  Chapter 

This chapter discusses the information processing operations involved in updating the general ledger and preparing reports that summarize the results of an organization’s activities. The general ledger and reporting system plays a central role in a company’s accounting information system. Its primary function is to collect and organize data from the following sources:

  • Each of the accounting cycle subsystems provides information about regular transactions.

  • The treasurer provides information about financing and investing activities.

  • The budget department provides budget numbers.

  • The controller provides adjusting entries.

Figure 16.3 on page 485 shows the typical design of an online general ledger and reporting system.

The centralized database must be organized in a manner that facilitates meeting the varied information needs of both internal and external users. Managers need timely detailed information about the results of operations in their particular area of responsibility. Investors and creditors want periodic financial statements and timely updates to help them assess the organization’s performance.

The most important threats for a general ledger are:

  • Inaccurate of invalid general ledger data

  • Unauthorized disclosure of financial information

  • The loss or destruction of master data

See table 16.1 on page 486 for the threats and controls in the general ledger and reporting system.

The first activity in the general ledger system is updating the general ledger. Updating consists of posting journal entries that originate from two sources.

  • Accounting subsystems. Each of the accounting subsystems creates a journal entry to update the general ledger. The general ledger could be updated for each individual transaction.

  • Treasurer. The treasurer’s office provides information for journal entries to update the general ledger for non-routine transactions.

The individual journal entries used to update the general ledger are stored in the journal voucher file. The journal voucher file contains the information that would be found in the general journal in a manual accounting system: the date of the journal entry, the accounts debited and credited, and the amounts.

Journal entries made by the treasurer are original data entry. The following types of input edit and processing controls are needed to ensure that they are accurate and complete:

  • A validity check to ensure that general ledger accounts exists for each account number referenced in a journal entry

  • Field (format) checks to ensure that the amount field in the journal entry contains only numeric data.

  • A zero balance check to verify that total debits equal total credits in a journal entry.

  • A completeness test to ensure that all pertinent data are entered.

  • Closed-loop verification matching account numbers with account descriptions, to ensure that the correct general ledger account is being accessed.

  • A sign check of the general ledger account balance to verify that the balance is of the appropriate nature.

  • Calculating run-to-run totals to verify the accuracy of journal voucher batch processing.

Reconciliations and control reports can detect whether any errors were made during the process of updating the general ledger. One form of reconciliation is the preparation of a trial balance. A trail balance is a report that lists the balances for all general ledger accounts.

The audit trail is a traceable path that shows how a transaction flows through the information system to affect general ledger account balances. It is an important detective control that provides evidence about the causes of changes in general ledger account balances.

The second activity in the general ledger system is posting various adjusting entries. Adjusting entries originate from the controller’s office, after the initial trial balance has been prepared. Adjusting entries fall into five basic categories.

  1. Accruals are entries make at the end of the accounting period to reflect events that have occurred but for which cash has not yet been received or disbursed.

  2. Deferrals are entries made at the end of the accounting period to reflect the exchange of cash prior to performance of the related event.

  3. Estimates are entries that reflect a portion of expenses expected to occur over a number of accounting periods.

  4. Revaluations are entries made to reflect either differences between the actual and recorded value of an asset or a change in accounting principle.

  5. Corrections are entries made to counteract the effects of errors found in the general ledger.

The third activity in the general ledger and reporting system is preparing financial statements. Most organizations close the books to produce financial statements both monthly and annually. A closing journal entry zeroes out all revenue and expense accounts in the adjusted trail balance and transfers the net income to retained earnings.

In 2010, the SEC reaffirmed its commitment to decide in 2011 whether it will require American companies to switch from US based Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS) as the basis for preparing financial statements.

The XBRL file containing the tagged data that is delivered to users is called an instance document. The instance document contains facts about specific financial statement line items, including their values and contextual information. Each specific item in an XBRL document is called an element. An element’s specific value is displayed in an instance document between tags. An instance document is created by applying a taxonomy to set of data. A taxonomy is a set of files that defines the various elements and the relationships between them. One part of the taxonomy is called the schema, which is a file that contains the definitions of every element that could appear in an instance document.

The following are some of the basic attributes used to define each element.

  • A unique identifying name used by the software

  • A description that can be used to correctly interpret the element

  • The element’s data type

  • The element’s normal balance type

  • The element’s period type

The taxonomy also includes a set of files called linkbases, which define the relationships among elements. Important linkbases include the following.

  • The reference linkbase identifies relevant authoritative pronouncements

  • The calculation linkbase specifies how to combine elements

  • The definition linkbase indicates hierarchical relationships among elements

  • The presentation linkbase describes how to group elements

  • The label linkbase associates human-readable labels with elements

The final activity in the general ledger and reporting system is to produce various managerial reports, including budgets. ERP systems can produce a number of budgets to help managers plan and evaluate performance. An operating budget depicts planned revenues and expenditures for each organizational unit. A capital expenditure budget shows planned cash inflows and outflows for each capital project. Cash flow budgets compare estimated cash inflows from operations with planned expenditures and are used to determine borrowing needs.

To properly evaluate performance, reports should be highlight the results that can be directly controlled by the person or unit being evaluated. Responsibility accounting does this by producing a set of correlated reports that break down the organization’s overall performance by the specific subunits which can most directly control those activities.

A flexible budget, in which the budgeted amounts vary in relation to some measure of organizational activity, mitigates problems. Flexible budgeting would entail dividing the budget for each line item in the general superintendent’s department into its fixed and variable cost components.

A balance scorecard is a report that provides a multidimensional perspective of organizational performance. A balanced scorecard contains measures reflecting four perspectives of the organization: financial, customer, internal operations, and innovation and learning.

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