Accounting Information System Chapter 4-6

Accounting Information System (ACCTG 124)

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 REVENUE CYCLE be performed as a function
Is the direct exchange of which goods separate from the sales activity.
or services for cash in a single - In our conceptual system, the
transaction between a seller and a receive-order task sends the
buyer. sales order (credit copy) to the
check-credit task for approval.
Sales Order Procedures - The returned approved sales
- The task involved in receiving order then triggers the
and processing a customer continuation of the sales process
order, filling the order and by releasing sales order
shipping products to the information simultaneously to
customer, billing the customer various tasks.
at the proper time, and correctly Pick Goods
accounting for the transaction. - The receive order activity
Receive Order forwards the stock release
- The sales process begins with document (also called the
the receipt of a customer order picking ticket) to the pick goods
indicating the type and quantity function, in the warehouse.
of merchandise desired. - After picking the stock, the order
- The customer order is not in the is verified for accuracy, and the
standard format that the seller’s goods and verified stock release
order processing system needs, documents are sent to the ship
the first task is to transcribe it goods task.
into a formal sales order. - However, If inventory levels are
- Sales order captures vital insucient to fill the order, a
information such as the warehouse employee adjusts the
customer’s name, address, and verified stock release to reflect
account number; the name, the amount actually going to the
number, and description of the customer. The employee then
items sold; and the quantities prepares a back-order record,
and unit prices of each item sold which stays on file until the
- After creating the sales order, a inventories arrive from the
copy of it is placed in the supplier. Back-ordered items are
customer’s open order file for shipped before new sales are
future reference. processed.
- The customer record in the open - The warehouse employee adjusts
order file is updated each time the stock records to reflect the
the status of the order changes reduction in inventory.
such as credit approval, on - These stock records are not the
back-order, and shipment. The formal accounting records for
open order file thus enables controlling inventory assets.
customer service employees to They are used for warehouse
respond promptly and accurately management purposes only.
to customer questions. Ship Goods
Check Credit - Before the arrival of the goods
- Before processing the order and the verified stock release
further, the customer’s document, the shipping
creditworthiness needs to be department receives the packing
established. The circumstances
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of the sale will determine the the receive order function.
nature and degree of the credit
 check.
- The credit approval process is an
authorization control and should

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 - The bill of lading is a formal Periodically, the financial value
contract between the seller and of the total reduction in
the shipping company (carrier) inventory is summarized in a
to transport the goods to the journal voucher and sent to the
customer. This document general ledger.
establishes legal ownership and Update Accounts Receivable
responsibility for assets in - Customer records in the
transit. accounts receivable (AR)
- The shipping clerk packages the subsidiary ledger are updated
goods, attaches the packing slip, from information the sales order
completes the shipping notice (ledger copy) provides.
and prepares a bill of lading. Post to General Ledger
Bill Customer - By the close of the transaction
- The shipment of goods marks processing period, the general
the completion of the economic ledger function has received
event and the point at which the journal vouchers from the billing
customer should be billed. and inventory control tasks and
- This document is placed in an an account summary from the
S.O. pending file until receipt of AR function.
the shipping notice, which
describes the products that were Sales Return Procedures
actually shipped to the customer. An organization can expect that a
- The completed sales invoice is the certain percentage of its sales will be
customer’s bill, which formally returned. This occurs for a number of
depicts the charges to the reasons, some of which may be:
customer. - A return is necessary, the buyer
Sales Journal requests credit for the unwanted
- is a special journal used for products. This involves reversing
recording completed sales the previous transaction in the
transactions. The details of sales sales order procedure.
invoices are entered in the PREPARE RETURN SLIP
journal individually. At the end - When items are returned, the
of the period, these entries are receiving department employee
summarized into a sales journal counts, inspects, and prepares a
voucher, which is sent to the return slip describing the items.
general ledger. PREPARE CREDIT MEMO
- Each journal voucher represents - Upon receipt of the return slip,
a general journal entry and the sales employee prepares a
indicates the general ledger credit memo. This document is
accounts aected. the authorization for the
- The journal voucher system customer to receive credit for the
eliminates the need for a formal merchandise returned.
general journal, which is APPROVE CREDIT MEMO
replaced by a journal voucher - The credit manager evaluates the
file. circumstances of the return and
Update Inventory Records makes a judgment to grant (or
- The inventory control function disapprove) credit. The manager
updates inventory subsidiary then returns the approved credit
ledger accounts
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from
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information contained in the
stock release document.
- Each stock release document
reduces the quantity on hand of
one or more inventory accounts. UPDATE SALES JOURNAL

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 - Upon receipt of the approved - A cash receipts employee verifies
credit memo, the transaction is the accuracy and completeness
recorded in the sales journal as a of the checks against the prelist.
contra entry. The credit memo is Any checks possibly lost or
then forwarded to the inventory misdirected between the
control function for posting. mailroom and this function are
UPDATE INVENTORY AND AR RECORDS thus identified. After reconciling
- The inventory control function the prelist to the checks, the
adjusts the inventory records employee records the check-in
and forwards the credit memo to the cash receipts journal.
accounts receivable, where the -the clerk prepares a bank deposit
customer’s account is also slip showing the amount of the
adjusted. day’s receipts and forwards this
UPDATE GENERAL LEDGER along with the checks to the
- Upon receipt of the journal bank.
voucher and account summary UPDATE ACCOUNTS RECEIVABLE
information, the general ledger - The remittance advices are used
function reconciles the figures. to post to the customers’
accounts in the AR subsidiary
CASH RECEIPTS PROCEDURES ledger. Periodically, the changes
The sales order procedure described a in account balances are
credit transaction that resulted in the summarized and forwarded to
establishment of an account the general ledger function.
receivable. Payment on the account is UPDATE GENERAL LEDGER
due at some future date, which the - Upon receipt of the journal
terms of trade determine voucher and the account
- They involve receiving and summary, the general ledger
securing the cash; depositing the function reconciles the figures,
cash in the bank; matching the posts to the cash and AR control
payment with the customer and accounts, and files the journal
adjusting the correct account, voucher.
and properly accounting for and RECONCILE CASH RECEIPTS AND
reconciling the financial details DEPOSITS
of the transaction. - Periodically (weekly or
OPEN MAIL AND PREPARE REMITTANCE monthly), a clerk from the
ADVICE controller’s oce (or an
- A mailroom employee opens employee not involved with the
envelopes containing customers’ cash receipts procedures)
payments and remittance advice. reconciles cash receipts by
Remittance advices comparing the following
- contain information needed to documents: (1) a copy of the
service individual customers’ prelist, (2) deposit slips received
accounts. This includes payment from the bank, and (3) related
date, account number, the journal vouchers.
amount paid, and customer
check number.
- a form of a turnaround
document. Its importance is
most apparent in firms that
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process large volumes of cash
receipts daily.
RECORD AND DEPOSIT CHECKS REVENUE CYCLE CONTROLS

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 - Chapter 3 defined six classes of SPECIAL JOURNALS
internal control activities that - By grouping similar transactions
guide us in designing and together into special journals,
evaluating transaction the system provides a concise
processing controls. They are record of an entire class of
transaction authorization, events. For this purpose, revenue
segregation of duties, cycle systems use the sales
supervision, accounting records, journal and the cash receipts
access control, and independent journal.
verification. Table 4-1 SUBSIDIARY LEDGERS
summarizes these control - Two subsidiary ledgers are used
activities as they apply in the for capturing transaction event
revenue cycle. details in the revenue cycle: the
Transaction Authorization inventory and AR subsidiary
- The objective of transaction ledgers. The sale of products
authorization is to ensure that reduces quantities on hand in
only valid transactions are the inventory subsidiary records
processed. and increases the customers’
CREDIT CHECK balances in the AR subsidiary
- Credit checking of prospective records.
customers is a credit department GENERAL LEDGERS
function. This department - The general ledger control
ensures the proper application of accounts are the basis for
the firm’s credit policies. financial statement preparation.
RETURN POLICY Revenue cycle transactions
- Because credit approval is aect the following general
generally a credit department ledger accounts: sales,
function, that department inventory, cost of goods sold,
authorizes the processing of AR, and cash. Journal vouchers
sales returns as well. An that summarize activity
approval determination is based captured in journals and
on the nature of the sale and the subsidiary ledgers flow into the
circumstances of the return. general ledger to update these
REMITTANCE LIST (CASH PRELIST) accounts.
- The cash prelist provides a Access Controls
means for verifying that - prevent and detect unauthorized
customer checks and remittance and illegal access to the firm’s
advice match in amount. assets. The physical assets at risk
Segregation of Duties in the revenue cycle are
- ensures that no single individual inventories and cash.
or department processes a Independent Verification
transaction in its entirety. The - to verify the accuracy and
number of employees and the completeness of tasks that other
volume of transactions being functions in the process
processed influence how to perform. To be eective,
accomplish segregation. independent verifications must
PRENUMBERED DOCUMENTS occur at key points in the process
- Prenumbered documents (sales where errors can be detected
orders, shipping
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notices,
0 quickly and corrected.
remittance advice, and so on) are
sequentially numbered by the
printer and allow every
transaction to be identified Manual Systems
uniquely.

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 - The purpose of this section is to
support the system concepts
presented in the previous section
with models depicting people,
organizational units, and
physical documents and files.
SALES ORDER PROCESSING
- In manual systems, maintaining
physical files of source
documents is critical to the audit
trail. As we walk through the
flowchart, notice that in each
department, after completion of
the assigned task, one or more
documents are filed as evidence
that the task was completed.
Sales Department
- The sales process begins with a
customer contacting the sales
department by telephone, mail,
or in person. The sales
department records the essential
details on a sales order. This
information will later trigger
many tasks, but for the moment
is filed pending credit approval.
Credit Department Approval
- To provide independence to the
credit authorization process, the
credit department is
organizationally and physically
segregated from the sales
department. When credit is
approved, the sales department
clerk pulls the various copies of
the sales orders from the
pending file and releases them to
the billing, warehouse, and
shipping departments.
- The customer order and credit
approval are then placed in the
open order file.

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 CHAPTER 5

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 The Expenditure Cycle prior to completing the receiving
Part I: Purchases and Cash report.
Disbursements Procedures - receiving report
- One copy of the receiving report
Purchases Processing Procedures accompanies the physical
- Purchases procedures include inventories to either the raw
the tasks involved in identifying materials storeroom or finished
inventory needs, placing the goods warehouse for
order, receiving the inventory, safekeeping.
and recognizing the liability. - A third copy of the receiving
MONITOR INVENTORY RECORDS report is sent to the AP
- Firms deplete their inventories department, where it is filed in
by transferring raw materials the AP pending file.
into the production process (the - A fourth copy of the receiving
conversion cycle) and by selling report is sent to inventory
finished goods to customers control for updating the
(revenue cycle. inventory records. Finally, a copy
purchase requisition of the receiving report is placed
- is prepared and sent to the in the receiving report file.
prepare purchase order UPDATE INVENTORY RECORDS
function to initiate the - Depending on the inventory
purchase process valuation method in place, the
PREPARE PURCHASE ORDER inventory control procedures
- The prepare purchase order may vary somewhat among
function receives the purchase firms.
requisitions, which are sorted by SET UP ACCOUNTS PAYABLE.
vendor if necessary. - During the course of this
purchase order (PO) transaction, the set up AP
- is prepared for each function has
vendor, - received and temporarily filed
- A copy of the PO is sent to copies of the PO and receiving
the vendor. In addition, a report. The organization has
copy is sent to the set up received
accounts payable (AP) - inventories from the vendor and
function for filing has incurred (realized) an
temporarily in the AP obligation to pay for the goods.
pending file, and a blind Vouchers Payable System
copy is sent to the receive - Under this system, the AP
goods function, where it is department uses cash
held until the inventories disbursement vouchers and
arrive. maintains a
RECEIVE GOODS - voucher register. After the AP
- Most firms encounter a time lag clerk performs the three-way
(sometimes a significant one) match, he or she prepares a cash
between placing the order and disbursement
receiving the inventory. During - voucher to approve payment.
this time, the copies of the PO Vouchers provide improved
reside in temporary files in control over cash disbursements
various departments.
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- blind copy - allow firms to consolidate
- The purpose of the blind copy is several payments to the same
to force the receiving clerk to supplier on a single voucher,
count and inspect inventories thus reducing the number of
checks written.

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voucher register form of a voucher packet (the
- The voucher register voucher
- reflects the AP liability of the - and/or supporting documents)
firm. The sum of the unpaid to the cash disbursements
vouchers in the register (those department.
with no check numbers and paid PREPARE CASH DISBURSEMENT
dates) is the firm’s total AP - The cash disbursements clerk
balance. The AP clerk files the receives the voucher packet and
cash disbursement voucher, - reviews the documents for
along with supporting source completeness and clerical
documents, in the vouchers accuracy. For each
payable file. disbursement, the clerk prepares
- vouchers payable file. - a check and records the check
- This file is equivalent to the open number, dollar amount, voucher
AP file discussed earlier and also number, and other pertinent
is organized by due date. data in the check register, which
POST TO GENERAL LEDGER is also called the cash
- The general ledger function disbursements journal.
receives a journal voucher from UPDATE AP RECORD
the AP department and an - Upon receipt of the voucher
account summary from packet, the AP clerk removes the
inventory control. The general liability by debiting
ledger function posts from the - the AP subsidiary account or by
journal voucher to the inventory recording the check number and
and AP control accounts and payment date in the voucher
reconciles the inventory control register.
account and the inventory - The voucher packet is filed in the
subsidiary summary. closed voucher file, and an
THE CASH DISBURSEMENTS SYSTEMS account summary is prepared
- The processes of the payment of and sent to the general ledger
obligations created in the function.
purchases system. The principal POST TO GENERAL LEDGER
objective of this system is to - The general ledger function
ensure that only valid creditors receives the journal voucher
receive payment and that from cash
amounts paid are timely and - disbursements and the account
correct. If the system makes summary from AP. The voucher
payments early, the firm forgoes shows the total reductions in the
interest income that it could firm’s
have earned on the funds. If - obligations and cash account as a
obligations are paid late, result of payments to suppliers.
however, the firm will lose
purchase discounts or may
damage its credit standing.
IDENTIFY LIABILITIES DUE
- The cash disbursements process
begins in the AP department by
- identifying items that have come
due. Each day, the AP function
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reviews the open AP file (or
vouchers