system. In accounting, the input function involves recording financial transactions, such as sales, purchases, and expenses. This data is then entered into the accounting system through journals and ledgers, which are used to record and classify financial information.
Processing
The processing function of an information system involves transforming data into useful information. In accounting, the processing function involves summarising the data entered into the system into financial statements, such as the balance sheet, cash flow statement and income statement. These financial statements provide a snapshot of a company’s financial position and are used by stakeholders to make informed decisions.
Output
The output function of an information system involves delivering information to the users of the system. In accounting, the output function involves delivering financial statements and other financial reports to stakeholders, such as investors, creditors, and regulatory agencies. These financial reports provide information about a company’s financial health and are used to make decisions about investing, lending, and regulating the company. Therefore, it has become increasingly important to develop effective risk management methods to ensure these financial statements’ accuracy and reliability.
Types of Accounting Information Systems
Organisations use different types of accounting systems, including manual, legacy, and computerised systems.
Manual Accounting Systems
Manual accounting systems involve recording financial transactions using paper-based journals and ledgers. These systems are labour-intensive and prone to errors, but they can be useful for small businesses with a low volume of financial transactions.
Legacy Accounting Systems
Legacy accounting systems involve using software that is outdated or no longer supported by the vendor. These systems are often difficult to use, and the information they provide may not be accurate or timely. However, many organisations still use legacy accounting systems because they are familiar with the software and want to avoid incurring the costs of upgrading to a new system.
Computerised Accounting Systems
Computerised accounting systems record, classify, and summarise financial transactions using software. These systems are efficient, accurate, and provide timely financial information. They also have features such as automated invoicing, accounts payable, and accounts receivable, which can save time and reduce errors. Computerised accounting systems can be customised to meet an organisation’s specific needs, and they are scalable, which means they can grow as the organisation grows. With the right accounting software, businesses can make data-driven decisions that lead to success.
Benefits of Accounting Information Systems
Accounting information systems provide several benefits to organisations. These benefits include:
Timely and accurate financial information
It provides timely and accurate financial information that can be used to make informed decisions. This information is essential for managers, investors, and creditors to assess an organisation’s financial health.
Efficient processing of financial transactions
It automates many financial processes, such as invoicing, accounts payable, and accounts receivable. This automation saves time and reduces errors, leading to cost savings for the organisation.
Improved decision-making
It provides valuable insights into an organisation’s financial position. Managers can use this information to make informed decisions about investments, expansions, and cost-cutting measures. Investors and creditors can also use this information to make decisions about investing in and lending to the organisation.
Regulatory compliance
Many organisations are required to comply with regulatory requirements, such as tax laws and financial reporting standards. Accounting information systems can help organisations comply with these requirements by providing accurate and timely financial information that can be used to prepare tax returns and financial statements.
Conclusion: The Impact and Importance of Accounting Information Systems
Accounting is called an information system because it meets the primary functions of an information system: input, processing, and output. Accounting information systems capture financial transactions, process them into useful information, and deliver financial reports to stakeholders. Accounting information systems provide several benefits to organisations, such as timely and accurate financial information, efficient processing of financial transactions, improved decision-making, and regulatory compliance. With the advancement of technology, accounting information systems continue to evolve, becoming more efficient and providing even more valuable insights to stakeholders.