Today’s business world is fast-paced and data-driven. And accounting has been constantly adapting to this change, as staying ahead of the curve is crucial for success. The advent of Artificial Intelligence (AI) significantly transformed the accounting industry – multiple accounting software already employs AI technology – and the impact of AI in this sphere is increasing. One of the latest breakthroughs in AI and machine learning technology, ChatGPT, has found its application in various business areas, helping to speed up and optimize many processes: from research to programming to customer support. And accountants can also leverage this power in their practice.
In this article, we’ll look at using AI in accounting, break down its benefits, debunk some common myths around AI, and show practical examples of ChatGPT assistance in performing accounting tasks.
Here’s what you’ll read about AI in accounting:
- Automating transaction categorization and balancing the books
- Streamlining expense and project descriptions
- Simplifying tax liability calculations
- Efficient bank statement reconciliation
- Detecting potentially fraudulent transactions
- Accurate cash flow forecasting
- Optimizing revenue recognition
- Analyzing financial ratios for better decision-making
- Recommending cost-saving measures
What is AI in general and ChatGPT in particular?
To begin with, it’s worth noting that all things AI are very controversial today, and no single opinion exists about its role in modern life and the future.
Some consider AI a virtue, a real game changer in processing vast volumes of information that surround us, doing it much faster and much more efficiently, and thus helping revolutionize scientific research, boost technology development, or at least optimize the way many people do their jobs. Others – those on the opposite end of the scale – take AI as a curse: from being a threat to many human jobs to, at worst, being the end of humankind in the future. So, you see what I mean by saying it’s controversial.
I suggest not getting that dramatic and looking at AI from a purely scientific point of view to recall some basic definitions from the AI world and get a clue about AI and what lies behind this intelligence.
The definition of AI
AI, or Artificial Intelligence, in a nutshell, is the simulation of human intelligence in machines programmed to think and learn like humans. It involves developing computer systems capable of performing tasks that typically require human intelligence, such as speech recognition, decision-making, problem-solving, and language understanding.
AI is a multidisciplinary field encompassing various subfields, such as machine learning, natural language processing, computer vision, robotics, and expert systems. AI aims at creating intelligent systems that can perceive and understand the world, reason and make decisions, and communicate effectively.
As we’re going to explore the potential and capabilities of ChatCPT in accounting in particular, two of the AI subfields are the most interesting for us, namely machine learning and natural language processing.
- Machine learning plays a fundamental role in AI by enabling systems to learn from data and improve performance over time without explicit programming. Algorithms make machine learning models identify patterns, extract meaningful insights, and predict or decide based on the input data. This ability to learn and adapt sets AI apart from traditional software systems.
- Natural language processing (NLP) is another essential aspect of AI, focusing on the interaction between computers and human language. NLP allows machines to understand, interpret, and generate human language in a contextually relevant and meaningful way. This capability has paved the way for applications such as virtual assistants, chatbots, and language translation systems.
What is ChatGPT?
ChatGPT, developed by OpenAI, is an advanced language model – a specific example of an AI model that focuses on natural language processing. It has gained significant attention for its ability to generate human-like text responses based on the input it receives.
ChatGPT leverages deep learning techniques, specifically deep neural networks, to process and understand language. Besides, it relies on a vast knowledge base comprising a wide range of data sources, including books, articles, and websites, to develop a comprehensive understanding of human language. Altogether, it makes ChatCPT capable of engaging in conversations, answering questions, and providing valuable insights across various topics, generating contextually relevant responses.
How does ChatGPT apply in various industries?
ChatCPT is an example of how AI models can facilitate human-like communication and interaction, opening up new possibilities in customer service, content generation, and knowledge sharing. Let’s look a bit closer at some of the areas where ChatGPT has already had a notable impact.
ChatGPT has been widely used in customer support chatbots, providing instant responses to customer queries and addressing common issues. Its ability to understand and generate human-like text helps businesses improve customer satisfaction and reduce response times.
ChatGPT can generate content across different domains, including news articles, blog posts, and product descriptions. Its language generation capabilities make it a valuable tool for content creators, enabling them to produce high-quality content quickly and efficiently.
ChatGPT has shown promise in the field of language translation. It can be trained on multilingual data and used to provide translations between different languages, making communication across language barriers more accessible.
ChatGPT has been utilized as a programming assistant, helping developers with code suggestions, bug fixing, and providing explanations for programming concepts. It assists programmers by reducing development time and aiding in problem-solving.
ChatGPT has been leveraged in educational settings to provide personalized tutoring, answer students’ queries, and assist with learning materials. Its ability to understand and generate educational content has the potential to revolutionize online learning platforms.
Creative writing and storytelling
ChatGPT has been used as a creative writing tool, generating stories, poems, and even screenplays. It can provide inspiration, assist with plot development, and generate coherent narratives based on user inputs.
Research and knowledge discovery
ChatGPT has been employed as a research assistant, helping researchers find relevant information, summarize articles, and explore new ideas. Its vast knowledge base and text generation abilities facilitate knowledge discovery and accelerate the research process.
Why might accountants consider using ChatGPT?
Above, are just a few examples of the impact ChatGPT has had in various spheres. As the technology continues to advance, its potential applications are likely to expand even further, transforming industries and enhancing human productivity in numerous domains. Accounting is no exception.
How does AI transform the role of accountants?
AI technology has been transforming the usual ways in accounting for quite a time already. If you, as an accountant, have been using any sort of accounting software, you might have tracked how these solutions have been evolving to take more responsibility in automating various bookkeeping and accounting tasks: from importing records to generating financial statements to helping accounts reconciliation.
Today, embracing AI-powered accounting software can drastically enhance your accounting practice, especially if you work with businesses featuring high volumes of transactions, such as e-commerce or SaaS, etc. It literally takes care of the majority of repetitive or highly error-prone tasks that accountants used to struggle with, investing substantial time. And it’s not mere recording of transactions. It’s more about bringing together business-critical data from multiple sources and making it the source of truth for a business about their financials, areas of improvement, and available growth options.
Synder is a smart accounting software that aims at helping accountants make their practice stand out and provide additional value to their clients, shifting their focus from bookkeeping, reconciliation, and preparing financial reports to interpreting figures to business owners the way it makes sense for the business, becoming more of an advisor and strategic growth partner. You can find out more about how Synder can help transform your accounting practice by booking a private talk with our team or signing up for a 15-day free trial to explore Synder yourself.
At this point, it’s safe to say that AI is transforming the role of accountants in several ways, revolutionizing traditional accounting practices and enabling accountants to focus on higher-value tasks. We’ll quickly break down some key transformations brought about by AI.
- AI automates repetitive and time-consuming tasks such as transaction categorization, data entry, and report generation. Accountants can leverage AI-powered tools to streamline these processes, saving time and reducing manual errors.
- AI algorithms have a high level of accuracy and can detect patterns, anomalies, and errors more effectively than humans. Accountants can leverage AI to ensure greater accuracy in financial statements, minimize compliance risks, and adhere to accounting standards.
- AI enables accountants to analyze large volumes of financial data swiftly and accurately. Advanced data analytics tools powered by AI can provide valuable insights, identify trends, predict outcomes, and support decision-making processes.
- AI-based algorithms can detect suspicious patterns and anomalies in financial data, aiding in fraud detection and risk mitigation. Accountants can use AI tools to identify potential fraud cases, flag them for further investigation, and implement preventive measures.
- AI models can analyze historical data, market trends, and economic indicators to generate accurate forecasts. Accountants can utilize AI-powered forecasting tools to make informed financial decisions, plan strategically, and optimize cash flow and resource allocation.
- With routine tasks automated, accountants have more time to focus on providing advisory and value-added services to clients. They can leverage their expertise and insights gained from AI-driven analysis to offer strategic financial guidance, optimize business processes, and support growth initiatives.
- Accountants need to stay updated with evolving regulations and industry practices. AI-based platforms can provide real-time access to the latest accounting standards, regulatory updates, and industry insights, enabling accountants to enhance their knowledge and skills continuously.
Why might accountants consider using ChatGPT?
Back to ChatGPT, we already mentioned how it successfully found applications in various domains. And if you’re wondering how you can use it, as an accountant, here are some ideas about how ChatGPT can assist you in various aspects of your work.
ChatGPT offers a range of benefits that can enhance productivity and accuracy by automating repetitive and usually time-consuming tasks such as transaction categorization, expense tracking, and bank statement reconciliation, reducing manual effort and minimizing errors. It can also analyze financial data, identify patterns, and generate insights for improved decision-making.
Moreover, you can use ChatGPT as a valuable resource, providing you with access to up-to-date information and regulatory guidance.
At this point, embracing ChatGPT can enhance your accounting practices, allowing you to focus on higher-value tasks, which means you can become a strategic partner to your clients, helping them make sense of their financial data, eliminate assumptions and uncertainty from decision-making, and clearly understand their next steps and actions to encourage growth and development.
Common concerns about AI in accounting
Before getting to the practical part and showing examples of how ChatGPT can perform various accounting functions, we’ll look at general concerns about AI in accounting. It might help understand some of the counter-AI voices and see what areas of AI accounting might need more of your attention.
A common belief regarding the use of AI in accounting is the concern that AI can’t effectively handle the complexities and nuances involved in accounting practices. Some of the reasons behind this belief include:
- Lack of understanding
There may be a lack of understanding about the capabilities and potential of AI in the accounting field. Skepticism arises when individuals aren’t fully aware of AI capabilities in automating repetitive tasks, analyzing data, and providing valuable insights.
- Human judgment and interpretation
Accounting involves professional judgment and interpretation of financial data, regulations, and accounting principles. Critics argue that AI can’t make subjective decisions and apply professional judgment in complex scenarios, while those are considered essential aspects of the accounting profession.
- Data reliability and bias
AI systems heavily rely on data, and concerns may arise regarding the reliability and biases within the data used for training AI models. If the training data is incomplete, inaccurate, or biased, it can potentially lead to erroneous outcomes and financial misrepresentations.
- Regulatory compliance
Accounting practices are governed by specific regulations and must-follow standards. Skeptics may question whether AI systems can adhere to these regulations accurately and consistently, particularly considering the dynamic nature of accounting rules and the need for ongoing compliance updates.
- Human interaction and trust
Accounting often involves interactions with clients, stakeholders, and regulatory bodies. Some believe that relying solely on AI systems may diminish the personal touch and human-to-human communication valued in accounting. Building trust with clients and stakeholders may also be a concern when AI systems are making critical financial decisions.
Practical use of AI in accounting on the example of ChatGPT
As you can see, some concerns about AI in accounting might stem from not clearly understanding how it works, and how to apply it to your practice. At this point, I think that demonstration sometimes might be the best way to explain things. So we picked out some basic accounting tasks and asked ChatGPT (remember, it’s a language model that mimics human communication, so yes, you can literally ask it to do things for you) to solve them.
Let’s look at the results.
Automating transaction categorization and balancing the books
Traditionally, transaction categorization has been a labor-intensive task, prone to errors and inconsistencies. With the implementation of AI, ChatGPT can assist accountants in accurately categorizing transactions.
By analyzing past transaction patterns and learning from them, ChatGPT can swiftly classify transactions into appropriate categories, reducing the need for manual intervention.
Moreover, balancing the books becomes more efficient with ChatGPT’s ability to detect discrepancies and suggest adjustments, ensuring the accuracy of financial statements.
ChatGPT was provided with a list of ten transactions and asked to properly categorize them.
- Office rent payment of $2,000
- Purchase of computer equipment for $1,500
- Monthly subscription payment for software service: $300
- Sales revenue of $5,000
- Payment of employee salaries: $4,000
- Electricity bill payment: $250
- Internet service bill payment: $100
- Payment for office supplies: $75
- Received payment from a client: $3,500
- Advertising expenses: $600
The AI tool categorized the provided transactions the following way:
- Rent Expense
- Computer Equipment
- Software Expense
- Sales Revenue
- Salaries Expense
- Utilities Expense
- Utilities Expense
- Office Supplies Expense
- Accounts Receivable
- Advertising Expense
Detecting errors in the trial balance
ChatGPT was given an example of a trial balance where errors had sneaked in. So we asked it to find those errors.
ChatGPT found errors in the following accounts:
- Accounts Payable;
- Depreciation Expense;
- Retained Earnings;
ChatGPT found errors in the following accounts:
- Accounts Payable;
- Depreciation Expense;
- Retained Earnings;
Streamlining expense and project descriptions
Tracking and categorizing expenses can be a time-consuming process for accountants. ChatGPT comes to the rescue by automating expense tracking and categorization. By parsing expense descriptions and analyzing historical data, ChatGPT can assign the appropriate expense category, eliminating the need for manual entry.
Additionally, when it comes to project descriptions and allocation, ChatGPT can generate detailed project summaries based on the provided information, making it easier to allocate costs accurately.
As a test, we asked ChatGPT to allocate expenses to appropriate projects. We provided it with the following list of Expenses:
- Marketing costs: $5,000.
- Software development labor: $10,000.
- Office rent: $2,000.
- Customer support salaries: $6,000.
- Software licenses: $3,500.
- Travel expenses: $1,200.
We also gave it a list of the projects we needed to allocate expenses for:
- Project Alpha (Marketing campaign)
- Project Beta (New software development)
- Project Gamma (Customer support)
Here’s how ChatGPT managed to do the job:
Simplifying tax liability calculations
Tax calculations can be intricate, with various regulations and frequent updates. ChatGPT can simplify this process by utilizing its vast knowledge and computational abilities. AI-powered tax software can leverage ChatGPT to ensure accurate and compliant tax calculations.
By incorporating tax laws, rules, and exemptions, ChatGPT can accurately determine sales tax and other tax liabilities, minimizing errors and reducing the risk of non-compliance.
For example, we asked ChatGPT to calculate sales tax liability, providing it with the following list of transactions and tax rates:
- Sale of $1,000 at a 5% tax rate;
- Sale of $2,500 at a 7% tax rate;
- Sale of $3,000 at a 4% tax rate;
- Sale of $4,500 at a 6% tax rate;
- Sale of $6,000 at a 5% tax rate.
And we got the following result:
- Transaction 1: $50
- Transaction 2: $175
- Transaction 3: $120
- Transaction 4: $270
- Transaction 5: $300
Efficient bank statement reconciliation
Reconciling bank statements with financial records is often a time-consuming and error-prone task. With ChatGPT, the process becomes more efficient and accurate. By automating bank statement reconciliation, ChatGPT can match transactions, identify discrepancies, and provide suggestions for resolution. This streamlines the reconciliation process, saving valuable time and reducing the likelihood of errors.
Detecting potentially fraudulent transactions
Fraud detection is a critical aspect of accounting. Identifying potentially fraudulent transactions early on can save businesses from significant financial losses. ChatGPT can assist accountants by analyzing vast amounts of financial data and identifying suspicious patterns and anomalies. By leveraging AI-based fraud detection techniques and algorithms, ChatGPT can flag transactions that require further investigation, enhancing financial security and minimizing the risk of fraud.
We offered ChatGPT a list of transactions and asked it to detect potential fraud. Here’s the transactions list:
- Unusual wire transfer to an unknown recipient: $5,000.
- Duplicate invoice payment: $1,200.
- Payment for an unapproved service: $2,500.
- Employee reimbursement for non-business expense: $500.
As you can see, ChatGPT didn’t just name the transactions that seemed suspicious, but gave an explanation of why this or that transaction might have raised suspicion. For some transactions the answer was a bit vague, like maybe yes, maybe no, which probably derives from the lack of context.
Accurate cash flow forecasting
Cash flow forecasting is essential for businesses to effectively manage their finances. ChatGPT can play a pivotal role in this process by analyzing historical cash flow data, market trends, and external factors. By using AI-driven models, ChatGPT can provide accurate cash flow predictions, enabling businesses to make informed decisions, plan strategically, and mitigate potential cash flow challenges.
We gave ChatGPT a task of forecasting cash flow based on the provided data, as follows:
ChatGPT provides the following answer, breaking down the steps it took to come to a final result.
1. First, it calculated net cash flow for each month.
2. Next, ChatGPT determined the ending cash balances, assuming that the initial cash balance for this calculation would be 10,000.00. As a result, it forecast the ending cash balance of $148,000.00 at the end of Month 3.
Optimizing revenue recognition
Revenue recognition is a complex process that requires adherence to accounting standards and guidelines. ChatGPT can assist in optimizing revenue recognition by automating the identification and classification of revenue streams. By applying AI-enhanced revenue recognition solutions, ChatGPT can ensure compliance, enhance transparency, and minimize the risk of misstatements.
We asked ChatGPT to optimize revenue recognition for the following transactions:
- Annual software subscription: $1,200;
- Quarterly software subscription: $400;
- Monthly software subscription: $50;
- One-time software purchase: $2,000.
So, the tool came up with the following approach:
- Annual software subscription: Recognize $100 per month for 12 months.
- Quarterly software subscription: Recognize $133.33 per month for 3 months.
- Monthly software subscription: Recognize $50 per month.
- One-time software purchase: Recognize the full amount of $2,000 upon delivery.
Analyzing financial ratios for better decision-making
Financial ratios provide insights into a company’s performance and financial health. However, analyzing these ratios manually can be time-consuming and prone to errors. ChatGPT can streamline the process by utilizing AI-driven tools that analyze financial ratios swiftly and accurately. By leveraging ChatGPT’s computational abilities, accountants can gain a comprehensive understanding of a company’s financial position, enabling better decision-making and strategic planning.
We offered ChatGPT to analyze the following financial data and come up with available financial ratios.
|Cost of Goods Sold||50,000.00|
ChatGPT returned three key financial ratios with a pretty detailed break down of the calculation and gave short explanations of what each ratio is about:
- Current Ratio
This ratio measures the company’s ability to cover short-term obligations with its short-term assets.
Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Insurance = 25,000 + 15,000 + 30,000 + 3,000 = 73,000
Current Liabilities = Accounts Payable + Salaries Payable + Unearned Revenue =17,000 + 5,000 + 4,000 = 26,000
Current Ratio = 73,000 / 26,000 = 2.81
The current ratio is 2.81.
- Debt-to-Equity Ratio
This ratio indicates the proportion of debt financing compared to equity financing.
Debt-to-Equity Ratio = Total Debt / Total Equity
Total Debt = Notes Payable = 40,000
Total Equity = Common Stock + Retained Earnings = 50,000 + 68,500 = 118,500
Debt-to-Equity Ratio = 40,000 / 118,500 = 0.34
The debt-to-equity ratio is 0.34.
- Gross Profit Margin
This ratio shows the percentage of revenue remaining after deducting the cost of goods sold.
Gross Profit Margin = (Sales Revenue – Cost of Goods Sold) / Sales Revenue
Gross Profit Margin = (100,000 – 50,000) / 100,000 = 0.5 or 50%
The gross profit margin is 50%.
But if you ask for a concise answer that only provides the ratios in question, with no details, it can do it as well.
Recommending cost-saving measures
Identifying cost-saving opportunities is crucial for maximizing profitability and efficiency. ChatGPT can aid accountants in this task by analyzing expense data and identifying potential areas for cost optimization. By generating AI-based expense analysis and recommendations, ChatGPT can guide businesses towards implementing cost-saving measures and improving their bottom line.
In this example, we provided ChatGPT with a list of expenses that we’d potentially want to cut, and asked it to make some cost-saving suggestions.
- Office rent: $2,000.
- Employee salaries: $10,000.
- Utilities: $500.
- Software subscriptions: $1,500.
- Office supplies: $200.
- Advertising: $3,000.
- Travel expenses: $1,000.
As you can see, ChatGPT came up with ideas on how you could optimize those costs. For instance, it suggests negotiating a lower rental rate with the landlord to cut your office rent expenses. It also recommends assessing your workforce to find the possibility of combining roles to reduce the number of employees, etc. These recommendations, at large, seem pretty much generic. But as we haven’t provided any additional context, we couldn’t expect some out-of-the-box recommendations, could we?
What can’t ChatGPT do in accounting?
While AI has made remarkable strides in automating repetitive and rule-based tasks and processing vast amounts of data at incredible speeds, there are distinct areas where the human touch remains indispensable. At this point, AI may encounter challenges or exhibit lower performance compared to human accountants fulfilling certain tasks. It highlights the unique strengths that human professionals bring to the field of accounting.
Back to our examples, while ChatGPT formally completed all the tasks, at some, an accounting professional is highly likely to outperform the artificial mind.
- Identification of unusual or suspicious transactions
AI may lack the depth of understanding and intuitive insight possessed by human accountants, making it less effective in identifying transactions that raise suspicion or indicate potential fraud.
- Cost allocation based on context
AI systems may struggle to fully comprehend the intricacies and specific contextual requirements of a client’s business, leading to inaccuracies in cost allocation.
- Development of customized chart of accounts
Although AI can generate a standard chart of accounts, developing a tailored chart that accommodates the unique characteristics of a client’s business or industry may prove challenging for AI systems.
- Drafting comprehensive financial statement notes
AI can generate basic financial statement notes. However, it can’t provide nuanced explanations and insightful interpretations compared to the expertise and insights offered by human accountants.
- Analysis of financial ratios and provision of meaningful insights
While AI can perform the necessary computations for financial ratios, it may struggle to offer in-depth insights and recommendations based on those ratios, as human accountants are better equipped to provide valuable context and expert judgment.
It’s worth noting that in these particular tasks, human accountants excel due to their ability to understand context, exercise professional judgment, and provide tailored advice based on their extensive knowledge of a client’s individual circumstances.
Final words: Why do you need to embrace AI in accounting?
As you can see, integrating AI in accounting holds immense potential for transforming traditional accounting practices. While concerns and skepticism exist, it’s important to note that AI can’t replace an accountant entirely. The effectiveness of AI systems like ChatGPT heavily relies on the quality of input provided. As demonstrated in the example, the outcome is highly dependent on asking the right questions and providing accurate information.
Accounting professionals, with their vast experience, expertise, and ability to discern pertinent details, play a dramatic role in maximizing the benefits of AI in accounting. They possess the necessary skills to extract valuable insights from AI-generated outputs and make informed decisions. Therefore, the successful integration of AI in accounting requires collaboration and synergy between AI systems and human accountants. By leveraging AI as a powerful tool and combining it with human intelligence, accountants can optimize their accounting practices, enhance productivity, and deliver meaningful value to their clients in this evolving digital landscape.