Coding, General Ledger, and Financial Reporting Chapter 8 Post entries to the ledger Coding, General Ledger, and Financial Reporting COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license 1

Objectives for Chapter 8 Features, advantages, and disadvantages of various coding schemes Operational features of the GLS, and FRS Principle operational controls governing the GLS and FRS Note that we do not cover the MRS section of Chapter 8. 31

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 4

Match the types of coding Block codes Sequential codes Group codes Alphanumeric codes Mnemonic codes 1001 1002 1003 1004 11000-00 TX Category-Item-Color 444000-0010-00355

Sequential Codes Represent items in sequential order Common uses: Pre-number source documents Sales 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 Disadvantages carry no information content beyond their order in the sequence inserting a new item at some midpoint requires complete renumbering 5

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 Disadvantage the information content is not readily apparent. 6

Example of Chart of A/Cs (block codes) Assets 10000-00 to 19999-00 Revenue 40000-00 to 49999-00 Liabilities 20000-00 to 29999-00 COGS 50000-00 to 59999-00 Expenses 60000-00 to 69999-00 Equity 30000-00 to 39999-00

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 Advantages facilitates the representation of large amounts of diverse data allows complex data structures to be represented in a hierarchical form that is logical and more easily remembered by humans permits detailed analysis and reporting both within an item class and across different classes of items Disadvantage tend to be overused which can lead to unnecessarily complex group codes that cannot be easily interpreted Example: Coding scheme used to track sales of inventory in G.P. 13000-10 Company Division 13000 10 7

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 Disadvantages difficulty of rationalizing the meaning of codes sequentially assigned sorting records that are coded alphabetically tend to be more difficult for users 9

Block with alpha example: 1000-1999 = 999 numbers A1000-Z1999 = 999 (times 26) numbers = 25,974 numbers

Mnemonic Codes Disadvantage: 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 Disadvantage they are limited in their ability to represent items within a class 10

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 data Post transactions to proper accounts Update general ledger accounts and transaction files Record adjustments to accounts Store transaction data Generate timely financial reports Input Process Output

Blue bubbles are modules we use in G.P. General Ledger System (GLS) Financial Reporting System Billing/ Invoicing Management Reporting System Sales Order Inventory Control General Ledger System (GLS) Cash Receipts Payroll Cost Accounting Cash Disbursements Accounts Payable Orange bubbles are commonly used modules, but we don’t use in G.P. PO (Inventory) 3

GLS Database general ledger master file primary FRS file based on chart of accounts general ledger history (archive) file used for comparative financial statements journal voucher (transaction) file all journal vouchers of current period journal voucher history (archive) file journal vouchers of past periods for audit trail budget master file budget data by responsibility centers for MRS 12

The Financial Accounting Process Trial balance Post entries to the ledger Transaction entries in the Trans. File Source documents NOTICE THE IP-OP MODEL WITH FEEDBACK Generic Model Adjusting and closing Financial statements

The Financial Accounting Process Great Plains The Financial Accounting Process Post entries to each module Post entries to General Ledger Capture transaction entries in various Trans. Files List of transactions NOTICE THE IP-OP MODEL WITH FEEDBACK Trial balance Trial balance Financial statements Adjusting/ Correcting

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

Potential Exposures (Risks) in GL/FRS Improperly prepared journal entries Unposted journal entries Debits not equal to credits Subsidiary ledger(s) not equal to general ledger control accounts Inappropriate access to general ledger Poor audit trail Lost or damaged data Incorrect account balances because of unauthorized or incorrect journal vouchers

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 Manual System 18

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 kept Accounting Records - should be able to trace a source document from inception to impact on fin. statements and vice-versa Manual System 19

Audit Trail Journal General Ledger Financial Statements Source Document Journal General Ledger Financial Statements Source Document 16

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 Manual System 20

GL/FRS Using Database Technology 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 22

The End