Accounting has always been a stable profession, but with the relentless rise of AI, its future promises even greater opportunities (and challenges.) Whatever the case is, one thing is certain that it is here to stay!
If you’re (still) pondering AI in the accounting and finance realm, rest assured—AI has already firmly established its presence in most firms for all their accounting and finance needs.
Hence, embracing AI in accounting ensures competitiveness in today’s digital landscape.
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Benefits of AI in Accounting:
Firms worldwide have undergone digital transformations by harnessing digital technologies like the cloud, SaaS, Big Data, artificial intelligence, and machine learning to boost their growth.
Like all emerging technological advancements, the advent of AI presents a landscape of possibilities and benefits.
As AI progresses swiftly, leaders in various sectors must learn to maneuver the intricacies of these tools and discover how to harness their potential to drive their companies toward success.
- Automation of Repetitive Tasks
AI can automate mundane and time-consuming accounting activities such as data entry, bookkeeping, financial reporting, and tax preparation.
- Real-time Financial Insights: With its rapid processing capabilities, artificial intelligence can provide real-time financial insights, enabling faster and more informed decision-making.
- Enhancing Tax Compliance: As seen in the example below, AI can assist accountants in ensuring tax compliance by analyzing vast amounts of data and identifying potential errors or inconsistencies.
- Fraud Detection: Through advanced data analysis, AI can detect patterns that may indicate fraudulent activities, helping accountants safeguard against financial fraud.
AI in accounting can help streamline routine tasks. Accountants can shift their attention to their role’s more valuable and strategic aspects.
How is AI Used in Accounting?
Today we see AI built into anything. From toothbrushes to baby strollers, to mind-blowing computer graphics in DALL-E2, AI is helping people worldwide with writing, assistant tasks, shopping, and being more productive in general.
AI in accounting is revolutionizing financial procedures. The cloud and AI tools are making relationship- building, advisory services, and even compliance work much more efficient through e-signatures, data inputs, reporting, and more, allowing tax and accounting professionals more flexibility and time-saving tools.
Earlier this year, in January 2023, we explored the real-life use cases of Chat-GPT and its impact on finance and accounting. The most interesting use-case we found while using AI in accounting back then was how we summarized a real earnings report and simplified it for an 11-year-old to understand here.
Later we discussed more strategic use cases in our blog: How CEOs are Harnessing the Power of Chat GPT. And now we present some really interesting real-life use cases and apps of AI in accounting.
Here are interesting real-life use cases of AI in accounting:
AI in Calculating Tax Returns:
Disclaimer: Chat GPT is not a tax professional. The information below is only used to showcase the use of AI in calculating tax returns.
Taking inspiration from Jason’s Staats’ YouTube video, we calculated the tax returns by providing information for a dummy client.
Here’s tax information for a dummy client that we entered into Chat-GPT to use to calculate tax return:
Sample Tax Scenario for John Doe:
Personal Information:
– Full Name: John Doe
– Social Security Number: 123-45-6789
– Filing Status: Single
Income Sources:
- Employment Income:
– Employer: XYZ Corporation
– Total Wages: $50,000
- Investment Income:
– Bank Interest: $500
– Stock Dividends: $1,000
- Self-Employment Income (Freelance):
– Total Revenue: $10,000
– Business Expenses: $2,000
Deductions and Credits:
- Standard Deduction (Single): $12,550
- Education Expenses:
– Tuition Fees: $3,000
– Student Loan Interest: $500
- Retirement Contributions:
– Traditional IRA: $2,000
- Health Savings Account (HSA) Contributions: $1,500
- Charitable Contributions: $1,000
Calculations:
- Total Income:
Employment Income: $50,000
Investment Income: $1,500 ($500 + $1,000)
Self-Employment Income: $8,000 ($10,000 – $2,000)
Total Income: $59,500
- Adjusted Gross Income (AGI):
Total Income: $59,500
Deductions: $20,050 ($12,550 + $3,000 + $500 + $2,000 + $1,500 + $1,000)
AGI: $39,450 ($59,500 – $20,050)
- Taxable Income:
AGI: $39,450
Taxable Income: $39,450
- Tax Liability:
Using Tax Brackets (for demonstration purposes only):
– First $40,000 taxed at 12%: $4,800
– Remaining $6450 taxed at 22%: $1,419
Total Tax Liability: $6,219
- Tax Credits:
– Child Tax Credit: $0 (Assuming no qualifying dependents)
Total Tax Credits: $0
Final Tax Return Summary:
– Total Income: $59,500
– Adjusted Gross Income (AGI): $39,450
– Taxable Income: $39,450
– Total Tax Liability: $6,219
– Tax Credits: $0
Note: This is a simplified example for educational purposes only. Tax calculations can be more complex in real-life scenarios and depend on various factors such as deductions, credits, tax law changes, and more.
Here’s the tax return that Chat-GPT calculated:
Based on the provided information, here’s a summary of John Doe’s tax return calculation:
- Total Income:
- Employment Income: $50,000
- Investment Income: $1,500
- Self-Employment Income: $8,000
- Total Income: $59,500
- Adjusted Gross Income (AGI):
- Total Income: $59,500
- Deductions: $20,050
- Standard Deduction: $12,550
- Education Expenses: $3,000
- Student Loan Interest: $500
- Traditional IRA Contribution: $2,000
- HSA Contribution: $1,500
- Charitable Contributions: $1,000
- AGI: $39,450 ($59,500 – $20,050)
- Taxable Income:
- AGI: $39,450
- Taxable Income: $39,450
- Tax Liability:
- Using Tax Brackets (for demonstration purposes only):
- First $40,000 taxed at 12%: $4,800
- Remaining $5,450 taxed at 22%: $1,199
- Total Tax Liability: $5,999
- Using Tax Brackets (for demonstration purposes only):
- Tax Credits:
- Child Tax Credit: $0 (Assuming no qualifying dependents)
- Total Tax Credits: $0
Final Tax Return Summary:
- Total Income: $59,500
- Adjusted Gross Income (AGI): $39,450
- Taxable Income: $39,450
- Total Tax Liability: $5,999
- Tax Credits: $0
Please note that the tax calculations provided are based on simplified tax brackets for demonstration purposes only. In a real-world scenario, the tax calculations can be more complex due to various factors, including additional tax credits, deductions, and potential changes in tax laws. It’s recommended to consult a tax professional or use tax preparation software for accurate and up-to-date tax calculations based on your specific circumstances.
AI in Financial Reporting Analysis
Earlier this year, we asked Chat-GPT to summarize an earnings report and simplify it by explaining it to an 11-year- old. However, we were just playing around with Chat-GPT at that time. But it was the first time we discovered AI’s use in financial reporting analysis.
We decided to explore further the use of AI in financial analysis. Hence, we copy pasted a balance sheet of Delta Airlines from Yahoo Finance. Then we wrote the following prompt to Chat-GPT 4:
Prompt: You are a financial analyst. Here is the balance sheet of Delta Airlines. Read the balance sheet carefully. Analyze the following risks associated with this company’s solvency. Assess the risk in terms of likelihood, impact, and RAC score.
Chat-GPT’s answer:
As a financial analyst, I’ll analyze the risks associated with Delta Airlines’ solvency based on the information provided in the balance sheet. Solvency refers to a company’s ability to meet its long-term debt obligations and remain financially stable in the long run. To assess the risks, I’ll focus on the key financial metrics and trends related to the company’s profitability, operating income, and net income over the past few years.
- Revenue and Profitability Risk: Likelihood: Moderate Impact: High RAC Score: Moderate-High
Delta Airlines has experienced a significant decline in total revenue in 2020 compared to the previous year, likely due to the COVID-19 pandemic’s impact on the airline industry. However, the revenue has since shown recovery in 2021 and TTM (Trailing Twelve Months), indicating a moderate likelihood of revenue volatility. The impact of revenue fluctuations is high, as a substantial decline in revenue can lead to operational challenges, debt repayment issues, and potential solvency risks.
- Operating Income and EBITDA Risk: Likelihood: Moderate Impact: High RAC Score: Moderate-High
The operating income and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) figures have shown fluctuations over the years. In 2020, both operating income and EBITDA were significantly negative, indicating operational difficulties. Although there has been improvement in 2021 and TTM, the moderate likelihood of further fluctuations poses a high impact risk. Declining operating income and EBITDA could lead to financial distress, difficulty servicing debt, and potentially impact solvency.
- Net Income and Normalized Income Risk: Likelihood: Moderate Impact: High RAC Score: Moderate-High
Delta Airlines reported a net loss in 2020 due to the pandemic’s severe impact on the airline industry. While there has been improvement in net income in 2021 and TTM, the likelihood of volatility remains moderate. The impact of net income fluctuations is high, as sustained losses can strain the company’s financial position and ability to meet its obligations, potentially leading to solvency concerns. The risk is further emphasized when considering normalized income, which adjusts for unusual items, showing that profitability has not fully recovered.
- Unusual Items and Tax Impact Risk: Likelihood: Low-Moderate Impact: Moderate-High RAC Score: Low-Moderate
The presence of unusual items in the financials, particularly in 2020, can introduce uncertainty in financial performance. While these items might not be recurring, they can affect profitability and distort the overall picture of the company’s health. The tax impact of unusual items is notable, as it adds to the financial complexity and might impact future tax liabilities. The likelihood of unusual items is considered low to moderate, but the impact on the company’s solvency, especially when combined with other risks, can be moderate to high.
In conclusion, Delta Airlines faces several risks related to its solvency, primarily driven by uncertainties in the airline industry, particularly due to the COVID-19 pandemic. The impact of these risks can have significant consequences on the company’s financial stability and ability to meet its long-term debt obligations. As a financial analyst, I recommend closely monitoring the company’s financial performance, debt levels, and industry trends to accurately assess evolving risks. Investing or making business decisions related to Delta Airlines should be done with a thorough understanding of these risks and consideration of external factors that may impact the company’s financial position.
Thus we can use Chat GPT similarly for the balance sheet analysis of any company. At the same time, there are a lot of external factors that affect how we forecast things.
Next, let’s analyze Twitter’s financials. Here I copy pasted Twitter’s balance sheet for the period ending 30/6/’22. And wrote this prompt:
You are a financial analyst. Identify the key metrics and provide insights on the financial position of this company.
ChatGPT’s answer:
Sure, let’s analyze the key financial metrics and gain insights into the company’s financial position based on the provided financial data.
- Total Current Assets: This includes the assets expected to be converted into cash or used up within a year. It’s an indicator of the company’s short-term liquidity. The company’s current assets have declined over the past year, which might indicate a decrease in its ability to cover short-term obligations.
- Cash and Short-Term Investments: This shows the company’s cash reserves and short-term investments that can be quickly converted to cash. The decline in this figure over the year might indicate that the company has been using its cash for operational needs or investments.
- Total Receivables, Net: This represents the total amount of money owed to the company by its customers minus any allowances for doubtful accounts. The decrease in receivables might indicate that the company is more efficient in collecting payments from its customers.
- Total Inventory: Unfortunately, inventory data is missing, which could be crucial to assess the company’s inventory management efficiency and its ability to convert inventory into sales.
- Total Current Liabilities: This includes the company’s short-term obligations due within a year. The decrease in this figure over the past year suggests a reduction in short-term liabilities, which can be a positive sign for the company’s liquidity.
- Total Long-Term Debt: This indicates the company’s long-term debt obligations. The increase in long-term debt might result from the company raising funds for expansion or other purposes.
- Total Equity is the residual interest in the company’s assets after deducting its liabilities. An increase in equity suggests improved financial health and the company’s ability to generate returns for shareholders.
- Retained Earnings (Accumulated Deficit): This figure shows the company’s cumulative net income or loss retained over time. The negative value indicates that the company has accumulated more losses than profits.
- Additional Paid-In Capital: This represents the additional amount of capital shareholders contribute above the par value of the company’s common stock. The increase might indicate new investments or capital injections.
- Property/Plant/Equipment, Total – Net: This reflects the company’s tangible assets net of accumulated depreciation. The increase in net property assets might suggest the company has invested in its physical assets.
- Goodwill, Net: Goodwill represents the excess amount paid for acquisitions over the fair value of acquired net assets. The increase in goodwill might suggest that the company has made acquisitions or investments.
- Intangibles, Net includes non-physical assets such as patents, trademarks, and copyrights. The fluctuations in intangibles might indicate changes in the company’s investments in intellectual property.
Overall, the company seems to have experienced positive changes in key metrics like reduced current liabilities and increased equity. However, it’s important to note that it’s challenging to provide a comprehensive analysis without context about the industry, competitors, and the company’s historical performance. Additionally, the missing inventory data limits a complete assessment of the company’s financial health and operational efficiency. It’s recommended to compare these metrics with industry benchmarks and historical data for a more accurate evaluation.
Following the next prompt: Should I invest in this company?
Chat-GPT’s answer:
As an AI language model, I can’t provide personalized investment advice. However, I can offer you some general considerations that you should keep in mind when deciding whether to invest in a company:
- Financial Health: Analyze the company’s financial statements, as you’ve provided above, to understand its revenue trends, profitability, debt levels, and liquidity. Look for consistency and stability in these metrics.
- Industry and Market Analysis: Research the industry in which the company operates. Is it growing, stable, or declining? Consider the company’s competitive position within the industry and its ability to capture market share.
- Management and Leadership: Assess the management team’s experience and track record. Strong leadership can make a significant difference in a company’s success.
- Future Prospects: Consider the company’s growth prospects, expansion plans, and upcoming products or services that could impact its revenue and profitability.
- Risks: Evaluate potential risks the company faces, such as regulatory changes, technological disruptions, or economic downturns.
- Valuation: Compare the company’s valuation (market capitalization, price-to-earnings ratio, etc.) with its peers in the industry to determine if it’s overvalued or undervalued.
- Dividends and Returns: If you’re interested in income, check if the company pays dividends and its historical dividend yield. For growth, consider its historical returns and potential for capital appreciation.
- Long-Term vs. Short-Term: Consider whether you’re looking for a short-term or long-term investment. Short-term investments may focus on market trends, while long-term investments require a deep understanding of the company’s fundamentals.
- Diversification: Avoid putting all your investment capital into a single company. Diversifying your investments across different sectors and asset classes can help manage risk.
- Professional Advice: If you’re unsure about making investment decisions, consider seeking advice from financial professionals, such as financial advisors or investment professionals.
Remember that investing involves risks, and there are no guarantees of returns. It’s important to conduct thorough research, consider your risk tolerance, financial goals, and consult with professionals before making any investment decisions.
AI Apps for Accounting
Pixie Co-pilot, the cutting-edge AI-powered feature by Pixie, the accounting software company based in the UK, is now being previewed. This innovative addition aims to optimize accounting procedures by leveraging AI AutoGPT. By harnessing the most advanced artificial intelligence technology, Pixie Co-pilot is poised to completely transform how accountants handle daily tasks and interact with clients.
2. Docyt
Docyt is an AI-powered accounting automation software platform with a remarkable capability to speed up decision-making processes. It digitizes financial data and automates various workflows. Moreover, it significantly reduces the expenses and intricacy associated with bookkeeping and corporate back-office responsibilities. It allows you to automate tedious bookkeeping tasks, empower your management team, and gain on-the-spot visibility into your overall financial health with live reporting and insights.
3. Digits (for accountants)
According to Digits, AI will categorize transactions, run reports, or use Excel. One of the awesome things about this accounting app is that you can use Digits with your existing Quickbooks, banks, credit cards, and invoices. Hence it helps you to better understand your business.
Key Takeaways
The article highlights the game-changing impact of AI in accounting and finance. AI’s integration into accounting processes has enhanced accuracy, streamlined workflows, and valuable insights.
The benefits of AI in accounting include automation of repetitive tasks, real-time financial insights, enhanced tax compliance, and fraud detection. Real-time reporting and forecasting become possible through AI integration.
Embracing AI in accounting is essential for firms to remain competitive in the digital landscape.
The article also presents real-life use cases of AI in accounting, demonstrating how AI can calculate tax returns and perform financial reporting analysis. Additionally, it introduces AI-powered accounting apps like Pixie Co-pilot, Docyt, and Digits that optimize accounting procedures and automate workflows.
AI is revolutionizing the accounting profession, offering numerous possibilities for growth and efficiency.