GENERAL LEDGER SYSTEM (GLS) 3.

GLS PROCEDURES
- hub connected to the other systems of the firm - performed as either a separate operation or
through spokes of information flows integrated within transaction processing
- source of input for Management Reporting systems which involves additional updates in
System (MRS) and Financial Reporting System the form of reversing, adjusting, and closing
(FRS) entries.
Sources of Information Flows to the GLS
a) Transaction Processing Subsystems THE FINANCIAL REPORTING SYSTEM
b) Financial Reporting System (FRS) (as feedback) The law dictates management’s responsibility for
providing stewardship information to external
Key Elements of GLS
parties. This reporting obligation is met via the
1. Journal Voucher
Financial Reporting Standard.
- used to represent summaries of similar
The primary users of financial statement
transactions or a single unique transaction
information are generally interested in the
- identifies the financial amounts and affected
performance of the organization as a whole. The
general ledger (GL) accounts
primary users are what we call external users (e.g.
- Routine transactions, adjusting entries, and
Stockholders, Creditors and Government
closing entries are all entered into the GL via
Agencies)
journal vouchers
Information that the external users are requiring for
2. GLS Database the company: (1) Information that allows them to
- includes a variety of files varying from firm to observe trends in the performance over time, and
firm: (2) Comparison between different organization.
a. General Ledger Master File Given to the nature of these needs, financial
- principal file in the GLS database based reporting information must be prepared and
on the organization’s published chart of presented by all organizations in a manner that is
accounts. generally accepted and understood by external
GL master file records are either: users.
a. Separate GL Account
Sophisticated Users
b. Control Account
The financial statements are prepared for the
GL Master file is used by:
purpose of providing information that is useful in
a. Financial Reporting System (FRS) to
making decision. With that, its purpose will meet
produce firm’s financial statements
the homogenous information needs of the
b. Management reporting system to
sophisticated users or the general audience.
support internal information reporting
Financial Reporting Procedures
b. General Ledger History File
Financial reporting is the final step in the overall
- (same format as the GL master file); to
accounting process that begins in the transaction
provide historical financial data for
cycles. The process begins with a clean slate at the
comparative financial reports
start of a new fiscal year. Only the balance sheet
c. Journal Voucher File
(permanent) accounts are carried forward from the
- total collection of the journal voucher previous year. From this point, the following steps
processed in the current period; provides a occur:
record of all general ledger transactions and 1. Capture the Transaction - Transactions are
replaces the traditional general journal recorded in the appropriate transaction file.
d. Journal Voucher History File 2. Record in Special Journal - Each transaction is
- contains journal vouchers for past periods entered into the journal.
which supports management’s stewardship 3. Post to Subsidiary Ledger - The details of each
responsibility to account for resource transaction are posted to the subsidiary
utilization accounts.
e. Responsibility Center File 4. Post to General Ledger - Summarizing the
- contains revenues, expenditures, and other entries made to the special journals and
resource utilization data for each subsidiary ledgers, are prepared and posted to
responsibility center in the organization; the GL accounts.
input for MRS in preparing responsibility 5. Prepare the Unadjusted Trial Balance - At the
reports for management end of the accounting period, the ending balance
f. Budget Master File of each account in the GL is placed in a
- contains budgeted amounts for revenues, worksheet and evaluated in total for debit–credit
expenditures, and other resources for equality.
responsibility centers. 6. Make Adjusting Entries - Made to the worksheet
to correct errors and reflect unrecorded
transactions during the period.
 7. Journalize and Post Adjusting Entries - Journal Hyper Text Markup eXtensible Markup
Language (HTML) Language (XML)
vouchers are prepared and posted to the tags have predefined meaning tags are customized to the user,
appropriate accounts in the GL that describes how the attributes and the user’s application can
8. Prepare the adjusted trial balance - A trial will be presented in a document. read and interpret the tagged
Ex. data.
balance is prepared that contains all the entries <H1> Book Order </H1> Ex.
that should be reflected in the financial <BOLD>Understanding <ORDERTYPE> Book Order
statements. XML</BOLD> </ORDERTYPE>
<H2> Doe, John </H2> <TITLE> Understanding XML
9. Prepare the financial statements - The balance </TITLE>
sheet, income statement, and statement of cash End-user computer cannot <AUTHOR> Doe, John
flows are prepared using the adjusted trial process HTML and can only </AUTHOR>
display the format.
balance. End- user computer can
10. Journalize and post the closing entries - recognize XML and process
Prepared for entries that close out the income accordingly, relieving some of
the burden currently placed on
statement (temporary) accounts and transfer the the web services
income or loss to retained earnings. XBRL Reporting Process
11. Prepare the post-closing trial balance - A trial Step 1: Selection of XBRL Taxonomy
balance worksheet containing only the balance Taxonomy
sheet accounts may now be prepared to indicate - classification schemes that are compliant
the balances being carried forward to the next with XBRL specifications to accomplish a
accounting period. specific information exchange or reporting
objective such as filing with the SEC.
EXTENSIBLE BUSINESS REPORTING Step 2: Mapping the organization’s internal data to
LANGUAGE (XBRL) XBRL taxonomy elements
 It is the internet standard specifically designed Step 3: Generate XBRL Instance Documents (actual
for business reporting and information financial reporting)
exchange.
 Its objective is to facilitate the publication, CONTROLLING THE FRS
exchange, and processing of financing and Sarbanes-Oxley legislation requires that
business information. management design and implements controls over
 A derivative of another Internet standard called the financial reporting process.
XML (eXtensible Markup Language)
 Includes the transaction processing systems that
 Recognizing the potential benefits of XML, the feed data into the FRS
AICPA encouraged research into the creation of
 This examines only the controls that relate to the
an accounting-specific markup language.
FRS
 An XML-based language that was designed to
The potential risks to the FRS include:
provide the financial community with a
1. A defective audit trail
standardized method for preparing, publishing,
2. Unauthorized access to the general ledger
and automatically exchanging financial
3. GL accounts that are out of balance with
information, including financial statements of
subsidiary accounts
publicly held companies.
4. Incorrect GL account balances because of
 Typically used for reporting aggregated
unauthorized or incorrect journal vouchers
financial data, but can also be applied to
If not controlled, these risks may result in misstated
communicating information pertaining to
financial statements and other reports, thus
individual transactions.
misleading users of this information.
 The use of XBRL will facilitate fulfillment of
Potential consequences are:
legal requirements stipulated in the Sarbanes-
 Litigation
Oxley Act, which was passed in response to
widespread concern and skepticism about  Significant financial loss for the firm
financial-reporting standards.  Sanctions specified by SOX legislation
eXtensible Markup Language (XML) SAS 78/COSO CONTROL ISSUES
 A metalanguage for describing markup Transaction Authorization
languages Journal voucher
 XML can be used to model the data structure of  Is the document that authorizes an entry to the
an organization’s internal database general ledger.
Extensible means that any markup language can be  Has numerous sources, such as the cash receipts
created using XML which includes the creation of processing, sales order processing, and the
markup languages capable of storing data in financial reporting group.
relational form in which tags (or formatting  It is vital to the integrity of the accounting
commands) are mapped to data values. records that the journal vouchers be properly
authorized by a responsible manager at the
source department.
Segregation of Duties  Controls must be designed and put in place to
The task of updating the general ledger must be ensure the correct generation of XBRL
separate from all accounting and asset custody taxonomies.
responsibility within the organization. Therefore, Taxonomy Mapping Error
individuals with access authority to GL accounts  The process of mapping the internal database
should not: accounts to the taxonomy tags needs to be
1. Have record-keeping responsibility for special controlled.
journals or subsidiary ledgers.  Correctly generated XBRL tags may be
2. Prepare journal vouchers. incorrectly assigned to internal database
3. Have custody of physical assets. accounts resulting in material
Access Controls misrepresentation of financial data.
Unauthorized access to the GL accounts can result Validation of Instance Documents
in errors, fraud, and misrepresentations in financial
 Once the mapping is complete and tags have been
statements. SOX explicitly addresses this area of risk
stored in the internal database, XBRL instance
by requiring organizations to implement controls
documents (reports) can be generated.
that limit database access to authorized
 Independent verification procedures need to be
individuals only.
established to validate the instance documents
Accounting Records
to ensure that appropriate taxonomy and tags
Audit Trail
have been applied before posting to a Web
 Is a record of the path that a transaction takes
server.
through the input, processing, and output phases
of transaction processing.
THE MANAGEMENT REPORTING SYSTEM
 Involves a network of documents, journals, and (MRS)
ledgers designed to ensure that a transaction can Management Reporting (Discretionary Reporting)
be accurately traced through the system from  reason: it is not mandated, as is financial
initiation to final disposition. reporting
 Facilitates error prevention and correction  HOWEVER, one could take issue with the term
when the data files are conveniently and discretionary and argue that effective
logically organized. management reporting system (MRS) is
The general ledger and other files that constitute the mandated by SOX legislation, requiring all
audit trail should be detailed and rich enough to: public companies monitor and report on
(1) provide the ability to answer inquiries, for effectiveness of internal controls over financial
example, from customers or vendors reporting
(2) be able to reconstruct files if they are  Long been recognized as a critical element of an
completely or partially destroyed organization’s internal control structure.
(3) provide historical data required by auditors  An MRS that directs management’s attention to
(4) fulfill government regulations problems on a timely basis promotes effective
(5) Provide a means for preventing, detecting, and management and supports the organization’s
correcting errors business objectives.
Independent Verification  Designing effective MRS requires
The general ledger functions as an independent understanding of the information that managers
verification step within the accounting information need to deal with the problems they face.
system. The FRS produces two operational reports— Factors That Influence the MRS
journal voucher listing and the GL change report— 1. Management principles
that provide proof of the accuracy of this process. 2. Problem structure
The journal voucher listing provides relevant 3. Types of management reports
details about each journal voucher posted to the 4. Responsibility accounting
GL. The general ledger change report presents the 5. Behavioral considerations
effects of journal voucher postings to the GL
Management Principles
accounts.
 Provide insight into management information
Internal Control Implications of XBRL needs
Although the potential benefits of XBRL and  Most directly influential principles to the MRS:
associated Web technologies have been extensively A.) Formulation of Tasks
researched, less attention has been given to the  Suggests that management should
potential control implications of using XBRL. These structure the firm around the tatas it
are the three areas of specific concern: performs rather than around individuals
Taxonomy Creation with unique skill
 Taxonomy may be generated incorrectly, which  Organizational areas are subdivided into
results in an incorrect mapping between data tasks that represent full-time job positions
and taxonomy elements that could result in  Each position must have clearly define
material misrepresentation of financial data. limits of responsibility.
  PURPOSE: to avoid an organizational  Refers to the number of subordinates
structure in which the organization’s directly under manager’s control
performance, stability, and continued  The size of the span has an impact on the
existence depend on specific individual organization’s physical structure
 PROBLEM/ISSUE: a firm’s most  Organizational behavior research
valuable resource is its employees, but it suggests that wider spans of control are
does not own the resource. Thus, sooner preferable for they allow more employee
or later, key individuals leave and take autonomy in decision making which may
their skills with them translate into better employee morale and
 SOLUTION: By formalizing tasks, the increased motivation
firm can more easily recruit individuals to  An important consideration in setting the
fill standard positions left open by those span of control is the nature of the task
who leave.  The more routine and structured the
 It promotes internal control task, the more subordinates one
 With employee responsibilities manager can control
formalized and clearly specified,  Therefore, routine tasks tend to be
management can construct an associated with a broad span of control
organization that avoids assigning  Less structured or highly technical
incompatible tasks to an individual tasks often require a good deal of
 IMPLICATIONS FOR THE MRS: management participation on task-
 Formalizing the tasks of the firm allows related problems. This close interaction
formal specification of the information reduces the manager’s span of control
needed to support the task  IMPLICATIONS FOR THE MRS:
 When a personnel change occurs, the  Different management approaches
information the nen employee will need require different information
is essentially the same as for his or her  Managers with narrow spans of
predecessor control are closely involved with
 The information system must focus on details of the operation and specific
the task, not the individual performing decisions
the task  Managers with narrow spans of
 Internal control is strengthened by control require detailed reports
restricting information based on need as  Managers with broad spans control
defined by the task, rather than the responsibilities operate most
whim or desire of the user. effectively with summarized
B.) Responsibility and Authority information.
 Refers to an individual’s obligation to  Broad spans of control remove
achieve desired results managers from details of the
 Responsibility is closely related to the operation with specific decisions
principle of authority  These managers delegate more of
 If a manager delegates responsibility to their decision-making authority to
a subordinate, he or she must also grant their subordinates.
the subordinate the authority to make o A firm with a narrow span of control has
decisions within the limits of that fewer subordinates reporting directly to
responsibility managers. These firms tend to have tall, narrow
 In BUSINESS ORGANIZATIONS, structures with several layers of management
managers delegate responsibility and o Firms with broad spans of control (more
authority downward through the subordinates reporting to each manager) tend to
organizational hierarchy from superior have wide structures, with fewer levels of
to subordinates management
 IMPLICATIONS FOR THE MRS: D.) Management by exception
 The principles of responsibility and  suggests that managers should limit their
authority define the vertical reporting attention to potential problem areas (that
channels of the firm through which is, exceptions) rather than being involved
information flow with every activity or decision
 In designing a reporting structure, the  Managers thus maintain control without
analyst must consider the manager’s being overwhelmed by the details
position in the reporting channel  IMPLICATIONS FOR THE MRS:
 Managers at higher levels usual  Managers need information that
require more summarized information identifies operations or resources at risk
 Managers at lower levels receive of going out of control
information that is more detailed.  Reports should support management by
C.) Span of Control exception by focusing on change in key
 factors that are symptomatic of - these decisions are shorter term, more specific,
potential problems recurring, have more certain outcomes, and have
 Unnecessary details that may draw a lesser impact on the firm than strategic
attention away from important facts decisions.
should be excluded from reports 3. Management Control Decisions
Management Function, Level, And Decision Type - involves motivating managers in all functional
Planning function is concerned with making areas to use resources, including materials,
decisions about the future activities of the personnel, and financial assets, as productively
organization. as possible.
Types of Planning Function - Supervising manager compares the performance
1. Long-range planning of his or her subordinate manager to pre-
 usually encompasses a period of between 1 established standards. If the subordinate does
and 5 years, but this varies among industries. not meet the standard, the supervisor takes
 involves a variety of tasks, including setting corrective action but if met or exceeds
the goals and objectives of the firm, planning expectations, he or she may be rewarded.
the growth and optimum size of the firm, and Operational Control Decisions
deciding on the degree of diversification  ensures that the firm operates in accordance with
among the firm’s products. pre-established criteria.
2. Short-term planning  are narrower and more focused than tactical
- involves the implementation of specific plans decisions because they are concerned with the
that are needed to achieve the objectives of the routine tasks of operations.
long-range plan.  are more structured than management control
decisions, more dependent on details than
Control function ensures that the activities of the
planning decisions, and have a shorter time frame
firm conform to the plan. This entails evaluating
than tactical or strategic decisions.
the operational process (or individual) against a
 associated with a fairly high degree of certainty.
predetermined standard and, when necessary,
taking corrective action. Effective control takes ELEMENTS
place in the present time frame and is triggered by a. Standards
feedback information that advises the manager  are pre-established levels of performance that
about the status of the operation being controlled. managers believe are attainable.
Four Categories of Planning and Control:  apply to all aspects of operations, such as sales
volume, quality control over production, costs
1. Strategic Planning Decisions
for inventory items, material usage in the
- made by top-level managers. This includes:
production of products, and labor costs in
 Setting the goals and objectives of the firm. production.
 Determining the scope of business activities. b. Performance evaluation
 Determining or modifying the organization’s  decision maker compares the performance of the
structure. operation in question against the standard. The
 Setting the management philosophy. difference between the two is the variance.
Strategic planning decisions Characteristics: c. Taking corrective action
 Long-term time frames because they deal with  after comparing the performance to the
the future, managers making strategic decisions standard, the manager takes action to remedy
require information that supports forecasting. any out-of-control condition.
 Require highly summarized information.
Strategic decisions focus on general trends PROBLEM STRUCTURE
rather than detail-specific activities. The structure of a problem reflects how well the
 They tend to be nonrecurring. Strategic decision maker understands the problem. Structured
decisions are usually one-time events. As a problems are well suited for traditional data
result, there is little historical information processing techniques because they do not present
available to support the specific decision. unique situations to the decision maker and their
 Strategic decisions are associated with a high information requirements can be anticipated. When
degree of uncertainty. The decision maker must all three elements of structure mentioned below are
rely on insight and intuition. Judgment is often known with certainty, the problem is structured.
central to the success of the decision. 1. Data – values used to represent factors that are
 They are broad in scope and have a profound relevant to the problem.
impact on the firm. 2. Procedures – sequence of steps or decision rules
 Strategic decisions require external as well as used in solving the problem.
internal sources of information. 3. Objectives – results the decision maker desires
2. Tactical Planning Decisions to attain by solving the problem.
- are subordinate to strategic decisions and are Unstructured Problems
made by middle management An unstructured problem is one for which we have
no precise solution techniques. Such a problem is
normally complex and engages the decision maker in Setting Financial Goals: The Budget Process
a unique situation. Budget process helps achieve financial objectives by
TYPES OF MANAGEMENT REPORTS establishing measurable goals. Standards are used to
Report Objectives measure performance. Flowing downwards –
– reports must have information content. Two increasingly detailed as it moves to lower levels of
general reporting objectives: (1) to reduce the management.
level of uncertainty and (2) to influence the Measuring and Reporting Performance
decision maker’s behavior in a positive way Flows upward whereas information becomes
Programmed Reporting increasingly summarized at each higher level of
– provide information to solve users’ anticipated management.
problems. Two subclasses of programmed Responsibility Centers - Organized to achieve
reports: (1) Scheduled reports, according to an accountability.
established time frame ad (2) On-demand Most Common Forms:
reports, triggered by events 1. COST CENTERS
Report attributes - Organizational unit for cost management within
– A report will be effective if it possesses the budgetary limits.
following attributes: (1) Relevance, supports the The performance report reflects controllable cost
manager’s decision; (2) Summarization, behavior focusing on budgeted costs, actual costs,
according to the level of manager within the and variances from budget.
organizational hierarchy; (3) Exception
orientation, identify activities that are going out 2. PROFIT CENTERS
of control and ignore activities that are not; (4) - Responsible for cost control and revenue
Accuracy, free of material errors; (5) generation. Only controllable items are used to
Completeness, all essential information must be assess manager’s performance, profit center is
present; (6) Timeliness, reports must be on-time assessed by its contribution after
and (7) Conciseness, short and clear. noncontrollable costs.
Ad Hoc Reporting 3. INVESTMENT CENTERS
– provide direct inquiry and report generation – its’ manager has general authority to make
capabilities to managers. decisions profoundly affecting the organization.
Data mining supports the ad hoc reporting needs.
BEHAVIORAL CONSIDERATIONS
It is the process of selecting, exploring, and
Goal Congruence
modelling large amounts of data to uncover
- promoted by management principles of authority,
relationships and global pattern in large
responsibility, and formalization of tasks.
databases hidden among the vast amount of facts.
Individual managers serve their own best interests
Two general approaches of data mining: (1)
as well as the best interests of the organization.
Verification Model, uses a drill-down technique
to either verify or reject a user’s hypothesis ad (2) Two Pitfalls to Act Dysfunctionally:
Discovery Model, employs inductive learning to 1. Information overload
infer information from detailed data by searching – receives more information than can be
recurring patterns, trends, and generalizations. assimilated, causing disregard of formal
Data warehouse is a relational database information (replaced by heuristics, tips,
management system that has been designed hunches, and guesses) and reliance to informal
specifically to meet the needs of data mining. cues for decision making resulting to decisions
running on a high risk of being suboptimal and
RESPONSIBILITY ACCOUNTING dysfunctional.
- personalizes performance structured around areas 2. Inappropriate performance measures
of responsibility implying that economic events - causes report to have an opposite effect,
affecting the organization is the responsibility of whereby used of single-criterion performance
and can be traced to an individual manager. measures becomes the focus of attention and
Managers are accountable only for items they object of manipulation (succeeding only in
control. short run) imposing personal goals conflicting
Flow of Information: (Represents 2 Phases of with organizational goals that result in
Responsibility Accounting) dysfunctional behavior.
1. Downward (Top-Down) - performance measures should consider all
2. Upward (Bottom-Up) relevant aspects of manager’s responsibility,
including measurement of trends in key
2 Phases of Responsibility Accounting
variables. Nonfinancial measures may also be
1. Creating financial performance goals pertinent
relevant in assessing management
to manager’s responsibilities.
performance.
2. Reporting and measuring actual performance.