427 Chapter 14 Notes: General Ledger and Reporting System
Introduction

The general ledger and reporting systems must be designed to produce regular periodic reports
and to support real-time inquiry needs
General Ledger and Reporting System Activities

Four basic activities performed by the general ledger and reporting system:
o Update general ledger
o Post adjusting entries
o Prepare financial statements
o Produce managerial reports
Update General Ledger


Post journal entries that originate from 2 sources:
o Accounting Subsystems – update the general ledger by means of summary journal
entries that represent the results of all transactions that occurred during a given period
of time
o Treasurer – creates individual journal entries to update the general ledger for nonroutine transactions
Journal entries to update the general ledger can be documented on a form called a journal
voucher
Post Adjusting Entries




Adjusting entries originate from the controller’s office after the initial trial balance has been
prepared
Trial balance – a report that lists the balances for all general ledger accounts
Five basic categories of adjusting entries:
o Accruals – entries made at the end of the accounting period to reflect events that have
occurred but for which cash has not yet been received or disbursed
o Deferrals – entries made at the end of the accounting period to reflect the exchange of
cash prior to performance of the related event
o Estimates – entries that reflect a portion of expenses that occur over a number of
accounting periods
o Revaluations – entries made to reflect either differences between the actual and
recorded value of an asset or a change in accounting principle
o Corrections – entries made to counteract the effects of errors found in the general
ledger
After all adjusting entries have been posted, an adjusted trial balance is prepared
Prepare Financial Statements



Income statement is prepared first using data from the revenue and expense account balances
in the adjusted trial balance.
Balance sheet is prepared next, followed by the statement of cash flows
Lastly, prepare closing entries to zero out all revenue and expense accounts and transfer net
income/loss to retained earnings.
Produce Managerial Reports









Lists of journal vouchers by numerical sequence, account number or date; lists of general ledger
account balances
o Used to verify the accuracy of the posting process
Operating budget – depicts planned revenues and expenditures for each organizational unit
Capital expenditures budget – shows planned cash inflows and outflows for each capital project
Cash flow budget – compares estimated cash inflows from operations with planned
expenditures and are used to determine borrowing needs
Budgets and performance reports should be prepared based on responsibility accounting
Responsibility accounting – reporting financial results on the basis of managerial responsibilities
within an organization.
Contents of the budgetary performance reports should be tailored to the nature of the unit
being evaluated
Easiest approach is to establish fixed targets for each unit, store the figures in a database, and
compare actual performance with the preset values
o Drawback – budget number is static and doesn’t reflect unforeseen changes in the
operating environment
It’s better to develop a flexible budget where budgeted amounts vary in relation to some
measure of organizational activity.
XBRL: Revolutionizing the Reporting Process



A problem with how data used to be transmitted electronically was that many recipients had
different requirements concerning the manner in which information was to be delivered
o Non-value-added costs and opportunities for error
o Underlying cause was the lack of standards for identifying the content of data
XBRL (Extensible Business Reporting Language) – a variant of XML specifically designed for use in
communicating the content of financial data, by creating tags for each data item that look much
like tags used by HTML
2 major benefits to the creation and electronic dissemination of financial data
o Enables organizations to publish information only once, using standard XBRL tags
o The information the XBRL tags provide is interpretable


Internal reporting also benefits because data from the organization’s AIS can be exported once
and then reused by different managers in different applications without the need to manually
reenter it.
o Improves efficiency and accuracy
Two different taxonomies for XBRL tags
o Financial reporting taxonomies (developed for different industries and countries, define
summary measures that appear in financial statements and reports)
o XBRL-GL taxonomies define the underlying data elements in an AIS, thereby tagging
each individual piece of business data prior to its aggregation in reports
Control Objectives, Threats, and Procedures


Control objectives in the general ledger and reporting system:
o All updates to the general ledger are properly authorized
o All recorded general ledger transactions are valid
o All valid, authorized general ledger transactions are recorded
o All general ledger transactions are accurately recorded
o General ledger data are safeguarded from loss or theft
o General ledger system activities are performed efficiently and effectively
Use well-designed documents, online data entry, use appropriate application controls, record
who completed and reviewed forms, prenumber journal entries, restrict access to the general
ledger
Threat 1: Errors in Updating the General Ledger and Generating Reports

Input edit and processing controls, reconciliations and control reports, and maintenance of an
adequate audit trail
Input Edit and Processing Controls


Primary input edit control for summary journal entries is checking to ensure that they represent
activity for the most recent time period
Controls for original data entry:
o Validity check – ensure general ledger accounts exist for each account # referenced in a
journal entry
o Field (format) check – ensure amount field in the journal entry contains only numeric
data
o Zero-balance check – verify total debits = total credits in a journal entry
o Completeness test – ensure all pertinent data are entered
o Closed-loop verification – match account numbers with account descriptions, ensure
correct account is being accessed
o Create a standard adjusting entry file for recurring adjusting entries made each period
o Sign check – verify the balance is of the appropriate (debit or credit) nature
o
Run-to-run totals – verify 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 trial balance (see if total debits = total credits)
Clearing and suspense accounts should have a zero balance at the end of the fiscal period
Another important reconciliation is to compare the general ledger control account balances to
the total balance in the corresponding subsidiary ledger
Examine all transactions occurring near the end of an accounting period to verify that they are
recorded in the proper time period
General journal listing – shows details of each entry posted to the general ledger; indicates if
total debits = total credits posted to the general ledger
The Audit Trail



Audit trail – depicts the path of a transaction through the accounting system; provides the
information needed to trace all changes made to the general ledger.
Facilitates the following tasks:
o Tracing any transaction from its original source document to the general ledger and any
report using that data
o Tracing any item appearing in a report back through the general ledger to its original
source document
o Tracing all changes in general ledger accounts from their beginning balance to ending
balance
Usefulness of the audit trail depends on its integrity
Threat 2: Financial Statement Fraud



Often involves journal entries by upper-level management that either overstate revenues or
understate liabilities
Difficult to prevent because management has override functions
Need to regularly test AIS to ensure controls are adequate
Threat 3: Loss or Unauthorized Disclosure or Alteration of Financial Data



User IDs and passwords should be used to control access to the general ledger and to enforce
the proper segregation of duties by limiting the functions that each legitimate user may
perform.
Controls over the creation of journal voucher records also are important because they authorize
changes to general ledger account balances; check for proper authorization code
Controller and CFO need to review and suggest appropriate configuration of user rights in
integrated AIS packages and ERP systems


Important to provide adequate backup and disaster recovery procedures to protect the
information contained in the general ledger; at least one on-site and one off-site
General ledger data should be encrypted while in storage and during transmission
Threat 4: Poor Performance

XBRL, redesigning business processes – improve efficiency and effectiveness
Supporting Management’s Information Needs
The Balanced Scorecard






Balance scorecard – a report that provides a multidimensional perspective of organizational
performance
Contains measures reflecting financial, customer, internal operations, and innovation and
learning perspectives
Financial is lagging, the other 3 are leading (forward looking)
Provides a more comprehensive overview of organizational performance than just financial
measures alone
Provides the ability to test and refine strategy
It can also be used as a vehicle to better manage enterprise risk by incorporating appropriate
risk-based goals and measures in the various dimensions
Using Data Warehouses for Business Intelligence










Online general ledger systems give management ready access to information needed to make
timely operating and tactical decisions
Strategic decision making requires access to large amounts of historical data
Data warehouse – contains both detailed and summarized data for a number of years and is
used for analysis rather than transaction processing; enormous
An organization may have more than one data warehouse
Data marts – small versions of data warehouses
Data warehouses and data marts complement transaction processing databases to provide
support for strategic decision making.
Data warehouses are usually designed to be purposely redundant to maximize query efficiency;
usually designed to be dimensional in nature
Business intelligence – the process of accessing the data contained in a data warehouse and
using it for strategic decision making; 2 main techniques: online analytical processing and data
mining.
Online analytical processing – use queries in which user the user guides the investigation of
hypothesized relationships in the data
Data mining – use sophisticated statistical analysis to “discover” unhypothesized relationships in
the data

Data warehouses also require controls:
o Data validation controls to ensure that the information input into the data warehouse is
accurate; very time consuming and expensive
o Control access to the data warehouse
o Information in the data warehouse should be encrypted
o Regularly back up copies of the data warehouse and store them securely
Principles of Graph Design




Graphs highlight and summarized important facts of certain reports
Well-designed graphs make it easy to identify and understand trends and relationships; poorly
designed graphs can impair decision making
Bar charts are the most common type of graph used to display trends in financial data
o Use titles that summarize the basic message
o Include data values with each element instead of just labeling the vertical axis
o Use 2-D instead of 3-D bars
o Use different shades of gray or colors instead of patterns to represent different
variables
Readability is important, but the ultimate value of graphs to support decision making depends
on the accuracy with which they are interpreted.
o Begin the vertical axis at zero; ensures magnitude of change in data accurately reflects
the actual change in the data; exception: don’t start at zero if there is a need to monitor
minor fluctuations in data
o For graphs that depict time-series data, order the x-axis chronologically from left to right