CHAPTER # 06

THE GENERAL LEDGER, FINANCIAL REPORTING, AND

6.1 The General Ledger System (GLS)

The GLS of a firm continually updates the general ledger accounts from the journal
vouchers. The bulk of the information flow into the GLS comes from the transaction
cycle subsystems. Other, less frequent events, such as stock transactions, mergers, and
lawsuit settlements, for which there may be no formal processing cycle in place, are
entered into the GLS directly.

THE JOURNAL VOUCHER

A document called the journal voucher is the input source to the general ledger. A
journal voucher, which can be used to represent summaries of similar transactions or a
single unique transaction, identifies the financial amounts and general ledger accounts
that are affected. Routine transactions, adjusting entries, and closing entries are all
entered into the general ledger from journal vouchers. Since journal vouchers must be
approved by a responsible manager, they provide effective controls against
unauthorized general ledger entries.

THE GENERAL LEDGER DATABASE

The GLS database includes a variety of transaction files, master files, reference file, and
archive files. While these will vary from firm to firm, the following are the common
GLS database:

 The general ledger master file: is the principle file in the GLS database. The
basis of this file is the firm’s coded chart of accounts. Each record in the general
ledger master is either a separate GL account (for example, sales) or the control
account (such as A/R_control) for a corresponding subsidiary file in the
transaction processing system (TPS). The financial reporting system (FRS) draws

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 up on the GL master to produce the firm’s financial statements. The management
reporting system (MRS) also uses this file to support internal information needs.
 The general ledger history file: has the same format as the GL master. The
primary purpose of this file is to present comparative financial reports on a
historic basis.
 The journal voucher file: is the total of the journal vouchers processed in the
current period.
 The journal voucher history file: contains journal vouchers for past
periods. This historic information supports management’s stewardship
responsibility to account for resource utilization. Both the current and historic
journal voucher files are important links in the firm’s audit trial.
 The budget master file: contains budgeted amounts for revenues,
expenditures, and other resources for responsibility centers.

GLS PROCEDURES

The GLS update process is conceptually simple. Journal vouchers flow from transaction
processing systems and other sources into the general ledger department. Routinely,
these are summary transactions from subsidiary accounts and special journal located in
the transaction cycles. Less frequent transactions from the fixed asset systems along
with adjusting, closing, and reversing entries from the financial reporting system, also
enter the GLS.

6.2 The Financial Reporting System (FRS)

The responsibility for providing stewardship information to external parties is, to a

The primary recipients of financial statement information are external users, such as
stockholders, creditors, and government agencies. Generally speaking, outside users of

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information are interested in the performance of the organization as a whole. Therefore,
they require information that allows them to observe trends in performance over time
and to make comparisons between different organizations. Given the nature of these
needs, financial reporting information must be prepared and presented by all
organizations in a manner that is generally accepted and understood by external users.

FRS ACTIVITIES

Sources of input to the FRS include the current general ledger master file, the general
ledger history file, and direct input (adjusting and closing entries) from the financial
reporting group. The most common outputs of the FRS are financial statements,
including the balance sheet, income statement, and statement of cash flows. These
reports, based on the general ledger master file, are sent to stockholders, creditors, and
other interested outsiders. The FRS may also produce financial analysis reports,
comparative financial statements, tax returns, and special reports for regulatory bodies,
such as the Securities and Exchange Commission.

THE FINANCIAL ACCOUNTING PROCESS

The FRS is actually the final step in the entire financial accounting process that begins in
the transaction cycles.

The financial accounting process begins with a clean slate at the start of a new fiscal
year. Only the balance sheet (permanent) accounts are carried forward from previous
year. From this point, the process proceeds with the following steps:

1. Capture the transaction. Within each transaction cycle, transactions are recorded
on the appropriate source documents.
2. Record in special journal. Each transaction is entered into the journal i.e. the
book of original entry. Frequently occurring classes of transactions such as sales
are captured in special journals. Those that occur infrequently are recorded in the
general journal or directly on a journal voucher.

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 3. Post to subsidiary ledger. The details of each transaction are posted to the
affected subsidiary accounts.
4. Post to general ledger. Periodically, journal vouchers, summarizing the entries
made to the special journals and subsidiary ledgers, are prepared and posted to
the general ledger accounts.
5. Prepare the unadjusted trial balance. At the end of the accounting period, the
ending balance of each account in the general ledger is placed on a work sheet
next to its account caption. They are evaluated in total for debit-credit equality.
6. Make adjusting entries. Adjusting entries are made to the worksheet to correct
errors and to reflect unrecorded transactions during the period, such as
depreciation.
7. Journalize and post adjusting entries. Journal vouchers for the adjusting entries
are prepared and posted to the appropriate accounts in the general ledger.
8. Prepare the adjusted trial balance. From the adjusted balances a trial balance is
prepared that contains all the entries that should be reflected in the financial
statements.
9. Prepare the financial statements. The balance sheet, income statement, and
statement of cash flows are prepared using the adjusted trial balance.
10. Journalize and post the closing entries. Journal vouchers are prepared for
entries that close out the income statement (temporary or nominal) accounts and
transfer the income or loss to retained earnings. Finally, these entries are posted
to the general ledger.
11. Prepare the post-closing trial balance. A trial balance worksheet containing only
the balance sheet accounts may now be prepared to indicate the balances being
carried forward to the next accounting period.

Generally, the financial accounting process has three distinct phases:

Phase I-Daily procedures. The Transaction processing subsystems capture daily

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Phase II-Period-end procedures. Journal vouchers are entered into general ledger
periodically. This involves both the TPS and GLS. The frequency of updates to the
general ledger determines the degree of integration of these systems. In highly
integrated systems, GL updates are part of daily procedure.

Phase III-Financial reporting procedures. The analysis of general ledger

6.3 The Management Reporting System (MRS)

Although discretionary in nature, the MRS has long been informally regarded as an
important element in the internal control system of the organization. A reporting
system that directs management’s attention to problems on a timely basis also promotes
effective management and thus supports the organization’s business objectives.

One technique for achieving ongoing monitoring is the judicious use of management
reports. Timely reports allow managers in functional areas such as sales, purchasing,
production, and cash disbursements to oversee and control their operations. By
summarizing activities, highlighting trends, and identifying exceptions from normal
performance, well designed management reports provide evidence of internal control
function or malfunction.