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Chapter 8
Coding, General Ledger, and Financial Reporting
Post entries to the ledger
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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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