Revenue Cycle

Ayore, Fornoles, Manalo, Ybañez

Learning Objectives
▪ Understand the fundamental tasks performed in the revenue cycle, regardless of
the technology in place.
▪ Be able to identify the functional departments involved in revenue cycle
activities and trace the flow of revenue transactions through the organization.
▪ Be able to specify the documents, journals, and accounts that provide audit
trails, promote the maintenance of historical records, support internal decision
making, and sustain financial reporting.
▪ Understand the risks associated with the revenue cycle and recognize the
controls that reduce those risks.
▪ Be aware of the operational and control implications of technology used to
automate and reengineer the revenue cycle. 2
What is REVENUE CYCLE?

▪ where firms sell their goods and services to

customers. It involves processing cash sales, credit
sales, and the receipt of cash following a credit sale.
Revenue cycle transactions also have a physical and
financial component.

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What is REVENUE CYCLE?

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Primary Objectives

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The Conceptual System

Data flow diagrams (DFDs)

▪ trace the sequence of activities through three
processes that constitute the revenue cycle for most
retail, wholesale, and manufacturing organizations.

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DFD of Sales Order Processing System 7
Sales Order Procedures
▫ RECEIVE ORDER:

Customer orders are documents indicating the type and quantity of

merchandise being requested.
Sales order is a source document that captures such vital information
Customer order file shows the status of customer orders.

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Sales Order 9
EXAMPLE: Sales Order Procedure 10
Sales Order Procedures
▫ CHECK CREDIT:

Sales order (credit copy) is a copy of a sales order sent by the

receive-order task to the check-credit task.
Approved sales order contains sales order information for the sales
manager to review once the sales order is approved.

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Sales Order Procedures
▫ PICK GOODS:

Stock release is a document that identifies which items of inventory

must be located and picked from the warehouse shelves.
Back-order are records that stay on file until the inventories arrive
from the supplier. Items are shipped before new sales are processed.
Stock records are not the formal accounting records for controlling
inventory assets.

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EXAMPLE: Sales Order Procedure 13
Sales Order Procedures
▫ SHIP GOODS:

Packing slip is a document that travels with the goods to the customer
to describe the contents of the order.
Shipping notice form is a document that informs the billing
department that the customer’s order has been filled and shipped.
Bill of lading is a formal contract between the seller and the shipping
company that transports the goods to the customer.
Shipping log specifies orders shipped during the period.

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Bill of Lading 15
Sales Order Procedures
▫ BILL CUSTOMER:
Sales order (invoice copy) is the copy of a sales order to be reconciled with the
shipping notice.
S.O. pending file is used to store the sales order (invoice copy) from the
receive-order task until receipt of the shipping notice.
Sales journal is a special journal used for recording completed sales
transactions.
Journal voucher is composed of accounting journal entries into an accounting
system for the purposes of making corrections or adjustments to the accounting
data.
Journal voucher file is a compilation of all journal vouchers posted to the
general ledger.
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Journal Voucher 17
Sales Order Procedures

▫ UPDATE INVENTORY RECORDS:

Inventory subsidiary ledger is a ledger with inventory records

updated from the stock release copy by the inventory control system.

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Inventory Subsidiary Ledger 19
Sales Order Procedures

▫ UPDATE ACCOUNTS RECEIVABLE RECORDS:

Accounts receivable (AR) subsidiary ledger is an account record

that shows activity by detail for each account type.
Ledger copy is a copy of the sales order received along with the
customer sales invoice by the billing department clerk from the sales
department.

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Accounts Receivable Subsidiary Ledger 21
Sales Order Procedures
• POST TO GENERAL LEDGER
Serves two purposes
First, the general ledger uses the journal vouchers to post to the following
control accounts:

Accounts Receivable-Control XXXXXX

Cost of Goods Sold XXXXX
Inventory Control XXXXX
Sales XXXXXX
Second, this information supports an important independent varication
control.
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DFD Sales Return Procedures 23
Sales Return Procedures

This occurs when:

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Sales Return Procedures
▫ PREPARE RETURN SLIP:
Return slip is a document recording the counting and inspect of
items returned, prepared by the receiving department employee.
▫ PREPARE CREDIT MEMO:
Credit memo is a document used to authorize the customer to
receive credit for the merchandise returned.
▫ APPROVE CREDIT MEMO:
Approved credit memo is issued when the credit manager evaluates
the circumstances of the return and makes a judgment to grant (or
disapprove) credit. 25
Credit Memo 26
Sales Return Procedures
• UPDATE SALES JOURNAL
• UPDATE INVENTORY AND AR RECORDS
• UPDATE GENERAL LEDGER

Inventory Control XXXXXX

Sales XXXXX
Cost of Goods Sold XXXXX
Accounts Receivable XXXXXX

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DFD of Cash Receipts Procedure 28
Cash Receipts Procedures
▫ OPEN MAIL AND PREPARE REMITTANCE LIST:

Remittance advice is a source document that contains key

information required to service the customers account.
Remittance list is a cash prelist, where all cash received is logged.

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Remittance Advice 30
Cash Receipts Procedures
▫ RECORD AND DEPOSIT CHECKS:

Cash receipts journals are records that include details of all cash
receipts transactions, including cash sales, miscellaneous cash
receipts, and cash received.
Deposit slip is a written notification accompanying a bank deposit
that specifies and categorizes the funds (such as checks, bills, and
coins) being deposited.

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Cash Receipts Journal 32
Cash Receipts Procedures
• UPDATE ACCOUNTS RECEIVABLE RECORDS
• UPDATE GENERAL LEDGER
• RECONCILE CASH RECEIPTS AND DEPOSITS:
Reconciles cash receipts by comparing
(1)a copy of the prelist,
(2)deposit slips, and
(3)related journal vouchers.

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EXAMPLE 34
Physical Systems

▪ Physical accounting information systems are a

combination of computer technology and human activity.
▪ As a general rule, smaller businesses tend to rely less on
technology and more on manual procedures, whereas
larger companies tend to employ advanced technologies

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Point of Sale System

▪ revenue systems in which no customer accounts

receivable are maintained and inventory is kept on the
store’s shelves, not in a separate warehouse.
▪ It serves as central component of business. It’s the hub
where everything like sales, inventory and customer
management merges.

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Basic Technology Sales Order Processing System

o Sales Department
o Credit Department Approval
Verifies the customer’s creditworthiness by using the
department computer to review the customer’s credit history in
the customers record file
o Warehouse Procedure
The warehouse clerk receives the copy of the sales order and
uses this to locate inventory 38
Basic Technology Sales Order Processing System

o Shipping Department
The shipping clerk reconciles the products
received from the warehouse with shipping
notice copy of the sales order received.

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 40
Basic Technology Sales Order Processing System
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Basic Technology Sales Order Processing System

o Billing Department
o Accounts Receivable , Inventory Control and
General Ledger Department

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Structures for AR and Inventory Subsidiary Files 43
Basic Technology Cash Receipts System

o Mail Room
o Cash Receipts
o Accounts Receivable
o General Ledger Department
o Controller’s Office
They periodically performs a bank reconciliation by comparing
deposit slips returned from the bank, account summaries used to
post to the accounts and journal vouchers.
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Basic Technology Cash Receipts System 45
Advance Technology Revenue Cycle

o Advanced technologies allow systems designers to

integrate accounting and other business functions
through a common information system.

o The objective of integration is to improve operational

performance and reduce costs by identifying and
eliminating nonvalue-added tasks.
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Integrated Sales Order

o Sales Procedures
• The process begins with sales clerks receiving customer
orders, which may be hard-copy documents or may be
received via e-mail, fax, or phone.
• Using a computer terminal connected to a central sales
order system, the clerk enters the sales order.

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Integrated Sales Order System 48
Integrated Cash Receipts System

▪ This system assumes that an organization in which

customers make payment on account with physical
checks that are mailed to the company.

▪ Organizations use electronic funds transfer to receive

customer payment to employ different procedures.

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Integrated Cash Receipts System
o Mail Room
o Cash Receipts Department
o Automatic Data Processing Procedures
▪ Closes the sales invoices that are covered by the customer checks by
placing the customer number and payment date in the invoice record.
▪ Post to the GL accounts
▪ Prepare and distributes various management reports including
transaction listings, discrepancy reports and GL change reports.
o Controller’s Office
Periodically performs reconciliation.
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Integrated Cash Receipts System 51
Revenue Cycles Risks and Internal Controls
▪ Objective of Internal Control is to lessen the risk from frauds and
errors.
Risks associated with revenue cycle transactions:
✓ Selling to un-creditworthy customers.
✓ Shipping customers the wrong items or incorrect quantities.
✓ Inaccurately recording sales and cash receipts transactions in journals
and accounts.
✓ Misappropriation of cash receipts and inventory.
✓ Unauthorized access to accounting records and confidential reports.
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Point-of-Sale (POS) Systems
• POS systems are used extensively in grocery stores, department stores,
and other types of retail organizations.
• All transactions are for cash, checks, or bank credit/debit card.
• Inventory is kept on the store’s shelves, not in a separate warehouse.
• Customers personally pick the items they wish to buy and carry them
to the checkout location where the transaction begins.

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Point of Sale System
Point-of-Sale (POS) Systems
▪ Daily Procedures
▪ End-of-Day Procedures
Cash xxx
Cash Over/Short xxx
AR xxx
COGS xxx
Sales xxx
Inventory xxx
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Point-of-Sale (POS) Systems

POINT-OF-SALE CONTROL ISSUES

• Authorization
• Supervision
• Access Control
• Accounting Records
• Independent Verification

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Reengineering Using EDI
• Electronic Data Interchange technology was devised to speed up
routine transactions between manufacturers and wholesalers.
• Customers computer is connected to the sellers computer via a private
network.
• This system employs little or no human involvement.
• More than just a technology. It represents a strategic business
arrangement between buyer and seller.
• Poses unique control problems for organizations. Only valid
transactions are processed. 58
Reengineering Using EDI
• VIDEO

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Reengineering Using the Internet

• Unlike EDI, which is exclusively a B2B arrangement between trading

partners, Internet sales are both B2B and business-to-consumer (B2C)
transactions.
• Connecting to the Internet exposes the organization to threats from
computer hackers, viruses, and transaction fraud.
• Most organizations take these threats seriously and implement
controls, including password techniques, message encryption, and
firewalls, to minimize their risk.

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Reengineering Using the Internet
• VIDEO

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Appendix: SALES RETURN SYSTEM

Receiving Department

Where personnel
▫ Receive,
▫ Count,
▫ Inspect for damage, and
▫ Send returned products

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Appendix: SALES RETURN SYSTEM

Sales Department

Where clerk
▫ Manually prepares a credit
memo
▫ Dictate the credit department
approval

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Appendix: SALES RETURN SYSTEM

Processing the Credit Memo

Objective (sales return system)

▫ To reverse the effects of the original
sales transaction.

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Basic Technology Sales Returns System 65
Appendix: LEGACY SYSTEM

Batch Processing Using Sequential Files

▫ Data Entry
▫ Edit Run
▫ Sort Run
▫ AR Update and Billing Run
▫ Sort and Inventory Update Runs
▫ General Ledger Update Run

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Batch Processing with Sequential Files 67
Appendix: LEGACY SYSTEM

Batch Processing Using Direct Access Files

Keystroke
Data entry clerk converts the hard-copy shipping notices to digital
form
Edit Run
Performs clerical and logical tests on the data; detect errors
File Update Run
Transaction fil does not need to be sorted before the update process
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Update of Accounts Receivable from Sales Orders 69
Update of Inventory from Sales Orders 70
Batch Sales Order System 71
Direct Access Update for AR and Inventory Files Concurrently 72
 Thank you and God bless!

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