AT 06-06 Transaction Cycles Part 1

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AT 06-06 Transaction Cycles Part 1

Suggested Readings
Best practices implemented by different entities in their business processes.
No official standard/s governing the different transaction cycles.

Overview
Transaction Cycles means through which an accounting system process transaction of related activities

Conversion/
Revenue and Expenditure and
Payroll (Hire to Production Financing and
Receipt (Order Disbursement
Retire) (Plan to Investing
to Cash) (Procure to Pay)
Inventory)

Revenue and Receipt (Order to Cash)


➢ (Sales Quote)
➢ Receives order from the customer
➢ Examines the order for credit worthiness
➢ Ships goods or provides services to customer
➢ Issue an invoice
➢ Collects Payment
Sales Credit Warehouse Shipping Billing Accounting
Customer Reception Treasury
Department Department or Storage Department Department Department

Process Overview
Customer ➢ Customer Purchase Order – external file
Sales Department ➢ Direct Communication with the customer
➢ Prepares Sales Order (uniform) – internal file
Credit Department ➢ For credit review
➢ Credit Investigation – based on 5C’s of credit
➢ If existing Customer – check credit limit (automated control)
Warehouse or Storage ➢ For release of goods
Shipping Department ➢ Delivers the goods to customers
➢ Shipping Documents or Bill of Lading
Billing Department ➢ Prepares invoices
Accounting Department ➢ Forwarded invoices from Billing Department – for recording
➢ Verify the series or sequence of transactions before recording
Reception ➢ Receives check with the remittance advice containing the details of the
customer and the invoice being paid
Treasury ➢ For deposit of check
➢ Remittance Advice will be returned to Accounting Department
Documents used
Sales Order
Shipping Documents Note:
These are not uniform for all entities.
Sales Invoices
Considered as Minimum requirements
Remittance Advice based on Best Practices.
Transaction Summaries

Major Controls - Sales


1.) Credit granted by a credit department.
2.) Sales orders and invoices prenumbered and controlled.
3.) Sales returns are presented to receiving clerk who prepares a receiving report, which supports prenumbered
sales return credit memoranda.

Major Controls – Accounts Receivable


1.) Subsidiary ledger reconciled to control ledger Control Ledger – total AR balance in the General Ledger
regularly. Subsidiary Ledger – total AR balance per customer
2.) Individual independent of receivable posting reviews statements before sending out to customers.
3.) Monthly Statement sent to all customers
4.) Write-offs approved by management official independent of recordkeeping responsibility (e.g., the treasurer is
appropriate).
Major Controls – Cash Receipts
1.) Cash receipts received in mail listed by individuals with no recordkeeping responsibility.
a) Cash goes to cashier.
b) Remittance advice go to accounting.
2.) Over-the-Counter cash receipts controlled (cash register tapes).
3.) Cash deposited daily. – imprest system
4.) Employees handling cash are bonded.
5.) Use of lockbox system.
6.) Bank reconciliation prepared by individuals independent of cash receipts recordkeeping.

Other Activities in the Revenue and Receipt Cycle


A.) Uncollected Accounts
1.) Accounts Receivable
• Review individual customer accounts periodically against credit limits.
• Prepare monthly AR subsidiary ledger summary for reconciliation with the general ledger.
2.) Credit Department
• Review and age AR balances periodically.
3.) Treasurer
• Authorize write-offs for uncollectible accounts and perform review of delinquent customer balances.
Other Activities in the Revenue and Receipt Cycle
B.) Sales Returns and Allowances
1.) Sales Department
• Review customer’s request for return (and allowances).
• Grant sales returns and allowances and prepare credit memo (to customer, AR, and receiving)
2.) Receiving
• Compare goods received and credit memo.
3.) Accounting
• Periodic/Perpetual: Record adjustment to sales, AR, cost of sales, and inventory respectively.
Form Description Origin Recipient

Customers, Credit
Contains the details of the goods
Department, Shipping
Sales Order ordered (quantity, prices, and Sales Department
Forms or Documents Summary

Department, Billing
payment terms)
Department

Shipping Document Describes the goods to be shipped


Carrier, Customers,
(Bill of Lading or and serves as contract between the Shipping Department
Billing Department
Delivery Receipt) entity and carrier

Customers,
Describes the goods sold, amount
Sales Invoice Billing Department Accounting
due, and the terms of payment
Department

Specifies which invoice the check is


Remittance Advice Billing Department Customers
paying

Transaction Summarizes transactions recorded Accounting and


All Department
Summaries during the day Treasury Department
Conversion/Production (Plan to Inventory)
1. Monitors and records the production of entity’s product for sale
2. Monitors the movement and current level of materials, work-in-process and finished goods
3. Identify the cost that would be charged to inventory accounts

Raw Finished Cost


Production Production Production
Materials Goods Accounting
Planning Department Department
Storage Storage Department

Process Overview
Production Planning ➢ Generates the production plan
Production Department ➢ Follows the production plan (bill of materials, prepares materials requisition
form)
Raw Materials Storage ➢ Approves MRF
Production Department ➢ Actual Production
➢ Adds Conversion Cost
➢ Upon completion, forwards to Finished Goods Storage
Finished Goods Storage ➢ Receives completed goods from Production Department
Cost Accounting Department ➢ Accumulating the cost of materials, labor, and overhead
Documents used
Bill of Materials
Production Plan Note:
These are not uniform for all entities.
Materials Requisition
Considered as Minimum requirements
Production Reports based on Best Practices.
Raw Materials Stock Cards
Finished Goods Stock Cards
Job/Departmental Cost Sheets

Major Controls – Inventory and Production


1.) Perpetual inventory records for larger items.
2.) Prenumbered receiving reports prepared when inventory received, receiving reports accounted for.
3.) Adequate standard cost system to cost inventory items.
4.) Physical controls against theft.
5.) Written inventory requisitions used.
6.) Proper authorization of purchases and use of prenumbered purchase orders.
7.) Wall-to-wall counts and cycle counts are performed periodically and variances resolved.
Authorization Recording Custody
Controls and Procedures Summary

Physical Custody of
Accumulation of
materials and finished
Normal production runs materials, labor, and
goods – warehousing /
• Production department overhead costs – cost
Related controls and storage department
supervisor accounting
person/s assigned
Special production runs
Physical controls over
• Board of Directors Recording – general
work in process –
accounting
production department
Review entries made in
Review production orders
the general ledger with Observation of physical
and related documents
Audit Procedures daily summaries prepared inventory count and
supporting production runs
by cost accounting performing test counts.
to check authorization
department

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