Accounting Information System - Post to General Ledger – The general

ledger function has received journal

Chapter 4: Revenue Cycle vouchers from the billing and inventory
The Conceptual System control tasks and an account summary
 Overview of Revenue Cycle Activities from the AR function. (Db – A/R, COGS, Cr
– Inventory Control, Sales)
A. Sales Order Procedures
 Include the tasks involved in receiving B. Sales Return Procedures
and processing a customer order,  The company shipped the customer the
filing the order and shipping products wrong merchandise.
to the customers at the proper time  The goods were defective.
and correctly accounting for  The product was damaged in shipment.
transactions.  The buyer refused delivery because the
- Receive Order – begins with the receipt seller shipped the goods too late, or they
of a customer order indicating the type were delayed in transit.
and quantity of merchandise desired. - Prepare return slip – the receiving
- Check Credit – the customer’s department employee counts, inspect,
creditworthiness needs to be established. and prepares a return slip describing the
- Pick Goods – This document identifies items.
the items of inventory that must be - Prepare Credit Memo – Upon receipt of
located and picked from the warehouse the return slip, the sales employee
shelves. prepares a credit memo. This document
- Ship Goods – the shipping department is the authorization for the customer to
receives the packing slip and shipping receive credit for the merchandise
notice from the receive order function. returned.
- Bill Customers – The shipment of goods - Approve Credit Memo – the credit
marks the completion of the economic manager evaluates the circumstances of
event and the point at which the the return and makes a judgement to
customer should be billed. grant (or disapprove) credit.
- Update Inventory Records – the - Update Sales Journal – Upon receipt of
inventory control function updates the approved credit memo, the
inventory subsidiary ledger accounts from transaction is recorded in the sales
information contained in the stock journal as a contra entry.
release document. (Db – COGS, Cr – - Update Inventory and AR Records – the
Inventory Control) inventory control function adjusts the
- Update Accounts Receivable – Customer inventory records and forwards the credit
records in the accounts receivable (AR) memo to accounts receivable.
subsidiary ledger are updated from - Update General Ledger – Upon receipt of
information the sales order (ledger copy) the journal voucher and account
provides. summary information.
C. Cash Receipts Procedures
  They involve receiving and securing - Return Policy – Credit approval is
the cash, depositing the cash in the generally a credit department function,
bank. that department authorizes the
- Open Mail and Prepare Remittance processing of sales returns as well.
Advice – Remittance advices contain - Remittance List (Cash Prelist) – the cash
information needed to service individual’s prelist provides a means for verifying that
customer’s accounts. customers checks and remittances
- Record and Deposits Checks – A cash advices match in amount.
receipts employee verifies the accuracy
and completeness of the checks against F. Segregation of Duties
the prelist. 1. Transaction authorization should be
- Update Accounts Receivable – the separate from transaction processing.
remittance advices are used to post to 2. Asset custody should be separate from
the customers’ account in the AR the task of asset record keeping.
subsidiary ledger. 3. The organization should be structured so
- Update General Ledger – Upon receipt of that the perpetration of fraud requires
the journal voucher and the account collusion between two or more
summary. individuals.
- Reconcile Cash Receipts and Deposits – a
clerk from the controller’s office (or an G. Supervision
employee not involved with the cash  These firms must rely on supervision
receipts procedures) reconciles cash as a form of compensating control. By
receipts. closely supervising employees who
perform potentially incompatible
D. Revenue Cycle Controls functions, a firm can compensate for
this exposure.

H. Accounting Records
- Prenumbered Documents –
Prenumbered documents are
sequentially numbered by the printer and
allow every transaction to be identified
uniquely.
- Special Journals – By grouping similar
transaction together into special journals,
the system provides a concise record of
an entire class of events.
E. Transaction Authorization - Subsidiary Ledgers – two subsidiary
- Credit Check – Credit checking of ledgers are used for capturing transaction
prospective customers is a credit event details in the revenue cycle: the
department function. inventory and A/R subsidiary ledgers.
- General Ledgers – control accounts are through clearly defined departmental
the basis for FS preparation. boundaries.
- Files 3. Manual systems are a fundamental
a. Open sales order file shows the status component of the framework for viewing
of customers order. technology innovation.
b. Shipping log specifies orders shipped
during the period  Manual Systems
c. Credit records file provides customer
credit data  Sales Order Processing
d. Sales order pending file contains - Sales Department – It records the
open orders not yet shipped or billed essential details on a sales order.
e. Back-order file contains customer - Credit Department Approval - to provide
order for out-of-stock items. independence to the credit authorization
f. Journal voucher file is a compilation process.
of all journal vouchers posted to the - Warehouse Procedures – It records the
general ledger. inventory reduction in the stock records.
- The Shipping Department – reconciles
I. Access control the products received from the
 Prevent and detect authorized and warehouse with shipping notice copy of
illegal access to the firm’s assets. the sales order received earlier.
 Warehouse security, such as - The Billing Department – it compiles the
fences, alarms, and guards relevant facts about the transaction bills
 Depositing cash daily in the the customers.
bank - Accounts Receivable, Inventory Control,
 Using a safe or night deposit and General Ledger Departments – They
for cash prepare journal vouchers and account
 Locking cash drawers and summary, which they send to the general
safes in the cash receipts ledger department for reconciliation and
department. posting to the control accounts.

J. Independent Verification  Sales Return Procedures

 To verify the accuracy and - Receiving Department – the sales return
completeness of tasks functions in process begins in the receiving
the process perform. department, where personnel receive,
count, inspect for damage, and send
Physical Systems returned products to the warehouse.
1. Manual systems serve as a visual training - Sales Department – preparing credit
aid to promote a better understanding of memo.
key concepts. - Processing the Credit memo – the
2. Manual system flowcharts reinforce the objective of the sales return system is to
importance of segregation of duties reverse the effects of the original sales
transaction.
 - Sales Department – The sales process
 Cash Receipts Procedures begins with a customer contacting the
- Mail Room – customer payments and sales department and placing an order.
remittance advices arrive at the mail - Credit Department Approval – when
room, where the envelopes are opened. credit is approved, the sales department
- Cash Receipts – the cashier records the releases copies of the sales order to the
checks in the cash receipts journal and billing, warehouse, and shipping
promptly sends them to the bank. departments.
- Accounts Receivable – it uses the - Warehouse Procedures – the warehouse
remittances advices to reduces the clerk receives the stock release copy of
customer’s account balance consistent the sales order and uses this to pick the
with the amount paid. goods.
- General Ledger Department – Upon - The shipping Department – the shipping
receipt of the journal voucher and clerk reconciles the products received
account summary from cash receipts and from the warehouse with the shipping
A/R. notice.
- Controller’s Office – Because cash is a
liquid asset and subject to  Keystroke
misappropriation, additional controls are  Automated element of the system
necessary. begins with the arrival of batches of
- Concluding Remarks shipping notices from the shipping
1. Notice how manual systems generate department.
a great deal of hard-copy (paper)  These documents are verified copies
documents. of the sales orders that contain
2. For purposes of internal control, information about the customer and
many function such as the billing, items shipped.
A/R, inventory control, cash receipts,  The keystroke clerk converts the
and the general ledger are located in hard-copy shipping notices to digital
physically separate departments. form to produce a transaction file of
sales order.
 Computer-Based Accounting Systems
1. Automation involves using technology to  Edit Run
improve the efficiency and effectiveness  The system is composed of a series of
of a task. programs runs.
2. Reengineering involves radically  The edit program first validates all
rethinking the business process and the transaction records in the batch by
workflow. performing clerical and logical tests
on the data.
 Automating sales order processing with  The edit program recalculates the
batch technology batch control totals to reflects any
changes due to the removal of error
records.
 - Shipping Department – the clerk then
 Update Procedures selects a carrier and prepares the goods
 The update program posts the first for shipment.
transaction to the corresponding
inventory and AR subsidiary records using  General Ledger Update Procedures
the secondary keys to locate the records  The batch update program searches
directly. the open sales order file for records
 This system generates a number of marked closed and updates the
management reports, including sales following general ledger accounts:
summaries, inventory status reports, Inventory, Control, Sales, A/R Control,
transaction listings, journal voucher and Cost of Goods Sold.
listing, and budget and performance
reports.  Advantages of Real-Time Processing
1. Real-time processing greatly shortens the
 Reengineering Sales Order Processing cash cycle of the firm.
with Real-Time Technology 2. Real-time processing can give the firm a
competitive advantage in the
 Transaction Processing Procedures marketplace.
- Sales Procedures – sales clerk receiving 3. Manual procedures tend to produce
orders from customers process each clerical errors, such as incorrect account
transaction separately as it is received. numbers, invalid inventory numbers, and
1. The system accesses the inventory price-quantity extension miscalculations.
subsidiary file and checks the 4. Real-time processing reduces the amount
availability of the inventory. of paper documents in a system.
2. If credit is approved, the system
updates the customer’s current  Automated Cash Receipts Procedures
balance to reflect the sales and  Cash receipts procedures are natural
reduces inventory by the quantities batch systems.
of items sold to present an accurate - Mail Room – Separate the checks and
and current picture of inventory on remittance advices and prepares a
hand and available for sale. remittance list.
3. The system automatically transmit a - Cash Receipts Department – reconciles
digital stock release document to the the checks and the remittance list and
warehouse, a digital shipping notice prepares the deposits slips.
to the shipping department, and - Accounts Receivable Department – The
records the sale in the open sales A/R clerk receives and reconciles the
order file. remittances advice and remittances list.
- Data Processing Department – The batch
- Warehouse Procedures – The warehouse program reconciles the journal voucher
clerk’s terminal immediately produces a with the transaction file of cash receipts
hard-copy printout of the electronically
transmitted.
 and updates the A/R subsidiary and the 5. The cash receipts clerk prepares a cash
general ledger control account. reconciliation form and gives one copy to
the sales clerk as a receipt for cash
 Reengineered Cash Receipts Procedures remitted and records cash received and
 Some organizations have cash short/over in the cash receipts
reengineered their mail room journal.
procedures to effectively reduce the
risk and the cost.  End-of-Day Procedures
 The system uses special transaction  The cash receipts clerk prepares a
validation software that employs three-part deposit slip for the total
artificial intelligence capable of amount of the cash received.
reading handwriting.  Db – Cash, Cash Over/Short, A/R,
 Organizations with sufficient COGS. Cr – Sales, Inventory
transaction volume to justify the
investment in hardware and software  Reengineering Using EDI
have the advantages of improved  Doing Business via EDI
control and reduced operating costs.  Electronic data interchange (EDI)
technology was devised to expedite
 Point-of-Sale (POS) Systems routine transactions between
 POS systems are used extensively in manufacturers and wholesalers and
grocery stores, department stores, between wholesalers and retailers.
and other types of retail  It represents a business arrangement
organizations. between the buyer and seller in
which they agree, in advance, to the
 Daily Procedures terms of their relationship.
1. The checkout clerk scans the universal  EDI poses unique control problems
product code (UPC) label on the items for an organization.
being purchased with a laser light
scanner.  Reengineering Using the Internet
2. When all the UPCs are scanned, the  Doing Business on the Internet
system automatically calculates taxes,  Internet sales are credit card
discount, and the total for the transactions.
transaction.  An employee reviews the order, verifies
3. The clerk enters the transaction into the credit, and enters the transaction into the
POS system via the register’s keypad, and seller’s system for processing in the
a record of the sale is added to the sales normal way.
journal in real time.
4. At the end of the clerk’s shift, a  Control Considerations for Computer-
supervisor unlocks the register and Based Systems
retrieves the internal tape.
 Authorization
 Transaction authorization in real-time - File Backup – The physical loss,
processing systems is an automated task. destruction, or corruption of digital
 In POS systems, the authorization process accounting records is a serious concern.
involves validating credit card charges The data processing department should
and establishing that the customer is the perform separate file-backup procedures.
valid user of the card.
 Independent Verification
 Segregation of Duties  Restored somewhat by performing
 Tasks that would need to be segregated batch control balancing after each
in manual systems are often consolidated run and by producing management
within computer programs. reports and summaries for end users
to review.
 Supervision
 We examine the importance of PC-Based Accounting Systems
supervision over the cash-handling  PC applications tend to be general-
procedures in the mail room. purpose systems that serve a wide
 In a POS system, where both inventory range of needs.
and cash are at risk, supervision is  This strategy allows software vendors
particularly important. to mass-produce low-cost and error-
free standard products.
 Access Control  Their modular design provides users
 In computerized systems, digital with some degree of flexibility in
accounting records are vulnerable to tailoring systems to their specific
unauthorized and undetected access. needs.
 This may take the form of an attempt  The central control program provides
at fraud, an act malice by a the user interface to the system.
disgruntled employee, or an honest  Commercial Systems usually have
accident. fully integrated modules.
 Because POS systems involve cash
transactions, the organization must  PC Control Issues
restrict access to cash assets.  Create unique control problems for
 Inventory in the POS system must accountants. The risks arise from
also be protected from unauthorized inherent weaknesses in the PC
access and theft. environment.

 Accounting Records  Segregation of Duties

- Digital Journals and Ledgers – Digital  PC systems tend to have inadequate
journals and master files are the basis for segregation of duties.
financial reporting and many internal  In a manual system, this degree of
decisions. authority would be similar to
assigning accounts receivable,
 account payable, cash receipts, and
cash disbursements responsibilities
to the same person.

 Access Control
 PC systems generally provide
inadequate control over access to
data files.

 Accounting Records
 Data losses that threaten accounting
records and audit trail plague the PC
environment.