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rinciples o! Accounting "n!or#ation$yste#s, Asia %dition

&a#es A. 'all

Chapter 4

The Revenue Cycle


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Objectives for Chapter 4

Tasks performed in the revenue cycle, regardless of thetechnology used

Functional departments in the revenue cycle and the

flow of revenue transactions through the organization Documents, journals, and accounts needed for audittrails, records, decision making, and financial reporting

Risks associated with the revenue cycle and thecontrols that reduce these risks

The operational and control implications oftechnology used to automate and reengineer therevenue cycle

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R E V E N U E C Y C L E

( S U B S Y S T E M )

S a l e s O r d e r

B i l l i n g / A c c o u n t s

R e c e i a ! l e

C a s " R e c e i # t s /C o l l e c t i o n s

S " i # # i n g

$

%

& / '

C r e d i t / C u s t o e r

S e r i c e*

(


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Journal Vouchers/Entries

How do we get them? )illing *epart#ent prepares a +ournal voucher

Accounts Receivable DR

Sales CR "nventory Control *ept. prepares a +ournal

voucherCost of Goods Sold DR

Inventory CR Cash Receipts prepares a +ournal voucher

Cash DR

Accounts Receivable CR

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evenue C!cle "atabases

Master !iles custo#er #aster !ile

accounts receivable #aster !ile

#erchandise inventory #aster

!ile ransaction and /pen

*ocu#ent iles sales order transaction !ile

open sales order transaction

!ile

sales invoice transaction !ile

cash receipts transaction !ile

• Other Files– shipping and price data

reference le

– credit reference le (maynot be needed)

– salesperson le (may be amaster le)

– Sales history le

– cash receipts history le

– accounts receivable

reports le


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"#" of $ales Order %rocessing $!stem

3igure -41


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&anual $ales Order %rocessing $!stem

5igure -412


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&anual $ales Order %rocessing $!stem (cont.)

6igure -412


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$ales Order %rocessing

)egins with a custo#er placing an order

he sales depart#ent captures the essential details on asales order !or#.

he transaction is authori7ed by obtaining credit approvalby the credit depart#ent.

$ales in!or#ation is released to

)illing

8arehouse 9stoc: release or pic:ing tic:et;

$hipping 9pac:ing slip and shipping notice;

<


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$ales Order %rocessing he #erchandise is pic:ed !ro# the 8arehouse and sent

to $hipping. $toc: records are ad+usted.

he #erchandise, pac:ing slip, and bill o! lading areprepared by $hipping and sent to the custo#er. $hipping reconciles the #erchandise received !ro#

the 8arehouse with the sales in!or#ation on thepac:ing slip.

$hipping in!or#ation is sent to )illing. )illing co#pilesand reconciles the relevant !acts and issues an invoice tothe custo#er and updates the sales +ournal. "n!or#ationis trans!erred to Accounts Receivable 9A=R; "nventory Control

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A=R records the in!or#ation in the custo#er>s account in the

accounts receivable subsidiary ledger.

"nventory Control ad+usts the inventory subsidiary ledger.

)illing, A=R, and "nventory Control sub#its su##ary

in!or#ation to the ?eneral Ledger dept., which then

reconciles this data and posts to the control accounts in the

?=L.

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"#" of $ales eturn %rocedures

12igure -45


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$ales eturns %rocedures

1(igure -41(


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$ales eturn Journal Entr!

?=L posts the !ollowing to control accounts

Inventory—Control DR Sales Returns and Allowances DR

Cost of Goods Sold CR

Accounts Receivable—Control CR

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"#" of Cash eceipts %rocedure

1

igure -4<


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#lowchart of Cash eceipts $!stem

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igure -41-


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Cash eceipts %rocesses

Custo#er chec:s and re#ittance advices are

received in the Mail Roo#.

A #ail roo# cler: prepares a cash prelist and sends the

prelist and the chec:s to Cash Receipts. he cash prelist is also sent to A=R and the Controller.

Cash Receipts

veri!ies the accuracy and co#pleteness o! the chec:s

updates the cash receipts +ournal

prepares a deposit slip

prepares a +ournal voucher to send to ?=L

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Cash eceipts %rocesses

A=R posts !ro# the re#ittance advices to the

accounts receivable subsidiary ledger. eriodically, a su##ary o! the postings is sent to ?=L.

?=L depart#ent reconciles the +ournal voucher !ro# Cash Receipts with

the su##aries !ro# A=R

updates the general ledger control accounts

he Controller reconciles the ban: accounts.

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$ummar! of 'nternal Controls

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(uthori)ation Controls

roper authori7ation o! transactions 9docu#entation;should occur so that only valid transactions get processed.

8ithin the revenue cycle, authori7ation should ta:e place

when a sale is #ade on credit 9authori7ation;

a cash re!und is re@uested 9authori7ation;

posting a cash pay#ent received to a custo#er>saccount 9cash pre4list;

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$egregation of #unctions*hree ules

1. ransaction authori7ation should be separate

!ro# transaction processing.2. Asset custody should be separate !ro# asset

record4:eeping.

(. he organi7ation should be so structured thatthe perpetration o! a !raud re@uires collusionbetween two or #ore individuals.

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$egregation of #unctions


credit authori7ation separate !ro# $/ processing

inventory control separate !ro# warehouse

accounts receivable sub4ledger separate !ro# general ledgercontrol account

Cash eceipts %rocessing

cash receipts separate !ro# accounting records

accounts receivable sub4ledger separate !ro# general ledger

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$upervision

/!ten used when unable to enact appropriate

segregation o! duties.

$upervision o! e#ployees serves as a deterrent

to dishonest acts and is particularly important in

the mailroom.

2(


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(ccounting ecords

8ith a properly #aintained audit trail, it is

possible to trac: transactions through the

syste#s and to !ind where and when errors were

#ade pre4nu#bered source docu#ents

special +ournals

subsidiary ledgers

general ledger

!iles

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(ccess Controls

Access to assets and in!or#ation 9accounting

records; should be li#ited.

8ithin 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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'ndependent Verification

hysical procedures as well as record4:eeping should be

independently reviewed at various points in the syste# to

chec: !or accuracy and co#pleteness

shipping veri!ies the goods sent !ro# the warehouse are

correct in type and @uantity warehouse reconciles the stoc: release docu#ent

9pic:ing slip; and pac:ing slip

billing reconciles the shipping notice with the sales

invoice

general ledger reconciles +ournal vouchers !ro# billing,

inventory control, cash receipts, and accounts receivable

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(utomating the evenue C!cle

Authori7ations and data access can be per!or#ed throughco#puter screens.

here is a decrease in the a#ount o! paper.

he #anual +ournals and ledgers are changed to dis: ortape transaction and #aster !iles.

"nput is still typically !ro# a hard copy docu#ent and goesthrough one or #ore co#puteri7ed processes.

rocesses store data in electronic !iles 9the tape or dis:;or prepare data in the !or# o! a hardcopy report.

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(utomating the evenue C!cle

Revenue cycle progra#s can include

!or#atted screens !or collecting data

edit chec:s on the data entered

instructions !or processing and storing the data

security procedures 9passwords or user "*s;

steps !or generating and displaying output

o understand !iles, you #ust consider the record design

and layout. he docu#ents and the !iles used as input sources #ust

contain the data necessary to generate the output reports.

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Computer+,ased (ccounting $!stems

C)A$ technology can be viewed as a continuu#

with two etre#es

automation 4 use technology to

i#prove e!!iciency and e!!ectiveness

reengineering B use technology to

restructure business processes and !ir#

organi7ation

2<


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E-ample. (utomated ,atch $ales

(0

igure -413


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eengineering $ales Order %rocessing sing

eal+*ime *echnolog! Manual procedures and physical docu#ents are replaced by

interactive co#puter ter#inals.

Real ti#e input and output occurs, with so#e #aster !iles

still being updated using batches. eal+time 4 entry o! custo#er order, printout o! stoc:

release, pac:ing slip and bill o! lading update o! credit

!ile, inventory !ile, and open sales orders !ile

,atch 4 printout o! invoice, update o! closed sales order9+ournal;, accounts receivable and general ledger control

account

(1


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eal+*ime $ales Order $!stem

(2

igure -416


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(dvantages of eal+*ime

%rocessing

$hortens the cash cycle o! the !ir# by reducing the

ti#e between the order date and billing date )etter inventory #anage#ent which can lead to a

co#petitive advantage

ewer clerical errors, reducing incorrect ite#s

being shipped and bill discrepancies Reduces the a#ount o! epensive paper

docu#ents and their storage costs

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eengineered Cash eceipts

he #ail roo# is a !re@uent target !or reengineering.

Co#panies send their custo#ers preprinted envelopes andre#ittance advices.

Dpon receipt, these envelopes are scanned to provides acontrol procedure against the!t.

Machines are open the envelopes, scan re#ittance advicesand chec:s, and separate the chec:s.

Arti!icial intelligence #ay be used to read handwriting, suchas re#ittance a#ounts and signatures.

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(utomated Cash eceipts

(


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%oint+of+$ale $!stems

oint o! sale syste#s are used etensively in retail

establish#ents.

Customers pic the inventory from the shelves and tae

them to a cashier . he cler: scans the universal product code 9DC;. he /$

syste# is connected to an inventory !ile, where the price and

description are retrieved.

!he inventory levels are updated and reorder needs canimmediately be detected .

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%oint+of+$ale $!stems

he syste# co#putes the a#ount due. ay#ent is either

cash, chec:, AM or credit card in #ost cases.

Eo accounts receivables

"! chec:s, AM or credit cards are used, an on4line lin: toreceive approval is necessary.

At the end o! the day or a cashier>s shi!t, the #oney and

receipts in the drawer are reconciled to the internal cash

register tape or a printout !ro# the co#puter>s database. Cash over and under #ust be recorded

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%oint+of+$ale $!stem

(6

igure -420


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eengineering sing E"'

%*" helps to epedite transactions.

he custo#er>s co#puter deter#ines that inventory is needed

selects a supplier with who# the business has a !or#albusiness agree#ent

dials the supplier>s co#puter and places the order

he echange is co#pletely auto#ated. Eo hu#an intervention or #anage#ent

(<


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E"' $!stem

urchases$yste#

%*"

ranslation

$o!tware

%*"

ranslation

$o!tware

Co##unications

$o!tware

Co##unications

$o!tware

/ther

Mailbo

/ther

Mailbo

Co#pany

A>s #ailbo

Co#pany

)>s #ailbo

$ales /rder $yste#(pplication$oftware

(pplication$oftware

*irect Connection

V(0

Compan! ( Compan! ,

-0


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eengineering sing the 'nternet

ypically, no !or#al business agree#ents eist asthey do in %*".

Most orders are #ade with credit cards. Mainly done with e4#ail syste#s, and thus a

turnaround ti#e is necessary "ntelligent agents are needed to eli#inate this ti#e lag.

$ecurity and control over data is a concern with"nternet transactions.

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C,($ Control Considerations

Authori7ation 4 in real4ti#e syste#s,

authori7ations are auto#ated

rogra##ed decision rules #ust be closely

#onitored. $egregation o! unctions 4 consolidation o!

tas:s by the co#puter is co##on

rotect the co#puter progra#s

Coding, processing, and #aintenance should be

separated.

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$upervision 4 in /$ syste#s, the cash register>sinternal tape or database is an added !or# o!supervision

Access Control 4 #agnetic records are vulnerable to

both authori7ed and unauthori7ed eposure andshould be protected

Must have li#ited !ile accessibility Must sa!eguard and #onitor co#puter progra#s

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(ccounting ecords 4 rest on reliability andsecurity o! stored digitali7ed data Accountants should be s:eptical about the accuracy o!

hard4copy printouts. ,ac1ups 4 the syste# needs to ensure that bac:ups o!

all !iles are continuously :ept

'ndependent Verification B consolidatingaccounting tas:s under one co#puter progra# canre#ove traditional independent veri!ication controls.o counter this proble# per!or# batch control balancing a!ter each run produce #anage#ent reports and su##aries !or end

users to review

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%C+,ased (ccounting $!stems

Dsed by s#all !ir#s and so#e large decentrali7ed!ir#s

Allow one or !ew individuals to per!or# entireaccounting !unction

Most syste#s are divided into #odules controlled by a#enu4driven progra# general ledger

inventory control

payroll

cash disburse#ents purchases and accounts payable

cash receipts

sales order


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%C Control 'ssues

$egregation of "uties 4 tend to be inade@uate andshould be co#pensated !or with increased supervision,

detailed #anage#ent reports, and !re@uent independent

veri!ication

(ccess Control 4 access controls to the data stored onthe co#puter tends to be wea: #ethods such as

encryption and dis: loc:ing devices should be used

(ccounting ecords 4 co#puter dis: !ailures causedata losses eternal bac:up #ethods need to bei#ple#ented to allow data recovery

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