Chapter 4:

The Revenue
Cycle
Gwyneth L. Beriña
Maria Jhanelle B. Cancejo
Trixie Anne H. Ilao
Overview of Revenue Cycle
In this section we examine the revenue
cycle conceptually. Using data flow diagrams
(DFDs) as a guide, we will trace the sequence of
activities through three processes that constitute
the revenue cycle for most retail, wholesale, and
manufacturing organizations.

These are:
• Sales order procedures
• Sales return procedures
• Cash receipts procedures
Sales order procedures include the tasks
involved in receiving and processing a
customer order, filling the order and shipping
products to the customer, billing the customer
at the proper time, and correctly accounting for
the transaction.

Receive Order- The sales process begins with

the receipt of a customer order indicating the
type and quantity of merchandise desired. At
this point, the customer order is not in a standard format and may or
may not be a physical document. Orders may arrive by mail, by
telephone, or from a field representative who visited the customer.
Check Credit- Before processing the order
further, the customer’s creditworthiness needs
to be established. The circumstances of the sale
will determine the nature and degree of the
credit check.

Pick Good-. The receive order activity

forwards the stock release document (also
called the picking ticket)
to the pick goods function, in the warehouse. This document
identifies the items of inventory that must be located and picked
from the warehouse shelves. It also provides formal authorization
for warehouse personnel to release the specified items.
Ship Goods- The packing slip will ultimately
travel with the goods to the customer to
describe the contents of the order. It will later
be forwarded to the billing function as evidence
that the customer’s order was filled and
shipped.

Bill Customer- The shipment of goods marks the completion of the

economic event and the point at which the customer should be
billed. Billing before shipment encourages inaccurate record
keeping and inefficient operations. When the customer order is
originally prepared, some details such as inventory availability,
prices, and shipping charges may not be known with certainty.
Sales journal is a special journal used for
recording completed sales transactions. The
details of sales invoices are entered in the
journal individually. At the end of the period,
these entries are summarized into a sales
journal voucher, which is sent to the general
ledger task for posting to the following
accounts:
DR CR
Accounts Receivable—Control XXXX.XX
Sales XXXX.XX
Update Inventory Records- The inventory control
function updates inventory subsidiary ledger accounts
from information contained in the stock release document.

Update Accounts Receivable- Customer records in the

accounts receivable (AR) subsidiary ledger are updated
from information the sales order (ledger copy) provides.

It contains the following data: customer name; customer address; current balance;
available credit; transaction dates; invoice numbers; and credits for payments,
returns, and allowances.

Post to General Ledger- By the close of the transaction processing period, the
general ledger function has received journal vouchers from the billing and
inventory control tasks and an account summary from the AR function.
Sales Return Procedures
An organization can expect that a certain
percentage of its sales will be returned. This
occurs for a number of reasons, some of which
may be:
• The company shipped the customer the wrong
merchandise.
• The goods were defective.
• The product was damaged in shipment.
• The buyer refused delivery because the seller
shipped the goods too late or they were
delayed in transit.
Prepare Return Slip- When items are
returned, the receiving department employee
counts, inspects, and prepares a return slip
describing the items. The goods, along with a
copy of the return slip, go to the warehouse to
be restocked. The employee then sends the
second copy of the return slip to the sales
function to prepare a credit memo.

Prepare Credit Memo- Upon receipt of the return slip, the sales
employee prepares a credit memo. This document is the
authorization for the customer to receive credit for the merchandise
returned.
Approve Credit Memo- The credit manager evaluates
the circumstances of the return and makes a judgment to
grant (or disapprove) credit. The manager then returns
the approved credit memo to the sales department.

Update Sales Journal- Upon receipt of the approved

credit memo, the transaction is recorded in the sales
journal as a contra entry. The credit memo is then
forwarded to the inventory control function for posting.

At the end of the period, total sales returns are summarized in a journal voucher
and sent to the general ledger department.

Update Inventory and AR Records- The inventory control function adjusts the
inventory records and forwards the credit memo to accounts receivable, where the
customer’s account is also adjusted.
Update General Ledger- Upon receipt of the
journal voucher and account summary
information, the general ledger function
reconciles the figures and posts to the following
control accounts:
DR CR
Inventory—Control XXX.XX
Sales Returns and Allowances XXXX.XX
Cost of Goods Sold XXX.XX
Accounts Receivable-Control XXXX.XX
Cash Receipts Procedures
The sales order procedure described a credit
transaction that resulted in the establishment of
an account receivable. Payment on the account
is due at some future date, which the terms of
trade determine. Cash receipts procedures
apply to this future event. They involve
receiving and securing the cash; depositing the
cash in the bank; matching the payment with
the customer and adjusting the correct account;
and properly accounting for and reconciling the
financial details of the transaction.
Open Mail and Prepare Remittance Advice- A mail
room employee opens envelopes containing customers’
payments and remittance advices. Remittance advices
contain information needed to service individual
customers’ accounts including payment date, account
number, amount paid, and customer check number.
Record and deposits check - The employee records the check in the cash receipts
journal including cash sales, miscellaneous cash receipts, and cash received on
account, are recorded in the cash receipts journal. Next, the clerk prepares a bank
deposit slip showing the amount of the day’s receipts and forwards this along with
the checks to the bank. Upon deposit, the bank teller validates the deposit slip and
returns it to the company for reconciliation. At the end of the day, the cash receipts
employee summarizes the journal entries and sends the following journal voucher
entry to the general ledger function.
Update Accounts Receivable- The remittance advices
are used to post to the customers’ accounts in the AR
subsidiary ledger. Periodically, the changes in account
balances are summarized and forwarded to the general
ledger function.

Update General Ledger- Upon receipt of the journal

voucher and the account summary, the general ledger
function reconciles the figures, posts to the cash and AR
control accounts, and files the journal voucher.

Reconcile Cash Receipts and Deposits- Periodically (weekly or monthly), a clerk

from the controller’s office (or an employee not involved with the cash receipts
procedures) reconciles cash receipts by comparing the following documents: (1) a
copy of the prelist, (2) deposit slips received from the bank, and (3) related
journal vouchers.
Physical Systems of Revenue
Cycle
This begins with a review of manual procedures
and then moves on to deal with several forms of
computer-based systems. We do so for three
reasons:
1. Manual systems serve as a visual training aid to promote a better
understanding of key concepts.
2. Manual system flowcharts reinforce the importance of segregation
of duties through clearly defined departmental boundaries.
3. Manual systems are a fundamental component of the framework for
viewing technology innovations.
Manual Systems of Revenue
Cycle
The purpose of this section is to support the
system concepts presented in the previous
section with models depicting people,
organizational units, and physical documents
and files. This section should help you envision
the segregation of duties and independent verifications, which are
essential to effective internal control regardless of the technology in
place.
• Sales order processing
• Sales revenue procedures
• Cash receipts procedures
Sales Order Processing
SALES DEPARTMENT – customer
contacting the sales department by telephone,
mail or in person

CREDIT DEPARTMENT APPROVAL –

provide independence to the credit
authorization process

WAREHOUSE PROCEDURE – ship the merchandise as soon

after the credit approval as possible
Sales Order Processing
THE SHIPPING DEPARTMENT – shipping
clerk reconciles the product received from the
warehouse with the shipping notice copy.

THE BILLING DEPARTMENT – billing

clerk compiles the relevant facts about the
transaction and bills the customer.

ACCOUNTS RECEIVABLE, INVENTORY CONTROL AND

GENERAL LEDGER DEPARTMENTS– the AR and inventory
control clerks update their respective subsidiary ledgers.
Sales Return Procedures
RECEIVING DEPARTMENT – personnel
receive, count, inspect for damage and send
returned products to the warehouse.

SALES DEPARTMENT – upon receipt of the

return slip, the clerk prepares a credit memo.

PROCESSING THE CREDIT MEMO – billing records a contra

entry into sales return, and allowance journal inventory control
debits the inventory records to reflect the return of goods.
Cash Receipts Procedures
MAIL ROOM – customer payments and
remittance advices arrive at the mail room where
the envelopes are opened.

CASH RECEIPTS – cashier records the check

in the cash receipts journal and promptly sends
them to the bank accompanied by 2 deposit slip.

ACCOUNTS RECEIVABLE – AR department uses the remittance

advices to reduce the customer’s account balances.
Cash Receipts Procedures
GENERAL LEDGER DEPARTMENT – the
general ledger clerk reconciles the information
and posts to the control accounts.

CONTROLLER’S OFFICE – someone from

controller’s office periodically performs a bank
reconciliation by comparing deposit slips
returned from the bank, account summaries used
to post the accounts and journal vouchers.
Computer-based Accounting
Sytems
In this section we review:
• Automating Sales Order Processing with
Batch Technology
• Reengineering Sales Order Processing with
Real-Time Technology
• Point-of-Sale (POS) Systems
• Reengineering using Electronic Data
Interchange (EDI)
• Reengineering using Internet
• PC-based Accounting System
AUTOMATION
• involves using technology to improve the
efficiency and effectiveness of a task
• simply replicates the traditional process that
it replaces

REENGINEERING
• involves radically rethinking the business
process and the work flow
• improve operational performance and reduce
costs by identifying and eliminating non
value-added tasks
Automating Sales Order Processing
with Batch Technology
SALES ORDER NUMBER
• primary key (PK) because it is the only field
that uniquely identifies each record in the file
• provides link between digital records and
physical source document

ACCOUNT NUMBER and INVENTORY NUMBER

• both secondary keys (SK) as neither of these uniquely identifies
sales order records
• locate the corresponding records in the AR subsidiary and
inventory master files
ADVANTAGES
• Cost Savings
• Error Reduction
DISADVANTAGE
• Loss of Flexibility
• Lack of Jobs

KEYSTROKE: Arrival of batches of shipping notices from

shipping department
EDIT RUN: Sales order system is executed
UPDATE PROCEDURES: The update program posts the first
transaction using SK
SALES DEPARTMENT
• Customer contacting the sales department
and placing an order
CREDIT DEPARTMENT APPROVAL
• Sales department releases copies of the sales
order
WAREHOUSE PROCEDURES
• Warehouse clerk receives the stock release
copy
SHIPPING DEPARTMENT
• Shipping clerk reconciles the products
received from the warehouse
Reengineering Sales Order Processing
with Real-Time Technology
TRANSACTION PROCESSING PROCEDURES
SALES PROCEDURES
• Sales clerk receiving orders from customers and
process separately each as it is received
WAREHOUSE PROCEDURES
• Warehouse clerk’s terminal immediately produces a hard-copy
printout of the electronically transmitted stock release document
SHIPPING DEPARTMENT
• Shipping clerk reconciles the goods, the stock release document
and the hard-copy packing slip produced on the terminal
ADVANTAGES OF REAL-TIME
PROCESSING
1. Real-time processing greatly shortens the
cash cycle of the firm.
2. Real-time processing can give the firm a
competitive advantage in the marketplace.
3. Manual procedures tend to produce clerical
errors, such as incorrect account numbers,
invalid inventory numbers and price-quantity
extension miscalculations.
4. Real-time processing reduces the amount of
paper documents in a system.
AUTOMATED CASH RECEIPTS PROCEDURES
MAIL ROOM
• Mail room clerk separates the checks
and remittances advices and prepares list.
CASH RECEIPTS DEPARTMENT
• Cash receipts clerk reconciles the checks
and remittances list and prepares deposit slips.
ACCOUNTS RECEIVABLE DEPARTMENT
• AR clerk receives and reconciles the remittances advices and list.
DATA PROCESSING DEPARTMENT
• The system produces a transaction listing that the AR clerk will
reconcile against the remittance list.
REENGINEERED CASH RECEIPTS
PROCEDURES
1. Mail room clerk places batches of unopened
envelopes into a machine that automatically
opens them and separates their contents into
remittance advices and checks.
2. Checking process is performed internally,
and once the envelopes are opened, mail
room staff cannot access their contents.
3. The system prepares a computer-readable file of cash receipts,
which is then posted to the appropriate customer and general
ledger accounts.
Point-of-Sale (POS) Systems
DAILY PROCEDURES
1. Checkout clerk scans the universal product
code (UPC) label on the items being
purchased with a laser light scanner.
2. The system automatically calculates taxes,
discounts and the total for the transaction.
3. The clerk enters the transaction into the POS system via the
register’s keypad and a record of the sale is added to the sales
journal in real time.
4. The supervisor unlocks the register and retrieve the internal tape.
5. When contents are reconciled, the cash receipt clerk prepares a
cash reconciliation form and gives one copy to the sales clerk.
END-OF-DAY PROCEDURES
• Cash receipts clerk prepares a three-part
deposit slip for the total amount of cash
received.
• Prepares a journal voucher and posts to the
general ledger account as follows:
DR CR
Cash XXXX.XX
Cash Over/Short XX.XX
Accounts Receivable (Credit Card) XXX.XX
Cost of Goods Sold XXX.XX
Sales XXXX.XX
Inventory XXX.XX
Reengineering using EDI
• The customer’s computer is connected
directly to the seller’s computer via telephone
lines.
• Represents a business arrangement between
the buyer and seller in which they agree.
• Requires a little or no human involvement.
• The exchange is completely automated.
• Poses unique control problems for an
organization.
Reengineering using Internet
• Entering the seller’s home page address into
the internet communication program from a
personal computer.
• Customer’s order and credit card information
is attached to the seller’s email file.
• Employee reviews the order, verifies credit,
and enters the transaction into the seller’s
system for processing.
PC-based Accounting Systems
SEGGREGATION OF DUTIES
• PC systems tend to have inadequate
segregation of duties
ACCESS CONTROL
• PC systems generaly provide inadequate
control over access to data files
ACCOUNTING RECORDS
• Data losses that threaten accounting records
and audit trails plague the PC environment
Concludin
g Remarks
Thank you
for
listening❤️