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352 PART II Transaction Cycles and Business Processes

Finally, the budget master file contains budgeted amounts for revenues, expenditures, and other
resources for responsibility centers. These data, in conjunction with the responsibility center file, are
the basis for responsibility accounting, which is discussed later in the chapter.

GLS PROCEDURES
As we have seen in previous chapters, certain aspects of GLS update procedures are performed as either a
separate operation or integrated within transaction processing systems. Our focus in the next section is on
the interrelationship between the GLS and financial reporting. This involves additional updates in the form
of reversing, adjusting, and closing entries. Let’s now turn our attention to the financial reporting system.

The Financial Reporting System

The law dictates management’s responsibility for providing stewardship information to external parties.
This reporting obligation is met via the FRS. Much of the information provided takes the form of standard
financial statements, tax returns, and documents required by regulatory agencies such as the Securities
and Exchange Commission (SEC).
The primary recipients of financial statement information are external users, such as stockholders,
creditors, and government agencies. Generally speaking, outside users of 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 organiza-
tions in a manner that is generally accepted and understood by external users.

SOPHISTICATED USERS WITH HOMOGENEOUS INFORMATION
NEEDS
Because the community of external users is vast and their individual information needs may vary, finan-
cial statements are targeted at a general audience. They are prepared on the proposition that the audience
comprises sophisticated users with relatively homogeneous information needs. In other words, it is
assumed that users of financial reports understand the conventions and accounting principles that are
applied and that the statements have information content that is useful.

FINANCIAL REPORTING PROCEDURES
Financial reporting is the final step in the overall accounting process that begins in the transaction cycles.
Figure 8-4 presents the FRS in relation to the other information subsystems. The steps illustrated and
numbered in the figure are discussed briefly in the following section.
The process begins with a clean slate at the start of a new fiscal year. Only the balance sheet (perma-
nent) accounts are carried forward from the previous year. From this point, the following steps occur:

1. Capture the transaction. Within each transaction cycle, transactions are recorded in the appropriate
transaction file.
2. Record in special journal. Each transaction is entered into the journal. Recall that frequently occur-
ring classes of transactions, such as sales, are captured in special journals. Those that occur infre-
quently are recorded in the general journal or directly on a journal voucher.
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 GL accounts. The frequency of
updates to the GL will be determined by the degree of system integration.
5. Prepare the unadjusted trial balance. At the end of the accounting period, the ending balance of each
account in the GL is placed in a worksheet and 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.