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Theoretical Framework of Accounting

Accounting as an Information System

Accounting Information System (AIS) is a system which collects, stores and processes the accounting and financial data. This financial data is useful for users of accounting information system for reporting the financial information to Owners/Shareholders, Managers, Prospective Investors, Creditors, Bankers, and other Lending Institutions, Government, etc. Let us learn more about Characteristics and users of accounting information system.

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What is Accounting Information System?

A collection of multiple pieces of equipment involved in the dissemination of information is called an information system (IS).

Hardware, software, computer networks, information, information system users, and the system’s housing are all part of an information system (IS).

Accounting is a tool to communicate financial and other information to individuals, organizations, governments etc. about various aspects of business and non-business entities.

Accounting Information Systems connects Information Technology with GAAP (Generally Accepted Accounting Principles).

For example, when a firm approach for a loan from a bank, it will have to submit details of its business activities in terms of operating profit or loss and the financial position.

Similarly, the stakeholders must have financial information of business in order to evaluate the performance of the management.

Many laws require the reporting of the financial information to various government departments such as the income-tax department, sales tax department, company law board, etc.

Users of Accounting Information

Accounting is of primary importance to the owners and managers. However, creditors, bankers, etc. are also interested in the accounting reports of the organization.

Following is the list of Users of Accounting Information

  • Owners/Shareholders
  • Managers
  • Prospective Investors
  • Creditors, Bankers, and other Lending Institutions
  • Government
  • Employees
  • Regulatory Agencies
  • Researchers
  • Customers

users of accounting information system

Characteristics of Accounting Information

  • Relevance
  • Reliability
  • Comparability
  • Understandability
  • Timeliness
  • Cost-benefit
  • Verifiability
  • Neutrality
  • Completeness

1. Relevance

The information should be relevant in order to influence the economic decisions taken by users. Accounting information has an impact on decision making by helping stakeholders, creditors and other users to evaluate past and future events. Thus, it confirms or corrects pre-decided expectations. The type, nature, and materiality affect the relevance of information.

2. Reliability

Accounting information should be reliable. Reliability relates to the confidence in the accounting information in the sense that the information faithfully represents what it intends to present.

It must be factual. Information should be free from errors and bias. The key aspects of reliability are a faithful representation of facts, substance over form, neutrality, prudence, and completeness.

3.  Comparability

Accounting information of an enterprise is useful when it is comparable with similar information for the same enterprise in different periods of time and similar information regarding other enterprises at the same time.

Therefore, the organization needs to present the information in a consistent manner over time so that the users can make significant comparisons between organizations.

4. Understandability

Information should be easily understandable by users who are expected to have a reasonable knowledge of business, economics, and accounting and a willingness to study the information with reasonable due diligence.

5. Timeliness

There should be quick communication of the information to the users so that it can influence their decisions. Hence, for decision-making accounting information should be made available at the appropriate time without delays.

6. Cost-benefit

It must be useful to most of the people who want to use it. Also, the process of preparation of that useful information should not be costly and time-consuming. The emphasis is on cost-benefit analysis and the benefit derived from information should exceed the cost of providing it.

7. Verifiability

Verifiability ensures the correctness of the recording of the transactions Also, persons other than the accountant himself shall also be able to check it for accuracy.

8. Neutrality

Accounting information is neutral in the sense that it should be free from errors and it should not favor one group over another. Neutrality is significant especially for the external users of information.

9. Completeness

Completeness means that all material facts that are necessary to creditors or other users for assessing the financial position and operating results of the organization has been disclosed in the financial statements.

Solved Example on Accounting Information System

Question: Discuss the users of accounting information.

Ans.

Following persons are users of accounting information.

1. Owners/Shareholders

The primary object of accounting is to provide necessary information to the owners/shareholders related to their business.

2.  Managers

In large business enterprises and in corporations specifically, there is a separation of ownership and management functions. The managers of These business houses are more concerned with the accounting information because they are responsible to the owners.

3. Prospective Investors

The persons who are interested to make an investment in business will like to know about its profitability and financial position. Thus, they derive this information from the accounting reports of the business.

4. Creditors, Bankers, and other Lending Institutions

Trade creditors, bankers, and other lending institutions would like to be ensured that they will be paid on time. Moreover, the financial reports help them in judging such position. Thus, Banks and other lending agencies rely upon accounting statements for determining the acceptability of a loan application.

5. Government

The Government is interested in the financial statements of business organization on account of taxation, labor, and corporate laws.

6. Employees

Employees are also interested in financial statements because an increase in their salaries, incentives, and wages and payment of bonus depends on the size of the profit earned.

7. Regulatory Agencies

Various Government agencies and departments like Registrar of Companies, Company Law Board and Tax Authorities, etc. use accounting information.

They not only require it as a basis for tax assessment but also in evaluating how well various businesses are operating under law related requirements.

8. Researchers

Accounting information is also used by the research scholars in their research in accounting theory as well as business affairs and practices.

9. Customers

Customers may also have either a short-term or long-term interest in the business entity to know the profitability, liquidity and solvency position of the business.

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