Appendix F - Accounting Cycles

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Appendix F
Accounting Cycles
On the following pages are five flowcharts and accompanying tables describing the steps in five basic
accounting cycles and the controls in each step for an organization large enough to have an optimal
segregation of duties.
NOTE: Except for manual checks and remittance advices, the flowcharts presented do not assume
the use of either a paper-based or an electronic system. Each document symbol represents a
business activity or control, whether manual or computerized.
NOTE: In the diagrams that follow, documents that originate outside the organization are separated
by a thick border.
Copyright © 2023 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact copyright@gleim.com.
2 Appendix F: Accounting Cycles
Figure F-1
Appendix F: Accounting Cycles 3
Sales-Receivables System Flowchart Table
Function Authorization Custody Recording
Inventory Inventory Accounts General

Department Customer Sales Credit Shipping Billing
Warehouse Control Receivable Ledger
Step Business Activity Internal Control
Sales receives a customer order and prepares a Reconciling sequentially numbered sales
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multi-part sales order then forwards it to Credit. orders helps ensure that orders are legitimate.
Credit performs a credit check. If the customer is Ensures that goods are shipped only to actual
2 creditworthy, Credit approves the sales order. customers and that the account is unlikely to
become delinquent.
Credit sends copies of the approved sales order to Notifies these departments that a legitimate
3 Sales, Inventory Warehouse, Shipping, Billing, and sale has been made.
Inventory Control.
Upon receipt of the approved sales order, Sales The customer’s expectation of receiving
4 sends an acknowledgment to the customer. goods reduces the chances of misrouting or
misappropriation.
Upon receipt of the approved sales order, the Ensures that goods are removed from the
5 Inventory Warehouse pulls the goods and forwards Inventory Warehouse only as part of a
them to Shipping. legitimate sale.
Shipping verifies that the goods received from Ensures that the correct goods are shipped.
Inventory Warehouse match the approved sales
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order, prepares a packing slip and a bill of lading,
and ships the goods to the customer.
Shipping forwards a copy of the packing slip and Notifies these departments that the goods
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bill of lading to Inventory Control and Billing. have been shipped.
Upon receipt of the packing slip and bill of lading, Ensures that inventory records are updated
8 Inventory Control matches them with the approved once the goods have been shipped.
sales order and updates the inventory records.
Upon receipt of the packing slip and bill of lading, Ensures that customers are billed for all goods,
Billing matches them with the approved sales and only those goods, that were actually
9 order, prepares a multi-part invoice, and sends shipped. Reconciling sequentially numbered
a copy to the customer. Typically, a remittance invoices helps prevent misappropriation of
advice is included for use in the cash receipts cycle. goods.
Accounts Receivable receives an invoice copy from Ensures that customer accounts are kept
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Billing and posts a journal entry to the AR file. current.
Accounts Receivable prepares a daily invoice Separation of the Accounts Receivable, Billing,
11 summary for the day and forwards it to General and General Ledger helps assure integrity of
Ledger for posting to the GL file. recording.
General Ledger receives a daily invoice summary Updating inventory, AR, and GL files
12 from AR to post to the GL file. separately provides an additional accounting
control when they are periodically reconciled.
Figure F-2
Cash Receipts System Flowchart Table
Mail Cash Accounts General

Department Customer Bank
Room Receipts Receivable Ledger
Mail Room opens customer mail with two clerks always Reduces risk of misappropriation by a single
present. Customer checks are immediately endorsed employee. Checks stamped “For Deposit
1 “For Deposit Only into Account XXX.” Remittance Only into Account XXX” cannot be diverted.
advices are separated (one is prepared if not included
in the payment).
Mail Room prepares a remittance listing of all checks Remittance listing provides a control total for
2 received during the day and forwards it with the checks later reconciliation.
to Cash Receipts.
Cash Receipts prepares a deposit slip and deposits Bank provides independent evidence that
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checks in Bank. Bank validates the deposit slip. the full amount was deposited.
Mail Room sends remittance advices to Accounts Ensures that customer accounts are kept
4 Receivable for updating of customer accounts in the current.
AR file.
Mail Room also sends a copy of the remittance listing Updating AR and GL files separately
5 to General Ledger for posting of the total to the GL file. provides an additional accounting control
when they are periodically reconciled.
Validated deposit slip is returned to General Ledger Ensures that all cash listed on the remittance
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to compare with remittance listing. listing from the Mail Room was deposited.
Accounts Receivable periodically sends an account Customers will complain about mistaken
7 statement to customers showing all sales and billings or missing payments.
payment activity.
Figure F-3
Purchases-Payables System Flowchart Table
Inventory Inventory Accounts General

Department Purchasing Vendor Receiving
Control Warehouse Payable Ledger
Inventory Control prepares a purchase Predetermined inventory levels trigger

requisition when inventory reaches the reorder authorization to initiate a purchase transaction.
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point due to sales and sends it to Purchasing and
Accounts Payable.
Purchasing locates the authorized vendor in the • Purchasing ensures that goods are bought only
vendor file, prepares a purchase order, and from vendors who have been preapproved for
2 updates the purchase order file. reliability.
• Reconciling sequentially numbered purchase
orders helps ensure that orders are legitimate.
Purchasing sends the purchase order to • Receiving is put on notice to expect shipment.
3 Vendor, Receiving, and Accounts Payable. • Accounts Payable is put on notice that liability
Receiving’s copy has blank quantities. to this vendor will increase when goods arrive.
When goods arrive, Receiving accepts goods Because quantities are blank on Receiving’s
based on the file copy of the purchase order, copy of the purchase order, employees must
4 prepares a receiving report, and forwards the count items to prepare the receiving report.
receiving report with the goods to the Inventory
Warehouse.
The Inventory Warehouse verifies that goods Detects any loss or damage between
received match those listed on the receiving Receiving and the Inventory Warehouse.
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report. Inventory Warehouse accepts responsibility for
safeguarding receipted goods.
Receiving sends the receiving report to Ensures that inventory records are current.
6 Inventory Control for matching with the purchase
requisition and updating of inventory records.
Receiving also sends a copy of the receiving Accounts Payable ensures that all documents
report to Accounts Payable for matching with the reconcile and will await the arrival of the vendor
7 purchase order and purchase requisition. invoice to record the payable transaction (as
shown in the Cash Disbursements System
Flowchart on the next page).
Figure F-4
Cash Disbursements System Flowchart Table
Cash Accounts General

Department Vendor Purchasing
Disbursements Payable Ledger
Purchasing receives a vendor invoice. The • Purchasing ensures the vendor invoiced for the
vendor invoice is matched with the purchase proper amount and the terms are as agreed.
order and approved for payment. The purchase • Purchasing can follow up on partially filled
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order is marked as closed in the purchase order orders.
file if completed, and the approved vendor
invoice is forwarded to Accounts Payable.
Accounts Payable matches the approved • Matching all documents provides assurance
vendor invoice with the file copies of the that only goods that were appropriately
purchase requisition, purchase order, and ordered, received, and invoiced are recorded
receiving report and prepares a payment as a liability.
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voucher. The payment voucher is recorded in • Periodic reconciliation with the payment
the accounts payable file. vouchers in the tickler file (maintained by due
date) with the accounts payable file (maintained
by vendor) ensures proper recording.
The payment voucher, with the attached Filing by due date ensures that payment will be
documents, is filed in a tickler file by due date. made on a timely basis (e.g., to obtain discounts
3 The daily total of all payment vouchers is sent or avoid default).
to the General Ledger to record the purchase
(inventory) and liability (accounts payable).
On the due date, the payment voucher and • Cash Disbursements cannot issue a check
attached documents are removed from the without an approved payment voucher.
4 tickler file sent to Cash Disbursements for check • Large payments may require two signatures on
preparation, signing, and mailing. The check is the check to provide additional oversight.
recorded in the cash disbursements journal.
The payment voucher and attached documents Stamping the documents “Paid” prevents
5 are stamped “Paid,” and the check is mailed to them from supporting a second, illicit payment
the vendor. voucher.
The daily total of all checks written and mailed Periodic reconciliation of the accounts payable
6 for the day is sent to General Ledger to record and general ledger ensures proper recording.
the reduction in accounts payable and cash.
Figure F-5
Payroll System Flowchart Table
Human Cash Dis- Time- Cost Accounts General

Department Production Bank Payroll
Resources bursements keeping Accounting Payable Ledger
Human Resources sends an authorized Ensures that only actual employees are
1 employees’ rates and deductions list to Payroll. included on the payroll and that rates of pay and
withholding amounts are accurate.
Employees record the start and end times of The recording process mechanically or
2 their workdays on employee clock cards held in electronically captures employee work hours.
Timekeeping.
Production employees record time worked on Allows accumulation of labor costs by job as well
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various tasks on job time tickets. as tracking of direct and indirect labor.
At the end of each day, a production supervisor Ensures that employees worked only authorized
approves the job time tickets and forwards them hours. Reconciles the time allocated to direct and
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to Timekeeping, where they are reconciled with indirect labor with total time worked.
the employee clock cards.
Timekeeping prepares a summary of hours Ensures that employees are paid the proper
worked by employee and forwards it to amount.
5 Payroll. Payroll matches it with the authorized
employees’ rates and deductions list and
prepares a payroll register.
Timekeeping prepares a summary of hours Ensures that direct labor costs are appropriately
6 worked by job and forwards it to Cost assigned to jobs.
Accounting for updating of the job cost records.
Accounts Payable receives the payroll register Ensures that a payable is accrued. Authorizes
from Payroll, prepares a payment voucher, and the transfer of cash to the payroll imprest
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forwards it along with the payroll register to account.
Cash Disbursements.
Payroll also forwards the payroll register to Updating AP and GL files separately provides
8 General Ledger for posting of the total to the GL an additional accounting control when they are
file. periodically reconciled.
Cash Disbursements compares the payment Ensures that the correct amount is transferred to
voucher with the payroll register total and the payroll imprest account (and governmental
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initiates the bank transfer to the payroll imprest authorities).
fund.
Paychecks are distributed to employees by the Treasurer has custody responsibility but no
Treasurer function. recording or authorization responsibility. This
10 ensures that Payroll or supervisory personnel
cannot perpetrate fraud by creating fictitious
employees.

Appendix F - Accounting Cycles

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1

Sales-Receivables System Flowchart Table

Function Authorization Custody Recording

Inventory Inventory Accounts General

Step Business Activity Internal Control

Cash Receipts System Flowchart Table

Function Authorization Custody Recording

Mail Cash Accounts General

Step Business Activity Internal Control

Purchases-Payables System Flowchart Table

Function Authorization Custody Recording

Inventory Inventory Accounts General

Step Business Activity Internal Control

Inventory Control prepares a purchase Predetermined inventory levels trigger

Cash Disbursements System Flowchart Table

Function Authorization Custody Recording

Cash Accounts General

Step Business Activity Internal Control

Payroll System Flowchart Table

Function Authorization Custody Recording

Human Cash Dis- Time- Cost Accounts General

Step Business Activity Internal Control

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