Chapter 4: REVENUE CYCLE

REVENUE CYCLE DATABASES

● Master Files
○ Customer master file
○ AR master file
○ Merch. Inv. master file
● Transaction and Open Document files
○ Sales order transaction file
■ Open sales order transaction file
○ Sales invoice transaction file
○ Cash receipts transaction file
○ Other files
■ Shipping and price ■ Sales history file
data reference file ■ Cash receipts history
■ Credit reference file file
■ Salesperson file ■ AR reports file

REVENUE CYCLE ACTIVITIES

A. Sales Order Procedure
The sales order procedure involves several interconnected tasks that ensure the
accurate processing, shipping, and billing of customer orders.
1. Receive Order: The process starts when a customer places an order, which may arrive
through various channels. This order is transcribed into a formal sales order capturing
key details (customer info, item details, quantities, etc.) and is stored in the open order
file (order in the market that has not yet been filled and is still working).
2. Check Credit: The customer’s creditworthiness is evaluated.
3. Pick Goods: The warehouse receives a stock release (picking ticket) to locate and
pick the items from inventory. If there are any shortages, a back-order record (customers
are pre-ordering a product that is temporarily unavailable) is created.
4. Ship Goods: The shipping department reconciles the picked goods with documents
such as the packing slip, shipping notice, and stock release to verify the order. The
shipping notice is a separate document prepared within the shipping function. Once
confirmed, goods are shipped, and a bill of lading (formal contract between the seller
and the shipping company (carrier) to transport the goods to the customer. This
document establishes legal ownership and responsibility for assets in transit.) is
prepared, transferring ownership to the carrier. Shipping details are logged.
5. Bill Customer: The billing process starts after shipment is confirmed. A sales invoice is
prepared. S.O. (Sales Order) pending file is used to store the sales order (invoice
copy) from the receive-order task until receipt of the shipping notice. billing should wait
until. items are shipped. Journal Voucher File a file that stores all journal entries used
to update the general ledger.
 6. Update Inventory Records
7. Update Accounts Receivable
8. Post to General Ledger: Journal vouchers from billing and inventory control are posted
to ledger. Independent verifications help detect errors.

B. Sales Return Procedure

The sales return procedure outlines the steps for processing and approving customer
returns and issuing credit. Reason for return: The company shipped the customer the wrong
merchandise, The goods were defective, The product was damaged in shipment and The buyer
refused delivery because the seller shipped the goods too late or they were delayed in transit.
1. Prepare Return Slip: When items are returned, the receiving department inspects and
counts them, then prepares a return slip.
2. Prepare Credit Memo: A sales employee prepares a credit memo based on the return
slip. This document authorizes a refund or credit to the customer.
3. Approve Credit Memo
4. Update Sales Journal
5. Update Inventory and AR Records
6. Update General Ledger

C. Cash Receipts Procedure

The cash receipts procedure covers receiving and processing customer payments for
outstanding accounts receivable.
1. Open Mail and Prepare Remittance Advice: Mailroom staff open customer payments
and remittance advice (The remittance advice is a form of a turnaround document),
which contain account details. Checks are endorsed, and a remittance list is prepared
with three copies: depositing, accounts receivable, and reconciliation.
2. Record and Deposit Checks: The cash receipts employee reconciles the checks with
the remittance list to ensure accuracy.. A deposit slip is prepared and forwarded to the
bank with the checks. After deposit, the bank validates the deposit slip and returns it for
reconciliation.
3. Update Accounts Receivable
4. Update General Ledger: The general ledger is updated using journal vouchers based
on the copy of pre-list, deposit slips, and related journal vouchers.

REVENUE CYCLE CONTROLS / 6 CLASSES OF INTERNAL CONTROL ACTIVITIES

1. Transaction Authorization / Authorization Controls
Authorization should take place when:
● A sale is made on credit (authorization)
● A cash refund is requested (authorization)
● Posting a cash payment received to a customer’s account (cash prelist)
2. Segregation of Duties/Functions
● Transaction Authorization should be separate from transaction processing
 ● Asset Custody should be separate from asset record-keeping: Inventory
control and accounts receivable keep records, while warehouse and cash
receipts departments maintain custody.
● The organization should be so structured that the perpetration of a fraud
requires collusion between two or more individuals: Subsidiary ledgers,
journals, and the general ledger are maintained separately. This separation
requires collusion for fraud to occur, making it easier to detect and prevent fraud.
3. Supervision
Often used when unable to enact appropriate segregation of duties.
● Mail Room: handles incoming mail, especially customer payments. It processes
checks and remittance documents, logs payments, and routes checks for deposit
while sending remittance info to update accounts.
4. Accounting Records
Possible to track transactions through the following:
● Prenumbered Documents
● Special Journals
● Subsidiary Ledgers
● General Ledger
● Files
○ Open sales order file shows the status of customer orders.Shipping log
specifies orders shipped during the period.
○ Credit records file provides customer credit data.
○ Sales order pending file contains open orders not yet shipped or billed.
○ Back-order file contains customer orders for out-of-stock items.
○ Journal voucher file is a compilation of all journal vouchers posted to the
general ledger.
5. Access Controls
Key measures include:
● Physical Security: Warehouses are secured with fences, alarms, and guards,
while cash is secured in safes or night deposit boxes, and deposited daily.
● Access to Records: Access to sensitive documents like sales orders, AR
ledgers, and cash accounts is restricted to prevent manipulation. Unauthorized
access to these records could enable fraud or asset theft.
6. Independent Verification
- Independent verification controls are used to review the accuracy and completeness
of tasks performed in different departments.
● Shipping Function: Verifies that the goods sent to customers match the stock
release and packing slip.
● Billing Function: Reconciles the sales order with the shipping notice to ensure
correct billing.
● General Ledger Function: Reconciles journal vouchers and summaries from
different areas, such as sales, inventory, AR, and cash receipts, ensuring that
discrepancies are identified before posting to the general ledger.
REVENUE CYCLE SYSTEMS
● PHYSICAL SYSTEMS
● MANUAL SYSTEMS
AUTOMATING THE REVENUE CYCLE
● Authorization and data access can be performed through computer screens
● Revenue cycle programs include: formatted screens for collecting data, edit
checks on the data entered, instructions for processing and storing the data,
security procedures, steps for generating and displaying output.
● To understand file, need to consider record design and layout
● COMPUTER-BASED ACCOUNTING SYSTEMS (CBA)
2 Extremes of CBA’s
1. Automation - use technology to improve efficiency and effectiveness.
a. Automating sales order with Batch Technology
i. Sales order file has 3 Fields:
1. Sales order number (primary key)
2. Account number (secondary key)
3. Inventory number (secondary key)
b. Automated Cash Receipts Procedures (naturally batch system)
i. Mail Room
ii. Cash receipt Department
iii. AR Department
iv. Data Processing Department
2. Reengineering - use technology to restructure business processes and firm
organization.
a. Reengineering sales order processing with Real-time Technology
i. Real-Time - A system that processes data and transactions
immediately as they occur.
1. Advantage
a. Shortens the cash cycle of the firm by reducing the
time between the order date and billing date.
b. Better inventory management which can lead to a
competitive advantage
c. Fewer clerical errors, reducing incorrect items
being shipped and bill discrepancies
d. Reduce the amount of expensive paper documents
and their storage cost
ii. Batch - A system that processes data and transactions in groups
(batches) at scheduled times, rather than immediately
b. Reengineered Cash Receipts - The reengineering of cash receipts
procedures aims to enhance efficiency, reduce costs, and mitigate control
risks in the cash handling process. Mail Room is a frequent target for
reengineering.
 ● POINT-OF-SALE SYSTEMS
○ used extensively in RETAIL ORGANIZATIONS. The customers personally pick the
items they wish to buy and carry them to the checkout location, where the
transaction begins.
○ UNIVERSAL PRODUCT CODE (UPC) - barcode assigned to each product type and
scanned by the laser light scanner (primary key). The POS system is connected
online to the inventory file from which it retrieves product price data and displays this
on the clerk’s terminal.

Reengineering using Electronic Data Interchange (EDI)

- Expedite routine transactions between manufacturers and wholesalers, and wholesalers
and retailers (exclusive business arrangement between trading partners). This system
requires little or no human involvement.

Reengineering using the Internet

- Internet sales are credit card transactions. There is NO exclusive business arrangement
between trading partners and can be connected to THOUSANDS OF POTENTIAL
BUSINESS PARTNERS

CBAs CONTROL CONSIDERATIONS

● Authorization - authorization in real-time systems are automated
● Segregation of Duties - coding, processing, and maintenance should be separated
● Supervision - cash registers internal tape
● Access Controls - must have limited file accessibility
● Accounting Records - reliability and security of stored digital data and needed backups
● Independent Verification - produce management reports and summaries for end users

● PC-BASED ACCOUNTING SYSTEMS

- Used by small firms and some large decentralized firms.
- Allow one or few individuals to perform entire accounting function
- Menu-Driven Control Programs
a. General Ledger Module e. Purchases and Accounts
b. Inventory Control Module Payable Module
c. Payroll Module f. Cash Receipts Module
d. Cash Disbursement Module g. Sales Order Module

PC CONTROL ISSUES
a. Segregation of Duties - increased supervision, detailed management reports, and
frequent independent verification
b. Access Control - encryption and disk locking devices should be used
c. Accounting Records - external backup methods
d. Other
i. Two factor Authentication
ii. Automatic Logout for 3 incorrect passwords
iii. Changing passwords every 90 days
iv. Automatic security patches (Security Updates)