Research Project

AIS in Small Businesses

Linh TranACCT 11011/28/2013

Accounting Information Systems in Small Businesses

A. Statement of Purpose

My goal in this research project as accounting student was to further my education about AIS in small business through researching what an AIS is, what types of software are used by small business for AIS systems and the positives and negative impacts of AIS systems.

We are currently in a growing digital age. What this means for the business environment is that there is a change in how the processing and delivery of constant new information and services occur for customers and clients. This is especially true for small businesses. The small businesses owners are an important entity in the U.S. and other nations because they are a necessary part of creating a successful economy. They provide local services and help meet the requirements for bigger companies. It is common knowledge that the main objective of a business is to maximize profit either in terms of increases in business productivity or by achieving rapid expansion in market shares domination. The way in which a business responds to the changes in the information technology revolution determines their capabilities in competing in the market and obtaining these main goals (Kharuddin, Zariyawati and Annuar 2010, 30).

In order for a small company to stay alive in the highly competitive business environment, managers of the firm and investors have to have effective information. Small firms compete against each other, the larger corporations, and multinational ones (Kharuddin, Zariyawati andAnnuar 2010, 29). Effective information helps managers and investors make the best decisions in order to gain profits. Effective information in the context of this report refers to accounting information. There is a lot of research providing evidence that accounting information benefits the decision-making of firms’ managers and investors (Knežević n.d., 65).

The two most common ways for a company to acquire this effective accounting information is through a big accounting firm or through the use of accounting information systems (AIS). Small business entrepreneurs can't afford to hire a big accounting firm to give consulting advice, audit their financials, or close their books, but they need updated, accurate, and timely accounting information to survive (Bressler and Bressler 2006). Studies have shown that the most widely used information system is the accounting information system (AIS), specifically in financial reporting aspects. Therefore these small business owners rely on accounting information systems (AIS) for day-to-day management decisions and effective accounting information.

As an accountant, our job is not only about prepare the tax report as people always misunderstand but also many others works related to financial. To be prepared for accountant career, people really need to understand about the accounting information systems, especially in small businesses in this project. This research project will describe the primary components of an AIS, the different types of software used in small business, and the positive and negative impacts on a small business.

B. Supporting Evidence

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What is AIS?

Investopedia.com, a respected and trusted website that provides up to date investing education defines AIS as the following:

An accounting information system (AIS) is a structure that a business uses to collect, store, manage, process, retrieve and report its financial data so that it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors and regulatory and tax agencies. In particular, specially trained accountants work with AIS to ensure the highest level of accuracy in a company's financial transactions and recordkeeping and to make financial data easily available to those who legitimately need access to it, all while keeping data intact and secure (Fontinelle 2011)

In general, financial accounting data has been commonly defined as information prepared for external users such as creditors, investors and suppliers. An AIS system is designed to meet the needs of any person who can make use of it such as managers, accountants, consultants, business analysts, chief financial officers, and auditors (Kharuddin, Zariyawati and Annuar 2010, 30).

The main objectives of many businesses that adopt this system of acquiring financial accounting are to improve their organizational efficiency and increase competitiveness ability. Prior research has shown that AIS adoption does increases firm’s performance and operations efficiency. (Kharuddin, Zariyawati and Annuar 2010, 30).

Some of the research done includes showing how AIS helps the different departments within a company work together. For example, management can establish sales goals for which staff can then order the appropriate amount of inventory. The inventory order notifies the accounting department of a new payable. When sales are made, sales people can enter customer orders, accounting can invoice customers, the warehouse can assemble the order, the shipping department can send it off, and the accounting department gets notified of a new receivable. The customer service department can then track customer shipments and the system can create sales reports for management. A well-designed AIS, allows everyone within an organization who is authorized to access the same system and get the same information such as inventory costs, shipping costs, manufacturing costs and so on (Fontinelle 2011).

The procedures and instructions for the implementation of AIS are the methods it uses for collecting, storing, retrieving and processing data, which will be coded into the AIS software. Employees need necessary training and documentation of these procedures; consistency is the only way to achieve effectiveness.

The software component of AIS would be the computer programs used to store, retrieve, process, and analyze the company's financial data. The data contained in AIS is all the financial information that is necessary for the business practices. Business data that impacts the company's finances should be included in AIS such as: sales orders, customer billing statements, sales analysis reports, purchase requisitions, vendor invoices, check registers, general ledger,

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inventory data, payroll information, timekeeping, and tax information. The hardware necessities are items a business would typically need to have anyway - they include personal computers, servers, printers, surge protectors, routers, storage media, and possibly a backup power supply. The hardware selected for AIS must also be compatible with the software they intend to use.

Types of Software are used by small businesses for AIS systems

The main software component of AIS is the computer Software used to save, backup, handle and analyze the company’s financial data. So basically it is core part of any business. Before computers even existed, AIS were manual; basically everything had to be done by hand. But today computers do everything. Most Small businesses use Intuit’s QuickBooks, Quicken, excel and many other AIS software. But these three are the most popular. For Every type of business there are different types of Software and for different levels. Basically for small business the software package doesn’t need to be as advanced as a large business accounting system.

The most important things when choosing accounting Software for a business is to look for, quality, reliability and security. These are the main components any software must offer. For any person managing a business, information has to be of high quality in order to make all the good business decisions.

Most AIS programs can be customized by the user for easier use and better understanding of how business data is handled by the AIS software. This type of software can also be built from scratch for specific purposes; everything depends on the needs of a business. The only problem here is that this software is limited to certain things because of the Sabanes-Oxely regulations. These regulations indicate the structure of the AIS. The SOX is a United States federal act that set new rules, and standards for public companies to prevent fraudulent actions. (Fontinelle2011)

The other most important thing other than the Software is the Hardware, basically the type of computers that are going to be used such as servers, printers, surges protectors, routers, storage media, and maybe a backup power supply. These things are the most important physical parts for any accounting System. Additionally the AIS must have a plan for maintaining, replacing and upgrading components of the hardware system, and also a plan in case the business owners ever need to get rid of any data, so sensitive information is not leaked.

As mentioned before the programs that are most used in small business are QuickBooks, PeachTree Accounting, and Microsoft’s Small Business Accounting, and other such as Wave Accounting, Sage 50/100– US edition, Xero, and FreshBooks. There are so many programs available in the market, so how do business owners know what to choose? Well first of all, based on research made by Linda Bressler and Martin Bressler (Bressler and Bressler 2006), people were asked what type and how many AIS software packages they were using. They selected 175 Small

Bressler, Martin S. Strategic Finance87. 12 (Jun 2006): 56-60.

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businesses, which 75 business owners responded to the survey. Out of the 75, 41 responded that they used QuickBooks, 16 users reported to use Microsoft Excel. When asked how many AIS systems they used? 25% answer they used more than one. One of the answers were “I use QuickBooks to track jobs, generate invoices and estimates. I used Quicken to track checking info, credit card accounts, etc.” And other answers included flexibility, because this type of programs can be used anywhere and are easy to use. So these findings suggest that most of the small business owners use easy to use and flexible programs.

Another important thing about Software is that it should be easy to use, so that entrepreneurs don’t spend lots of money hiring someone trained specially to use an accounting program. As seen in the research results, most small business entrepreneurs use QuickBooks, and Microsoft Excel to do their periodic accounting.

I did a small survey with three people from different companies. My friend work as audit at Deloitt and she is using Excel to work. (Becky Ngo, personal communication, Nov 1 st 2013) Another friend from my country – Vietnam work at a small business, Tay Do Construction Company and she is using a software call CAD, the software that customized design for her company at work. (Yen Tran, personal communication, Nov 1st 2013) The last one work for another small company, Thai Binh Duong, and she is using QuickBooks at work. (Trang Nguyen, personal communication, Nov 1st 2013) From the survey, I can conclude that choosing the right AIS package has become one of the important decisions an entrepreneur has to make. If by any chance the wrong program is chosen no matter how many futures it has, or how popular it is, if it’s not right for your business or if people cannot understand how to use it, major business changes have to be made. Some may be happy to see how productive their business has become, and some others may not be happy with the software because they might have to spend lots of money to hire specialized people to use the software or training their staff and themselves to learn to use the program. Also, they might have to buy another AIS software.

Positive effect of AIS on small business

In most firms one will find that the accounting information system software will be valuable to their business. However, sometimes a business doesn’t understand and value the benefits of the system as a whole. There is a lot of research regarding the benefits of the accounting information system (AIS). The information will be discussed in detail regarding the specific areas a firm benefits from by using AIS.

In the past accountants were forced to do things manually, with the application of an AIS many accounting tasks can be automated. The AIS has the tools to build a variety of object categories, such as a list of grouping categories of materials and goods, jobs, and the list of tax money. Once a firms’ unique business system is built, there is minimal repetition of tasks, there won’t be wasted time to recreating the format for the same task. In addition, for having the automatic system, the business will help the accountants reduce the effort to build the bookkeeping reports. The automatic, cost, and immediate inventory program will also significantly reduce the amount of manual work for the accountants and manager (Fontinelle 2011).

Accuracy is very important part of running a successful business. The AIS can help to maintain very accurate accounting information. The use of the AIS can ensure the accuracies of the data,

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commodities and price. AIS allows for the collection and comparison of data in one place. It is also provides an easier way to check for and identify any errors that may occur during the accounting process (Bressler and Bressler 2006)

AIS can be a good reference tool. Users are able to quickly look up the account, tariffs list, portfolio fess, fixed assets, as well as any data used during the accounting process by using the AIS. This is not only helpful to new accountants in learning new skills but it’s useful for an experienced accountant because it is faster and saves (Bressler and Bressler 2006)

Fraud and theft are issues every company has to deal with. AIS can help the business prevent fraud, and theft of cash or property from the business. With the data and information from the system, the forensic accountants can check and monitor the supplies, goods, scrap or the efficiency performance of labor from different parts (Fontinelle 2011). AIS can perform scheduled maintenance and random checks to reduce the fraud or prevent further fraud or theft from happening. In many cases fraud happens because of the lack of management skill. The AIS helps improve management skills and abilities to make decision by providing them with easy access to necessary data.

Time is one of the most important parts of managing a business. The AIS will help management spend less time fixing problems from a manual system. The manager will have more time for analysis, forecasting, building strategy or business plan. Creating solutions to improve management efficiency will bring the business benefits such as profit for themselves and society. (Lohrey).

There are the benefit of using this system is that the AIS software program can be customized for the different requirements of a different company. If existing software doesn’t meet the requirement and satisfy the business’s need, they can develop and further the program to meet the specific needs of the company (Fontinelle 2011).

Negative effects of AIS on small businesses

In computerized accounting systems, system security is the most important that thing has to be set up before anything is done with the system. If the system is setup correctly but has poor security anyone can get access to sensitive information and jeopardize business productivity by leaking information to other rivals. Password authentication is a good way to keep every employee in check and also make sure that they have limited access to certain things. Unlike manual accounting information is not kept in a file cabinet locker with a key, but instead in computers with passwords, which can be easily hacked or stolen.

One of the most important decisions a business owner makes is choosing AIS, once this decision is made, the business will have to pay for its cost. Cost is really important when choosing an accounting system. Even though for small business the programs may not be too expensive, in the case of QuickBooks, which has numerous software packages ranging from $12 a month for the online version, up to $600 for the enterprise version. When it comes to cost, for a small business the cost of the software is just a small fraction of the total amount of buying an AIS. The things to worry most about are the hardware parts of the System. Depending on how big a

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small business is; the hardware part can be very costly because any business that has at least 15 employees must have at least 15 computers, one for each user. Aside from computer, you need a database to backup all your data, and also you need devices such printers, scanners, fax machines, Routers, and more. Another problem also surfaces when you buy hardware and it is not compatible with your system, you may also have connectivity issues resulting in a decline in productivity of a business. In case some of these things get damaged the business will have to spend more money in repairing or replacing equipment. A business has to pay for an annual subscription for a Antivirus program, it also has to pay for network maintenance, staff training, and maybe a monthly fees that some companies charge for using their accounting systems on the cloud or web-based. On top of everything else you also need to spend money in energy to power up your AIS, and also to buy supplies like ink and paper that is used to present reports, or just to keep a physical copy of important documents. (Deborah Beard 2007)

An additional downside of AIS in small business is that in the hand of the wrong person, bad things can happen like fraud for example. Because all the business’ data is digitized, it can be easily tampered with. Meaning that the information a file hold can be altered, this can cause business big losses. In case AIS is not set up correctly errors made can be made repeatedly and it will take a long time to figure that out. This can also cause accounts to be unbalanced. (Deborah Beard 2007)

C. What I Learn From The Project

Nowadays, small businesses have a hard time striving to succeed in this economy, in order to succeed changes and implementations have to be made, in order to maintain a business in good shape. AS we saw in this research, AIS one of the most useful “tools” a small business can use in order to keep all the financial history of the business in a safe place and organized. When choosing for a AIS software package a business owner has to make sure that the program he ends up choosing fits his/her business’ needs. AIS as any other accounting tools, has its benefits and risks. However, as long as you have a good system setup and trust worthy people working for the organization, AIS can help the business become successful and more productive.

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REFERENCES:

1.Knežević, Snežana, Aleksandra Stanković, and Rajko Tepavac. "Accounting Information System As A Platform For Businesses and Financial Decision-Making In The Company." Edited by Business Source Complete. Management 1820-0222, no. 54: 63-69.

2.Bressler, L. A., and M. S. Bressler. "HOW ENTREPRENEURS CHOOSE AND USE accounting information systems." Strategic Finance (Strategic Finance) 87, no. 12 (2006): 56-60.

3.Deborah Beard, H. Joseph Wen. "Reducing The Threats Levels of Accounting Information Systems." The CPA Journal, May 2007.

4.Fontinelle, Amy. Introduction To Accounting Information Systems. Edited by Amy Fontinelly. Investopedia. July 2011, 2011. http://www.investopedia.com/articles/professionaleducation/11/accounting-information-systems.asp (accessed December 2, 2013).

5.Intuit. QuickBooks Enterprise. Edited by Intuit. QuickBooks. 2013. (accessed 12 02, 2013).

6.Kharuddin, Saira, Mohd Ashhari Zariyawati , and Nassir Annuar. ". "Information System And Firms' Performance: The Case Of Malaysian Small Medium Enterprises." "International Business Research (International Business Research) 3.4 (2010): 28-35.

7.Lohrey, Jackie. "What Are the Negative & Positive Impacts of Computerizing an Accounting Department?."Chron. . http://smallbusiness.chron.com/negative-positive-impacts-computerizing-accounting-department-31404.html (accessed December 2, 2013).

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