Accounting Information Systems: Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Wong-On-

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 Miscellaneous Source Documents Paychecks Suppliers Invoices

Sales Invoices Sales Journal

Cash Remittance Advices

Checks

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

Figure 11-1

Balance Sheet

Income Cash-flow Statement Statement

Computerized Transaction Processing System

T1 T2 T3 T4 T5 T6 T7

D1

D2

D3

D4

D5

D1 D6

M1 A1 P1 D8 D2 D3 Display T8 Figure 11-2 T9 D9 P2

D7

(see text book for details)

Benefits & Differences of a ComputerBased 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

Benefits & Differences of a ComputerBased General Ledger System - II

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 ComputerBased General Ledger System - III

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

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 the chart of accounts structure, which combines the financial and managerial 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 Code 100-199 200-299 300-399 400-499 500-599 600-699 700-899 900-999 Account Code Current Assets Non-current Assets Liabilities Owners Equity Revenues Cost of Sales Operating Expenses Non-operating Expenses Figure 11-5

Expense Accounts
850 852 855 859 861 863 870 871 872 873 881 883 884 888 891 892 899 Administrative Expense Control Officers Salaries Office Salaries Overtime Premium Unemployment Insurance Expense FICA Expense Office Supplies Office Repairs Telephone & Telegraph Postage Dues & Subscriptions Donations Travel Depreciation Insurance Taxes Miscellaneous Administrative Expense
Figure 11-6

Potential Sources of Data Input

Routine external transactions Routine internal transactions Non-routine transactions Adjusting entries
Accruals Deferrals Re-evaluations Corrections

Reversing entries Closing entries

Forms of Data Input

Journal Vouchers
A non-routine, adjusting, reversing, or correcting transaction A summarization of a batch of routine transactions

Computer-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
sales cash receipts purchases cash disbursements payroll

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
Budget Master File General Ledger Master File Current Journal Entries & Adjusting Journal Entries Journal Voucher File Financial Reports Format File

Responsibility Center Master File General ledger change report General ledger trial balance

Prepare various listings and financial statements & managerial reports

General Ledger History File Journal Voucher History File

Journal entry Journal entry proof listing Figure 11-11

general ledger accounts

Statement of Comparative cash flows balance sheets Income Comparative analyses of statements

Budgetary Control Reports

Responsibility Center Reports

Responsibility Reporting
President

VP Finance & Accounting

VP Engineering

VP Production

VP Marketing

VP Industrial Relations

Purchasing

Production Planning and Control

Production Superintendent

Receiving Shipping and Stores

Quality Control and Maintnance

Production Unit 1

Production Unit 2

Supervisor Production Unit 3

Finishing

Assembly

Figure 11-15

File-Oriented Approach to Data Management

General Ledger Master File Current Journal Voucher File General Ledger History File Responsibility Center Master File Budget Master File Financial Reports Format File

Record Layout of a General Ledger Master File

Account Account

Account

Account Total Total

Total

Total

Current Debits or

Number Description Classification Balance Debits Credits Debits

Credits Account

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 Responsibility Number Code Budgeted amount for month Total Debits Month-to-date Total Credits Month-to-date

Account Account Number Description

Account Classification

Dr or Cr

Account Number

Journal Amount of Voucher Number line item

Dr or Cr

Journal Date of Voucher Transaction Number Figure 11-18

Preparers initials

Reference Description of Amount of Number Transactions Transaction

The General Ledgers 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 Controls Documentation Controls Asset Accountability Controls Management Practice Controls Data Center Operations Controls Authorization Controls Access 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 vouchers Correcting detected errors before the data are posted to the general ledger Compiling standardized adjusted journal entries Pre-computing batch control totals

Programmed Checks for Editing & Validating Journal Entry Data

Validity check Field check Limit check Zero-balance check Completeness check Echo check

Programmed Checks for Editing & Validating Journal Entry Data

Internal label check Sequence check redundancy matching check Relationship check Posting check Batch control/total checks

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 the general ledger accounts and then comparing the posted totals to the pre-computed batch control totals Establishing and maintaining an adequate 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
Authentication Authorization Accountability Data Transmission Disaster Contingency & Recovery Plan

Accounting Information Systems: Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Wong-On-

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