Del Mundo, Neffertari B.

BSMA 2202
LECTURE 3: Revenue Cycle paying his or her bills and that the current sale
ACC 207: ACCOUNTING INFORMATION SYSTEM does not exceed the pre- established limit.
BS Management Accounting
• The credit approval process is an authorization
control and should be performed as a function
Overview of Revenue Cycle Activities
separate from the sales activity.
• SALES ORDER PROCEDURES
• In our conceptual system, the receive order tasks
• This includes the tasks involved in receiving and
send the sales order (credit copy) to the check
processing a customer order, filling the order and
credit task for approval.
shipping products to the customer, billing the
• The returned approved sales order then triggers
customer at the proper time and correctly
the continuation of the sales process by releasing
accounting for the transaction.
sales order information simultaneously to various
tasks.
Receive Order
• The sales process begins with the receipt of a
Pick Goods
customer order indicating the type and quantity
• The receive order activity forwards the stock
of merchandise desired.
release document (also called the picking ticket) to
• At this point, the customer order is not in a
the pick goods function in the warehouse.
standard format and may or may not be a
• This document identifies the items of inventory
physical document.
that must be located and picked from the
• Orders may arrive by mail, by telephone or
warehouse shelves.
from a field representative who visited the
• It also provides formal authorization for
customer.
warehouse personnel to release the specified
• The sales order captures vital information such as
items.
the customer’s name, address and account number;
• After picking the stock, the order is verified for
the name, number and description of the items
accuracy and the goods, along with the verified
sold; and the quantities and unit prices of each
stock release document, are sent to the ship
item sold.
goods task.
• Financial information such as taxes, discounts, and
• If inventory levels are insufficient to fill the
freight charges may or may not be included.
order, a warehouse employee adjusts the verified
• After creating the sales order, a copy of it is
stock release to reflect the amount actually
placed in the customer order file for future
going to the customer.
reference. The task of filing an order and
• The employee then prepares a back-order
getting the product to the customer may take
record, which stays on file until the inventories
days or even weeks.
arrive from the supplier. Back ordered items are
• During this period, customers may contact their
shipped before new sales are processed.
supplier to check the status of their orders.
• Finally, the warehouse employee adjusts the
• The customer order file is updated each time
stock records to reflect the reduction in inventory.
the status of the order changes, such as credit
These stock records are not the formal
approval, on back-order, and shipment.
accounting records for controlling inventory assets.
• The customer order file must enable customer
• They are used for warehouse management
service employees to respond promptly and
purposes only.
accurately to customer questions.
• Assigning asset custody and record-keeping to
the warehouse clerk would violate a key principle
Check Credit
of internal control.
• Before processing the order further, the
• The inventory control function maintains the
customer’s creditworthiness needs to be
formal accounting inventory records.
established. The circumstances of the sale will
determine the nature and degree of the credit
Ship Goods
check.
• Before the arrival of the goods and the verified
• Once a credit limit is set, however, credit
stock release document, the shipping department
checking on subsequent sales may be limited to
receives the packing slip and shipping notice from
ensuring that the customer has a history of
the receive order function.
 • The packing slip will ultimately travel with the • To prevent such problems, the billing function
goods to the customer to describe the contents awaits notification from shipping before it bills.
of the order. • Upon credit approval, the bill-customer function
• The shipping notice will later be forwarded to receives the sales order (invoice copy) from the
the billing function as evidence that the receive order task.
customer’s order was filled and shipped. • This document is placed in an S.O. pending file
• This document conveys pertinent new facts such until the receipt of the shipping notice, which
as the date of shipment, the items and describes the products that were actually shipped
quantities actually shipped, the name of the to the customer.
carrier and the freight charges. • Upon arrival, the items shipped are reconciled with
• Upon receiving the goods from the warehouse, the those ordered, and unit prices, taxes and freight
shipping clerk reconciles the physical items with charges are added to the invoice copy of the
the stock release, the packing slip, and the sales order.
shipping notice to verify that the order is • The completed sales invoice is the customer’s bill
correct. which formally depicts the charges to the
• The ship goods function thus serves as an customer.
important independent verification control point and • In addition, the billing function performs the
is the last opportunity to detect errors before sending of the stock release document to the
shipment. update inventory records task; forwarding the
• The shipping clerk packages the goods, attaches ledger copy of the sales order to the update
the packing slip, completes the shipping notice, accounts receivable task; records the sale in the
and prepares a bill of lading. sales journal.
• The bill of lading is a formal contract between • The sales journal is a special journal used for
the seller and the shipping company (carrier) to recording completed sales transactions.
transport the goods to the customer. • The details of the sales invoices are entered in
• This document establishes legal ownership and the journal individually.
responsibility for assets in transit. • At the end of the period, the entry dr. accounts
• Once the goods are transferred to the carrier, receivable and cr. Sales is summarized in the sales
the shipping clerk records the shipment in the journal voucher which is then sent to the general
shipping log, forwards the shipping notice and the ledger task.
stock release to the bill-customer function as
proof of shipment, and updates the customer UPDATE INVENTORY RECORDS
order file to reflect the “shipped” status of • The inventory control function updates inventory
the transaction. subsidiary ledger accounts from information
contained in the stock release document.
Bill Customers • In a perpetual inventory system, every inventory
• • The shipment of goods marks the completion item has its own record in the ledger.
of the economic event and the point at which • Each stock release document reduces the quantity
the customer should be billed. Billing before on-hand of one or more accounts.
shipment encourages inaccurate record keeping and • When the quantity on-hand falls below the
inefficient operations. reorder point, a record is added to the purchase
• When the customer order is originally prepared, requisition file, which will trigger the reordering
some details such as inventory availability, prices process.
and shipping charges may not be known with • Periodically, the financial value of the total
certainty. reduction in inventory is summarized in a journal
• In the case of back orders, for example, voucher: dr. Cost of Goods sold, cr. Inventory-
suppliers do not typically bill customers for out- control
of-stock items. • Customer records in the accounts receivable (AR)
• Billing for goods not shipped causes confusion, subsidiary ledger are updated from information
damages relations with customers, and requires provided by the sales order.
additional work to make adjustments to the • Every customer has an account record in the AR
accounting records. subsidiary ledger containing, at minimum, the
following data: customer name, customer address,
 current balance, available credit, transaction dates, • The employee then sends the second copy of
invoice numbers, and credits for payment returns the return slip to the sales function to prepare
and allowances. a credit memo.

POST TO THE GENERAL LEDGER Prepare a Credit Memo

• ▪ By the close of the transaction processing • Upon receipt of the return slip, the sales
period, the general ledger function has received employee prepares a credit memo. This document
journal vouchers from the billing and inventory is the authorization for the customer to receive
control tasks and an account summary from the credit for the merchandise returned.
AR function. • In cases in which the specific authorization is
The following entry is posted: required, (i.e., if the amount of the return
exceeds or the circumstances surrounding the
Dr. Accounts Receivable – control xxx return needs the sales employee’s general
Cost of Goods Sold xxx authority to approve), the credit memo goes to
Inventory control xxx the credit manager for approval.
Sales xxx • If, however, the clerk has sufficient general
authority to approve the return, the credit memo
• Because GL accounts are used to prepare financial is sent directly to the billing function, where the
statements, they contain only summary figures customer sales transaction is reversed.
(no supporting detail) and require only summary
posting information. Approve credit memo
• This information supports an important • The credit manager evaluates the circumstances
verification control. of the return and makes a judgment to grant
• The AR summary, which the AR function (disapprove) credit.
independently provides, is used to verify the • The manager then returns the approved credit
accuracy of the journal vouchers for the memo to the sales department.
transaction period.
• By reconciling the figures, the general ledger Update Sales Journal
function can detect many types of errors. • Upon the receipt of the approved credit memo,
the transaction is recorded in the sales journal as
SALES RETURN PROCEDURE a contra entry.
• An organization can expect that a certain • The credit memo is then forwarded to the
percentage of its sales will be returned. This inventory control function for posting.
occurs for a number of reasons: • At the end of the period, total sales returns are
o The company shipped the customer the summarized in a journal voucher and sent to the
wrong merchandise; general ledger department.
o The goods were defective;
o The products were damaged in the Update Inventory and AR Records
shipment; • The inventory control function adjusts the
o The buyer refused delivery because the inventory records and forwards the credit memo
seller shipped the goods too late or they to the accounts receivable, where the customer’s
were delayed in transit. account is also adjusted.
o When the return is necessary, the buyer • Periodically, inventory control sends a journal
requests credit for the unwanted voucher summarizing the total value of inventory
products. returns to the update general ledger tasks.
• Similarly, accounts receivable submits an AR
Prepare a Return Slip account summary to the general ledger function.
• When items are returned, the receiving department
employee counts, inspects and prepares a return Update General Ledger
slip describing the item. Upon receipt of the journal voucher and the
• The goods, along with a copy of the return slip, account summary information, the general ledger function
go to the warehouse to be restocked. reconciles the figures and posts the following control
balances:
 advices to update the AR function and the third
Dr. Inventory Control xxx goes to reconciliation task.
Sales Returns & Allowances xxx
Cr. Cost of Goods Sold xxx Record and Deposit Check
Accounts Receivable –control xxx • A cash receipt employee verifies the accuracy
and completeness of the checks against the
CASH RECEIPTS PROCEDURE prelist. Any checks possibly lost or misdirected
• The sales order procedure described a credit between the mail room and this function are thus
transaction that resulted in the establishment of identified.
an accounts receivable. • After reconciling the prelist to the checks, the
• Payment on the account is due at some future employee records the check in the cash receipt
date, which the terms of trade determine. journal.
• Cash receipts procedures apply to this future • All cash receipts transactions including cash sales,
event. miscellaneous cash receipts and cash received on
• They involve receiving and securing the cash, account are recorded in the cash receipt journal.
depositing the cash in the bank, matching the • The clerk prepares a bank deposit slip showing
payment with the customer and adjusting the the amount of the day’s receipts and forwards
correct account, and properly accounting for and this along with the check to the bank.
reconciling the financial details of the transaction. • Upon deposit of the funds, the bank teller
validates the deposit slip and returns it to the
Open Mail and Prepare Remittance List company for reconciliation.
• A mail room employee opens envelopes containing
customers’ payments and remittance advices. At the end of the day, the cash receipts
• Remittance advices contain information needed to employee summarizes the journal entries and sends a
service individual customer accounts. journal with the following entry to the general ledger
• This include payment date, account number, function:
amount paid and customer check number.
• The remittance advice is a form of a turnaround Cash xxx
document. Its important is most apparent in Accounts Receivable –control xxx
firms that process large volumes of cash
receipts daily. Update Accounts Receivable Records
• This task is greatly simplified when the • The remittance advices are used to post to the
customer provides the necessary account number customers’ accounts in the AR subsidiary ledger.
and posting information. • Periodically, the changes in account balances are
• Because of the possibility of transcription errors summarized and forwarded to the general ledger
and omissions, however, sellers do not rely on their function.
customers to provide this information directly on
their checks. Update General Ledger
• Errors are avoided and operational efficiency is • Upon receipt of the journal voucher and the
greatly improved when using remittance advices. account summary, the general ledger function
• Mail room personnel route the checks and reconciles the figures, posts to the cash and AR
remittance advices to an administrative clerk who control accounts and files the journal voucher.
endorses the check “for deposits only” and
reconciles the amount on each remittance advice Reconcile Cash Receipts
with the corresponding check. • Periodically, a clerk from the controller’s office
• The clerk then records each check on a form reconciles cash receipts by comparing the
called a remittance list where all cash received is following documents: (1) copy of the prelist; (2)
logged. deposit slips received from the bank, and (3)
• In case where the clerk prepares three copies related journal vouchers.
of remittance list, the original copy is sent with
the checks to the record and deposit check
function, the second copy goes to remittance