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Chapter 8

Coding, General Ledger, and Financial Reporting

Post entries to the ledger

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-

Western are trademarks used herein under license

Objectives for Chapter 8

Features, advantages, and disadvantages of various coding schemes

Operational features of the GLS, and FRSPrinciple operational controls governing

the GLS and FRS

Note that we do not cover the MRS section of Chapter 8.

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Coding: Common Uses in AIS

Concisely represent large amounts of complex information otherwise unmanageable

Provide means of accountability over completeness of transactions

Uniquely identify transactions and accounts within file

Supports audit function provides effective audit trail

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Match the types of coding

Block codesSequential codesGroup codesAlphanumeric

codesMnemonic codes

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Sequential Codes Represent items in sequential order Common uses:

Pre-number source documentsSales orders, purchase orders, checks,

receiving reports Allows AIS to track each transaction

processed and to identify any out-of-sequence documents

Disadvantages: Difficult to insert more codes Provides arbitrary (subjective) information

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Block Codes

Represents whole classes of items by restricting each class to specific range within coding scheme

Used for chart of accounts, Chart of accounts is the basis for general ledger

Advantage: Allows for insertion of new codes within a block

without having to reorganize entire coding structure

Disadvantage: Provides arbitrary (subjective) information

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Example of Chart of A/Cs (block codes)

Assets10000-00 to 19999-00

Liabilities20000-00 to 29999-00

Equity30000-00 to 39999-00

Revenue40000-00 to 49999-00

COGS50000-00 to 59999-00

Expenses60000-00 to 69999-00

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Group Codes

Used to represent complex items or events involving two or more pieces of related data using zones or fields that possess specific meaning

Disadvantages: Overused Arbitrary information

Company Division

13000 10

Example: Coding scheme used to track sales of inventory in G.P.

13000-10

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Alphabetic Codes May be

used for many of same purposes as numeric codes

assigned sequentially or used along with block and group coding techniques

used to represent large numbers of items;

When used with blocks, number can increase substantially

Disadvantage: Arbitrary information

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Block with alpha example:

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Mnemonic Codes

Alphabetic characters in form of acronyms and other combinations that convey meaning

Does not require user to memorize meaning; code itself conveys high degree of information NY New York TX Texas

Disadvantage: Limited usability and availability

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IS Functions of General Ledger System

All general ledgers must: Collect transaction data promptly and

accurately Classify/code data and accounts Validate collected transactions/ Maintain

accounting controls (e.g., equal debits and credits)

Process transaction dataPost transactions to proper accountsUpdate general ledger accounts and transaction

filesRecord adjustments to accounts

Store transaction data Generate timely financial reports

Input

Process

Output

GeneralLedgerSystem(GLS)

FinancialReportingSystem

ManagementReportingSystem

InventoryControl

Payroll

CashDisbursements

AccountsPayable

CostAccounting

CashReceipts

SalesOrder

Billing/Invoicing

PO(Inventory)

Blue bubbles aremodules we use in G.P.

Orange bubbles arecommonly used modules,but we don’t use in G.P.

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GLS Databasegeneral ledger master file

primary FRS file based on chart of accountsgeneral ledger history (archive) file

used for comparative financial statementsjournal voucher (transaction) file

all journal vouchers of current periodjournal voucher history (archive) file

journal vouchers of past periods for audit trailbudget master file

budget data by responsibility centers for MRS

The Financial Accounting Process

Source documents Post entries to

the ledger

Trial balance

Financial statements

Adjusting and closing

Transaction entries in the

Trans. File

Generic Model

The Financial Accounting Process

List of transactions Post entries to

each module

Trial balance

Adjusting/ Correcting

Capture transaction entries in

various Trans. Files

Great Plains

Post entries to General

Ledger

Financial statements

Trial balance

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GLS Reports

Chart of Accounts: coded listing of accounts General Ledger Analysis

Listing of transactions Allocation of expenses to cost centers (if any) Comparison of account balances from prior periods Trial balance

Financial Statements Managerial Reports

Analysis of Sales Analysis of Cash Analysis of Receivables

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Potential Exposures (Risks) in GL/FRS

Improperly prepared journal entriesUnposted journal entriesDebits not equal to creditsSubsidiary ledger(s) not equal to general

ledger control accountsInappropriate access to general ledger Poor audit trailLost or damaged dataIncorrect account balances because of

unauthorized or incorrect journal vouchers

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GL/FRS Control Issues

Transaction Authorization - journal vouchers must be properly authorized by responsible manager at source dept.

Segregation of Duties - general ledger clerks should NOT: have recordkeeping responsibility for

special journals/subsidiary ledgers prepare journal vouchers have custody of physical assets

ManualSystem

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GL/FRS Control Issues (cont)

Access Controls: Direct - journal vouchers should only be

posted by authorized individuals Indirect - source documents should be

prenumbered and a log keptAccounting Records - should be

able to trace a source document from inception to impact on fin. statements and vice-versa

ManualSystem

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Audit Trail

SourceDocument

JournalGeneralLedger

FinancialStatements

SourceDocument

JournalGeneralLedger

FinancialStatements

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GL/FRS Control Issues (cont)

Independent Verification - Journal vouchers and summaries are reconciled by G/L Dept. Two important operational reports are used: journal voucher listing general ledger change report

ManualSystem

Advantages: immediate update and reconciliation timely information

even more timely if real-time processing Removes separation of transaction authorization and

processing Compensating control: detailed journal voucher

listing and account activity reports Centralized access to accounting records

Controls: Passwords and authorization tables

GL/FRS Using Database Technology

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