Accounting Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing

Chapter 11: The General Ledger and Financial Reporting Cycle

Slides Authored by Somnath Bhattacharya, Ph.D.Florida Atlantic University

Transaction Processing System Architectures

A firm’s transaction processing systems may either be manual or computerized

Manual Transaction Processing Systems

From Prior Processing Steps

Sales Invoices

Cash Remittance Advices

MiscellaneousSource

Documents

Paychecks Suppliers’ Invoices

Checks

Sales Journal

Cash Receipts Journal

Journal Vouchers

Payroll Journal

Purchases Journal

Cash Disbursements

Journal

Accounts Receivable Subsidiary Ledger

General Ledger

Accounts Payable Subsidiary Ledger

Trial Balance

Managerial Reports

Balance Sheet

Income Statement

Cash-flow StatementFigure 11-1

Computerized Transaction Processing System

T1 T2 T3 T4 T5 T6 T7

D1 D2 D3 D4 D5 D6

D7

D8

D9P1A1

D1

D2 D3

P2

M1

T8 T9

Display

Figure 11-2 (see text book for details)

Benefits & Differences of a Computer-Based General Ledger System - I

Transaction Data may be captured by electronic devices and stored on magnetic media, rather than on hard-copy documents

Transaction Data can be verified by programmed edit checks, in order to detect and prevent errors, rather than by human clerks

Added data may easily be captured, in order to identify transactions with individual employees or organizational units

Transactions can be quickly posted directly to ledgers, rather than being laboriously entered into journals and then posted

Figure 11-3

Transaction Processing, including summarizing of journals and ledgers and computing trial balance totals, can be done faster with fewer errors

Financial Statements and other financial summaries can be prepared at any time during the accounting period, rather than being delayed until the end of the period; furthermore, the ledgers can be kept in balance at all times

Detailed listings of journals and ledgers, reflecting all individual transactions rather than summaries, can be printed for thorough review Figure 11-3

Continued

Benefits & Differences of a Computer-Based General Ledger System - II

Required Stewardship Reports can be prepared quickly and easily from stored transaction data, using stored computer programs

A wide variety of managerial reports and analyses can also be prepared from data stored in related files and tables, thereby providing managers and employees with useful information; in manual systems all reports must be laboriously prepared by clerks

Figure 11-3 Continued

Benefits & Differences of a Computer-Based General Ledger System - III

The Central Role of the General Ledger & Financial Reporting Cycle

The main inputs to the general ledger and financial reporting cycle are the outputs of all the other cycles.

The general ledger provides thechart of accounts structure, which combines the financial andmanagerial sides of accounting.

Objectives of the General Ledger System

To record all accounting transactions promptly and accurately

To post these transactions to the proper accounts

To maintain an equality of debit and credit balances among the accounts

To accommodate needed adjusting journal entries

To generate reliable and timely financial reports pertaining to each accounting period

Brief Chart of Accounts

Account Code100-199200-299300-399400-499500-599600-699700-899900-999 Figure 11-5

Account CodeCurrent AssetsNon-current AssetsLiabilitiesOwners’ EquityRevenuesCost of SalesOperating

ExpensesNon-operating

Expenses

Expense Accounts

850 Administrative Expense Control 852 Officers’ Salaries 855 Office Salaries 859 Overtime Premium 861 Unemployment Insurance Expense 863 FICA Expense 870 Office Supplies 871 Office Repairs 872 Telephone & Telegraph 873 Postage 881 Dues & Subscriptions 883 Donations 884 Travel 888 Depreciation 891 Insurance 892 Taxes 899 Miscellaneous Administrative Expense

Figure 11-6

Potential Sources of Data Input

Routine external transactionsRoutine internal transactionsNon-routine transactionsAdjusting entries

Accruals Deferrals Re-evaluations Corrections

Reversing entriesClosing entries

Forms of Data Input

Journal Vouchers A non-routine, adjusting, reversing, or

correcting transaction A summarization of a batch of

routine transactionsComputer-oriented inputs

The Batch-entry journal voucher A pre-formatted data-entry screen

Individual non-routine journal entries

Data Processing

Daily Processing High volume transactions

salescash receiptspurchasescash disbursementspayroll

End of Period Processing Standard entries Nonrecurring adjusting entries

Information Output

General Ledger Analysis General journal listing General ledger change report

Financial Statements Balance sheet Income statement Statement of cash flows

Managerial Reports Account-oriented analyses Responsibility-oriented reports

System Flowchart Showing Period-End Preparation of Outputs Relating to the General Ledger

Responsibility Center Master

File

General Ledger Master

File

Budget Master

File

Current Journal

Entries & Adjusting Journal Entries

Journal Voucher

File

Financial Reports

Format File

General Ledger

History File

Journal Voucher

History File

Prepare various

listings and financial

statements & managerial

reports

Journal entry

Journal entry proof listing

General ledger change report

General ledger trial balance Comparative

analyses of general ledger

accounts

Comparative balance sheets

Income statements

Statement of cash flows

Responsibility Center Reports

Budgetary Control Reports

Figure 11-11

Responsibility Reporting

V PF in an ce &

A ccou n tin g

V PE n g in eerin g

P u rch as in g P rod u c tionP lan n in g

an dC on tro l

P rod u c tionU n it 1

P rod u c tionU n it 2

SupervisorProduction

Unit 3

F in ish in g A ssem b ly

ProductionSuperintendent

R ece ivin gS h ip p in g an d

S to res

Q u a lityC on tro l an dM ain tn an ce

VPProduction

V PM arke tin g

V PIn d u s tria lR e la tion s

P res id en t

Figure 11-15

File-Oriented Approach to Data Management

General Ledger Master FileCurrent Journal Voucher FileGeneral Ledger History FileResponsibility Center Master FileBudget Master FileFinancial Reports Format File

Record Layout of a General Ledger Master File

Account Account Account Account Total Total Total Total Current Debits

Number Description Classification Balance Debits Credits Debits Credits Account or

beginning year-to year-to current current Balance Credit

of year - year -year month month

Figure 11-17

Linked Tables within a General Ledger Relational Data Base

Account Account Account Dr or CrNumber Description Classification

Account Journal Amount of Dr or CrNumber Voucher Number line item

Journal Date of Preparer’s Reference Description of Amount ofVoucher Transaction initials Number Transactions TransactionNumber

Account Responsibility Budgeted Total Debits Total CreditsNumber Code amount for month Month-to-date Month-to-date

Figure 11-18

The General Ledger’s Risk Exposures

1) Incorrect journal entries 2) Incorrect posting of journal entries 3) Transactions not recorded or not posted 4) Inadequate authorization for journal entries 5) Control accounts out-of-balance with

subsidiary ledgers 6) Imbalances between debit and credit balance

accounts 7) Defects or breaks in the audit trail 8) Interception of data transmitted via the web 9) Unauthorized access to and viewing of

confidential data via the Web 10) Unauthorized alterations to the company’s

financial data via the Web 11) Breakdown of the Web server

General Controls Pertaining to the General Ledger

Organizational ControlsDocumentation ControlsAsset Accountability ControlsManagement Practice ControlsData Center Operations ControlsAuthorization ControlsAccess Controls

Passwords Special terminals Access logs Transaction logs Frequent backups

Application Controls Pertaining to the General Ledger: Input

Pre-numbered and well-designed journal vouchers

Validating data on journal vouchersCorrecting detected errors before the

data are posted to the general ledger

Compiling standardized adjustedjournal entries

Pre-computing batch control totals

Programmed Checks for Editing & Validating Journal Entry Data

Validity checkField checkLimit checkZero-balance checkCompleteness checkEcho check

Internal label checkSequence checkredundancy matching checkRelationship checkPosting checkBatch control/total checks

Programmed Checks for Editing & Validating Journal Entry Data

Application Controls Pertaining to the General Ledger: Processing

Posting journal entries to the general ledger accounts with a variety of program checks performed before and after posting

Summing the amounts posted to thegeneral ledger accounts and thencomparing the posted totals to thepre-computed batch control totals

Establishing and maintaining anadequate audit trail

Application Controls Pertaining to the General Ledger: Output

Preparing frequent trial balances, with any differences between total debits and credits being investigated

Maintaining a log or file of journal vouchers by number and periodically checking to make certain that the sequence of numbers is complete

Printing period-end listings and change reports for review by accountants before the financial statements are prepared

Reviewing financial reports and other outputs for correctness and reasonableness

Auditing general ledger procedures

Web-Security Procedures

AuthenticationAuthorizationAccountabilityData TransmissionDisaster Contingency & Recovery

Plan

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Accounting Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo,Raval, and Wong-On-Wing