Chapter 4

The Revenue Cycle

Chapter
4-1
 Revenue Cycle

we examine the revenue cycle conceptually, Using

data flow diagrams (DFDs)
revenue cycle includes:
sales order procedures,
sales return procedures,
and cash receipts procedures

Chapter
4-2
 Salse Order Procedures/Conceptual
System

Receive Order.
 The sales process begins with the receipt of a customer order
indicating the type and quantity of merchandise desired .
 Because the customer order is not in the standard format that the

seller’s order processing system needs, the first task is to

transcribe it into a formal sales order
 The sales order captures vital information such as the customer’s
name, address, and account number; the name, number, and
description of the items sold; and the quantities and unit prices of
each item sold.
 After creating the sales order, a copy of it is placed in the
Chapter
customer open order file for future reference 4-3
 Salse Order Procedures/Conceptual System

Receive Order.
The customer record in the open order file is updated each
time the status of the order changes such as credit
approval, on back-order, and shipment.
The open order file thus enables customer service
employees to respond promptly and accurately to customer
questions

Chapter
4-4
 Salse Order Procedures/Conceptual
System

Check Credit
 The credit approval process is an authorization control and

should be performed as a function separate from the sales

activity
 The receive-order task sends the sales order (credit copy) to

the check-credit task for approval.

 The returned approved sales order then triggers the
continuation of the sales process by releasing sales order
information simultaneously to various tasks

Chapter
4-5
 Salse Order Procedures/Conceptual
System

Pick Goods.
 The receive order activity forwards the stock release document

(also called the picking ticket) to the pick goods function, in the
warehouse.
 This document identifies the items of inventory that must be

located and picked from the warehouse shelves.

 It also provides formal authorization for warehouse personnel to

release the specified items

 After picking the stock, the order is verified for accuracy and the

goods and verified stock release document are sent to the ship
goods task Chapter
4-6
 Salse Order Procedures/Conceptual
System

Pick Goods.
 If inventory levels are insufficient to fill the order, a warehouse
employee adjusts the verified stock release to reflect the amount
actually going to the customer.
 The employee then prepares a back-order record, which stays
on file until the inventories arrive from the supplier
 The warehouse employee adjusts the stock records to reflect the
reduction in inventory.
 These stock records are not the formal accounting records for
controlling inventory assets. They are used for warehouse
management purposes only Chapter
4-7
 Salse Order Procedures/Conceptual
System

Ship Goods.
 The shipping department receives the packing slip and shipping
notice from the receive order function.
 The packing slip will ultimately travel with the goods to the
customer to describe the contents of the order.
 The shipping notice will later be forwarded to the billing
function as evidence that the customer’s order was filled and
shipped
 The shipping clerk reconciles the physical items with the stock
release, the packing slip, and the shipping notice to verify that
the order is correct Chapter
4-8
 Salse Order Procedures/Conceptual
System

Ship Goods.
 The shipping clerk packages the goods, attaches the packing slip,
completes the shipping notice, and prepares a bill of lading.
 Bill of lading is a formal contract between the seller and the
shipping company (carrier) to transport the goods to the
customer
 Once the goods are transferred to the carrier, the shipping clerk
records the shipment in the shipping log, forwards the shipping
notice to the bill customer function as proof of shipment, and
updates the customer’s open order file
Chapter
4-9
 Salse Order Procedures/Conceptual
System

Bill Customer
 The shipment of goods marks the completion of the economic
event and the point at which the customer should be billed
 When the customer order is originally prepared, some details
such as inventory availability, prices, and shipping charges may
not be known with certainty
 To prevent such problems, the billing function awaits
notification from shipping before it bills
 Upon credit approval, the bill-customer function receives the
sales order (invoice copy) from the receive order task. This
document is placed in a sales order pending file until receipt of
the shipping notice, which describes the products that were
Chapter
actually shipped to the customer 4-10
 Salse Order Procedures/Conceptual
System

Bill Customer
 The completed sales invoice is the customer’s bill

 The billing function performs the following record

keeping–related tasks:
1. Records the sale in the sales journal.

2. Forwards the ledger copy of the sales order to the update

accounts receivable task

3. Sends the stock release document to the update inventory

records task.

Chapter
4-11
 Salse Order Procedures/Conceptual
System

 The sales journal is a special journal used for recording

completed sales transactions.
 The details of sales invoices are entered in the journal
individually.
 At the end of the period, these entries are summarized into
a sales journal voucher, which is sent to the general ledger
task for posting to the following accounts

Accounts Receivable DR
Sales CR

Chapter
4-12
Salse Order Procedures/Conceptual
System

Chapter
4-13
 Salse Order Procedures/Conceptual
System

Update Inventory Records

 The inventory control function updates inventory
subsidiary ledger accounts from information contained in
the stock release document.
 the financial value of the total reduction in inventory is

summarized in a journal voucher and sent to the general

ledger function
Update Accounts Receivable.
 Customer records in the accounts receivable (AR) subsidi- ary ledger
are updated from information the sales order (ledger copy) provides.
 the individual account balances are summarized in a report that is sent
to the general ledger. Chapter
4-14
DFD of Sales Order Process

Chapter
4-15
 Salse Order Procedures/Conceptual
System

Post to General Ledger

Billing, A/R, and Inventory Control submits
summary information to the General Ledger dept

Chapter
4-16
Sales Return Procedures

Chapter
4-17
 Sales Return Procedures/
Conceptual System

 The company shipped the customer the wrong merchandise.

 The goods were defective.

 The product was damaged in shipment.

 The buyer refused delivery because the seller shipped the goods
too late or they were delayed in transit.

Chapter
4-18
 Sales Return Procedures/
Conceptual System

Prepare Return Slip

 When items are returned, the receiving department employee
counts, inspects, and prepares a return slip describing the items.
 The goods, along with a copy of the return slip, go to the
warehouse to be restocked.
 The employee then sends the second copy of the return slip to
the sales function to prepare a credit memo.

Chapter
4-19
 Sales Return Procedures/
Conceptual System

Prepare Credit Memo

 The sales employee prepares a credit memo.
 This document is the authorization for the customer to receive
credit for the merchandise returned.
 if the clerk has sufficient general authority to approve the return,
the credit memo is sent directly to the billing function, where the
customer sales transaction is reversed.
APPROVE CREDIT MEMO.
 The credit manager evaluates the circumstances of the return
and makes a judgment to grant (or disapprove) credit.
 The manager then returns the approved credit memo to theChaptersales
department. 4-20
 Sales Return Procedures/
Conceptual System

Update Sales Journal

 Upon receipt of the approved credit memo, 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.
 At the end of the period, total sales returns are summarized in a
journal voucher and sent to the general ledger department.

Chapter
4-21
 Sales Return Procedures/
Conceptual System

Update Inventory And Ar Records.

 The inventory control function adjusts the inventory records and

forwards the credit memo to accounts receivable, where the

customer’s account is also adjusted.

 Accounts receivable submits an AR account summary to the

general ledger function.

Chapter
4-22
 Sales Return Procedures/
Conceptual System

UPDATE GENERAL LEDGER.Upon receipt of

the journal voucher and account summary
information, the general ledger function reconciles
the figures and posts to the following control
accounts:

Chapter
4-23
 Cash Receipts Procedures/
Conceptual System

Open Mail And Prepare Remittance Advice

 A mail room employee opens envelopes containing customers’
payments and remittance advices.
 Remittance advices include payment date, account number,
amount paid, and customer check number.
 The remittance advice is a form of a turnaround document
 Mail room personnel route the checks and remittance advices to
an administrative clerk who endorses the checks ‘‘For Deposit
Only’’ and reconciles the amount on each remittance advice with
the corresponding check
Chapter
4-24
 Cash Receipts Procedures/
Conceptual System

The clerk prepares three copies of the remittance list. The

original copy is sent with the checks to the record and
deposit checks function. The second copy goes with the
remittance advices to the update AR function The third
goes to a reconciliation task.

Chapter
4-25
Cash Receipts Procedures

Chapter
4-26
 Cash Receipts Procedures
Conceptual System

Record And Deposit Checks

 A cash receipts employee verifies the accuracy and complete-

ness of the checks against the prelist.

 All cash receipts transactions, including cash sales,
miscellaneous cash receipts, and cash received on account, are
recorded in the cash receipts journal
 The clerk prepares a bank deposit slip showing the amount of the

day’s receipts and forwards this along with the checks to the
bank
 bank teller validates the deposit slip and returns it to the

company for reconciliation.

Chapter
4-27
 Cash Receipts Procedures
Conceptual System

Update Accounts Receivable.

 The remittance advices are used to post to the customers’

accounts in the AR subsidiary ledger.

 The changes in account balances are summarized and forwarded

to the general ledger function.

Update General Ledger.

 Upon receipt of the journal voucher and the account summary,

the general ledger function reconciles the figures, posts to the

cash and AR control accounts, and files the journal voucher.
Chapter
4-28
 Cash Receipts Procedures
Conceptual System

RECONCILE CASH RECEIPTS AND DEPOSITS. Periodically

(weekly or monthly),
a clerk from the controller’soffice (or an employee not
involved with the cash receipts procedures) reconciles cash
receipts by comparing the following documents:
• (1) a copy of the prelist,
• (2) deposit slips received from the bank, and
• (3) related journal vouchers.

Chapter
4-29
 Revenue Cycle Controls

Transaction Authorization
Credit Check
This department ensures the proper application of the firm’s

credit policies.
The principal concern is the credit- worthiness of the customer.

Return Policy
The credit department authorizes the processing of sales returns

Remittance List (Cash Prelist)

The cash prelist provides a means for verifying that customer

checks and remittance advices match in amount.

Chapter
4-30
 Revenue Cycle Controls

Segregation of Duties
Transaction authorization should be separate from transaction
1.

processing.
 The credit department is segregated from the rest of the process,
so formal authorization of a transaction is an independent event
2.Asset custody should be separate from the task of asset record

keeping.
The cash receipts department takes custody of the cash asset, while

updating AR records is an accounts receivable (accounting

function) responsibility. The cash receipts department typically
reports to the treasurer, who has responsibility for financial assets
Chapter
4-31
 Revenue Cycle Controls

Supervision
 Supervision of employees serves as a deterrent to dishonest
acts and is particularly important in the mailroom
 The individual who opens the mail has access both to cash (the
asset) and to the remittance advice (the record of the
transaction). A dishonest employee may use this opportunity to
steal the check, cash it, and destroy the remittance advice, thus
leaving no evidence of the transaction.

Chapter
4-32
 Revenue Cycle Controls
Accounting Records

Accounting Records
Prenumbered documents
 (sales orders, shipping notices, remittance advices, and so on)
are sequentially numbered by the printer and allow every
transaction to be identified uniquely.
Special Journals
 By grouping similar transactions together into special journals,

the system provides a concise record of an entire class of events

(sales journals and cash receipts)
Chapter
4-33
 Revenue Cycle Controls
Accounting Records

Subsidiary Ledgers
The inventory and AR subsidiary ledgers
The sale of products reduces quantities on hand in the
inventory subsidiary records and increases the customers’
balances in the AR subsidiary records.
The receipt of cash reduces customers’ balances in the AR
subsidiary records.
General Ledgers.
The general ledger control accounts are the basis for financial
statement preparation
Chapter
4-34
 Revenue Cycle Controls
Access Controls

 Access to sales order documents may permit an unauthorized

individual to trigger the shipment of a product.

 An individual with access to both cash and the general ledger

cash account could remove cash from the firm and adjust the
cash account to cover the act

Chapter
4-35
 Manual Sales Order Processing
Physical Systems

Sales Department
 The sales department records the essential details on a sales
order
Credit Department Approval
 The transaction is authorized by obtaining credit approval by
the credit 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.

Chapter
4-36
 Manual Sales Order Processing
Physical Systems

Warehouse Procedures
 The warehouse clerk receives the stock release copy of the sales
order and uses this to locate the inventory.
 The inventory and stock release are then sent to the shipping
department.
 Stock records are adjusted

Chapter
4-37
 Manual Sales Order Processing
Physical Systems

The Shipping Department

 The shipping clerk reconciles the products received from the
warehouse with the shipping notice copy of the sales order
received earlier.
 This reconciliation is an important control point, which ensures
that the firm sends the correct products and quantities to the
customer
 The merchandise, packing slip, and bill of lading are prepared
by Shipping and sent to the customer
 The clerk then enters the transaction into the shipping log and
sends the shipping notice and stock release to the billing
Chapter
department 4-38
 Manual Sales Order Processing
Physical Systems

The Billing Department

• Shipping information is sent to Billing.
• Billing compiles and reconciles the relevant facts and issues an
invoice to the customer and updates the sales journal and
distributes documents to the AR and inventory control
departments
• Information is transferred to:
Accounts Receivable (A/R)
Inventory Control

Chapter
4-39
 Manual Sales Order Processing
Physical Systems

 A/R records the information in the customer’s account in

the accounts receivable subsidiary ledger.

 Inventory Control adjusts the inventory subsidiary ledger.

 Billing, A/R, and Inventory Control submits summary

information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in the
G/L.

Chapter
4-40
Sales Order Process Flowchart

Chapter
4-41
Sales Order Process Flowchart

Chapter
4-42
 Sales Return Procedures/
Physical Systems /Flowchart

Receiving Department
 personnel receive, count, inspect for damage, and send
returned products to the warehouse. The receiving clerk
prepares a return slip, which is forwarded to the sales
department for processing
Sales Department
 Upon receipt of the return slip, the clerk prepares a credit
memo. Depending on the materiality and circumstance of
the return, company policy will dictate whether credit
department approval (not shown) is required
Chapter
4-43
 Sales Return Procedures/
Physical Systems /Flowchart

Processing the Credit Memo

 The objective of the sales return system is to reverse the
effects of the original sales transaction.
 Billing records a contra entry into sales return, and
allowance journal inventory control debits the inventory
records to reflect the return of goods. The AR clerk credits
the customer account
 All departments periodically prepare journal vouchers and
account summaries, which are then sent to the general
ledger for reconciliation and posting to the control
accounts. Chapter
4-44
Sales Returns Flowchart

Chapter
4-45
 Cash Receipts Procedures/
Physical Systems /Flowchart

Mail Room
 Customer payments and remittance advices arrive
at the mail room, where the envelopes are opened.
The checks are sent to the cashier in the cash
receipts department, and the remittance advices
are sent to the AR department

Chapter
4-46
 Cash Receipts Procedures/
Physical Systems /Flowchart

Cash Receipts
 The cashier records the checks in the cash receipts journal

and promptly sends them to the bank, accompanied by two

copies of the deposit slip.
 Periodically, the employee prepares a journal voucher and

sends it to the general ledger department

Accounts Receivable
The AR department uses the remittance advices to reduce the
customers’ account balances consistent with the amount paid.
The AR clerk prepares a summary of changes in account
balances, which is sent to the
Chapter
general ledger department 4-47
Cash Receipts Flowchart

Chapter
4-48
 Cash Receipts
Procedures/Flowchart

General Ledger Department

 Upon receipt of the journal voucher and account summary

from cash receipts and AR, respectively, the general ledger

clerk reconciles the information and posts to the control
accounts.

Chapter
4-49
 Computer-Based Accounting
Systems

Automating the Revenue Cycle

 There is a decrease in the amount of paper
 The manual journals and ledgers are changed to disk or tape
transaction and master files
 Input is still typically from a hard copy document and goes
through one or more computerized processes
 Processes store data in electronic files (the tape or disk) or
prepare data in the form of a hardcopy report.

Chapter
4-50
 Computer-Based Accounting
Systems

 CBAS technology can be viewed as a continuum

with two extremes:
1. automation - use technology to improve efficiency and
effectiveness
2. reengineering – use technology to restructure business
processes and firm organization, by identifying and
eliminating non–value-added tasks.

Chapter
4-51
Automating Sales Order Processing
With Batch Technology

Chapter
4-52
 Automating Sales Order Processing
With Batch Technology

Sales Department
 The sales clerk records the essential details and prepares
multiple copies of a sales order, which are held pending credit
approval.
Credit Department Approval
 The sales department releases copies of the sales order to the
billing, warehouse, and shipping departments.
Warehouse Procedures
 warehouse clerk receives the stock release copy of the sales
order and uses this to pick the goods. The inventory and stock
release are then sent to the shipping department.
Chapter
4-53
 Automating Sales Order Processing
With Batch Technology

Shipping Department
 The shipping clerk reconciles the products received from

the warehouse with the shipping notice

 bill of lading is prepared, and the products are packaged

and shipped via common carrier to the customer

 The clerk then sends the shipping notice to the computer

department.

Chapter
4-54
 Automating Sales Order Processing
With Batch Technology

Keystroke
 The automated element of the system begins with the arrival
of batches of shipping notices from the shipping department.
 These documents are verified copies of the sales orders that
contain information about the customer and the items shipped
 The keystroke clerk converts the hard-copy shipping notices
to digital form to produce a transaction file of sales orders
 Several times throughout the day, the keystroke clerk
transcribes batches of shipping notices
 The resulting transaction file will thus contain many separate
batches of records
Chapter
4-55
 Automating Sales Order Processing
With Batch Technology

Edit Run
 The system is composed of a series of program runs. The
edit program first validates all transaction records in the
batch by performing clerical and logical tests on the data.
 The edit program recalculates the batch control totals to
reflect any changes due to the removal of error records.
 The edited sales order file is then passed to the file update
run

Chapter
4-56
 Automating Sales Order Processing
With Batch Technology

Update Procedures
The update program posts the first transaction to the
corresponding inventory and AR subsidiary

Chapter
4-57
 SALES ORDER PROCESSING
WITH REAL-TIME TECHNOLOGY

Chapter
4-58
 SALES ORDER PROCESSING
WITH REAL-TIME TECHNOLOGY

Sales Procedures
 Sales clerks receiving orders from customers process each

transaction separately as it is received.

 The system checks the availability of the inventory.

 The system performs credit check.

 If the credit approve, the system updates the customer

current balance to reflect the sales and reduces the

inventory.
 The system automatically transmits a digital stock release

document to the warehouse, digital shipping notice to the

shipping department. Chapter
4-59
 SALES ORDER PROCESSING
WITH REAL-TIME TECHNOLOGY

Warehouse Procedures
 The warehouse clerk’s terminal immediately produces a hard-
copy printout of the electronically transmitted stock release
document.
 The clerk then picks the goods and sends them, along with a
copy of the stock release document, to the shipping
department.
Shipping Department
 A shipping clerk reconciles the goods, the stock release
document, and the hard-copy packing slip produced on the
terminal.
Chapter
4-60
 Advantages Of Real-time Processing

 Real Time processing shortens the cash cycle.

 It gives the firm a competitive advantage in the marketplace. By
maintaining current inventory information sales, sales staff can
determine immediately inventories on hand.
 It reduces the amount of papers documents in the system.

Chapter
4-61
 Automated Cash Receipts
Procedures

Mail Room
 The mail room clerk separates the checks and
remittance advices and prepares a remittance list.
 These checks and a copy of the remittance list are
sent to the cash receipts department.
 The remittance advices and a copy of the
remittance list are sent to the AR department.

Chapter
4-62
 Automated Cash Receipts
Procedures

Cash Receipts Department

 The cash receipts clerk reconciles the checks and the remittance

list and prepares the deposit slips

Accounts Receivable Department
 The AR clerk receives and reconciles the remittance advices

and remittance list

Data Processing Department
 At the end of the day, the batch program reconciles the journal

voucher with the transaction file of cash receipts and updates

the AR subsidiary and the general ledger control accounts
(AR—Control and Cash) Chapter
4-63
Automated Cash Receipts

Chapter
4-64
 Point-of-Sale Systems

 Point of sale systems are used extensively in retail

establishments.
 Customers pick the inventory from the shelves and take them to
a cashier.
 The clerk scans the universal product code (UPC). The POS
system is connected to an inventory file, where the price and
description are retrieved.
 The inventory levels are updated and reorder needs can
immediately be detected.

Chapter
4-65
 Point-of-Sale Systems

 In the case of credit card transactions, the sales clerk

obtains transaction approval from the credit card issuer via
an online connection. When the approval is returned, the
clerk prepares a credit card voucher for the amount of the
sale, which the customer signs.
 The clerk gives the customer one copy of the voucher and
secures a second copy in the cash drawer of the register.
 a record of the sale is added to the sales journal in real
time. The record contains the following key data: date,
time, terminal number, total amount of sale, cash or credit
card sale, cost of items sold, sales tax, and discounts taken
Chapter
4-66
 Point-of-Sale Systems

 The sale is also recorded on a two-part paper tape. One

copy is given to the customer as a receipt; the other is
secured internally within the register and the clerk cannot
access it. This internal tape is later used to close out the
register when the clerk’s shift is over.
 At the end of the clerk’s shift, a supervisor unlocks the
register and retrieves the internal tape. The cash drawer is
removed and replaced with a new cash drawer.
 The supervisor and the clerk whose shift has ended take
the cash drawer to the cash room (treasury), where the
contents are reconciled against the internal tape
Chapter
4-67
 Point-of-Sale Systems

 The system computes the amount due. Payment is either cash,

check, ATM or credit card in most cases.
 No accounts receivables
 If checks, ATM or credit cards are used, an on-line link to
receive approval is necessary.
 At the end of the day or a cashier’s shift, the money and receipts
in the drawer are reconciled to the internal cash register tape or a
printout from the computer’s database.

Chapter
4-68
 CONTROL CONSIDERATIONS FOR
COMPUTER-BASED SYSTEMS

Authorization
 Transaction authorization in real-time processing systems

is an automated task. Management and accountants should

be concerned about the correctness of the computer-
programmed decision rules and the quality of the data used
in this decision
Segregation of Duties
a computer application may perform such seemingly
incompatible tasks as inventory control, AR updating, billing,
and general ledger posting. In such situations, management
and auditor concerns are focused on the integrity of the
computer programs that perform these tasks Chapter
4-69
 CONTROL CONSIDERATIONS FOR
COMPUTER-BASED SYSTEMS

Supervision
The individual who opens the mail has access both to cash
(the asset) and to the remittance advice (the record of the
transaction). A dishonest employee has an opportunity to steal
the check and destroy the remittance advice

Chapter
4-70
 CONTROL CONSIDERATIONS FOR
COMPUTER-BASED SYSTEMS

Access Control
 Exposures exist in real-time systems, which often maintain

accounting records entirely in digital form. Without

physical source documents for backup, the destruction of
computer files can leave a firm with inadequate accounting
records.

Chapter
4-71
 CONTROL CONSIDERATIONS FOR
COMPUTER-BASED SYSTEMS

Accounting Records
 Accountants should be skeptical about the accuracy of
hard-copy printouts.
 The reliability of hard-copy documents for auditing rests
directly on the quality of the controls that protect them
from unauthorized manipulation

 The accountant should, therefore, be concerned about the

quality of controls over the programs that update,
manipulate, and produce reports from these files

 Backups - the system needs to ensure that backups of all

files are continuously kept Chapter
4-72