CHAPTER 4: The Revenue Cycle ➔ Bill of lading - a document issued by a

carrier (somebody who transports and delivers

Revenue Cycle goods) to a shipper (someone who supplies or
own goods) or consignor, confirming goods
were received in an acceptable condition and
are ready to be shipped
◆ Goods will then be delivered by the
carrier to a consignee (who bought the product)
➔ 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
Manual Sales Order Processing ledger dept. Which then reconciles this data and
➔ Begins with a customer placing an order posts to the control accounts in the G/L
◆ The sales department captures the Journal Voucher Entries
essential details on a sales order form (Company ➔ Billing Department prepares a journal voucher:
of buyer, TIN no., quantity of product, address to Accounts Receivable
be delivered, price of product) Sales
➔ The transaction is authorized by ➔ Inventory Control dept prepares a journal
obtaining credit approval by the credit voucher:
department Cost of goods sold
➔ Sales information is released to: Inventory
◆ Billing
◆ Warehouse (Stock release or picking ➔ Cash receipts prepares a journal voucher:
ticket) Cash
◆ Shipping (Packing slip and shipping Accounts Receivable
notice)
➔ The merchandise is picked from the Sales Return Journal Entry
warehouse and set to shipping ➔ G/L posts the ff to control accounts:
◆ Stock records are adjusted Inventory - Control
➔ The merchandise, packing slip, and bill Sales Returns and Allowances
of lading are prepared by shipping and sent to Cost of Goods Sold
the customer Accounts Receivable - Control
◆ Shipping reconciles the merchandise
received from the warehouse with the sales Manual Cash Receipts Processes
information on the packing slip ➔ Customer checks and remittance advices are
➔ Shipping information is sent to Billing. received in the Mail Room
Billing compiles and reconciles the relevant ◆ Mail room clerk prepares a cash prelist
facts and issues an invoice to the customer and and sends the prelist and the checks to Cash
updates the sales journal. Information is Receipts
transferred to: ◆ The cash prelist is also sent to A/R and
◆ Accounts Receivable (A/R) the Controller
◆ Inventory Control
 2. Asset custody should be separate from
➔ Cash receipts: asset record-keeping
◆ Verifies the accuracy and completeness 3. The organization should be so structures
of the checks that the perpetration of a fraud requires
◆ Updates the cash receipts journal collusion between two or more
◆ Prepares a deposit slip individuals
◆ Prepares a journal voucher to send to ● Sales order processing
G/L ○ Credit authorization separate
➔ A/R posts from the remittance advices to the from SO processing
accounts receivable subsidiary ledger ○ Inventory control separate from
◆ Periodically, a summary of the postings warehouse
is sent to G/L ○ Accounts receivable sub-ledger
➔ G/L dept: separate from general ledger
◆ Reconciles the journal voucher from control account
Cash Receipts with the summaries from A/R ● Cash Receipts Processing
◆ Updates the general ledger control ○ Cash receipts separate from
accounts accounting records
➔ The Controller reconciles the bank accounts ○ Accounts receivable sub-ledger
separate from general ledger
SUMMARY of INTERNAL CONTROLS
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

Accounting Records
- With a properly maintained audit trail, it
is possible to track transactions through
the systems and to find where and when
Authorization Controls errors were made:
- Proper authorization of transactions - Pre-numbered source documents
(documentation) should occur so that - Special journals
only valid transactions get processed. - Subsidiary ledgers
Within the revenue cycle, authorization should - General ledger
take place when: - Files
A sale is made on credit
- A cash refund is requested Access Control
- Posting a cash payment received to a - Access to assets and information
customer’s account (cash prelist) (accounting records) should be limited
- Within the revenue cycle, the assets to
Segregation of Functions protect are cash and inventories and
THREE RULES: access to records such as the accounts
1. Transaction authorization should be receivable subsidiary ledger and cash
separate from transaction processing journal should be restricted
 Automating the Revenue Cycle
Independent Verification ➔ Authorizations and data access can be
● Physical procedures as well as record- performed through computer screens
keeping should be independently ➔ There is a decrease in the amount of
reviewed at various points in the system paper
to check for accuracy and completeness: ➔ The manual journals and ledgers are
○ Shipping verifies the goods sent changed to disk or tape transaction and master
from the warehouse are correct files
in type and quantity ➔ Input is still typically from a hard copy
○ Warehouse reconciles the stock document and goes through one or more
release document (picking slip) computerized processes
and packing slip ➔ Processes store data in electronic files
○ Billing reconciles the shipping (the tape or disk) or prepare data in the form of
notice with the sales invoice a hardcopy report
○ General ledger reconciles journal ➔ Revenue cycle programs include
vouchers from the billing, ◆ Formatted screens for collecting data
inventory control, cash receipts, ◆ Edit checks on the data entered
and accounts receivable ◆ Instructions for processing and storing
the data
COMPUTER-BASED ACCOUNTING SYSTEMS ◆ Security procedures (passwords or
● Automation - use technology to improve userIDs)
efficiency and effectiveness ◆ Steps for generating and displaying
● Reengineering - use technology to output
restructure business processes and firm ➔ To understand files, you must consider
organization the record design and layout
➔ The documents and the rifles used as
Revenue Cycle Databases input sources must contain the data necessary
● Master files to generate the output reports
○ Customer master file
○ Accounts receivable master file Reengineering Sales Order Processing Using
○ Merchandise inventory master file Real-Time Technology
● Transaction and open document files ➔ Manual procedures and physical documents are
○ Sales order transaction file replaced by interactive computer terminals
■ Open sales order transaction file ➔ Real-time input and output occurs, with some
○ Sales invoice transaction file master files still being updated using batches
○ Cash receipts transaction file ◆ Real-TIme - entry of customer order,
● Other files print out of stock release, packing slip and bill of
○ Shipping and price data reference file lading; update of credit file, inventory file, and
○ Credit reference file open sales orders file
○ Salesperson fie ◆ Batch - printout of invoice, update of
○ Sales history file closed sales order (journal), accounts receivable
○ Cash receipts history file and general ledger control accounts
○ Accounts receivable reports file
Reengineered Cash Receipts
➔ The mail room is a frequent target for
reengineering
 ➔ Companies send their customers ◆ No human intervention or
preprinted envelopes and remittance advices management
➔ Upon receipt, these envelopes are Reengineering Using the Internet
scanned to provides a control procedure against ➔ Typically, no formal business
theft agreements exist as they do in EDI
➔ Machines will open the envelopes, scan ➔ Most orders are made with credit cards
remittance advices and checks, and separate ➔ Mainly done with e-mail systems, and
the checks thus a turnaround time is necessary
➔ Artificial intelligence may be used to read ◆ Intelligent agents are needed to
handwriting such as remittance amounts and eliminate this time lag
signatures ➔ Security and control over data is a
concern with Internet transactions
POINT-OF-SALE SYSTEMS
➔ 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
➔ 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

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
 CHAPTER 5: The Expenditure Cycle - ➔ A/P eventually receives copies of the
Purchases and Disbursement Procedures PR, PO, receiving report, and the
supplier’s invoice
Procurement cycle ➔ A/P reconciles these documents, posts
to the purchases journal, and records the
liability in the accounts payable
subsidiary ledger
➔ A/P periodically summarizes the entries
in the purchases journal as a journal
voucher which is sent to the General
Ledger (G/L) department
Inv-Control or Purchases
Accts Payable - Control
➔ A/P also prepares a cash disbursements
voucher and posts it in the voucher
register
Goals of the Expenditure Cycle ➔ G/L dept:
● Purchase from reliable vendors ◆ Posts from the accounts payable
● Purchase high quality items journal voucher to the general
● Obtain best possible price ledger
● Purchase only items that are properly ◆ Reconciles the inventory amount
authorized with the account summary
● Have resources available when they are received from inventory control
needed
● Receive only those items ordered Manual Cash Disbursement System
● Ensure items are not lost, stolen, broken ➔ Periodically, A/P searches the open
● Pay for the items in a timely manner vouchers payable file for items with
payments due:
Manual Purchases System ◆ A/P sends the voucher and
➔ Beings in Inventory Control when supporting documents to cash
inventory levels drop to reorder levels disbursements
➔ A purchase requisition (PR) is prepared ◆ A/P updates the accounts
and copies to sent to Purchasing and payable subsidiary ledger
Accounts Payable (A/P) ➔ Cash Disbursements:
➔ Purchasing prepares a purchase order ◆ Prepares the check
(PO) for each vendor and send copies to ◆ Records the information in a
Inventory Control, A/P, and Receiving check register (cash
➔ Upon receipt, Receiving counts and disbursements journal)
inspects the goods ◆ Returns paid vouchers to
◆ A blind copy of the PO is used to accounts payable, mails the
force workers to count the goods check to the supplier
➔ A receiving report is prepared and ◆ Sends to journal voucher to G/L:
copies sent to the raw materials Accounts Payable
storeroom, Purchasing, Inventory Cash
Control, and A/P
 ➔ G/L dept receives: ➔ Purchasing - a computer program
◆ The journal voucher from cash identifies inventory requirements
disbursements ➔ The ff methods are used for authorizing
◆ A summary of the accounts and ordering inventories:
payable subsidiary ledger from ◆ The system prepares POs and
A/P sends them to Purchases for
➔ The journal voucher is used to update review, signing, and distributing
the general ledger ◆ The system distributes POs
➔ The accounts payable control account is directly to the vendors and
reconciled with the subsidiary summary internal users, bypassing
Purchases
Levels of Automating and Reengineering ◆ The system uses electronic data
Ordering interchange (EDI) and
➔ Computer generates PR electronically places the order
◆ Purchases manually generates without POs
PO ➔ Other tasks performed automatically by
➔ Computer generates PO (no PR needed) the computer:
◆ PO not sent until manually ◆ Updates the inventory subsidiary
reviewed file from the receiving report
◆ computer -generated PO is ◆ Calculates batch totals for
automatically sent without general ledger update
manual review ◆ Closes the corresponding
◆ Electronic Data Interchange records in the open PO file to the
◆ Computer-to-computer closed PO file
communication without PO ◆ Validates the voucher records
against valid files
Expenditure Cycle Database
● Master Files Computer-Based Cash Disbursements
○ Supplier (vendor) master file ➔ Tasks performed automatically by the
○ Accounts Payable master file computer:
○ Merchandise inventory master ◆ The system scans for vouchers
file currently due
● Transaction and Open Document files ◆ Prints checks for these vouchers
○ Purchase order file ◆ Records these checks in the
■ Open purchase order file check register
○ Supplier’s invoice file ◆ Batch totals are prepared for the
○ Open vouchers file general ledger update procedure
○ Cash disbursements file
● Other files
○ Supplier reference and history file
○ Buyer file
○ Accounts payable detail file

Computer-Based Purchases
➔ A data processing dept. Performs routine
accounting tasks
 CHAPTER 6: The Expenditure Cycle - Payroll a paymaster for distribution to the
Processing and Fixed Asset Procedures employees
◆ Writes a check for the payroll and
Manual Payroll System deposits it into the payroll imprest
➔ Personnel dept. Uses personnel action account
forms to: ➔ G/L dept. Makes the following journal
◆ Activate new employees entries:
◆ Change the pay rate of ◆ From the labor distribution
employees summary
◆ Change marital status and/or WIP - Direct Labor
number of dependents Factory Overhead - indirect labor
◆ Terminate employees Wages payable
➔ Production employees fill out two forms: ◆ From the distribution voucher
◆ Job tickets - account for the time Wages Payable
spent by the worker on each Cash
production job Fed. Inc. Tax withholding payable
◆ Time cards - used to capture the State Inc. Tax Withholding Payable
total time worked each pay FICA Withholding Payable
period for payroll calculations Other Withholding Payable
● Must be signed by a ➔ G/L dept. Makes a journal entry to
supervisor transfer the cash from the operating
➔ Cost accounting dept. bank account to the payroll imprest
◆ Uses the job tickets to allocate account
labor costs to WIP accounts
◆ Summarizes these charges in a The Fixed Asset System (FAS)
labor distribution summary which - Fixed Assets - property, plant, and
is forwarded to G/L dept. equipment used in the operation of a
➔ Payroll dept. Receives personnel action business
forms and time cards and uses them to: Objectives of FAS
◆ Prepare the payroll register 1. Acquire fixed assets in accordance with
◆ Enter the information into the management approval and procedures
employee payroll records 2. Maintain adequate accounting records of
◆ Prepare paychecks asset acquisition, cost, description, and
◆ Send paychecks to Cash location
Disbursements and a copy of the 3. Maintain depreciation records for
payroll register to Accounts depreciable assets in accordance with
payable acceptable method
➔ Accounts payable dept: 4. Provide management with information to
◆ Prepares a cash disbursements help it plan future fixed asset
voucher for the total amount of investments
the payroll 5. Properly record the retirement and
◆ Sends copies to the Cash disposal of fixed assets
Disbursements and G/L depts
➔ Cash Disbursements dept:
◆ Reviews and signs the
paychecks and forwards them to
Asset Acquisition
➔ Begins when a dept. manager
determines that an old fixed asset needs
to be replaced or that a new fixed asset
is warranted
➔ A purchase requisition is filled out.
◆ May require an authorizing
signature for items over a pre-
specified limit
◆ FAS dept. performs record-
keeping functions.
Asset Maintenance
➔ Involves adjusting FAS subsidiary
account balances as assets depreciate
➔ Depreciation calculations are internal
transactions that the FAS system bases
upon a depreciation schedule.
➔ Physical improvements must also be
recorded to increase the subsidiary
account balance and depreciation
schedule.
Asset Disposal
➔ At the end of an asset’s useful life (or
earlier disposition), the asset must be
removed from the records and
depreciation schedule
➔ Disposals require disposal request forms
and disposal reports as source
documents.