ACCOUNTING AS FINANCIAL

INFORMATION SYSTEM
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Contents

Accounting as a financial information system ........................................................................ 2

Qualitative characteristics of accounting information ........................................................... 3
Users of accounting information ............................................................................................ 4
Meaning of Behavioural sciences ........................................................................................... 4
Impact of Behavioural Science on Accounting ....................................................................... 5

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Accounting as a financial information system

• Accounting is often referred to as the language of business.
• The primary purpose of a language is act as a medium of communication between two or
more people.
• Accounting is used to communicate financial information of business to its users (internal
and external users)
• As an information system, it collects data and communicates economic information about
the organization to a wide variety of users whose decisions and actions are related to its
performance.
• An accounting as an information system (AIS) is a system of collecting, storing and
processing financial and accounting data that are used by decision makers.
• It is a structured system where all the information of an organization (business entity or
non-profit organization) is collected, stored and managed in the form of data which is there
after processed to prepare financial records.

Inputs Process Output

Business Accounting P&L A/c
transactions concepts and Balance
and events conventions sheet

• An accounting information system is generally a method for tracking accounting.

• Accounting information systems are designed to support all accounting functions and
activities including auditing, financial accounting & reporting, management
accounting and tax.
For example, investors might use the information in AIS to analyze the effectiveness of the
company's management and to evaluate their own investments by looking at profit and loss
account and various ratios.

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Qualitative characteristics of accounting

information

1. Reliability- Reliability implies that information must be actual and verifiable. The accounting
information is said to have verifiable from source documents such as cash memos, purchase
invoice, sales invoice, agreements, property deed and other documents. Verifiability
ensures the truthfulness of the recorded transactions which can be independently checked
by anyone interested to ascertain the true position of the firm.
2. Relevance- Accounting information has quality of relevance when it influence the economic
decisions of the users by helping them to evaluate past, present or future events. To be
relevant, information must be available in time; Confirming or correcting their past
evaluations.
3. Understandability - Understandability means decision-makers must interpret accounting
information in the same sense as it is prepared. Accounting information should be
presented in such a simple and logical manner that they are understood easily by their
users. This can be done by giving relevant explanatory notes to explain information given in
financial statement.
4. Comparability – The information should be disclosed in such a manner that it can be
compared with previous year’s figures of business itself and other firm’s data. To be
comparable, accounting reports must belong to a common period and use common unit of
measurement and format of reporting.

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Users of accounting information

Internal users External users
• owners • banks & financial institutions
• management • creditors
• employees & workers • investors & potential investors
• government
• researchers
• consumers
• public

Users Classification The information user wants

Owners / Shareholders Returns on their investment, financial health of
firm
Internal
Management To evaluate performance
Employees Profits earned, their dues, salaries
Investors/ potential Safety, growth and future of business
investors
External Creditors Short term liquidity
Tax authorities / Assessment of tax, true and fair disclosure of
government accounting information

Meaning of Behavioural sciences

• Behavioural science is study of human behaviour that how a person takes decision in real
world. It explains how the emotions, social factors and environment effect the decision of
human beings and may at times influence the person to take irrational decision.

• For example, as given in Prospect theory which was developed by Daniel Kahneman and
Amos Tversky in 1979 which explains that losses cause a greater emotional impact on an
individual than does an equivalent amount of gain.

• Let us suppose, as an investor, you must invest your money in any one of the
given companies.

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Company A – company is earning profit of 20% on their capital employed from past 5 years.

Company B – company was earlier earning higher profits but from past 5 years it has been
earning profits of only 20% on their capital employed.

Maximum investors would opt for Company A even though current situation of both the
company is same (keeping other things constant). The reason for selecting Company A is
that there is negative news in company B with respect to decline in profits from last 5
years.

Impact of Behavioural Science on Accounting

• Behavioral science tries to find how individuals make decisions and influence other
individuals, organizations, markets, and society.

• The behavioral aspect of accounting is that part of accounting that tries to develop an
understanding of emotional elements of human behavior that influence the decision-
making process in accounting.

• Under behavioral accounting, we try to understand the impact of human behavior on

budget preparation, auditing, decision making, and leadership.

• Let's take an example where the behavior of a manager directly affects budgetary
decisions.

When the optimistic manager prepares a budget, he might overestimate the expected
sales and plans to increase production. He will try to achieve economies of scale and
ultimately reduce the price of the product.

On the other side when the pessimist manager prepares a budget, he might
underestimate the expected sales, and to cover the cost, he will increase the price of the
product.

Thus, behavior of manager directly affects the business decisions.

• It includes the study of the behavior of accountants or the behavior of non‐accountants

as they are influenced by accounting information. It also studies how variations in
information influence the behavior of people.

For example,

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Managers with a higher administrative background emphasize performance evaluation

and prefer to use financial information for the decision‐making process.

By contrast, other managers tend to use nonfinancial information more than financial
information in decision‐making.

• The other case of behavioral impact is the nature of the client that influences the
judgment of the auditor.

• For example, When the auditor has positive experiences with the client in the past, his
fraud‐risk assessments are lower and vice -versa.

• The nature of reporting of Corporate Social Responsibility by the firms improved since
societies perception about the firm changed based on their CSR reporting and
contribution towards social behavior. It has also been found that the CSR activities tend
to enhance the reputation of the firm.

• The effects of behavioral factors on accounting are so noticeable and significant that this
trend in accounting is said to be one of the most important in determining accounting
paradigms in the future.

• For example, including human resource accounting while preparing accounts.

• Human resource accounting is a process of reporting investments made in the human

resources of an organization that are presently unaccounted for in the conventional
accounting practice. It includes skills, knowledge and behavior of the employees in the
organization.

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