Reviewer in Revenue Cycle Check Credit- before processing the order further,

the customer’s credit worthiness need to be

Sales Order Procedures
established.
-Include the tasks involved in receiving and processing a
Credit approval process- is an authorization control and
customer order, filling the order and shipping the
should be performed as a function separate from the
products to the customer, billing the customer at the
sales activity
proper time, and correctly accounting for the
transaction Conceptual System (Continued from receive-order task)

1. The receive order task sends the sales

order(credit copy) to the check credit task for
approval
2. The approved sales order then triggers the
continuation of sales process by releasing sales
order information simultaneously to various
tasks. (Stock release, packing slip, shipping
notice, and sales invoice

Receive Order-

1. Receipt of customer order- indicating the type

and quantity of merchandise desired. Orders
may arrive by mail, telephone, or from field of
representative who visited the customer .
(When a customer is also a business entity, the Pick Goods
order is often a copy of the customer’s
1. The order activity forwards the stock release
purchase order.
document (picking ticket) to the goods function,
2. Transcribe into a formal sales order- captures
in the warehouse. It identifies the items in the
the customer’s name, address, and account
inventory that must be located and picked from
number; the name, number and description of
the warehouse shelves
the items sold; the quantities and unit prices of
2. After the picking of the stock, the order is
each sold item
verified for accuracy of the goods and verified
3. It is now placed to the customer open order
stock release document are sent to the ship
file- for future reference The task of filling the
goods task. If the inventory levels are
order may take days or weeks. The customer
insufficient to fill the order, a warehouse
record in the open order file is updated each
employee adjusts the verified stock release to
time the status of the order changes (credit
reflect the amount actually going to the
approval, on back-order, and shipment), for the
customer.
service employees to answer the questions of
the customers
 3. The employee then prepares a back-order 1. To prevent these problems, the billing function
record , which stays on file until the inventories awaits for notification from shipping before it
arrive from supplier. These orders are shipped bills
before the sales order are processes. 2. Upon credit approval, the bill-customer function
4. Finally, the warehouse adjusts the stock records receives the sales order (invoice copy) from the
to reflect the reduction of the inventory (not receive order task
formal accounting procedures and for 3. Sale order (invoice copy is placed in an S.O.
warehouse management purposes only.) pending file until the receipt of the shipping
notice which describes the products that were
Ship Goods – independent verification control point and
actually shipped to the customer
is the last opportunity to detect errors
4. Upon arrival, the items shipped are reconciled
1. Before the arrival of goods and the verified with those ordered and unit prices, taxes, and
stock release document, the shipping freight charges are added to the invoice copy of
department receives the packing slip and the sales order
shipping notice from the receive order function 5. The completed sales invoice is the customer’s
2. The packing slip will travel with the goods to bill, which formally depicts the charges to the
the customer to describe the contents of the customer.
order. The shipment notice will later be
The billing function performs the following records
forwarded to the billing function as evidence
keeping related tasks:
that the order was filled and shipped (contains
the date of shipment, quantity, name of carrier  Record the sales in the sales journal
and freight charges.  Forwards the ledger copy to the sales order to
3. Upon receiving the goods from the warehouse, the update accounts receivable task
the shipping clerk reconciles the physical items  Sends he stock release document to update
with the stock release, the packing slip, and the inventory record task
shipping notice to verify that the sales order
was correct
4. The shipping clerk packages the goods, attaches
the packing slip, completes the shipping notice
and prepares the bill of lading- the formal
contract between the seller and the shipping
company (carrier) to transport the goods to the
customer. It establishes legal ownership and
responsibility to the assets in transit
5. Once the goods are transferred to the carrier,
the shipping clerk records the shipment in the
shipping log, forwards the shipping notice to the
carrier and the stock release to the bill
customer function as a proof of shipment, and
updates the customer’s open order file

Bill Customer- the shipment of goods marks the

completion of the economic event and the point at
which the customer should be billed. Billing for goods
not shipped causes confusion damages relations with
customers, and requires additional work to make
adjustments to accounting records. Sales Journal- is a special journal used for recording
completed transactions
Sales Journals Voucher- at the end of the period, these o Available credit
entries are summarized to this voucher o Transaction dates
o Invoice numbers
Journal Voucher- each represents a general journal
o Credits for payments
entry and indicates the general ledger accounts
o Returns
affected. Summaries of transactions, adjusting entries,
and closing entries are all entered into the general o Allowances
ledger via this method

The journal voucher system eliminates the need for a

formal general journal, which is replaced by a journal
voucher file.

 Post to general ledger- receipt of journal

vouchers from billing and inventory control
tasks and an account summary from the AR
function. The general ledger uses the journal
voucher to post the following control accounts:

AR Control xxx

Cost of Goods sold xxx

 Update Inventory records- inventory control
Inventory control xxx
function updates the inventory subsidiary
ledger accounts from information contained in Sales xxx
the stock release document.
o Perpetual inventory- has its own record
in the ledger containing at the minimum
data. Each stock release document
reduces the quantity on hand of one or
more inventory accounts
o Periodically, the financial value of the
total reduction in inventory is
summarized in a journal voucher and
SALES RETURN PROCEDURES:
sent to the general ledger function for
posting: Reasons:
COST OF GOODS SOLD XXX 1. The company has shipped the wrong
merchandise
INVENTORY XXX
2. The goods were defective
3. The product was damaged during shipment
4. The buyer refused delivery because the seller
 Update accounts receivables- customer records
shipped the goods too late or they were
in the accounts receivable (AR) subsidiary
delayed in transit
ledger are updated from information the sales
order (ledger copy) provides. Includes: The procedures are:
o Customer name
o Customer address
o Current balance
1. Prepare return slip- the receiving department
employee counts, inspects, and prepares the
return slip
2. Prepare credit memo- the authorization for the
customer to receive credit for the merchandise
returned
3. Approve Credit memo- evaluation. The
approved credit memo is returned to the sales
department
4. Update sales journal- the transaction is
recorded in the sales journal as a contra entry.
At the end of the period, total sales returns are
summarized in a journal voucher and sent to
the general ledger department
5. Update inventory and AR records- the inventory
control function adjusts the inventory records
and forwards the credit memo to accounts
receivable, where the customer’s account is
also adjusted
6. Update General Ledger:

Inventory Control XXX

Sales Returns and Allowances XXX

Cost of Goods Sold XXX

Accounts Receivable control XXX

Cash Receipts procedures

It involves:

 Receiving and securing cash

 Depositing the cash in bank
 Matching payment with customer and adjusting
the correct amount
  Proper accounting for and reconciling the
financial details of the transaction

Procedures:

1. Open mail and prepare remittance advice

a. Remittance advice- contain information
needed to service individual customer’s
account (payment date, account
number, amount paid, and customer
check number)

REVENUE CYCLE CONTROLS

b. Remittance list (cash pre-list) where all

cash received is logged. 3 copies are
sent to the records and deposit check
function (original), remittance advices
(second copy), reconciliation task (3rd
copy)
2. Record deposit checks- after reconciling the
prelist checks, the employee’s records and
check in the cash receipts journal. Then the
clerk prepares a bank deposit slip.

Transaction Authorization
3. Update accounts receivable
4. Update general ledger  Credit check
5. Reconcile cash receipts and deposits  Return policy
 Remittance list(cash prelist)
  Sales department
 Credit department approval
 Warehouse procedures
 The shipping department
 The billing department

Sales Return Procedures

 Receiving Department
 Sales Department
 Processing the Credit
Memo
Segregation of Duties

1. Transaction authorization should be separate

from transaction processing
2. Asset custody be separate from the task of
asset record keeping
3. The organization should be structured so that
the perpetration of a fraud requires collusion
between 2 or more individuals

Supervision- provide control in systems that are

properly segregated

(Insert info from book here)

Physical System- Processing credit memo

Physical System

 Manual system serve as a visual training aid to

promote better understanding of the key
concepts
 Manual system flowcharts reinforce the
importance of segregation of duties through
clearly defined departmental boundaries
 Manual system is a fundamental component of
the framework for viewing technology
innovations

Manual System- to support the system concepts

presented in the previous models depicting people,
organizational units, and physical documents and
files

SALES ORDER PROCESSING

 Cash receipts procedures:
 Mail room
o Customer payments and remittance
advices arrive at the mailroom
where the envelops are opened.
The checks are sent to the cashier in
the cash receipts department, and
the remittance advices are sent to
the AR department
 Cash receipts
o The cashier records the checks in
the cash receipts journal and
promptly sends them to the bank,
accompanied by two copies of the
deposit slip. Period
 Accounts receivable
o The AR department uses the
remittance advices to reduce the
customer’s account balances
consistent with the amount paid.
The AR clerk prepares a summary of
changes in account balances which
is sent to the general ledger
department
 General Ledger department
o Upon receipt of the journal voucher
and account summary from cash
receipts and AR, respectively, the
general ledger clerk reconciles the
information and posts to the
control accounts
 Controller’s office
o Because cash is a liquid asset and
subject to misappropriation,
additional controls are necessary.
IN this case, someone from the
controller’s office periodically
performs a bank reconciliation by
comparing deposit slips returned
from the bank, account summaries
used to post the accounts, and
journal vouchers
 Concluding remarks

Computer-Based Accounting Systems

Automation- involves using technology to improve the
efficiency and effectiveness of a task. It replicates the
traditional process it replaces
Reengineering- rethinking the business process and the
work flow. The objective is to improve operational
performance and reduce costs by identifying and
eliminating non-value-added tasks
AUTOMATION SALES ORDER PROCESSING WITH
BATCH TECHNOLOGY
1. Sales Department- The sales process begins
with a customer contacting the sales
department and placing an order. The sales
clerk records the essential details and prepares
multiple copies of a sales order, which are held
pending credit approval.
2. Credit department- Approval When credit is
approved, the sales department releases copies
of the sales order to the billing, warehouse, and
shipping departments. The customer order and
credit approval are then placed in the open
order file.
3. Warehouse procedures- Next the warehouse
clerk receives the stock release copy of the sales
order and uses this to pick the goods. The
inventory and stock release are then sent to the
shipping department.
4. Shipping department- The shipping clerk
reconciles the products received from the
warehouse with the shipping notice. Assuming
no discrepancies exist, a bill of lading is
prepared, and the products are packaged and
shipped via common carrier to the customer.
The clerk then sends the shipping notice to the
computer department.
5. Keystroke- The keystroke clerk converts the
hard-copy shipping notices to digital form to
produce a transaction file of sales orders.
6. Edit Run - Periodically, the sales order system is
executed. The system is composed of a series of
program runs. The edit program first validates
all transaction records in the batch by
performing clerical and logical tests on the data.
typical tests include field checks, limit tests,
range tests, and price-times-quantity
extensions. The edit program recalculates the
batch control totals to reflect any changes due
to the removal of error records. The edited
sales order file is then passed to the file update
run.
Update Procedures
THIS SYSTEM GENERATES A NUMBER OF
MANAGEMENT REPORTS, INCLUDING SALES
SUMMARIES, INVENTORY STATUS REPORTS,
TRANSACTION LISTINGS, AND BUDGET AND
PERFORMANCE REPORTS. QUALITY MANAGEMENT
REPORTS PLAY A KEY ROLE IN HELPING
MANAGEMENT MONITOR OPERATIONS TO ENSURE
THAT CONTROLS ARE IN PLACE AND FUNCTIONING
PROPERLY.
 Reengineering Sales Oder Processing with Real- and send them, along with a copy of the stock release
Time technology document.

- Interactive computer terminals replace many of SHIPPING DEPARTMENT

the manual procedures and physical documents of
A shipping clerk reconciles the goods, the stock release
the previous system. This interactive system
document, and the hard-copy packing slip produced on
provides real-time input and output with batch
the terminal. The clerk then selects a carrier and repairs
updating of only some master files. Sales order
the goods for shipment. From the terminal, the clerk
processing with real-time technology can speed up
transmits a shipping notice containing shipping date and
the fulfillment cycle by reducing employee
freight charges. The system updates the open sales
intervention. With sales order system you can move
order record in real-time and places Y value in the
the products out the door more quickly.
CLOSED, thus closing the sales order.

General Ledger Update Procedures

Transaction Processing Procedures
SALES PROCEDURES
 The system accesses the system subsidiary file
and checks the availability of the inventory.
The inventory subsidiary and AR subsidiary records
were updated previously during the real-time
procedures. Updating the general ledger accounts in
real time possess no significant operational delays.
Finally, the batch program prepares and mails costumer
bills and transfers the closed sales records to the sales
journal.

Advantages of Real-time Processing

 If credit is approved, the system updates the
customer’s current balance to reflect the sale  Real-time processing greatly shortens the cash
and reduces inventory by the quantities of cycle of the firm.
items sold to present an accurate and current
picture of inventory on hand and available for
sale.  Real-time processing can give the firm a
competitive advantage in the marketplace.

 The system automatically transmits a digital

stock release document to the warehouse, a
digital shipping notice to the shipping
department, and records the sale in the open
sales order file. The structure of this file
includes a CLOSED field that contains either the
value of N or Y to indicate the status of the
order.
N is the default value in this field when the record is
created
 Manual procedures tend to produce clerical
errors, such as incorrect account numbers,
invalid inventory numbers, and price-quantity
extension miscalculations.
 Finally real-time processing reduces the amount
of paper documents in a system.

Y indicates that the goods have been shipped, so the

customer can be billed

WAREHOUSE PROCEDURES

The warehouse clerk’s terminal immediately produces a

hard-copy printout of the electronically transmitted
stock release document. The clerk then picks the goods
Automated Cash Receipts Procedures
 Very important part of the revenue cycle
 Records cash and checks
 It is extremely vulnerable part
Automated Cash Receipts Procedure
 Mail room
 Cash receipt department
 Accounts receivable department
 Data processing departments
Point of Sales (POS) System
Re-engineered Cash Receipts procedures
 Customer made payments on accounts with
physical checks and mailed to the company
 Labor-intensive
 Costly
 Creates a control risk.
 The mailroom is the frequent target in the
engineering.
 Companies send their preprinted envelopes and
remittance advices.
 machines open the envelopes, scan remittance
advices and checks and separate the checks
 POS systems are commonly used in retail stores
department stores and supermarkets.
 The clerk scans the universal product code
(UPC).
 The system computes the amount due.
 Payment is either cash, check, ATM or credit
card in most cases.
  Money and receipts in the drawer are
reconciled to the internal cash register tape
End-of-day Procedures
At the end of the day, cash receipts clerk prepares a
three-part deposit slip for the total amount of cash
received
 1 deposit slip- for file record
 2 deposit slip- accompany the cash in bank
Batch program summarizes the sales and cash receipts
journal voucher, then post to the general ledger.
Journal Entries
Cash xxx
Cash Over/Short xxx
Accounts receivable xxx
Cost of goods sold xxx
Sales xxx
Inventory xxx
Reengineering Using EDI
Electronic Data Interchange (EDI) - was devised
expedite routine transactions between manufacturers
and wholesalers and between wholesalers and retailers
EDI is more than just a technology.
Reengineering Using the Internet
Doing Business on the Internet
Thousands of organizations worldwide are establishing
home pages on the Internet to promote their products
and solicit sales. By entering the seller’s home page
address into the Internet communication program from
a PC, a potential customer can access the seller’s
product list, scan the product line, and place an order.
Control Considerations For Computer Based System
Authorization
- Transaction authorization in real-time
processing systems is an automated task.
Management and accountants should be
concerned about the correctness of the
computer-programmed decision rules and the
quality of the data used in this decision.
Segregation of Duties
- Tasks that would need to be segregated in
manual systems are often consolidated within
computer programs.
Supervision
- It is the process of supervising the activities
specially the financial transaction of the
business. Surveillance cameras and shop floor
security personnel can reduce the risk of the
inventory and cash of the business. To preserve
the integrity of accounting records, organization
management must implement controls that
restrict unauthorized access
Access Control
- Organization Management must implement
controls
Accounting Records
- Accounting Records
- (1) DIGITAL JOURNALS AND LEDGERS. Digital
journals and master files are the basis for
financial reporting and many internal decisions.
Accountants should be skeptical about
accepting, on face value, the accuracy of
computer-produced hard-copy printouts of
digital records.
- (2) FILE BACKUP. The physical loss, destruction,
or corruption of digital accounting records is a
serious concern. The data processing
department should perform separate file-
backup procedures.
Independent Verification
- Independent verification is restored somewhat by
performing batch control balancing after each run
and by producing management reports
and summaries for end users to review.
PC based Accounting System
- General purpose systems
- Use them to automate and replace manual
systems
- The software market offers hundreds of PC-
based accounting systems. PC applications
tend to be general-purpose systems that
serve a wide range of needs. This strategy
 allows software vendors to mass-produce
low-cost and error-free standard products.
Most PC systems are modular in design.
Their modular design provides users with
some degree of flexibility in tailoring
systems to their specific needs.

PC CONTROL ISSUES

Segregation of Duties

-PC systems tend to have inadequate segregation of

duties. Controlling the PC environment requires a high
degree of supervision, adequate management reports
(such as detailed listings of all transactions), and
frequent independent verification.

Access Control -PC systems generally provide

inadequate control over access to data files. Solutions
for dealing with the problem include data encryption,
disk locks, and physical security devices.

Accounting Records -Data losses that threaten

accounting records and audit trails plague the PC
environment. Formal procedures for creating backup
copies of data files and programs can reduce this threat
considerably.