Chapter 4

The Revenue Cycle

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 Understand the fundamental tasks
performed in the revenue cycle, regardless
of the technology in place.

Objectives  Identify functional departments in the

revenue cycle and the flow of revenue

for Chapter
transactions through the organization.
 Specify documents, journals, and accounts

4
needed for audit trails, records, decision
making, and financial reporting.
 Understand risks associated with the
revenue cycle and the recognize controls
that reduce these risks.
 Be aware of operational and control
implications of technology used to automate
and reengineer the revenue cycle.
 Revenue Cycle
3 Transfer of assets and
Physical servicing to customer
General
concept
Financial Receipt cash and or money
from customer

Conceptual
Systems Revenue
Process of (traditional) cycles Risks
Revenue cycles
& Internal
Control
Physical system
(technology
 Conceptual Systems
(traditional) F
wh ocus
a
4 ne t (co mor
e n e
no d to cep on
t H be tua
o d l)
do w to one
ne be
Conceptual system

Sales order Sales Return Cash Receipts

Procedures Procedures procedures

8 6 5

Task that involved in Organization can Involving receiving and

receiving, processing, expect that a certain securing the cash and
filing the order and percentage of its properly reconciling
shipping the product to sales will be accounting until to
customer. returned. financial statement.
 The Conceptual System: Sales Order
5 Procedures

1 Receive order.
 Begins with receipt of customer order which is transcribed into
a formal sales order which is placed in the customer order file
for future reference. May take days or weeks.
2 Check credit.
 Before processing order, creditworthiness must be established.
3 Pick goods.
 The stock release or picking ticket provides authorization to
warehouse personnel to release goods which are sent to
shipping along with the verified stock release.
 Warehouse employees adjust stock records to reflect inventory
reduction and prepares back-order records if insufficient goods.
 The Conceptual System: Sales Order
6 Procedures

4 Ship goods.
 Shipping department uses the packing slip and shipping notice to
reconcile goods received from the warehouse.
 Goods are packaged, bill of lading is prepared, goods are given to
carrier, and shipment is recorded in the shipping log.
5 Bill customer.
 Done after shipment by sending a completed sales invoice.
 Billing record-keeping includes recording the sale in the sales journal.
 The sales journal is a special journal used for recording completed
sales transactions. Entries are summarized in a sales journal
voucher used to update the GL control account.
 The Conceptual System: Sales Order
7 Procedures

6 Update inventory records.

 The inventory control function updates inventory subsidiary
ledger accounts from the stock release document information.

7 Update accounts receivable records.

 Customer records in the accounts receivable (AR) subsidiary
ledger updated from the sales order ledger copy.

8 Post to general ledger.

 General ledger function uses journal vouchers to update control
accounts.
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 The Conceptual System: Sales Return
14 Procedures

1 Prepare return slip.

 Customer records in the accounts receivable (AR) subsidiary
ledger updated from the sales order ledger copy.

2 Prepare credit memo.

 If clerk has authorization, sent directly to billing function.

3 Approve credit memo.

 Credit manager evaluates and return the approved credit memo
to the sales department.
 The Conceptual System: Sales Return
Procedures
15

4 Update sales journal.

 The transaction is recorded in the sales journal as a contra entry
 The credit memo is then forwarded to the inventory control
function for posting.
5 Update inventory and AR records.
 The inventory control function forwards the credit memo to
account receivable and customer account is adjusted.
 Then, inventory control sends a journal voucher summarizing
the total value of inventory return to the updated general ledger.
6 Update GL
 Upon receipt of the journal and account summary information.
The general ledger will reconcile the figures.
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 The Conceptual System: Cash Receipt
18 Procedures

1 Open mail and prepare remittance list.

 A mail room employee open envelopes containing customers’
payments and remittance advise.
 Remittance advices contain information needed to service
individual customers’ accounts. This includes payment date,
account number, amount paid, and customer cheque.
 The remittance advices is a form of a turnaround document as its
most apparent to the firm that process large volumes of cash
receipts daily.
 The Conceptual System: Cash Receipt
Procedures
19

2 Record and deposit cheque

 The employees will verify the accuracy and completeness of the
cheque against the prelist. Any lost and misdirected cheque thus
identified.
 After reconcile, the employees record the cheque in the cash
receipt journal.
 Next, the clerk will prepare a bank deposit slip showing the
amount of the day’s receipts and forwards this along with the
cheque to the bank.
3 Update accounts receivable records.
 The remittance advices are used to post to the customers’
account in the AR subsidiary ledger.
 The change in account balances are summarized and forwarded
to the general ledger.
 The Conceptual System: Cash Receipt
20 Procedures

4 Update General Ledger.

 Upon receipt of the journal voucher and the account summary the
general ledger function reconciles the figures, post to the cash
and AR control account, and files the journal voucher.

5 Reconcile cash receipts and deposits.

 Employee not involved in cash receipts process reconciles
receipts by comparing (1) a copy of the prelist, (2) deposit slips
and (3) related journal vouchers.
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 Revenue Cycle Physical
system Co
mb
24 in
(technology) tec com atio
hu hno pute n of
ma log r
The objective of this section is : na ya
cti nd
1) Illustrate AIS functionality vit
and work flow patterns under ies
different levels of technology.

2) Demonstrate how the internal

control profile changes as Physical System
the technology /human mix
changes.

BASIC ADVANCED

5
6 4
5

Integrated
Sales Cash Integrated cash
procedures procedures sales order receipt
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 Physical Systems: Basic Sales Order Processing
27
1 Sales Department
 The sales process begins with a customer contacting the sales
department by telephone ,mail, email, fax or in person.
 The sales department clerk manually records the essential details
on a sales order.
 One copy of sales order sent to the credit department for
approval.
 Physical Systems: Basic Sales Order Processing
28

2 Credit Department Approval

 Credit approval department is segregated from sales department as to
ensure the independent.
 Credit department verifies credit and approves order.
 As for new customer, the clerk can check the credit limit from the credit
bureau.
 Physical Systems: Basic Sales Order Processing
29
3 Warehouse Procedures
 The warehouse clerk receives the stock release copy of the sales order
and uses this to locate the inventory.
 Warehouse sends inventory to shipping and records inventory reduction.

The Shipping Department

4
 The shipping clerk reconcile the products received from the warehouse
with the shipping notice copy of the sales order received earlier.
 The reconcile is very important which to ensure that the firm sends the
correct product and quantities to the customer.
 When the order is determined correct, a bill of lading is prepared, and
the products are packaged and shipped via common carrier to the
customer.
 Physical Systems: Basic Sales Order Processing
30
5 The Billing Department

 Upon receipt of the shipping notice and stock release, the billing clerk will
compile the relevant facts about transaction (product prices, handling
charges, freight, taxes and discount terms) and bills the customer.

Account Receivable, inventory Control, and General Ledger

6
Department
 Journal vouchers and summaries are periodically sent to GL for
reconciliation and posting.
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 Physical Systems: Basic Cash Receipts
34 Processes

1 Mail Room

 Customer payments and remittance advices arrive at the mail room,

where clerk opens the envelopes, reconciles the cheque and
remittance advices, endorse the cheque, gathers the remittance
advices and check into batches, and prepare remittance list.
2 Cash Receipt

 Cash receipts clerk records checks in cash receipts journal, prepares

deposit slip and sends cheque to bank.
 Physical Systems: Basic Cash Receipts
35 Processes

3 Accounts Receivable
 The AR department uses the remittance advices to reduce the
customers’ account balances consistent with the amount paid.
 The AR clerk will prepare a summary of changes to account
balances, which is sent to general ledger department.
4 General Ledger Department
 Upon receipt of the journal voucher and account summary from
cash receipts and AR, respectively, the general ledger reconciles
the information and posts to the control account.

5 Controller’s Office
 Controller clerk performs periodic bank reconciliations.
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Physical Systems: Advanced Technology

The Objective of advanced technology is to improve operational performance and

reduce costs by identifying and eliminating nonvalue-added tasks.
 Physical Systems: Advanced Technology-
Sales Procedures
38
Using a computer terminal connected
to a central sales order system, the
clerk enters the sales order and
initiates the following tasks:

1. Access the inventory subsidiary file, check the availability. The perform credit
limit checking. Lastly proceed with approval or denied.
2. If approved, the system adds a record to the sales invoice file, transmits a
digital stock release document to the warehouse, and sends a digital copy
for packing slip to the shipping department.
3. The warehouse clerk’s terminal immediately produces a hard-copy printout
of the electronically-Then, pick the goods and send them to the shipping
department.
4. The shipping department reconciling the goods with the packing slip,
preparing them for shipment, and selecting a carrier.
 Physical Systems: Advanced Technology-
Sales Procedures
39

5. Upon receipt of the shipping notice, the system automatically perform the
following accounting tasks:
I. Update the customer’s credit history record to reflect the sale
II. Update the inventory for sale.
III. if quantity inventory at minimum level reorder or sent a purchase requisition.
IV. Places and on-order flag in the inventory records.
V. Inserts a shipped date in sales invoice record to indicate the order status.
VI. Update GL
VII. The system produces and distributes various management report.
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41 Physical Systems: Integrated Cash Receipts

1 Mail Room
 Clerk reconciles items, endorses cheque, prepares remittance
list and sends cheque, remittance advices and list to cash
receipts.

2
Cash Receipts
 Cash receipts clerk reconciles checks and creates a record in the
cash receipts journal for each remittance advice, and prepares
deposit slip.

 Member of security group deposits checks in bank.

 Physical Systems: Integrated Cash Receipts
42

4 Automatic Data Processing Procedures

 System automatically closes sales invoice, posts to GL, and
prepares and distributes various management reports.

5 Controller’s Office
 Controller clerk periodically reconciles remittance lists,
deposit slips, cash receipts journal and GL cash account.
Revenue Cycle-Revenue
cycles Risks & Internal
Control
44 Revenue Cycle-Revenue cycles Risks &
Internal Control

 The objectives of internal control is to mitigate the risk from errors and
fraud. The following are the primary risks associated with revenue cycle
transactions:
 Selling to un-creditworthy customers.
 Shipping Customers the wrong item or incorrect quantities
 Inaccurately recording sales and cash receipts transactions in journal and
accounts.
 Misappropriation of cash receipt and inventory
 Unauthorized access to accounting records and confidential reports.
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 Physical Systems: Multilevel Security
46

 Employs programmed techniques that permit simultaneous access to a

central system by many users with different access privileges.
 Users are prevented from obtaining information for which they lack
authorization.
 TWO (2) common multilevel security methods:
 Access control list (ACL) method assigns privileges directly to
individuals which is burdensome in large organizations.
 Role-based access control (RBAC) creates standard tasks called
roles that are assigned specific privileges.
 Once a role is created, individuals are assigned to it.
 Easy to add or delete roles as job responsibilities change.
 Physical Systems: Point-of-Sale (POS)
47 Systems
 POS systems used extensively in retail establishments.
 Customers pick items from shelves and take them to a
cashier.
DAILY  Clerk scans the Universal product code (UPC) of items.
PROCEDURES
 Price and description retrieved from inventory file.
 Inventory levels are updated and reordered as needed.
 System automatically calculates taxes, discounts and total.
 Non-cash payments are approved via online connection.
 Money and receipts reconciled to the internal cash register
END-OF-DAY tape with cash over and shorts accounts for.
PROCEDURES
 Cash receipts clerk prepares deposit slip for total daily cash
receipts and batch program posts entry to the GL.
 Physical Systems: POS Control Issues
48
 Authorization:
 Clerk should match customer signature with credit card.
 Supervision:
 Surveillance cameras and floor security help prevent
shoplifting and employee theft.
 Access Control:
 Separate cash drawers, locked showcases and magnetic
tags attached to merchandise help control theft.
 Accounting records:
 Only supervisors should access internal cash register tapes.
 Independent verification:
 Cash drawers should be reconciled to internal register tapes.
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 Physical Systems: Reengineering Doing
Business on
50 the internet

 Electronic data interchange (EDI) expedites transactions.

 Customer’s computer automatically orders inventory as
needed.
 Seller processes order with little or no human involvement.
 Binding terms specified in a trading partner agreement.
 Control problems include ensuring only valid transactions are
processed and that accounting records are not compromised.
 Doing business on the Internet involves both business-to-business
(B2B) and business-to-consumer (B2C) transactions.
 Opens the door to thousands of business partners without
formal trading agreements.
 Risks include threats from computer hackers, viruses and
transaction fraud.