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CHAPTER 16
GENERAL LEDGER AND REPORTING SYSTEMS
Instructor’s Manual
Learning Objectives:
1. Describe the information processing operations required to update
2. Identify the major threats in general ledger and reporting
activities, and evaluate the adequacy of various control
procedures for dealing with them.
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.
Figure 16-1 on page 464 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:
1. Each of the accounting cycle subsystems described in chapters
10 through 13 provides information about regular transactions.
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 16-2 on page 464 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
Figure 16-3 on page 465 depicts a typical online system used to perform
these activities.
The first three activities in Figure 16-2 (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
2. Treasurer
The treasurer’s office creates individual journal entries to
update the general ledger for nonroutine transactions.
Post Adjusting Entries
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These adjusting entries originate from the controller’s office.
The trial balance is a report that lists the balances for all general
ledger accounts.
Adjusting entries fall into five basic categories:
1. Accruals represent 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.
2. Deferrals represent entries made at the end of the accounting
period to reflect the exchange of cash prior to performance of
the related event.
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 16-2).
Produce Managerial Reports
The final activity in the general ledger and reporting system (circle
4.0 in Figure 16-2) 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.
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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.
Multiple Choice 1
The third basic activity in the accounting system which produces
financial statements is:
a. post adjusting entries
Multiple Choice 2
The __________ creates the journal entries to update the general ledger
for nonroutine transactions.
a. accounting department
b. systems analyst
c. treasurer’s office
d. CFO
Multiple Choice 3
The _____ category includes adjusting entries to record the expensing
of prepaid assets.
a. estimates
Multiple Choice 4
The following are the three basic financial statements:
1. balance sheet
2. income statement
3. statement of cash flows
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d. 2, 3, and 1
e. 3, 1, and 2
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. All updates to the general ledger are properly authorized.
3. All valid, authorized general ledger transactions are recorded.
Table 16-1 on page 466 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
The controls for this threat fall into three categories:
1. Input edit and processing controls
Input Edit and Processing Controls
The journal entries from the other AIS cycles comes from the
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The journal entries made by the treasurer and controller are
original data entry which needs input edit and processing
controls.
2. Field (format) checks to ensure that the amount field in
the journal entry contains only numeric data
4. A completeness test to ensure that all pertinent data are
entered, especially the source of the journal entry
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.
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:
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After both entries have been made, the special clearing account,
unbilled shipments, should have a balance of zero.
Enterprise Resource Planning (ERP) systems provide a number of control
reports to help identify the source of errors that occurred.
1. Listing journal vouchers by general account number helps
identify the source of any errors affecting a specific general
ledger account.
The Audit Trail
The audit trail depicts the path of a transaction through the
accounting system.
An audit trail facilitates the following tasks:
1. Tracing any transaction for omits from the original source
document to the general ledger and to any report or other
document using that data
The journal voucher file provides information about the source of all
entries made to update the general ledger.
Threat 2—Financial Statement Fraud
Financial statement fraud often involves journal entries by upper-level
management that either overstate revenues or understate liabilities.
Threat 3—Loss or Unauthorized Disclosure or Alteration of Financial
Data
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The general ledger is a key component of the organization’s 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.
Threat 3—Poor Performance
Organizations provide information to a multitude of external parties
and internal reports for use in managing operations.
Supporting Management’s Information Needs
There are three important topics regarding the use of general ledger
information for decision making:
1. The balance scorecard
Multiple Choice 7
There are several input edit and processing controls to ensure that the
journal entries made by the controller are accurate and complete. Which
of the following statement(s) is true?
a. A field check is to ensure that the amount field in the journal
entry contains alphanumeric data.
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d. B and C
e. All of the above are true.
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.
Figure 16-8 on page 473 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.
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.
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XBRL is certainly an important IT development. It is also noteworthy
because the accounting profession spearheaded its development (see
Focus 16-1 on page 476).
Multiple Choice 5
XBRL is a variant of _____.
a. HTML
b. NAARS
c. EDGAR
d. XML
Multiple Choice 6
The power of XBRL lies in the information provided by its:
a. edit checks
The Balanced Scorecard
The balance scorecard is a report that provides a multidimensional
perspective of organizational performance.
Many companies have three key financial goals:
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1. Increased revenue streams through sales of new products
For every organization, customers are the key to achieving financial
goals.
AOE’s balanced scorecard contains two key goals; 1) improve customer’s
satisfaction and 2) become the preferred supplier for key customers.
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.
Multiple Choice 8
In using a balanced scorecard, __________ is (are) the key for every
organization to achieving financial goals.
a. Profitability
b. Internal controls
c. Innovation
d. Customers
