Chapter 4 The Revenue Cycle Accounting Accounting Information Information Systems, Systems, 5 5th edition James A. Hall
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S a le s O rd e r $ C re d it / C u s to e r Serice *
R E V E N U E C Y C LE (S U B S Y S T E M ) C a s " R e c e i# t s / C o lle c tio n s %
S"i##ing
B illin g / A c c o u n ts R e c e i a ! le & /'
Journal ouchers/0ntries Ho1 do 1e *et them2 3 illin* epartment prepares a -ournal voucher6 Accounts Receivable Sales CR
DR
3 Inventory Control ept. prepares a -ournal voucher6 Cost of Goods Sold Inventory
DR CR
3 Cash Receipts prepares a -ournal voucher6 Cash
DR Accoun Accounts ts Recei Receiva vabl ble e
CR
Revenue Cycle ata,ases 3 7aster )iles 8 customer master )ile 8 accounts receiva,le master )ile 8 merchandise inventory master )ile
3 Transaction and Open ocument 9iles 8 sales order transaction )ile 3 open sales order transaction )ile
8 sales invoice transaction )ile 8 cash receipts transaction )ile
• Other Files – shipping and price data reference le – credit reference le (may not be needed) – salesperson le (may be a master le) – Sales history le – cash receipts history le – accounts receivable reports le
9 o) %ales Order Process
%ales Order Process 9lo1chart
%ales Order Process 9lo1chart
7anual %ales Order Processin* 3 e*ins 1ith a customer placin* an order 8 The sales department captures the essential details on a sales order )orm.
3 The transaction is authori:ed ,y o,tainin* credit approval ,y the credit department. 3 %ales in)ormation is released to6 8 illin* 8 'arehouse ;stoc+ release or pic+in* tic+et< 8 %hippin* ;pac+in* slip and shippin* notice<
7anual %ales Order Processin* 3 The merchandise is pic+ed )rom the 'arehouse and sent to %hippin*. 8 %toc+ records are ad-usted.
3 The merchandise( pac+in* slip( and ,ill o) ladin* are prepared ,y %hippin* and sent to the customer. 8 %hippin* reconciles the merchandise received )rom the 'arehouse 1ith the sales in)ormation on the pac+in* slip.
3 %hippin* in)ormation is sent to illin*. illin* compiles and reconciles the relevant )acts and issues an invoice to the customer and updates the sales -ournal. In)ormation is trans)erred to6 8 Accounts Receiva,le ;A/R< 8 Inventory Control
7anual %ales Order Processin* 3 A/R records the in)ormation in the customer=s account in the accounts receiva,le su,sidiary led*er. 3 Inventory Control ad-usts the inventory su,sidiary led*er. 3 illin*( A/R( and Inventory Control su,mits summary in)ormation to the eneral >ed*er dept.( 1hich then reconciles this data and posts to the control accounts in the />.
9 o) %ales Returns
%ales Returns 9lo1chart
%ales Return Journal 0ntry /> posts the )ollo1in* to control accounts6 Inventory—Control
DR
Sales Returns and Allowances
DR
Cost of Goods Sold
CR
Accounts Receivable—Control
CR
9 o) Cash Receipts Processes
Cash Receipts 9lo1chart
7anual Cash Receipts Processes 3 Customer chec+s and remittance advices are received in the 7ail Room. 8 A mail room cler+ prepares a cash prelist and sends the prelist and the chec+s to Cash Receipts. 8 The cash prelist is also sent to A/R and the Controller.
3 Cash Receipts6 8 veri)ies the accuracy and completeness o) the chec+s 8 updates the cash receipts -ournal 8 prepares a deposit slip 8 prepares a -ournal voucher to send to />
7anual Cash Receipts Processes 3 A/R posts )rom the remittance advices to the accounts receiva,le su,sidiary led*er. 8 Periodically( a summary o) the postin*s is sent to />.
3 /> department6 8 reconciles the -ournal voucher )rom Cash Receipts 1ith the summaries )rom A/R 8 updates the *eneral led*er control accounts
3 The Controller reconciles the ,an+ accounts.
%ummary o) Internal Controls
Authori:ation Controls 3 Proper authori:ation o) transactions ;documentation< should occur so that only valid transactions *et processed. 3 'ithin the revenue cycle( authori:ation should ta+e place 1hen6 8 a sale is made on credit ;authori:ation< 8 a cash re)und is re?uested ;authori:ation< 8 postin* a cash payment received to a customer=s account ;cash pre&list<
%e*re*ation o) 9unctions Three Rules @. Transaction authori:ation should ,e separate )rom transaction processin*. ". Asset custody should ,e separate )rom asset record&+eepin*. . The or*ani:ation should ,e so structured that the perpetration o) a )raud re?uires collusion ,et1een t1o or more individuals.
%e*re*ation o) 9unctions 3 Sales Order Processing 8 credit authori:ation separate )rom %O processin* 8 inventory control separate )rom 1arehouse 8 accounts receiva,le su,&led*er separate )rom *eneral led*er control account 3 Cash Receipts Processing 8 cash receipts separate )rom accountin* records 8 accounts receiva,le su,&led*er separate )rom *eneral led*er
%upervision 3 O)ten used 1hen una,le to enact appropriate se*re*ation o) duties. 3 %upervision o) employees serves as a deterrent to dishonest acts and is particularly important in the mailroom.
Accountin* Records 3 'ith a properly maintained audit trail( it is possi,le to trac+ transactions throu*h the systems and to )ind 1here and 1hen errors 1ere made6 8 pre&num,ered source documents 8 special -ournals 8 su,sidiary led*ers 8 *eneral led*er 8 )iles
Access Controls 3 Access to assets and in)ormation ;accountin* records< should ,e limited. 3 'ithin the revenue cycle( the assets to protect are cash and inventories and access to records such as the accounts receivable subsidiary ledger and cash ournal should ,e restricted.
Independent eri)ication 3 Physical procedures as 1ell as record&+eepin* should ,e independently revie1ed at various points in the system to chec+ )or accuracy and completeness6 8 shippin* veri)ies the *oods sent )rom the 1arehouse are correct in type and ?uantity 8 1arehouse reconciles the stoc+ release document ;pic+in* slip< and pac+in* slip 8 ,illin* reconciles the shippin* notice 1ith the sales invoice 8 *eneral led*er reconciles -ournal vouchers )rom ,illin*( inventory control( cash receipts( and accounts receiva,le
Automatin* the Revenue Cycle 3 Authori:ations and data access can ,e per)ormed throu*h computer screens. 3 There is a decrease in the amount o) paper. 3 The manual -ournals and led*ers are chan*ed to dis+ or tape transaction and master )iles. 3 Input is still typically )rom a hard copy document and *oes throu*h one or more computeri:ed processes. 3 Processes store data in electronic )iles ;the tape or dis+< or prepare data in the )orm o) a hardcopy report.
Automatin* the Revenue Cycle 3 Revenue cycle pro*rams can include6 8 )ormatted screens )or collectin* data 8 edit chec+s on the data entered 8 instructions )or processin* and storin* the data 8 security procedures ;pass1ords or user Is< 8 steps )or *eneratin* and displayin* output 3 To understand )iles( you must consider the record desi*n and layout. 3 The documents and the )iles used as input sources must contain the data necessary to *enerate the output reports.
Computer&ased Accountin* %ystems 3 CA% technolo*y can ,e vie1ed as a continuum 1ith t1o eBtremes6 8 automation & use technolo*y to improve e))iciency and e))ectiveness 8 reengineering 8 use technolo*y to restructure ,usiness processes and )irm or*ani:ation
0Bample6 Automated atch %ales
Reen*ineerin* %ales Order Processin* sin* Real&Time Technolo*y 3 7anual procedures and physical documents are replaced ,y interactive computer terminals. 3 Real time input and output occurs( 1ith some master )iles still ,ein* updated usin* ,atches. 8 Real-time & entry o) customer order( printout o) stoc+ release( pac+in* slip and ,ill o) ladin*D update o) credit )ile( inventory )ile( and open sales orders )ile 8 Batch & printout o) invoice( update o) closed sales order ;-ournal<( accounts receiva,le and *eneral led*er control account
Real&time %ales Order
Advanta*es o) Real&Time Processin* 3 %hortens the cash cycle o) the )irm ,y reducin* the time ,et1een the order date and ,illin* date 3 etter inventory mana*ement 1hich can lead to a competitive advanta*e 3 9e1er clerical errors( reducin* incorrect items ,ein* shipped and ,ill discrepancies 3 Reduces the amount o) eBpensive paper documents and their stora*e costs
Reen*ineered Cash Receipts 3 The mail room is a )re?uent tar*et )or reen*ineerin*. 3 Companies send their customers preprinted envelopes and remittance advices. 3 pon receipt( these envelopes are scanned to provides a control procedure a*ainst the)t. 3 7achines are open the envelopes( scan remittance advices and chec+s( and separate the chec+s. 3 Arti)icial intelli*ence may ,e used to read hand1ritin*( such as remittance amounts and si*natures.
Automated Cash Receipts
Point&o)&%ale %ystems 3 Point o) sale systems are used eBtensively in retail esta,lishments. 8 Customers pic! the inventory from the shelves and ta!e them to a cashier .
3 The cler+ scans the universal product code ;PC<. The PO% system is connected to an inventory )ile( 1here the price and description are retrieved. 8 "he inventory levels are updated and reorder needs can immediately be detected .
Point&o)&%ale %ystems 3 The system computes the amount due. Payment is either cash( chec+( AT7 or credit card in most cases. 8 Eo accounts receiva,les
3 I) chec+s( AT7 or credit cards are used( an on&line lin+ to receive approval is necessary. 3 At the end o) the day or a cashier=s shi)t( the money and receipts in the dra1er are reconciled to the internal cash re*ister tape or a printout )rom the computer=s data,ase. 8 Cash over and under must ,e recorded
Computeri:ed PO%
Reen*ineerin* sin* 0I 3 0I helps to eBpedite transactions. 3 The customer=s computer6 8 determines that inventory is needed 8 selects a supplier 1ith 1hom the ,usiness has a )ormal ,usiness a*reement 8 dials the supplier=s computer and places the order
3 The eBchan*e is completely automated. 8 Eo human intervention or mana*ement
EDI System Company B
Company A Application Software
Purchases %ystem
%ales Order %ystem
0I Translation %o)t1are
0I Translation %o)t1are
irect Connection Communications %o)t1are
Communications %o)t1are Other 7ail,oB
Company A=s mail,oB
A! Other 7ail,oB
Company =s mail,oB
Application Software
Reen*ineerin* sin* the Internet 3 Typically( no )ormal ,usiness a*reements eBist as they do in 0I. 3 7ost orders are made 1ith credit cards. 3 7ainly done 1ith e&mail systems( and thus a turnaround time is necessary 8 Intelli*ent a*ents are needed to eliminate this time la*.
3 %ecurity and control over data is a concern 1ith Internet transactions.
CA% Control Considerations 3 Authori:ation & in real&time systems( authori:ations are automated 8 Pro*rammed decision rules must ,e closely monitored.
3 %e*re*ation o) 9unctions & consolidation o) tas+s ,y the computer is common 8 Protect the computer pro*rams 8 Codin*( processin*( and maintenance should ,e separated.
CA% Control Considerations 3 %upervision & in PO% systems( the cash re*ister=s internal tape or data,ase is an added )orm o) supervision 3 Access Control & ma*netic records are vulnera,le to ,oth authori:ed and unauthori:ed eBposure and should ,e protected 8 7ust have limited )ile accessi,ility 8 7ust sa)e*uard and monitor computer pro*rams
CA% Control Considerations 3 Accounting Records & rest on relia,ility and security o) stored di*itali:ed data 8 Accountants should ,e s+eptical a,out the accuracy o) hard© printouts. 8 Bac"ups & the system needs to ensure that ,ac+ups o) all )iles are continuously +ept
3 Independent erification 8 consolidatin* accountin* tas+s under one computer pro*ram can remove traditional independent veri)ication controls. To counter this pro,lem6 8 per)orm ,atch control ,alancin* a)ter each run 8 produce mana*ement reports and summaries )or end users to revie1
PC&ased Accountin* %ystems 3 sed ,y small )irms and some lar*e decentrali:ed )irms 3 Allo1 one or )e1 individuals to per)orm entire accountin* )unction 3 7ost systems are divided into modules controlled ,y a menu&driven pro*ram6 8 8 8 8 8 8 8
*eneral led*er inventory control payroll cash dis,ursements purchases and accounts paya,le cash receipts sales order
