The Revenue Cycle

Chapter 4 The Revenue Cycle  Accounting  Accounting Information Information Systems, Systems, 5  5th edition James A. Hall

O,-ectives )or Chapter 4 as k sper f or medi nt her ev enuecy cl e,r egar dl es sof •T t het echnol ogyus ed unct i onal depar t ment si nt her evenuecycl eandt he •F fl ow ofr ev enuet r ans act i onst hr ought heor gani z at i on s ,j our nal s ,andaccount sneededf oraudi t • Document t r ai l s ,t hemai nt enanceofr ecor ds ,deci s i onmak i ng, andfi nanci al r epor t i ng s k sas s oci at edwi t ht her ev enuecy cl eandt he • Ri cont r ol st hatr educet hes er i s k s heoper at i onal andcont r ol i mpl i cat i onsof •T t echnol ogyus edt oaut omat eandr eengi neert he r evenuecycl e

O,-ectives )or Chapter 4 as k sper f or medi nt her ev enuecy cl e,r egar dl es sof •T t het echnol ogyus ed unct i onal depar t ment si nt her evenuecycl eandt he •F fl ow ofr ev enuet r ans act i onst hr ought heor gani z at i on s ,j our nal s ,andaccount sneededf oraudi t • Document t r ai l s ,t hemai nt enanceofr ecor ds ,deci s i onmak i ng, andfi nanci al r epor t i ng s k sas s oci at edwi t ht her ev enuecy cl eandt he • Ri cont r ol st hatr educet hes er i s k s heoper at i onal andcont r ol i mpl i cat i onsof •T t echnol ogyus edt oaut omat eandr eengi neert he r evenuecycl e

S a le s O rd e r $ C re d it / C u s to  e r Serice *

R E V E N U E C Y C LE (S U B S Y S T E M ) C a s " R e c e i# t s / C o lle c tio n s %

S"i##ing 

B illin g / A c c o u n ts R e c e i a ! le

Journal ouchers/0ntries Ho1 do 1e *et them2 3 illin* epartment prepares a -ournal voucher6  Accounts Receivable Sales CR  

DR 

3 Inventory Control ept. prepares a -ournal voucher6 Cost of Goods Sold Inventory

DR  CR  

3 Cash Receipts prepares a -ournal voucher6 Cash

DR  

Revenue Cycle ata,ases 3 7aster )iles  8 customer master )ile  8 accounts receiva,le master )ile  8 merchandise inventory master )ile

3 Transaction and Open ocument 9iles  8 sales order transaction )ile 3 open sales order transaction )ile

 8 sales invoice transaction )ile  8 cash receipts transaction )ile

• Other Files – shipping and price data reference le – credit reference le (may not be needed) – salesperson le (may be a master le) – Sales history le – cash receipts history le – accounts receivable reports le

9 o) %ales Order Process

%ales Order Process 9lo1chart

%ales Order Process 9lo1chart

7anual %ales Order Processin* 3 e*ins 1ith a customer placin* an order   8 The sales department captures the essential details on a sales order )orm.

3 The transaction is authori:ed ,y o,tainin* credit approval ,y the credit department. 3 %ales in)ormation is released to6  8 illin*  8 'arehouse ;stoc+ release or pic+in* tic+et<  8 %hippin* ;pac+in* slip and shippin* notice<

7anual %ales Order Processin* 3 The merchandise is pic+ed )rom the 'arehouse and sent to %hippin*.  8 %toc+ records are ad-usted.

3 The merchandise( pac+in* slip( and ,ill o) ladin* are prepared ,y %hippin* and sent to the customer.  8 %hippin* reconciles the merchandise received )rom the 'arehouse 1ith the sales in)ormation on the pac+in* slip.

3 %hippin* in)ormation is sent to illin*. illin* compiles and reconciles the relevant )acts and issues an invoice to the customer and updates the sales -ournal. In)ormation is trans)erred to6

7anual %ales Order Processin* 3  A/R records the in)ormation in the customer=s account in the accounts receiva,le su,sidiary led*er. 3 Inventory Control ad-usts the inventory su,sidiary led*er. 3 illin*( A/R( and Inventory Control su,mits summary in)ormation to the eneral >ed*er dept.( 1hich then reconciles this data and

9 o) %ales Returns

%ales Returns 9lo1chart

%ales Return Journal 0ntry /> posts the )ollo1in* to control accounts6 Inventory—Control

DR 

Sales Returns and Allowances

DR 

Cost of Goods Sold

CR 

 Accounts Receivable—Control

CR 

9 o) Cash Receipts Processes

Cash Receipts 9lo1chart

7anual Cash Receipts Processes 3 Customer chec+s and remittance advices are received in the 7ail Room.  8  A mail room cler+ prepares a cash prelist and sends the prelist and the chec+s to Cash Receipts.  8 The cash prelist is also sent to A/R and the Controller.

3 Cash Receipts6  8 veri)ies the accuracy and completeness o) the chec+s  8 updates the cash receipts -ournal  8 prepares a deposit slip

7anual Cash Receipts Processes 3  A/R posts )rom the remittance advices to the accounts receiva,le su,sidiary led*er.  8 Periodically( a summary o) the postin*s is sent to />.

3 /> department6  8 reconciles the -ournal voucher )rom Cash Receipts 1ith the summaries )rom A/R  8 updates the *eneral led*er control accounts

3 The Controller reconciles the ,an+ accounts.

%ummary o) Internal Controls

 Authori:ation Controls 3 Proper authori:ation o) transactions ;documentation< should occur so that only valid transactions *et processed. 3 'ithin the revenue cycle( authori:ation should ta+e place 1hen6  8 a sale is made on credit ;authori:ation<  8 a cash re)und is re?uested ;authori:ation<  8 postin* a cash payment received to a customer=s account ;cash pre&list<

%e*re*ation o) 9unctions Three Rules @. Transaction authori:ation should ,e separate )rom transaction processin*. ". Asset custody should ,e separate )rom asset record&+eepin*. . The or*ani:ation should ,e so structured that the perpetration o) a )raud re?uires collusion ,et1een t1o or more individuals.

%e*re*ation o) 9unctions 3 Sales Order Processing  8 credit authori:ation separate )rom %O processin*  8 inventory control separate )rom 1arehouse  8 accounts receiva,le su,&led*er separate )rom *eneral led*er control account 3 Cash Receipts Processing  8 cash receipts separate )rom accountin* records  8 accounts receiva,le su,&led*er separate )rom *eneral led*er 

%upervision 3 O)ten used 1hen una,le to enact appropriate se*re*ation o) duties. 3 %upervision o) employees serves as a deterrent to dishonest acts and is  particularly important in the mailroom.

 Accountin* Records 3 'ith a properly maintained audit trail( it is possi,le to trac+ transactions throu*h the systems and to )ind 1here and 1hen errors 1ere made6  8 pre&num,ered source documents  8 special -ournals  8 su,sidiary led*ers  8 *eneral led*er   8 )iles

 Access Controls 3  Access to assets and in)ormation ;accountin* records< should ,e limited. 3 'ithin the revenue cycle( the assets to protect are cash and inventories and access to records such as the accounts receivable subsidiary ledger  and cash  ournal  should ,e restricted.

Independent eri)ication 3 Physical procedures as 1ell as record&+eepin* should ,e independently revie1ed at various points in the system to chec+ )or accuracy and completeness6  8 shippin* veri)ies the *oods sent )rom the 1arehouse are correct in type and ?uantity  8 1arehouse reconciles the stoc+ release document ;pic+in* slip< and pac+in* slip  8 ,illin* reconciles the shippin* notice 1ith the sales invoice  8 *eneral led*er reconciles -ournal vouchers )rom ,illin*(

 Automatin* the Revenue Cycle 3  Authori:ations and data access can ,e per)ormed throu*h computer screens. 3 There is a decrease in the amount o) paper. 3 The manual -ournals and led*ers are chan*ed to dis+ or tape transaction and master )iles. 3 Input is still typically )rom a hard copy document and *oes throu*h one or more computeri:ed processes. 3 Processes store data in electronic )iles ;the tape or dis+< or prepare data in the )orm o) a hardcopy

 Automatin* the Revenue Cycle 3 Revenue cycle pro*rams can include6  8 )ormatted screens )or collectin* data  8 edit chec+s on the data entered  8 instructions )or processin* and storin* the data  8 security procedures ;pass1ords or user Is<  8 steps )or *eneratin* and displayin* output 3 To understand )iles( you must consider the record desi*n and layout. 3 The documents and the )iles used as input sources must contain the data necessary to *enerate the output reports.

Computer&ased Accountin* %ystems 3 CA% technolo*y can ,e vie1ed as a continuum 1ith t1o eBtremes6  8 automation & use technolo*y to improve e))iciency and e))ectiveness  8 reengineering 8 use technolo*y to restructure ,usiness processes and )irm or*ani:ation

0Bample6 Automated atch %ales

Reen*ineerin* %ales Order Processin* sin* Real&Time Technolo*y 3 7anual procedures and physical documents are replaced ,y interactive computer terminals. 3 Real time input and output occurs( 1ith some master )iles still ,ein* updated usin* ,atches.  8 Real-time & entry o) customer order( printout o) stoc+ release( pac+in* slip and ,ill o) ladin*D update o) credit )ile( inventory )ile( and open sales orders )ile  8 Batch & printout o) invoice( update o) closed sales order ;-ournal