Chapter 4

The Revenue Cycle

BSA 2-1

Canlas, Karen R.

Guerrero, Noreen S.

Pelaez, Sherra N.

Costes, Angel Kate C.

Picones, Jessamine Rose D.

Professor Melinda S. Balbarino

August 6, 2021
The Conceptual System
There are three processes that constitute the revenue cycle that happens for most
retail, wholesale, and manufacturing organizations. And these processes are the sales order
procedures, sales return procedures, and cash receipts procedures. Service entities might use
other industry-specific methods. Aside from that, these processes are considered
technology-neutral which means that it could be done manually or with the use of a computer.

SALES ORDER PROCEDURES

1. Receive Order
The first process in the sales order procedure involves receiving the order from the
customer. The customer order indicates the type and quantity of merchandise desired. It can
be done in many ways such as through mail, telephone, field representative or a copy of the
customer’s purchase order. Since the customer order can be received in different ways, it has
to be uniformly recorded as a sales order.

After the sales order file is done, it will be transferred to the customer open order file
for future reference. The customer representatives will be able to identify the current status of
every merchandise ordered by their customers through the open order file.
2. Check Credit
Before further processing of the order, the credit worthiness of the customer must be
first established. An example measure would be having an extensive financial investigation to
establish a line of credit for new customers. In this way, credit checking on subsequent sales
will be limited and the sales will not exceed the pre-established limit. This step involves
credit authorization, so this must be a separate department. Once the sales order has been
received, it will undergo credit evaluation and after the approval, the process will continue.

3. Pick Goods
The received order will then be forwarded to the stock release document (also called
as picking ticket) to get the desired goods in the warehouse. This serves as a document to
identify which goods are required to be picked up from the shelves and as an authorization
for the warehouse personnel to release the goods. The verified stock release are sent to the
ship goods task. If there is an insufficiency of inventory, the warehouse clerk will update the
verified stock release reflecting the current quantity that will go to the customer. Then, a
back-order record will be prepared. This is shipped first before proceeding with the new
sales. The last step in the warehouse is the updating of records for the reduction of the
inventories.

4. Ship Goods
The shipping department will receive the packing slip and shipping notice from the
receive order function before the arrival of the verified stock release and the goods. The
packing slip is included in the package and it would contain the contents of the customer’s
order. The shipping notice will then be forwarded to the billing department. This document
will contain the following information:
● date of shipment
● items and quantities actually shipped
● name of the carrier
● freight charges
After receiving the goods from the warehouse, the shipping clerk will reconcile the
items in the package with the stock release. This is considered one of the most important
aspects of control because it is the last opportunity to detect any errors. And if all the items
are correct, a bill of lading will be prepared. The bill of lading is a contract between the
shipping company and the courier to transport the goods to the customer.
5. Bill Customer
Billing should be done before shipment as it removes inefficiencies in the process.
Some details might be unknown once the sales order has been done such as the availability,
prices, shipping charges and the like. That is why the billing department awaits the
notification from the shipping department before they bill the customer. The billing function
is also responsible for the following tasks:
● Records the sales in the sales journal
● Forwards the ledger copy of the sales order to the update accounts receivable task
● Sends the stock release document to the update inventory tasks

The sales journal is a special journal used to record completed sales transactions and the
information is summarized into a sales journal voucher while the journal voucher shows the
general journal entry and indicates the general ledger accounts affected.

6. Update Inventory Records

The inventory control clerk will update the records based on the information found on
the stock release document. In the perpetual inventory system, each item has their own ledger
accounts shown on figure 4-5. Periodically, the reduction in inventory is summarized in a
journal voucher reflecting these entries below and will be sent to the general ledger function.
7. Update Accounts Receivable
The customer record in the Accounts Receivable ledger will be updated from the
information acquired in the sales order (ledger copy). Every customer has their own records
in the AR ledger which contains, at a minimum of:
● Customer name
● Customer address
● Current balance
● Available credit
● Transaction dates
● Invoice numbers
 ● Credits for payments
● Returns and allowances
The account balances of every customer is also summarized in a report to send in the general
ledger.

8. Post to the General Ledger

The general ledger function will receive the journal vouchers from the billing and
inventory control tasks and the account summary from the AR function. The information
received has two purposes: the first one is, the journal vouchers are used to post into these
control accounts. Second, this provides an important verification control. The independent
summary of accounts in the AR function is used to verify the journal vouchers from the
billing department. The AR summary should equal the total debits in the journal vouchers.
SALES RETURN PROCEDURES
There are many reasons why a certain percentage of an organization’s sales will be
returned. Some of it are:
● The customer received the wrong merchandise shipped by the company
● Defective merchandise
● Goods are damaged during shipment
● Refusal of the buyer to accept the delivery either because the seller shipped the item too
late or were delayed in transit.

Procedures for Approving and Processing Returned Items:

1. Preparation of the Return Slip
As soon as items are returned, the employee from the receiving department will count,
inspect for possible damages and prepare a return slip for the items returned, documenting the
quantity and the conditions of the items received. The goods and a copy of the return slip will
be forwarded to the warehouse to be restocked. The second copy of the return slip will be
sent to the sales function by the employee to prepare a credit memo.

2. Preparation of the Credit Memo

The credit memorandum serves as the authorization for the refund of the customer for
the returned items. In appearance, the credit memo is similar to a sales order. As a matter of
fact, some systems actually use a copy of the sales order marked credit memo. shipping
 department.

The sales employee will prepare a credit memo as soon as the copy of the return slip
is received. If the clerk can handle the approval of the return, the credit memo will be
forwarded to the billing function where the sales transaction will be reversed. However, in
times where the amount of the refund or circumstances relating to the return exceeds the
general capacity of the employee to authorize the return, the credit memo will be sent to the
credit manager for approval.

3. Approval of Credit Memo

The credit manager will use and make judgement on whether to grant or disapprove
credit upon evaluation. The approved credit memo will be returned by the manager to the
sales department.

4. Updating the Sales Journal

The sales department will record the transaction in the sales journal as a contra entry
as soon as the approved credit memo has been received. This will be sent next to the
inventory control function for posting. The total sales returns are placed and summarized in
a journal voucher and is forwarded to the general ledger department at the end of the period.

5. Updating the Inventory and the AR Records

The inventory will be adjusted by the inventory control function and they will forward
the credit memo to the accounts receivable for the adjustment of the customer’s account. The
inventory control dispatches a journal voucher periodically, which summarizes the total value
of the inventory returns, and the accounts receivable submits an AR account summary to the
general ledger function.

6. Updating the General Ledger

The general ledger function will reconcile the amounts and will post the following entry to
control accounts:
Inventory – Control xxx
Sales Returns and Allowances xxx
Cost of Goods Sold xxx
Accounts Receivable – Control xxx
CASH RECEIPTS PROCEDURE
1. Open Mail and Prepare Remittance Advice
A mail room employee will open envelopes containing customer payments and
remittance advices. This remittance advices contains information that is required for
individual customer’s accounts. It is also a form of a turnaround document for avoiding errors
and operational efficiency is easily achieved. The clerk will record each check on a form that
is called remittance list (or cash prelist), wherein all cash received are logged.
2. Record and Deposit Checks
An employee from the cash receipts department will authenticate the accuracy and
completeness of the checks against the prelist to identify checks possibly misplaced or
misdirected between the mail room. After that, the checks will be recorded in the cash
receipts journal, wherein cash related transactions (miscellaneous cash receipts, cash sales,
etc.,) are recorded. Each check received from a customer is recorded as a separate line item.
 After that, a bank deposit slip containing the amount of the day’s receipts is prepared
by the employee and this will be sent, along with the checks, to the bank. The deposit slip
will be validated by the bank teller upon deposit of the funds and will be returned to the
company for reconciliation. The cash receipts employee will prepare a summary of the
journal entries and forward the following journal voucher entry to the general ledger function.

Cash xxx
Accounts Receivable - Control xxx

3. Update Accounts Receivable

The information in the remittance advice will be used to post to the customers’
accounts in the AR subsidiary ledger. The summary of the changes in account balances is
made periodically and is forwarded to the general ledger function.

4. Update General Ledger

The general ledger function will reconcile the amounts, posts to the cash and AR
control accounts and will file the journal voucher as soon as the journal voucher and the
account summary are received.

5. Reconcile Cash Receipts and Deposits

These following documents are compared for the reconciliation of the cash receipts:
● Copy of the prelist
● Deposit slips received from the bank
● Related journal vouchers
The reconciliation is done periodically (weekly or monthly) by a personnel from the
controller’s office or an employee who is not in any way involved with the procedures of the
cash receipts.
REVENUE CYCLE CONTROLS

Revenue Control Activities had already defined in the previous chapter and its
summary are shown in the following table as they apply in the revenue cycle.

1. Transaction Authorization

The objective of transaction authorization is to ensure that only valid transactions are
being processed by the information and in accordance with the management goals. It has
been applied in each of the three systems in the following sections.

Credit Checks

Credit checking of prospective customers is an important function of the credit

department as it ensures the proper application of the entity’s credit policies. Credit
department may employ credit procedures to determine the credit-worthiness of the customer
since it is their principal concern as it also depends on their relationship with the customer
and materiality of transactions. Credit approval for first-time customers may take time while
credit decisions that fall within a sales employee’s general authority may be dealt
immediately. Credit must be approved first before the entity proceeds to its transaction.

Return Policy
 Another function of the credit department is to authorize the processing of sales
returns. An approval determination is based on the nature of sale and the circumstances of the
return. It is also influenced by the concepts of specific and general authority. Credit approval
becomes more formal as materiality of transaction increases. It is the basis of most entities in
granting cash refunds and credits to customers.

Remittance List (Cash Prelist)

The Cash Prelist provides a means for verifying the customer checks and remittance
advice match in amount. Prelist authorized the posting of a remittance advice to a customer’s
account in order to reconcile the presence of an extra remittance advice in the AR department
or the absence of a customer’s check in the cash receipts department.

2. Segregation of Duties

Segregation of duties ensures that no single individual or department processes a

transaction in its entirety. The number of employees and the volume of transactions being
processed influence how to accomplish segregation. Here are the three rules guide system
designers in this task which has already been mentioned in the previous chapter.

a. Transaction Authorization should be separate from transaction processing.

Within the revenue cycle, the credit department is segregated from the rest of the
process, therefore authorization of transaction is an independent event. It was being
emphasized when one considers the potential conflict in objectives between the individual
salesperson and the entity. Compensation for sales staff is based on their individual sales
performances thus they have an incentive to maximize sales volume which may not
adequately consider the credit worthiness of prospective customers. By acting in an
independent capacity, the credit department may objectively detect risk customers and
disallow poor and irresponsible sales decisions.

b. Asset custody should be separate from the task of asset record keeping.

It is necessary to separate asset custody from record keeping since the physical assets
at risk in the revenue cycle are inventory and cash. The custody on tasks should be different
as it would open the door to fraud and material errors. The responsibility in the physical
inventory asset and inventory record should be in the custody of a different person. Similarly,
Cash Assets should be in the custody of the cash receipts department while updating AR
records in an accounts receivable responsibility. The Cash Receipts department typically
reports to the treasurer, who has responsibility for financial assets then the accounting
functions report to the controller.

c. The organization should be structured so that the perpetration of a fraud requires

collusion between two or more individuals.

The record keeping tasks need to be carefully separated. The subsidiary ledgers, the
journals and the general ledgers should be separately maintained. An individual with total
record keeping responsibility and in collusion with someone with asset custody can perpetrate
fraud. Therefore tasks must be separated as collusion must involve more people which
increases the risk of detection then fraud would less likely to occur.

3. Supervision

Supervision is a form of compensating control which is being relied on by many

companies especially those with few employees to achieve an adequate separation of
functions. It provides control in systems that are properly segregated that prevent employees
from committing fraud. The deterrent effect of supervision can provide an effective
preventive control against those crimes.

4. Accounting Records

This control is also an important operational feature of well-designed accounting

systems as it guides transactions to not get lost in the system. Management can discover the
occurrences of an error by following the audit trail since several specific control techniques
contribute to it.

Prenumbered Documents

Prenumbered documents are sequentially numbered by the printer and allow every
transaction to be identified uniquely as it permits the isolation and tracking of a single event
through the accounting system. Prenumbered documents are necessary because without it, it
would be difficult to verify financial data and trace transactions.

Special Journals
 Special Journals are being used by the system to provide a concise record of an entire
class of events. For this purpose, the revenue cycle system uses special journals such as sales
journals and cash receipts journals to record similar transactions on it.

Subsidiary Ledgers

The inventory and AR subsidiary ledgers are two subsidiary ledgers used for
capturing transaction event details in the revenue cycle. The sale of products reduces
quantities on hand in the inventory subsidiary records and increases the customer’s balances
in the AR subsidiary records as well as reduces its cash receipts. These subsidiary records
provide links back to journal entries and to the source documents that captured the events.

General Ledgers

General ledger control accounts such as sales, inventory, and cost of goods sold, AR
and Cash are the basis for financial statements preparation and affected by the revenue cycle
transactions. Journal vouchers that summarize activity captured in journals and subsidiary
ledgers flow into the general ledger to update these accounts show complete audit trail from
the financial statements to the source documents via the general ledger, subsidiary ledgers
and special journals.

File

The revenue cycle employs several temporary and permanent files that contribute to
the audit trail. The following are the examples of these files.

● Open Sales Order File – shows the status of customer order

● Shipping Log – specifies orders shipped during the period
● Credit Records File – provides customer credit data
● Sales Order Pending File – contains open orders not yet shipped or billed
● Back-order File – contains customer orders for out-of-stock items
● Journal Voucher File – a compilation of all journal vouchers posted to the general
ledger
5. Access Controls

Access Controls prevent and detect unauthorized and illegal access to the entity’s
assets. Limiting access to the physical assets items includes the following.
 ● Warehouse security such as fences, alarms and guards.
● Depositing cash daily in the bank.
● Using a safe or night deposit box for cash.
● Locking cash drawers and safes in the cash receipts department.

Information is another important asset at risk thus access control over it involves
restricting access to documents that control physical assets including source documents,
ledgers and journals. The following are examples of access risks in the revenue cycle:

1. An individual with access to the AR subsidiary ledger could remove his or her
account from the books. Consequently, the entity would not send the customer
monthly statements if there is no record of the account.
2. Access to sales order documents may permit an unauthorized individual to trigger the
shipment of a product.
3. An individual with access to both cash and the general ledger cash account could
remove cash from the entity and adjust the cash account to cover the act.

6. Independent Verification

Accuracy verification and completeness of tasks are the objectives of independent

verification that other functions in the process perform. It must occur at key points in the
process where errors can be detected quickly and corrected in order for it to be effective.
Independent verification controls in the revenue cycle exists at the following points:

1. The shipping function verifies that the goods sent from the warehouse are correct in
type and quantity. Before the goods are sent to the customer, the stock release
document and the packing slip are reconciled.
2. The billing function reconciles the original sales order with the shipping notice to
ensure that customers are billed for only the quantities shipped.
3. Prior to posting to control accounts, the general ledger function reconciles journal
vouchers and summary reports prepared independently in different function areas.
The billing function summarizes the sales journal, inventory control summarizes
changes in the inventory subsidiary ledger, the cash receipts function summarizes the
cash receipts journal, and accounts receivable summarizes the AR subsidiary ledger.
Physical Systems

The discussion will begin with the review of the manual procedures before heading on
to the computer-based systems. There are numerous reasons why manual systems are still
included in this age of computer technology. The following are some of it:

1. For better understanding of the key concepts

Manual systems are used to promote a deeper comprehension of the key concepts. Its
processes including the source, routing, destination and sequence of events can be easily
represented through the use of flowcharts unlike computer-based systems, which may be
difficult for novice students to follow.

2. Establishes the importance of the segregation of duties

In computer-based systems, the segregation of duties cannot be represented visually

as it is accomplished in forms such as computer programming techniques and password
controls. On the other hand, manual system flowcharts reinforce clearly defined departmental
boundaries.

3. Manual systems are fundamental components of the framework for viewing

technology innovations.

Before the emergence of the computer-based systems, manual systems were the state
of the art. Its flaws and imperfections led us to the innovation of the computer-based system,
and the shortcomings of today’s systems will be used as the framework for the next.
Understanding what used to be the state of the art improves one’s understanding of what led
us to where we are now.

Manual Systems
SALES ORDER PROCESSING
- Figure 4.12 shows the typical manual sales order processes and in this step, maintaining
source documents is vital when it comes to the audit trail because the transactions that took
place for every specific date can be reconciled with the records. And every time a new
transaction has occurred, there will always be filing of evidence once a task has been
completed.
1. Sales Department
Every sales process begins with a customer making inquiries with the sales department
through a call, email, or whatever method of communication an entity has. And then, the
sales department will record all essential details regarding the transaction with the customer.
As details have been recorded, the tasks will begin, but in the meantime the transaction is still
pending for credit approval.

1. Credit Department Approval

There is a segregated department for credit approval so that there could be an independence
when it comes to the authorization process apart from the sales department. Once the credit is
approved, the sales department clerk will pull the copies from the pending file and will
transfer it to the open order file. It will also be released to the billing, warehouse, and
shipping departments.

2. Warehouse Procedures
After the credit has been approved by the credit department, the merchandise should be
shipped as soon as possible. Now, the warehouse clerk will receive a sales order from the
transaction that happened in the beginning of the sales process, so that he can locate the
inventory. Both the sales order and the released inventory will then be forwarded to the
shipping department. Lastly, the inventory reduction will be recorded in the stock records to
monitor stocks.

3. The Shipping Department

Now, the shipping clerk will reconcile the inventory received from the inventory department
and the sales order received earlier after the credit has been approved. This reconciliation is
considered a vital step for control in order to make sure that the products and quantities to be
delivered are correct and to minimize any further problems. If the order is correct, a bill of
lading is prepared, and the product is delivered to the customers through a common carrier. A
bill of lading is a detailed list of shipment of goods in the form of a receipt. It will outline the
journey of the shipment from the origin to the destination. Then, the clerk will log the
shipping transaction and send the notice to the billing department.
4. Billing Department
The shipping notice received from the shipping department is considered proof that the
product has been shipped and it initiates the billing process. After the receipt of shipping
notice and stock release, the billing clerk will now compile the relevant facts that happened in
the transaction which includes:
● Product Prices
● Handling Charges
● Freight
● Taxes
● Discount Terms
After compilation, the customer will be billed. Then, the transaction will now be recorded in
the sales journal and documents will be distributed in the AR and inventory control
departments. Periodically, the billing clerk will summarize the transactions into a journal
voucher and send this to the general ledger department.

5. Accounts Receivable, Inventory Control and General Ledger Departments

The AR and inventory control clerks will update their subsidiary ledgers upon the receipt of
sales documents from the billing department. Just like in the billing department, they also
periodically record and summarize journal vouchers and accounts which they will send to the
general ledger department for reconciliation and posting.

SALES RETURNS PROCEDURES

​The returns will be secured by the receiving department, where the sales return process
begins. The personnel in the mentioned department will document the quantity of the goods
returned, inspect for damages, and send the returned goods to the warehouse. The same
personnel will be making a return slip, which is forwarded to the sales department.

The sales department employee will prepare a credit memo as soon as the return slip has been
received. The company policy will rule whether the credit manager’s approval is required
depending on the materiality and the circumstance of the return.

The processing of the credit memo will reverse the effects of the original sales transaction.
The billing function will record a contra entry for the sales return, the allowance journal
inventory control debits the inventory and the AR personnel credits the accounts of the
customer. The journal vouchers and account summaries prepared by the departments
periodically will be sent to the general ledger for reconciliation and posting to the control
accounts.
CASH RECEIPTS PROCEDURES
1. Mail Room
It is advisable that all customer payments and remittance advices go to the mail room,
the place where envelopes are opened. The checks are sent to the cashier in the cash receipts
department while the remittance advices is sent to the AR department.
2. Cash Receipts
The cashier will record the check in the cash receipts journal and after that, it will be
sent to the bank together with two copies of deposit slip. There is also a periodic preparation
of journal vouchers which will be sent to the general ledger department.
3. Accounts Receivable
The remittance advices are used by the AR department to adjust the account balances
of the customers consistent with the amount paid. A summary of changes in account
balances, which will be sent to the general ledger department, will be prepared by the AR
clerk.
4. General Ledger Department
The general ledger clerk will reconcile the information from the journal voucher and
account summary from cash receipts and AR upon receipt.
5. Controller’s Office
Periodically, bank reconciliations are performed by someone from the controller’s
office through the comparison of the account summaries used to post to the accounts, journal
vouchers and deposit slips returned from the bank. This is necessarily done because of the
asset’s liquidity and because cash can be easily misappropriated.

Conclusion
Manual systems are labor-intensive and the clerical functions are prone to errors
which greatly adds to the cost of the system operations. It requires a lot of paperwork as the
necessary documents are located in physically separate papers. The primary objective of the
computer-based systems is to eliminate or reduce these labor and cost-intensive functions
which will be seen as we move forward on the discussions. The tasks of the computer-based
systems mainly concern the financial analysis and emerging technical problems rather than
routine transaction processing.
Computer-Based Accounting System (CBAS)

Automation involves using technology to improve the efficiency and effectiveness of

a task. It simply replicates the traditional (manual) process that it replaces.

Reengineering involves radically rethinking the business process and the workflow.
The objective is to improve operational performance and reduce costs by identifying and
eliminating non–value-added tasks.

* Automation and reengineering techniques are applied to both sales order processing and
cash receipts systems.

AUTOMATED SALES ORDER PROCESSING WITH BATCH TECHNOLOGY

The sales order file has three key fields:

1. Sales Order Number (primary key) is critical in preserving the audit trail and it
provides the link between digital records stored on a computer disk and the physical
source documents.
2. Account Number (secondary keys) is used to locate the corresponding records in the AR
subsidiary master file.
3. Inventory Number (secondary keys) is used to locate the corresponding records in the
inventory master files.
Batch Sales Order System

Its impact is greatly seen in billing, inventory control, accounts receivable, and
general ledger as the manual bookkeeping tasks have been automated. It is cost saving due to
the reduction of clerical staff and minimizes the exposure to many forms of errors.

1. Sales Department
The customer places an order and the sales clerk records the essential details and
prepares multiple copies of a sales order for different departments, 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
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. The 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.
KEYSTROKE

Keystroke clerk converts the hard-copy shipping notices to digital form to produce a
transaction file of sales orders.

EDIT RUN

Validates all transaction records in the batch by performing clerical and logical tests.
Detected errors are later corrected and resubmitted for processing with the next day’s
business. It recalculates the batch control totals to reflect any changes due to the removal of
error records.

UPDATE PROCEDURES

Posts the first transaction to the corresponding inventory and AR subsidiary records
using the secondary keys (Inventory Number and Account Number) to locate the records
directly.

REAL TIME SALES ORDER SYSTEM

It processes the entire transaction as it occurs and it can be captured, filled, and
shipped the same day. It improves productivity, reduced inventory, increased inventory
turnover, decreased lags in customer billing, and enhanced customer satisfaction. Physical
source documents can be eliminated or greatly reduced.
REENGINEERING SALES ORDER PROCESSING WITH REAL-TIME
TECHNOLOGY
1. Sales Procedures

- Sales clerks receiving orders from customers process each transaction separately as
it is received.
- Checks availability of the inventory and credit checks the customer based on his
data.The request for credit is approved or denied based on the criteria of the
customer’s credit limit, current balance, date of last payment, and current credit
status.
- Updates the customer’s current balance to reflect the sale and reduce the quantity of
inventory. It is to present an accurate and current picture of inventory on hand and
available for sale.
- It 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 sales clerk can determine the status of an order in response to customer inquiries
by viewing the records that contain either the value N (default value) or Y (closed
records or shipped).

2. Warehouse Procedures - produces a hard-copy printout of the electronically transmitted

stock release document.

3. Shipping Department - reconciles the goods, the stock release document, and the
hard-copy packing slip. They prepare the goods for shipment and the system updates the open
sales order record in real time thus closing the sales order.

GENERAL LEDGER UPDATE PROCEDURES

At the end of the day, the batch sales order files update the following general ledger
accounts: Inventory—Control, Sales, AR—Control, and Cost of Goods Sold. The inventory
subsidiary and AR subsidiary records were updated already in real-time procedures.
 It is done to achieve operational efficiency in high-volume transaction processing
systems. An alternative approach is to update it in real time if there are no significant
operational delays.

Finally, the batch program prepares and mails customer bills and transfers the closed
sales records to the closed sales order file (sales journal).

ADVANTAGES OF REAL-TIME PROCESSING

1. Real-time processing shortens the cash cycle of the entity in terms of reducing the
time needed in the order date and the billing date. Batch systems can cause delays
between making an order and billing a customer, whereas in a real-time system, the
order and billing date may occur on the same day.
2. Real-time processing promotes better inventory management, which gives a
competitive advantage for the entity in the marketplace. It helps maintain and monitor
current information, whether inventories are on hand, out of stock, or when the entity
needs to re-stock. It maximizes the ability of the entity to enhance the customers’
satisfaction which then leads to an increase in sales. Unlike in batch systems, current
information about inventories are not provided, which may cause uncertainty to the
customers.
3. Real-time processing has an editing feature, whereas it identifies errors as it occurs,
resulting in an effective and efficient operation. However, these errors may not be
detectable in batch systems.
4. Real-time processing provides documents in a digital form that are more efficient and
adequate for audit trail purposes. It reduces the amount of the paper documents, which
are expensive in terms of producing and storing, and may clutter the system.

AUTOMATED CASH RECEIPTS PROCEDURE

Cash Receipts are natural batch systems, for checks and remittance arrives in batches.
In contrast with sales transactions that continuously happen throughout the day, cash receipts
are separate events, as well as the deposit of cash receipts usually occur as a single event at
the end of the business day.
1. Mail Room

The clerk in the mail room separates the checks and the remittance advices. Then a
remittance list will be prepared. The checks together with the copy of the remittance list are
sent to the cash receipts department. Whereas, the remittance advices and a copy of the
remittance list are sent to the accounts receivable department.

2. Cash Receipts Department

The clerk in the cash receipts department reconciles the checks and the remittance list,
after that deposit slips are prepared. Then the clerk creates a journal voucher record of total
cash received, via terminal. The clerk files the remittance list and one copy of the deposit
slip. And at the end of the day, the clerk deposits the cash in the bank.

3. Accounts Receivable Department

The clerk in the AR department reconciles the remittance advices and remittance list.
Then the clerk creates the cash receipts transaction file based on the individual remittance
advice, via terminal. After that, the clerk files the remittance advices and the remittance list.

4. Data Processing Department

At the end of the day, the batch program reconciles the journal voucher with the
transaction file of cash receipts and updates the accounts receivable subsidiary together with
the general ledger control accounts. Finally, the system produces a transaction listing that the
AR clerk will reconcile in opposition to the remittance list.
REENGINEERED CASH RECEIPTS PROCEDURES

There are entities that have reengineered their mailroom procedures in order to reduce
the risk and the cost, which will lead to effective and efficient procedures.

Batch of unopened envelopes are placed by the mail room clerk into a machine which
opens them automatically and segregates their contents whether checks or remittance advices.
The remittance advices contains the address of the payee, therefore placed in front of the
envelopes, and once the envelopes are opened the machine will automatically know that the
first document is the remittance advices and the next document is the check. Since the
process performed is internal, the mail room clerk will not have access to the contents of the
envelopes.

The system uses a software that employs artificial intelligence which is used in
validating special transactions and is capable of reading handwriting. The remittance advices
and checks are scanned by the system to verify the equal dollar amounts and signature on the
checks. Items that are considered rejected by the system are being processed separately by
hand. Also, the system prepares a computer-readable file of cash receipts, and posts it to the
appropriate customer and general ledger accounts. The batches of checks are then sent to the
cash receipts department to be deposited in the back, and the transaction listings are sent to
the management in the AR department, cash receipts department, and general ledger
department to be reviewed and audited.

The system will work best if there is consistency between the remittance advices and
the customer checks, however failure to follow the format, such as having partial or multiple
payments may cause errors and rejections.

POINT OF SALE (POS) SYSTEMS

Point of sale systems are extensively used in retail establishments (grocery stores,
department stores). Entities with this system have no customer accounts receivable. The
customers pick the inventory from the shelves and take them up to the checkout location.

Once the customer takes the inventory to the checkout location, the cashier will scan
the inventory’s universal product code (UPC) with a laser light scanner. It is connected online
to the system’s inventory file whereas the price and the description of the inventory will be
retrieved. The quantity of the scanned inventory will then be reduced in the system,
representing the sold items.

As the inventory is scanned the system is computing for the overall amount, including
the taxes and discounts. For the payment, the customer may pay via cash, credit card, ATM,
or checks. The clerk enters the transaction into the system, and the sale will be recorded and
added to the sales journal in real time. The record contains the date, time, terminal number,
total amount of sale, cash or credit sale, cost per item, sales tax, and discount taken. In
addition, the sale is recorded on a two paper tape, one copy for the customer and the other is
secured internally and is registered in the system.

At the end of the shift of the clerk, the cash drawer will be brought to the cash room
(treasury), then the money and receipts are reconciled to the internal cash register tape or a
printout from the computer’s database. When the contents of the cash drawer have been
reconciled, the cash receipts clerk prepares a cash reconciliation form and gives one copy to
the sales clerk as a receipt for cash remitted and records cash received and cash short/over in
the cash receipts journal. The clerk files the credit card vouchers and secures the cash in the
safe for deposit in the bank at the end of the day.

Finally, a batch program system summarizes the sales and cash receipts journals, and
then prepares a journal voucher and posts it to the general ledger accounts as follows:

Cash xxx
Cash Over/Short xxx
Cost of Good Sold xxx
Sales xxx
Inventory xxx

Entries may vary among different entities, some have accounts receivable for the credit card
transaction, while some treat it as part of cash.
REENGINEERING USING ELECTRONIC DATA INTERCHANGE (EDI)

Electronic Data Interchange (EDI) is constructed to speed up routine transactions

between manufacturers and wholesalers, and between wholesalers and retailers. EDI
represents a business agreement between the buyer and the seller, wherein they both agree in
advance when it comes to terms of their relationship. Such as quantity to be sold, the selling
price, the delivery time, the payment terms, method of handling disputes and so on. When the
agreement is placed, the exchange will be completely automated by the system.

The customer’s computer is connected to the seller’s computer, whereas the computer
detects if the customer needs to order inventory and automatically sends the order to the
seller. Then the seller’s system will process the order automatically, requiring a little to no
human involvement.

REENGINEERING USING INTERNET

Nowadays, the internet is widely used by billions of people all over the world, some
of the users are sellers, organizations, entities whereas they use the internet and social media
to establish their home page, promote their products, and generate sales.

Upon viewing the seller’s page, a potential customer may access the products list to
see the products offered. In placing an order, a customer may need to input some information
including their email, and credit card information, since most internet sales are credit card
transactions.

An employee then will review the order, verify the credit and enter the transaction
made into the seller’s system for processing in the normal way. Hence, the need to review by
an employee prolong the transactions. In addition to this, both the seller and buyer face risks,
since there are also hackers, fraud, scams, and so on that are linked with the usage of the
internet.

CONTROL CONSIDERATION FOR COMPUTER-BASED SYSTEM

1. Authorization

The transaction authorization in real time processing is an automated task, however

the management and the accountants must still monitor the policies and rules set in the
computer program. In the point of sale system, the authorization process comprises validation
of credit cards and customer’s signature.

2. Segregation of Duties

Tasks that are usually segregated manually are consolidated when it comes to
computer programs. Thus, the management and auditors must ensure an ethical computer
program to handle these tasks.

3. Supervision

In the point of sale system, both the inventory and cash are at risk. The crime of
shoplifting is a great concern for customers who have direct access in the inventory and the
cashier’s terminal. Additional supervision must be implemented, such as installing
surveillance cameras. Clerks in charge of terminals must always be attentive. The internal
tape is also considered as a form of supervision, since it contains all the records of
transactions made throughout the day.

4. Access Control

Digital records are vulnerable to unauthorized and undetected access, thus in the
absence of proper access controls over programs, the entity might suffer devastating losses.
Therefore, these files must be protected by having limited accessibility together with
monitoring the program and system that is currently used.

In the point of sale system, the access to cash assets is being restricted by assigning one sales
clerk per cash drawer for an entire shift, and when the clerk is on break, the cash drawer is
kept locked or with a password. At the end of the shift the drawer will be moved to the cash
room (treasury) and will then be reconciled and deposited to the bank.

5. Accounting Records

Accounts must focus on the reliability and security of the stored digitized data.

Digital Journal and Ledgers, together with the master file are the basis of financial
reporting and internal decisions of an entity. Therefore, accountants must be skeptical when it
comes to the accuracy and reliability of hard-copy printouts from the digital records.
 File Backup is crucial for the entity, hence the system and the management needs to
ensure that files must always have a backup since computer-based programs may be prone to
loss, destruction, and corruption of files.

6. Independent Verification

The consolidation of accounting tasks in computer-based programs removes some of

the independent verification control from the system. Nevertheless, it is restored by
performing a batch control balancing after each run, and also by producing management
reports and summaries for the end users to review.

PC-Based Accounting Systems

PC-based accounting systems are general-purpose systems that serve a wide range of
needs of its users unlike the custom-designed systems. It is used by small entities and some
large decentralized companies to automate and replace manual systems making them more
efficient and competitive. It allows one or few individuals to perform entire accounting
functions which are convenient and cost-effective.

Most of these systems are divided into modules controlled by a menu-driven program.
This design technique provides users with some degree of flexibility in tailoring systems to
their specific needs.

Here is the illustration of the Modular Design Technique:

 The Menu-Driven Control Program provides the user interface to the system wherein
the user makes menu selections to invoke application modules. By selecting Sales Order
Module, the user can enter customer orders in real time then eventually, he/she can enter cash
receipts in Cash Receipts Module, the purchases in Purchases and Accounts Payable Module,
the disbursements in the Cash Disbursements Module, the payroll transactions in the Payroll
Module and the inventories in the Inventory Control Module. All transactions encoded in the
modules have been balanced and posted to subsidiary and general ledger accounts in the
General Ledger Module before it produces the financial reports.

This system is usually installed in Personal Computers that could only be accessed through
the use of the particular installed application. It has something to do with the fact that the
automated processes of other systems are in a cloud-based environment which is absent in
this PC-based system although it is also a computer-based system. Contrastingly, this feature
develops a massive growth in end-user computing as it innovates the business process of
many organizations.

PC Control Issues

The PC environment poses unique control problems that must be recognized by

accountants. These are discussed in the following paragraphs.

1. Segregation of Duties

PC systems tend to have inadequate segregation of duties due to the exposure and
control of the same person to all responsibilities associated with the running systems. It
should be compensated for with increased supervision, detailed management reports, and
frequent independent verification. As mentioned earlier, under the PC-based system, most of
the time it allows one or few individuals to perform the entire accounting functions.
Therefore there is a lack of segregation of duties thus it should be compensated with other
controls.

2. Access Controls

Access controls to the data stored on the computer tends to be weak due to the
inadequate control of PC systems over it. The methods such as encryption, disk locking
devices and physical security devices must be used in dealing with this problem. Since it is
installed in one computer, the access over the device must be protected.

3. Accounting Records

Computer disk failures are the primary cause of data losses that threaten accounting
records. When the disk was damaged because of a virus, it may be impossible to recover all
data stored on the disk. It would be also difficult when in another instance, the user lost
his/her laptop that had a PC-based accounting system installed. Then all its data would be lost
considering the fact that the PC system is not even cloud-based and not synchronized.
Therefore, users should have a data backup implementation once they use these pc controls
for them to recover data files and programs.