Instructor Outline CHAPTER 14 GENERAL LEDGER AND REPORTING SYSTEM As a result of your study of this chapter, you should

be able to:
1.

2. 3.

4. 5. 6.

Describe the information processing operations required to update the general ledger and to produce other reports for internal and external users. Understand the implications of new IT developments, such as XBRL, for internal and external reporting. Identify the major threats in general ledger and reporting activities, and evaluate the adequacy of various control procedures for dealing with them. Discuss and design a balanced scorecard for an organization. Explain the relationship between online transaction processing systems and data warehouses used to support business intelligence. Design graphs that accurately portray the data in a manner that supports decision making.

This chapter discusses the information processing operations involved in updating the general ledger and preparing reports that summarize the results of an organizations activities. Figure 14-1 on page 530 provides a context diagram of the general ledger and reporting system. One of the primary functions of the general ledger and reporting system is to collect and organize data from the following sources: Each of the accounting cycle subsystems described in chapters 10 through 13 provides information about regular transactions. The treasurer provides information about financing and investing activities, such as the issuance or retirement of debt and equity instruments and the purchase or sale of investment securities The budget department provides budget numbers. The controller provides adjusting entries. The general ledger and reporting system must be designed to produce regular periodic reports and to support real-time inquiry needs.

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General Ledger and Reporting System Activities Figure 14-2 on page 531 is a level 0 data flow diagram depicting the four basic activities performed by the general ledger and reporting system. Circle 1.0 Update general ledger Circle 2.0 Post adjusting entries Circle 3.0 Prepare financial statements Circle 4.0 Produce managerial reports Figure 14-3 on page 532 depicts a typical online system used to perform these activities. The first three activities in Figure 14-2 (Circles 1.0, 2.0 and 3.0) represent the basic steps in the accounting cycle, culminating in the production of the traditional set of financial statements. Update General Ledger Updating consists of posting journal entries that originate from two sources: 1. Accounting subsystems Each of the accounting subsystems described in chapters 10 through 13 creates a journal entry to update the general ledger. 2. Treasurer The treasurers office creates individual journal entries to update the general ledger for nonroutine transactions. Journal entries to update the general ledger may be documented on a form called a journal voucher. Figure 14-2 shows that the individual journal entries used to update the general ledger are then stored in the journal voucher file.

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Post Adjusting Entries These adjusting entries originate from the controllers office. The trial balance is a report that lists the balances for all general ledger accounts. Adjusting entries fall into five basic categories: Accruals represents 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.
1.

Deferrals represent entries made at the end of the accounting period to reflect the exchange of cash prior to performance of the related event.
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Estimates represent entries that reflect a portion of expenses that occur over a number of accounting periods.
3.

Revaluations represent entries made to reflect either differences between the actual and recorded value of an asset or a change in accounting principle.
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Corrections represent entries made to counteract the effects of errors found in the general ledger.
5.

Information about these adjusting entries is also stored in the journal voucher file. Prepare Financial Statements The third activity in the general ledger and reporting system is preparing financial statements (circle 3.0 in Figure 14-2 on page 531). The income statement is prepared first. The balance sheet is prepared next. The third major financial statement is the statement of cash flows.

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Produce Managerial Reports The final activity in the general ledger and reporting system (circle 4.0 in Figure 14-2) is producing various managerial reports. Examples of these reports include 1) lists of journal vouchers by numerical sequence, account number, or date and 2) lists of general ledger account balances. Budgets and performance reports should be developed on the basis of responsibility accounting. Responsibility accounting is reporting financial results on the basis of managerial responsibilities within an organization. Figure 14-4 on page 535 provides a sample set of reports for a responsibility accounting system. Many production, service and administrative departments are evaluated using cost centers. In contrast, sales departments are often evaluated as revenue centers. No matter which basis is used to prepare a units budgetary performance report, the method used to calculate the budget standard is crucial. The easiest approach to developing a budgetary performance report is to establish fixed targets for each unit (referred to as a static budget). The drawback to this approach is that it does not consider any changes in the operation of the activity. These changes could include actual units produced being different then the fixed (static) budget amount. Another example would be a difference in the number of unit sales. A solution to such problems is to develop a flexible budget, in which the budgeted amounts vary in relation to some measure of organizational activity. XBRL: Revolutionizing the Reporting Process Communications technology has long been used to reduce time and costs of preparing and distributing financial statements and managerial reports. Previously, electronic dissemination of reports containing financial and nonfinancial information was a cumbersome, inefficient process. The problem was that many recipients had different requirements concerning the manner in which information
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was to be delivered. For example, SEC filings include a lot of the information that is also found in financial statements. Figure 14-5 on page 536 shows the traditional electronic reporting process which contains much of the same information, but presented in many different ways. The underlying cause of these problems was the lack of standards for identifying the content data. The Extensible Business Reporting Language (XBRL) is a variant of XML, specifically designed for use in communicating the content of financial data. XBRL creates tags for each data item similar to that used by HTML. Refer to Figure 14-6 on page 537. Tag names are at the bottom of Figure 14-6, such as <usfrpt:SalesRevenueNet>. The tags are used to describe the various line items in the financial statement. The other fields in each tag provide contextual information such as the year and the units of measurement. Figure 14-7 on page 538 shows that XBRL provides two major benefits to the creation and electronic dissemination of financial data. First, it enables organizations to publish information only once, using standard XBRL tags. The second benefit of XBRL is that the information that XBRL tags provide is interpretable. This means that recipients will no longer need to manually reenter data they acquired electronically so that decision support tools can analyze them. The benefits of XBRL are not limited to its use to exchange financial data with external parties. Internal reporting will also benefit because data from the organizations AIS can be exported once and then reused by different managers in different applications. This eliminates the need to manually reenter the same data.

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XBRL is certainly an important IT development. It is also noteworthy because the accounting profession spearheaded its development (see Focus 14-1 on page 539). Control Objectives, Threats and Procedures The control objectives in the general ledger and reporting system are similar to those in the other AIS cycles discussed in previous chapters: 1. 2. 3. 4. 5. 6. All updates to the general ledger are properly authorized All recorded general ledger transactions are valid All valid, authorized general ledger transactions are recorded All general ledger transactions are accurately recorded General ledger data are safeguarded from loss or theft General ledger system activities are performed efficiently and effectively

Table 14-1 on page 540 lists the major threats and exposures in the general ledger and financial reporting system, along with applicable control procedures. Threat 1: Errors in Updating the General Ledger and Generating Reports Errors made in updating the general ledger and poorly designed reports can lead to poor decision making and impair the quality of the decisions made. The controls for this threat fall into three categories: 1. input edit and processing controls, 2. reconciliations and control reports, and 3. maintenance of an adequate audit trail Input Edit and Processing Controls Figure 14-3 on page 532 shows two sources of journal entries for updating the general ledger: summary journal entries from the other AIS cycles and direct entries made by the treasurer or controller.

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The journal entries from the other AIS cycles comes from the output of a series of processing steps, which are subject to a variety of application control procedures. The journal entries made by the treasurer and controller are original data entry which needs input edit and processing controls.
1) A validity check to ensure that general ledger accounts exist

for each account number referenced in a journal entry.

2) Field (format) checks to ensure that the amount field in the

journal entry contains only numeric data.

3) Zero-balance checks to verify that total debits equal total

credits in a journal entry.

4) A completeness test to ensure that all pertinent data are

entered, especially the source of the journal entry.

5) Closed-loop verification matching accounts numbers with

account descriptions to ensure that the correct general ledger account is being accessed.
6) Creating a standard adjusting entry file for recurring

adjusting entries made each period, such as the depreciation expense.

7) A sign check of the general ledger account balance, once

updating is completed.
8) Calculating run-to-run totals to verify the accuracy of journal

voucher batch processing. Reconciliation and Control Report Reconciliations and control reports can detect whether any errors were made during the updating of the general ledger.

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Another form of reconciliation is the trial balance which detects whether total debit balances in the general ledger are equal to total credit balances. Clearing and suspense accounts provide a means to ensure that the general ledger is always in balance. To illustrate, assume that one clerk is responsible for recording the release of inventory to customers and the other is responsible for recording the billing of customers. The journal entry made by the inventory clerk would be: Debit Unbilled shipments Credit Inventory XXX XXX

The journal entry made by the billing clerk would be: Debit Accounts receivable XXX Credit Unbilled shipments XXX After both entries have been made, the special clearing account, unbilled shipments, the balance in this account should be zero. Another important reconciliation is comparing the general ledger control account balance to the total balance in the corresponding subsidiary ledger. Enterprise Resource Planning (ERP) systems provide a number of control reports to help identify the source of errors that occurred. Listing journal vouchers by general account number helps identify the source of any errors affecting a specific general ledger account. Listing the journal vouchers by sequence can indicate the absence of any journal entry postings. The general journal listing shows the details, description and amount debited or credited of each entry posted to the general ledger. This report indicates whether total debits are equal to total credits.

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The Audit Trail The audit trail depicts the path of a transaction through the accounting system. An audit trail facilitates the following tasks: Tracing any transaction for omits original source document to the general ledger and to any report or other document using that data,
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Tracing any items appearing in a report back through the general ledger to its original source documents.
2.

Tracing all changes in general ledger accounts from their beginning balance to their ending balance.
3.

The journal voucher file provides information about the source of all entries made to update the general ledger. The usefulness of the audit trail depends on its integrity. Therefore, it is important to periodically make backups of all audit trail components and to control access to them. Threat 2: Financial Statement Fraud Financial statement fraud often involves journal entries by upper-level management that either overstate revenues or understate liabilities. The best control to mitigate the threat of financial statement fraud is regular, detailed testing of all special journal entries to the general ledger. Threat 3: Loss or Unauthorized Disclosure or Alteration of Financial Data The general ledger is a key component of the organizations accounting information system. User IDs and passwords should be used to control access to the general ledger and to enforce the proper segregation of duties. Controls over the creation of journal voucher records are important because they authorize changes to general ledger account balances.

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Enforcing proper access controls and segregation of duties requires the controller or CFO review and suggest appropriate configuration of user rights in integrated AIS packages and ERP systems. It is also important to provide adequate backup and disaster-recovery procedures to protect the information contained in the general ledger. Access and processing integrity controls are also needed to ensure the confidentiality and accuracy of any financial data transmitted electronically to branch offices or external parties. Threat 3: Poor Performance Organizations provide information to a multitude of external parties and internal reports for use in managing operations. XBRL provides a means to significantly improve both the efficiency and accuracy of these processes. Redesigning business processes provides additional opportunities to improve efficiency and effectiveness. Supporting Managements Information Needs There are three important topics regarding the use of general ledger information for decision making: (1) the balance scorecard, (2) data warehouses to support business intelligence, and (3) the proper design of graphs of financial data. The Balanced Scorecard The balance scorecard is a report that provides a multidimensional perspective of organizational performance. A balanced scorecard contains measures reflecting four perspectives of the organization; 1) financial, 2) customer, 3) internal operations, and 4) innovation and learning.

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Table 14-2 on page 544 provides an example of balanced scorecard used by AOE. This provides the targeted goal, and the current period and prior period actual performance results. Many companies have three key financial goals: 1) increased revenue streams through sales of new products, 2) increased profitability as reflected in return on equity, and 3) maintaining adequate cash flow to meet obligations. For every organization, customers are the key to achieving financial goals. AOEs balanced scorecard contains two key goals; 1) improve customers satisfaction and 2) become the preferred supplier for key customers. To continuously improve service and results, it is important to develop new products and to train the workforce. Hypothetically, increased employee training is expected to improve service quality, as reflected in the percentage of customer orders filled correctly. In turn, improved service quality is expected to result in increased customer satisfaction and in key customers making a greater share of purchases from AOE. Accountants and systems professionals should participate in the development of a balanced scorecard. Although the balanced scorecard was initially developed as a strategic management tool, it can also be used as a vehicle to better manage enterprise risk. Using Data Warehouses for Business Intelligence Timely access to information is important. Management must be continuously monitoring and reevaluating the organizations performance. Firms must be able to quickly alter their plans in response to changes in their environment.

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Figure 14-3 on page 532 provides an example of an online general ledger system. ERP systems and integrated AIS are primarily designed to support the organizations transaction processing needs, not strategic decisions. Strategic decision making requires access to large amounts of historical data. To provide the information needed for strategic decision making, organizations are building separate databases called data warehouses. A data warehouse contains both detailed and summarized data for a number of years and is used for analysis rather than transaction processing. Organizations are building one data warehouse for finance and another for human resources, etc. Such smaller warehouses are often referred to as data marts. Data warehouses and data marts complement the organizations transaction processing databases. Data warehouses differ from the databases used to support transaction processing not only in size but also in how they are structured. Data warehouses are normally designed to be dimensional in nature. The most common dimensional architecture is referred to as the star schema. It is so named because the data are arranged in a manner resembling a star. Figure 14-8 on page 547 provides an example of a star schema for a data warehouse. At the center of the star is a single fact table that represents the most important variable of interest. The process of accessing the data contained in a data warehouse and using it for strategic decision making is often referred to as business intelligence. There are two main techniques used in business intelligence; 1) online analytical processing (OLAP) and data mining.

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Online analytical processing (OLAP) is using queries in which the user guides the investigation of hypothesized relationship in the data. Data mining is using sophisticated statistical analysis, including artificial intelligence techniques such as neural networks to discover un-hypothesized relationships in the data. Proper controls are needed in order to enable data warehouses to provide significant benefits to an organization. Indeed, the process of verifying the accuracy (scrubbing) the information to be included in a data warehouse is often one of the most time-consuming and expensive steps in creating a data warehouse. Principles of Graph Design Accountants and information systems professionals can help management deal with the information overload by preparing graphs that highlight and summarize important facts. Some basic principles that make bar charts easy to read include: 1) use titles that summarize the basic message 2) Include data values with each element instead of labeling the vertical axis, to facilitate mental calculations and analyses. 3) Use 2-D, instead of 3-D, bars because that makes it easier to accurately assess the magnitude of changes and trends. 4) Use different shades of gray or colors instead of patterns of dots or stripes to represent different variables because they are easier to distinguish. Figure 14-9 on page 548 illustrates many of these principles. The following two principles are essential for properly designing graphs of financial data so that they are accurately interpreted:
1) Begin the vertical axis at zero, and 2) For graphs that depict time-series data, order the x-axis

chronologically from left to right.

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Figure 14-10 on page 549 provides an example of a poor graph design in which the vertical axis does not start at zero. Figure 14-11 shows the exception to vertical axis at zero rule. Figure 14-12 on page 550 provides an exam of a poor graph design which reverses the chronological year order. Focus 14-2 on page 550 addresses the problem that many annual reports contain graphs that violate these design principles. Therefore, accountants and information systems professionals should strive to follow the principles of proper graph design whenever possible. Back to Homepage

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