Systems of Accounting and Accounting Information System(AIS)

Today we study about the Systems of Accounting and Accounting Information System(AIS). There are two types of accounting systems. The first is Single Entry system of accounting and another is Double Entry System of Accounting. Today We discuss both the systems in detail.

Double Entry System of Accounting

Meaning of Double Entry System of Accounting-

There are two aspects of Double entry system of accounting i.e, Debit and Credit. Debit is denoted by Dr. and Credit is denoted by Cr. in the language of accounting. In double entry system of accounting we records both the aspects of any financial transaction. So, at the time of recording the transaction, it is recorded once on a credit side and again on the credit side. A Double entry system will maintain complete records and also gives proper financial results

Let us take an example to clarify this:-

ABC Ltd. purchases raw material for their further manufacturing process in business through cash of Rs 8000/- In this transaction, raw material are received and in return cash is paid, two aspects are involved in this i.e, receiving raw material and paying cash and under the Double Entry System of Accounting both these aspects are recorded. One part, i.e, receiving of goods is debited and the second part, i.e, payment of cash is credited. 

There is a logic behind this that what should be credited and what should be debited, we discuss this concept later. But one thing we should remember total amount debited is always equal to the total amount credited in the the Double Entry System of Accounting.

Stages of Double Entry System of Accounting

• Recording- Firstly we have to record those financial transactions and events which can be measured in terms of money. For recording the transactions we use the account i.e, Journal.
• Classifying- Classify the recorded transactions in the appropriate Ledger accounts and prepare Trial Balance thereafter.
• Summarising- Closing the books of accounts, prepare the final accounts and determine net profit/Loss and financial position of the business

Each stage contain there own different concept and principles. All these stages are discussed later one by one. 

Single Entry System of Accounting

Meaning of Single Entry System of Accounting

Single Entry System of Accounting is also known as an Incomplete Double Entry System or Accounts from incomplete records. In this system, all transactions are not recorded on Double entry basis. As regards some transactions, both aspects are recorded, as regards others, either one aspect is recorded or not recorded at all. Instead of maintaining all the accounts in the books, only Personal Accounts and Cash books are maintained in this system. The accounts maintained under this system are incomplete because both aspects are not recorded as the Double Entry System, thus Single Entry System Accounting is not reliable.
Since all transactions are not recorded under double entry principle, it is not possible to prepare the trial balance. As a result the final accounts are also not prepared. Thus, the single entry system is known as Accounts from Incomplete Records.

👉 Also read Difference between Bookkeeping and Accounting

Which method is reliable to use-

The method we opted for accounting is depend upon the size of our business. As we discuss in single entry system of accounting, Personal accounts(Related to Person) and cash accounts(Cash in or Cash out) are maintained So, a cash accounting method is good for small businesses because it doesn't require high level skills, easy to understand and implement.

But in the case of Large scale business Double Entry System is most reliable to opt, because number of transactions are high in nature so each transaction is recorded in a systematic way because it will give you a reliable and appropriate result with complete record of transaction and it helps in determining Profit and Loss. The possibility of frauds are also minimised in this method because complete information about all assets and liabilities in the books of accounts are recorded.
For all the benefits and advantages of Double Entry System it has been used extensively in all countries.

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

👉Must Read Accounting Basic explained

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.

👉Also read Accounting Equations Explained

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.

These all are the concepts of Systems of Accounting and Accounting Information System(AIS). By this we get to know that there are two types of Accounting Systems (Double Entry System of Accounting and Single Entry System of Accounting) and Accounting is done to reach at the results of the business so that we communicate the results to the related parties as discussed above and to take the right decision on time. If you have any questions or doubts regarding this topic then please tell me in the comment section. Thanks...