CHAPTER 21

G/L AND REPORTING CYCLE

G/L and Reporting Cycle

• df - the information processing operations involved in updating the G/L and preparing reports that summarize the results of activities.



• Context diagram

1. Major inputs
1. Revenue cycle - sales, cash receipts
2. Expenditure cycle - purchases, cash disbursements
3. Production cycle - cost of goods manufactured
4. HR/payroll - wage and salary expense
5. Budget - budget numbers
6. Controller - adjusting entries
7. Treasurer - financing and investing activity entries
2. Major outputs
1. Reports to treasurer, managers, external users, controller
2. New budget numbers

• Update the G/L

1. Accounting subsystem entries - each of the major subsystems will create a summary entry to the G/L
2. Treasurer - nonroutine transactions for financing and investing activities
3. Journal entries are documented by a file of journal vouchers, which are individual entries entered to the G/L

• Post adjusting entries - originate from controller's area

1. Accruals of events which have occurred but cash flow has not taken place.
2. Deferrals reflect the exchange of cash prior to the performance of the related event.
3. Estimates to recognize expenses over a period of time such as depreciation and the bad debt expense allowance
4. Revaluations - from reconciliations of actual and recorded value of assets or changes in accounting principles.
5. Corrections of errors made in the G/L
6. Adjusted trial balance (ATB) follows posting of the entries.

• Prepare the financial statements

1. Income statement is prepared from revenue and expense accounts from ATB.
2. Balance sheet from assets, liabilities and equity.
3. Revenue and expense accounts are closed to RE on a monthly basis.
4. CF statement uses data from both income statement and balance sheet.

• Prepare managerial reports

1. G/L control reports - journal vouchers by numerical sequence, account #, date and G/L account balance
2. Budget reporting - planning and evaluation
1. Responsibility accounting - reporting financial results on the basis of managerial responsibilities
2. Reports are hierarchical, with each layer including all subunits from below.
3. Reports show actuals and variances to budget for current month and year-to-date for items controllable at that level.
4. Costs centers - production, service and administrative.
5. Revenue center - sales
6. Support areas like IT are charged back to user areas
7. Investment centers - plants and divisions, unit return on investment is calculated
8. Establishment of the budget standard is crucial but budgets are not static, the environment changes - flexible budgeting can help to make sure that variable items do vary with changes in volume.

Threats and exposures

• Errors in updating the G/L - controls include:

1. Input edit and processing controls over summary entries from subsystems; direct, journal voucher entries made by the treasurer or controller.
1. Validity check over existence of G/L accounts
2. Field check over numeric data in amount field
3. Zero-balance check - debits = credits
4. Completeness test - all pertinent data are entered.
5. Redundant data check - closed loop verification on acct # and descriptions.
6. Creation of a standard adjusting entry file for recurring expenses
7. Sign check on debit and credit entries
8. Calculation of run-to-run totals can verify the accuracy of journal voucher batch processing.
2. Reconciliations and control reports - can detect errors made during updating and processing; trial balances, clearing and suspense accts
1. Balancing of control and subsidiary accounts
2. Examination of transactions late in the period to make sure they have been recorded in the proper period.
3. Control reports can help identify the source of errors - listings of journal vouchers and gen'l journal entries will show entries posted to the G/L
4. Audit trail - path of transactions through the system from source documents through accounts to the reports and statements.

• Unauthorized access to the G/L - controls include

1. User IDs, passwords, and access controls
2. Segregation of duties
3. AJEs only from controller's area
4. Valid authorization for journal voucher submission.

• Loss or destruction of the G/L - adequate backup and recovery procedures are needed to protect this key data asset. Backup controls include

1. Use of internal and external file labels to protect from accidental data loss.
2. Make regular backup copes of the G/L, one copy stored offsite.

General ledger data model

• Queries of financial data are more efficient if the data base contains aggregated account information in addition to data from the original transactions. Data would not have to be in a ledger form, but usually is.



• No resources or events in the model, just information processing activities.

1. Each row = specific account; primary key is account # and dept #.
2. There is a 1:* relationship between the G/L and G/L history entities; G/L history has a primary key of acct #, dept # and date.
3. Data used to update the G/L is stored in the journal vouchers and line items tables keyed by journal voucher number.
4. Summary entries from the AIS subsystems are generated by a query on the subsystem; each journal entry affects at least two accounts and an account can be affected by more than one journal voucher so the relationship is *:*.

• Benefits of a relational data base G/L

1. Improved support for managerial decision making; managers can use SQL queries to select any desired category of financial data.
2. Integration of financial and nonfinancial data that satisfies the need to present more nonfinancial information on accounting reports.

• Internal control considerations

1. Built-in controls to ensure data accuracy and consistency; referential integrity ensures that when a new row is added to the journal entry line-item table, the system will verify that the G/L account number actually exists as part of the primary key in the G/L table.
2. Safeguarding access to the G/L is enhanced by letting users see a view that is only relevant to his/her job.
3. An audit trail exists in the relational system in the form of links between tables and SQL queries for the various AIS cycles.

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