General Ledger and Reporting System Anup Kumar Saha

Learning Objectives Describe the information processing operations required to update the general ledger and to produce other reports for internal and external users. Identify the major threats in general ledger and reporting activities, and evaluate the adequacy of various internal control procedures for dealing with them. Read and explain an integrated enterprise-wide REA data model. Anup Kumar Saha

Learning Objectives 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. Understand the implications of new IT developments, such as XBRL, for internal and external reporting. Anup Kumar Saha

Introduction Linda Spurgeon, AOE’s president & CEO, is not satisfied with the financial reporting capabilities of AOE’s new ERP system. She has three primary goals: To develop a Balanced Scorecard in a timely manner. To speed up trend analysis data on the company’s financial performance. To lower costs associated with providing financial information to interested external parties on a timely basis. Anup Kumar Saha

Introduction 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. Anup Kumar Saha

Learning Objective 1 Describe the information processing operations required to update the general ledger and to produce other reports for internal and external users. Anup Kumar Saha

General Ledger and Reporting Activities What are the four basic activities performed in the general ledger and reporting system? Update the general ledger Post adjusting entries Prepare financial statements Produce managerial reports Anup Kumar Saha

Update The General Ledger (Activity 1) The first activity in the general ledger system is to update the general ledger. Updating consists of posting journal entries that originated from two sources: Accounting subsystems The treasurer Anup Kumar Saha

Update The General Ledger (Activity 1) Accounting subsystems Journal entry Journal entry Treasurer Journal voucher General ledger Anup Kumar Saha

Post Adjusting Entries (Activity 2) The second activity in the general ledger system involves posting various adjusting entries. Adjusting entries originate from the controller’s office, after the initial trial balance has been prepared. Anup Kumar Saha

Post Adjusting Entries (Activity 2) What are the five basic categories of adjusting entries? Accruals (wages payable) Deferrals (rent, interest, insurance) Estimates (depreciation) Revaluation (change in inventory method) Corrections Anup Kumar Saha

Post Adjusting Entries (Activity 2) Journal voucher Adjusting entries Adjusted trial balance Prepare financial statements Controller Financial statements Anup Kumar Saha

Prepare Financial Statements (Activity 3) The third activity in the general ledger and reporting system involves the preparation of financial statements. The income statement is prepared first. The balance sheet is prepared next. The cash flows statement is prepared last. Anup Kumar Saha

Produce Managerial Reports (Activity 4) The final activity in the general ledger and reporting system involves the production of various managerial reports. What are the two main categories of managerial reports? General ledger control reports Budgets Anup Kumar Saha

Produce Managerial Reports (Activity 4) What are examples of control reports? lists of journal vouchers by numerical sequence, account number, or date listing of general ledger account balances What are examples of budgets? operating budget capital expenditures budget Anup Kumar Saha

Produce Managerial Reports (Activity 4) Budgets and performance reports should be developed on the basis of responsibility accounting. What is responsibility accounting? It involves reporting financial results on the basis of managerial responsibilities within an organization. Anup Kumar Saha

Learning Objective 2 Identify the major threats in general ledger and reporting activities, and evaluate the adequacy of various internal control procedures for dealing with them. Anup Kumar Saha

Control: Objectives, Threats, and Procedures What are the control objectives in the general ledger and reporting system? Updates to the general ledger are properly authorized. Recorded general ledger transactions are valid. Valid, authorized general ledger transactions are recorded. Anup Kumar Saha

Control: Objectives, Threats, and Procedures General ledger transactions are accurately recorded. General ledger data are safeguarded from loss or theft. General ledger system activities are performed efficiently and effectively. Anup Kumar Saha

Threats and Controls in the General Ledger and Reporting System Process/Activity Threat Applicable Control Procedures Updating the general ledger Errors Input and processing controls; reconciliations and control reports; audit trail Access to general ledger Loss of confidential data and/or concealment of theft Access controls; audit trail Loss or destruction of the general ledger Loss of data and assets Backup and disaster recovery procedures Anup Kumar Saha

Threat 1: Errors in Updating the General Ledger Errors made in updating the general ledger can lead to poor decision making based on erroneous information in financial performance reports. Control procedures fall into three categories: Input edit and processing controls Reconciliations and control reports Maintenance of an adequate audit trail Anup Kumar Saha

Input Edit and Processing Controls There are two sources of journal entries for updating the general ledger: Summary journal entries from other AIS cycles Direct entries made by the treasurer or controller Anup Kumar Saha

Input Edit and Processing Controls Journal entries made by the treasurer and controller are original data entry. Several types of input edit and processing controls are needed to ensure that they are accurate and complete. These are: Validity Check Field Checks Zero-balance checks Completeness test Closed-loop verification Calculation run-to-run totals to verify accuracy of journal voucher batch processing Standard adjusting entry file for recurring adjusting entries made each period Sign check Anup Kumar Saha

Reconciliation and Control Report Reconciliations and control reports can detect if any errors were made during the process of updating the general ledger. Examples include: Preparation of the trial balance Comparing the general ledger control account balances to the total balance in the corresponding ledger Anup Kumar Saha

Reconciliation and Control Report The audit trail is the path of a transaction through the accounting system. The audit trail facilitates these three tasks: Trace any transaction from its original source document to the general ledger and to any report or other document using that data. Anup Kumar Saha

Reconciliation and Control Report The audit trail, continued Trace any item appearing in a report back through the general ledger to its original source document Trace all changes in general ledger accounts from their beginning balance to their ending balance Anup Kumar Saha

Threat 2: Unauthorized Access to the General Ledger Unauthorized access to the general ledger can result in confidential data leaks to competitors or corruption of the general ledger. It can also provide a means for concealing the theft of assets. Anup Kumar Saha

Threat 2: Unauthorized Access to the General Ledger Some controls against this threat are: User IDs and passwords Read-only access to the general ledger System checks of authorization codes for each journal voucher record before posting Anup Kumar Saha

Threat 3: Loss or Destruction of the General Ledger Adequate backup and disaster recover y procedures must be in place to protect the general ledger. Backup controls include: Use of internal and external file labels Performance of regular backup of the general ledger Anup Kumar Saha

Read and explain an integrated enterprise-wide REA data model. Learning Objective 3 Read and explain an integrated enterprise-wide REA data model. Anup Kumar Saha

Integrated Data Model An integrated enterprise-wide data model represents a merging of separate data models. This merging primarily involves linking each resource with the events that increase and decrease that resource. Anup Kumar Saha

Integrated Data Model Cash receipts Cash disbursements Cash (1, 1) Anup Kumar Saha

Integrated Data Model Cash Issue debt Pay employees Issue stock (1, 1) Issue debt (1, N) (0, N) (0, N) (0, N) (0, N) (1, 1) (1, 1) (1, 1) (1, 1) (1, N) Pay employees Issue stock Dividend payment Debt payment Anup Kumar Saha

Benefits of an Integrated Data Model What are some benefits of an Integrated data model? Improved support for decision making Integration of financial and nonfinancial information Improved internal reporting Anup Kumar Saha

Benefits of an Integrated Data Model Development of a virtual value chain occurs in three stages. What are these stages? Visibility Mirroring Building new customer relationships Anup Kumar Saha

Discuss and Design a Balanced Scorecard for an organization. Learning Objective 4 Discuss and Design a Balanced Scorecard for an organization. Anup Kumar Saha

Balanced Scorecard What is a balanced scorecard? A report that provides a multidimensional perspective of organizational performance It contains measures reflecting four perspectives of the organization: Financial Customer Internal operations Innovation and learning Anup Kumar Saha

Learning Objective 5 Explain the relationship between online transaction processing systems and data warehouses used to support business intelligence. Anup Kumar Saha

Data Warehouses Data warehouses, which contain both current and historical data, can provide additional support for strategic decision making. Whereas transaction-processing databases are designed to minimize redundancy, data warehouses purposely build in redundancies in order to maximize query efficiency. Anup Kumar Saha

Data Warehouses The process of accessing data contained in the data warehouse and using it for strategic decision making is referred to as Business Intelligence. The two main techniques of business intelligence are: Online Analytical Processing (OLAP) Data mining Anup Kumar Saha

Learning Objective 6 Understand the implications of new IT developments, such as XBRL, for internal and external reporting. Anup Kumar Saha

Opportunities for Using Information Technology The Extensible Business Reporting Language (XBRL) has addressed two problems: Different requirements for the manner in which information is delivered. The need for manual reentry of information into standalone decision analysis tools. Anup Kumar Saha

Opportunities for Using Information Technology XBRL provides two benefits: It enables organizations to publish information only once using standard XBRL tags. XBRL tags are interpretable. Anup Kumar Saha

Case Conclusion What did Stephanie Cromwell and Elizabeth Venko decide? They decided that AOE needs to switch to an online general ledger system. They agreed that AOE will first acquire a general ledger package that is built on a relational database. Anup Kumar Saha

End Anup Kumar Saha