chapter 11: the general ledger and financial reporting … · accounting information systems:...
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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
Miscellaneous Source
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
Statement Figure 11-1
Computerized Transaction
Processing System
T1 T2 T3 T4 T5 T6 T7
D1 D2 D3 D4 D5 D6
D7
D8
D9 P1 A1
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 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
Figure 11-5
Account Code
Current Assets
Non-current Assets
Liabilities
Owners’ Equity
Revenues
Cost of Sales
Operating Expenses
Non-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 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
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
VP
Finance &
Accounting
VP
Engineering
Purchasing Production
Planning
and
Control
Production
Unit 1
Production
Unit 2
Supervisor
Production
Unit 3
Finishing Assembly
Production
Superintendent
Receiving
Shipping and
Stores
Quality
Control and
Maintnance
VP
Production
VP
Marketing
VP
Industrial
Relations
President
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
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 Cr
Number Description Classification
Account Journal Amount of Dr or Cr
Number Voucher Number line item
Journal Date of Preparer’s Reference Description of Amount of
Voucher Transaction initials Number Transactions Transaction
Number
Account Responsibility Budgeted Total Debits Total Credits
Number 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 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
Internal label check
Sequence check
redundancy matching check
Relationship check
Posting check
Batch 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 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
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Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing