CHAPTER 4

THE REVENUE CYCLE

 OBJECTIVES FOR CHAPTER 4
• Tasks performed in the revenue cycle, regardless of the
technology used
• Functional departments in the revenue cycle and the flow
of revenue transactions through the organization
• Documents, journals, and accounts needed for audit
trails, records, decision making, and financial reporting
• Risks associated with the revenue cycle and the controls
that reduce these risks
• The operational and control implications of technology
used to automate and reengineer the revenue cycle
2
 Sales Order
1

Credit / Customer
Service REVENUE CYCLE
2 (SUBSYSTEM)
Cash Receipts/
Collections
6

Shipping

Billing/ Accounts
Receivable
4/5
3
 JOURNAL VOUCHERS/ENTRIES
HOW DO WE GET THEM?
• Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
• Inventory Control Dept. prepares a journal voucher:
Cost of Goods Sold DR
Inventory CR
• Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR

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 REVENUE CYCLE DATABASES
• Master files • Other Files
• customer master file – shipping and price data
• accounts receivable master reference file
file – credit reference file (may not
be needed)
• merchandise inventory
master file – salesperson file (may be a
master file)
• Transaction and Open Document – Sales history file
Files – cash receipts history file
• sales order transaction file – accounts receivable reports
• open sales order transaction file file
• sales invoice transaction file
• cash receipts transaction file
5
DFD OF SALES ORDER PROCESSING
SYSTEM

Figure 4-1
MANUAL SALES ORDER PROCESSING
SYSTEM

Figure 4-12
MANUAL SALES ORDER PROCESSING
SYSTEM (CONT.)

Figure 4-12
 SALES ORDER PROCESSING
• Begins with a customer placing an order
• The sales department captures the essential details on a sales order form.
• The transaction is authorized by obtaining credit approval
by the credit department.
• Sales information is released to:
• Billing
• Warehouse (stock release or picking ticket)
• Shipping (packing slip and shipping notice)

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 SALES ORDER PROCESSING
• The merchandise is picked from the Warehouse and sent
to Shipping.
• Stock records are adjusted.
• The merchandise, packing slip, and bill of lading are
prepared by Shipping and sent to the customer.
• Shipping reconciles the merchandise received from the Warehouse
with the sales information on the packing slip.
• 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. Information
is transferred to:
• Accounts Receivable (A/R)
• Inventory Control

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 SALES ORDER PROCESSING

• 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.
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DFD OF SALES RETURN PROCEDURES

12

Figure 4-7
SALES RETURNS PROCEDURES

13

Figure 4-13
 SALES RETURN JOURNAL ENTRY
G/L posts the following to control accounts:

Inventory—Control DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts Receivable—Control CR
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DFD OF CASH RECEIPTS PROCEDURE

15
Figure 4-9
FLOWCHART OF CASH RECEIPTS SYSTEM

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Figure 4-14
 CASH RECEIPTS PROCESSES
• Customer checks and remittance advices are received in the Mail Room.
• A mail room clerk prepares a cash prelist and sends the prelist and the
checks to Cash Receipts.
• The cash prelist is also sent to A/R and the Controller.

• Cash Receipts:
• verifies the accuracy and completeness of the checks
• updates the cash receipts journal
• prepares a deposit slip
• prepares a journal voucher to send to G/L

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 CASH RECEIPTS PROCESSES
• A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
• Periodically, a summary of the postings is sent to G/L.

• G/L department:
• reconciles the journal voucher from Cash Receipts with the summaries
from A/R
• updates the general ledger control accounts

• The Controller reconciles the bank accounts.

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SUMMARY OF INTERNAL CONTROLS

19
 AUTHORIZATION CONTROLS
• Proper authorization of transactions (documentation)
should occur so that only valid transactions get
processed.
• Within the revenue cycle, authorization should take place
when:
• a sale is made on credit (authorization)
• a cash refund is requested (authorization)
• posting a cash payment received to a customer’s account (cash pre-list)

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 SEGREGATION OF FUNCTIONS
THREE RULES
1. Transaction authorization should be separate from transaction
processing.
2. Asset custody should be separate from asset record-keeping.
3. The organization should be so structured that the perpetration
of a fraud requires collusion between two or more individuals.

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 SEGREGATION OF FUNCTIONS
• Sales Order Processing
• credit authorization separate from SO processing
• inventory control separate from warehouse
• accounts receivable sub-ledger separate from general ledger
control account
• Cash Receipts Processing
• cash receipts separate from accounting records
• accounts receivable sub-ledger separate from general ledger

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 SUPERVISION

• Often used when unable to enact appropriate segregation of

duties.

• Supervision of employees serves as a deterrent to dishonest acts

and is particularly important in the mailroom.

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 ACCOUNTING RECORDS
• With a properly maintained audit trail, it is possible to track
transactions through the systems and to find where and when
errors were made:
• pre-numbered source documents
• special journals
• subsidiary ledgers
• general ledger
• files

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 ACCESS CONTROLS

• Access to assets and information (accounting records) should be

limited.

• Within the revenue cycle, the assets to protect are cash and
inventories and access to records such as the accounts receivable
subsidiary ledger and cash journal should be restricted.

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 INDEPENDENT VERIFICATION
• Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
• shipping verifies the goods sent from the warehouse are correct in type
and quantity
• warehouse reconciles the stock release document (picking slip) and
packing slip
• billing reconciles the shipping notice with the sales invoice
• general ledger reconciles journal vouchers from billing, inventory
control, cash receipts, and accounts receivable

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 AUTOMATING THE REVENUE
CYCLE
• Authorizations and data access can be performed
through computer screens.

• 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.
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 AUTOMATING THE REVENUE
CYCLE
• Revenue cycle programs can include:
• formatted screens for collecting data
• edit checks on the data entered
• instructions for processing and storing the data
• security procedures (passwords or user IDs)
• steps for generating and displaying output
• To understand files, you must consider the record design
and layout.
• The documents and the files used as input sources must
contain the data necessary to generate the output
reports.
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COMPUTER-BASED ACCOUNTING SYSTEMS
• CBAS technology can be viewed as a continuum with two
extremes:

• automation - use technology to

improve efficiency and effectiveness
• reengineering – use technology to
restructure business processes and
firm organization
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EXAMPLE: AUTOMATED BATCH SALES

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Figure 4-16
 REENGINEERING SALES ORDER PROCESSING
USING
REAL-TIME TECHNOLOGY
• Manual procedures and physical documents are replaced
by interactive computer terminals.
• Real time input and output occurs, with some master files
still being updated using batches.
• Real-time - entry of customer order, printout of stock release, packing
slip and bill of lading; update of credit file, inventory file, and open sales
orders file
• Batch - printout of invoice, update of closed sales order (journal),
accounts receivable and general ledger control account

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REAL-TIME SALES ORDER SYSTEM

32

Figure 4-18
 ADVANTAGES OF REAL-TIME
PROCESSING

• Shortens the cash cycle of the firm by reducing the time between the
order date and billing date
• Better inventory management which can lead to a competitive
advantage
• Fewer clerical errors, reducing incorrect items being shipped and bill
discrepancies
• Reduces the amount of expensive paper documents and their storage
costs

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 REENGINEERED CASH RECEIPTS
• The mail room is a frequent target for reengineering.

• Companies send their customers preprinted envelopes and

remittance advices.

• Upon receipt, these envelopes are scanned to provides a

control procedure against theft.

• Machines are open the envelopes, scan remittance advices

and checks, and separate the checks.

• Artificial intelligence may be used to read handwriting, such

as remittance amounts and signatures.

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AUTOMATED CASH RECEIPTS

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 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.

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 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.
• Cash over and under must be recorded
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POINT-OF-SALE SYSTEM

38
Figure 4-20
 REENGINEERING USING EDI

• EDI helps to expedite transactions.

• The customer’s computer:
• determines that inventory is needed
• selects a supplier with whom the business has a formal business
agreement
• dials the supplier’s computer and places the order

• The exchange is completely automated.

• No human intervention or management

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 EDI System
Company A Company B
Sales Order
Application Purchases System Application
System Software
Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox
40

Other
Mailbox
 REENGINEERING USING THE
INTERNET
• Typically, no formal business agreements exist as they do in EDI.
• Most orders are made with credit cards.
• Mainly done with e-mail systems, and thus a turnaround time is
necessary
• Intelligent agents are needed to eliminate this time lag.
• Security and control over data is a concern with Internet
transactions.

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 CBAS CONTROL CONSIDERATIONS
• Authorization - in real-time systems, authorizations are automated
• Programmed decision rules must be closely monitored.

• Segregation of Functions - consolidation of tasks by the computer

is common
• Protect the computer programs
• Coding, processing, and maintenance should be separated.

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 CBAS CONTROL CONSIDERATIONS
• Supervision - in POS systems, the cash register’s
internal tape or database is an added form of
supervision

• Access Control - magnetic records are vulnerable to

both authorized and unauthorized exposure and
should be protected
• Must have limited file accessibility
• Must safeguard and monitor computer programs

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 CBAS CONTROL CONSIDERATIONS
• Accounting Records - rest on reliability and security of stored
digitalized data
• Accountants should be skeptical about the accuracy of hard-copy
printouts.
• Backups - the system needs to ensure that backups of all files are
continuously kept

• Independent Verification – consolidating accounting tasks under

one computer program can remove traditional independent
verification controls. To counter this problem:
• perform batch control balancing after each run
• produce management reports and summaries for end users to review

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PC-BASED ACCOUNTING SYSTEMS
• Used by small firms and some large decentralized
firms
• Allow one or few individuals to perform entire
accounting function
• Most systems are divided into modules controlled by
a menu-driven program:
• general ledger
• inventory control
• payroll
• cash disbursements
• purchases and accounts payable
• cash receipts
• sales order
 PC CONTROL ISSUES
• Segregation of Duties - tend to be inadequate and should be
compensated for with increased supervision, detailed
management reports, and frequent independent
verification
• Access Control - access controls to the data stored on the
computer tends to be weak; methods such as encryption
and disk locking devices should be used
• Accounting Records - computer disk failures cause data
losses; external backup methods need to be implemented
to allow data recovery 46