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 Sales Journal Cash Remittance Advices Cash Receipts Journal Accounts Receivable Subsidiary Ledger Miscellaneous Source Documents Journal Vouchers General Ledger Paychecks Payroll Journal Suppliers’ Invoices Purchases Journal Checks Cash Disbursements Journal Accounts Payable Subsidiary Ledger Trial Balance Managerial Reports Figure 11-1 Balance Sheet Income Cash-flow Statement Statement Computerized Transaction Processing System T1 D1 T2 T3 T4 T5 D2 D3 D4 D5 T6 T7 D1 D6 M1 A1 P1 D9 D8 D7 D2 P2 D3 Display T8 Figure 11-2 T9 (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 Current Journal Entries & Adjusting Journal Entries Budget Master File General Ledger Master File Responsibility Center Master File Journal entry Journal entry proof listing Figure 11-11 General ledger change report General ledger trial balance Journal Voucher File Prepare various listings and financial statements & managerial reports Financial Reports Format File General Ledger History File Journal Voucher History File Statement of Comparative cash flows balance sheets Income Comparative analyses of statements general ledger accounts 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 Figure 11-15 Production Unit 2 Supervisor Production Unit 3 Finishing Assembly 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 Number Description Classification Balance Debits Credits Debits Total Current Credits Account Debits or beginning year-to year-to current current Balance Credit of year - year Figure 11-17 -year month month Linked Tables within a General Ledger Relational Data Base Account Responsibility Number Code Account Account Number Description Budgeted amount for month Account Classification Figure 11-18 Preparer’s initials Total Credits Month-to-date Dr or Cr Account Number Journal Date of Voucher Transaction Number Total Debits Month-to-date Reference Number Journal Amount of Voucher Number line item Description of Amount of Transactions Transaction Dr or Cr 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 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 Copyright © 2000 John Wiley & Sons, Inc. 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