AC 2104 ACCOUNTING

INFORMATION SYSTEM

Instructor:
Cherimae L. Pino, CPA
THE REVENUE CYCLE
This chapter is organized into these sections:

1. examines the principal features of the two major subsystems that

constitute the expenditure cycle: (1) the purchases processing
subsystem and (2) the cash disbursements subsystem
2. provides an overview of the conceptual system, including the logical
tasks, the key entities, the sources and uses of information, and the flow
of key documents through an organization, and
3. deals with the physical system.
What are the three processes that
constitute the revenue cycle?
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

Sales order procedures encompass the entire process from

receiving a customer order to shipping, billing, and accounting
for the transaction.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

1. Receive Order
Initiation: Begins with receipt of a customer order (not standardized;
may be verbal, written, or electronic).
Sources: Orders may come via mail, phone, or field representatives.
Conversion: Transcribed into a formal sales order with key details:
Customer name, address, account number
Item name, number, description, quantity, unit price
May include taxes, discounts, freight charges
Tracking: Sales order placed in the open order file; updated as status
changes (e.g., credit approval, back-order, shipment).
Customer Service: Open order file helps respond to customer
inquiries.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

2. Check Credit
Purpose: Assess customer’s creditworthiness before proceeding.
New Customers: May require full financial investigation.
Returning Customers: Checked against credit limit and payment
history.
Control: Credit approval is an authorization control, separate from
sales.
Flow: Approved sales order triggers release of documents (e.g., stock
release, packing slip, shipping notice, invoice).
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

3. Pick Goods
Document: Stock release (picking ticket) sent to warehouse.
Action: Items picked from shelves; verified for accuracy.
Shortages: Adjusted stock release and back-order record created.
Inventory Update: Warehouse stock records updated (not formal
accounting records).
Control Principle: Warehouse staff should not manage formal
inventory accounting.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

4. Ship Goods
Documents Received: Packing slip and shipping notice.
Packing slip: Travels with goods to customer.
Shipping notice: Sent to billing as proof of shipment.
Verification: Shipping clerk reconciles goods with documents.
Final Prep: Goods packaged, packing slip attached, shipping notice
completed.
Bill of Lading: Legal contract with carrier; establishes asset
ownership in transit.
Recordkeeping: Shipment logged; shipping notice and stock release
sent to billing; open order file updated.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

5. Bill Customer
Timing: Billing occurs only after shipment to avoid errors.
Pending File: Invoice copy of sales order held until shipping notice
arrives.
Invoice Completion: Reconciles shipped items with order; adds
prices, taxes, freight.
Sales Journal: Records completed sales transactions.
Ledger Updates:
Sales order ledger copy Accounts Receivable
Stock release Inventory records
Journal Voucher: Summarizes entries for general ledger:

DR: Accounts Receivable—Control

CR: Sales
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

6. Update Inventory Records

Function: Inventory control updates subsidiary ledger using stock
release.
System: Perpetual inventory system tracks each item.
Journal Voucher: Summarizes inventory reduction for general
ledger:

DR: Cost of Goods Sold

CR: Inventory—Control
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

7. Update Accounts Receivable (AR)

Source: Uses the ledger copy of the sales order.
AR Subsidiary Ledger: Each customer has a record containing:
Name and address
Current balance and available credit
Transaction dates and invoice numbers
Credits for payments, returns, and allowances
Reporting: Periodically, balances are summarized and sent to the
general ledger.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

8. Post to General Ledger

Inputs Received:
Journal vouchers from billing and inventory control
Account summary from AR
Posting Entries:
DR: Accounts Receivable Control
DR: Cost of Goods Sold
CR: Inventory Control
CR: Sales

Purpose:
a. Financial Reporting: General ledger holds summary figures for
financial statements.
b. Verification Control: AR summary is reconciled with journal
vouchers to detect errors.
 What are the three processes that
constitute the revenue cycle?

Sales Order Procedures

 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

Reasons for Returns

Sales returns may occur due to:
Wrong merchandise shipped
Defective goods
Damage during shipment
Late delivery or transit delays

Customer Action: Buyer requests credit for returned items.

System Response: The return process reverses the original sales
transaction.
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

1. Prepare Return Slip

Responsibility: Receiving department
Actions:
Count and inspect returned items
Document items on a return slip
Send goods + one copy of return slip to warehouse for
restocking
Send second copy to sales department to initiate credit memo
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

2. Prepare Credit Memo

Responsibility: Sales department
Purpose: Authorize customer credit for returned merchandise
Format: Often resembles a sales order; may be a marked copy
Approval Flow:
If within clerk’s authority sent directly to billing
If exceeds authority forwarded to credit manager
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

3. Approve Credit Memo

Responsibility: Credit manager
Action: Review return circumstances and approve/disapprove credit
Next Step: Approved memo returned to sales department

4. Update Sales Journal

Responsibility: Sales department
Action:
Record approved credit memo as a contra entry
Forward memo to inventory control
Summarize total returns in a journal voucher for general ledger
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

5. Update Inventory & Accounts Receivable

Inventory Control:
Adjust inventory records
Send journal voucher to general ledger
Accounts Receivable:
Adjust customer account
Submit AR summary to general ledger
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

6. Update General Ledger

Responsibility: General ledger function
Action:
Reconcile journal vouchers and summaries
Post to control accounts:

DR: Inventory—Control
DR: Sales Returns and Allowances
CR: Cost of Goods Sold
CR: Accounts Receivable—Control
 What are the three processes that
constitute the revenue cycle?

Sales Return Procedures

 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

Purpose
These procedures handle the payment phase of credit sales,
ensuring:
Cash is properly received and secured
Deposits are made accurately
Customer accounts are updated
Financial records are reconciled
 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

1. Open Mail & Prepare Remittance Advice
Responsibility: Mail room employee
Actions:
Open envelopes containing customer payments and remittance advices
Remittance advice includes:
Payment date
Account number
Amount paid
Customer check number
Helps match payments to correct customer accounts
Routing:
Checks and remittance advices sent to an administrative clerk
Clerk endorses checks “For Deposit Only”
Reconciles check amounts with remittance advices
Prepares a remittance list (cash prelist) in 3 copies:
1st copy Record and deposit checks
2nd copy Update AR
3rd copy Reconciliation task
 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

2. Record and Deposit Checks
Responsibility: Cash receipts employee
Actions:
Verify checks against prelist
Identify any missing or misdirected checks
Record each check in the cash receipts journal
Includes cash sales, miscellaneous receipts, and payments on
account
Prepare bank deposit slip and send with checks to bank
Bank validates deposit slip and returns it for reconciliation
End-of-day: Summarize journal entries and send journal voucher to
general ledger

DR: Cash
CR: Accounts Receivable Control
 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

3. Update Accounts Receivable
Responsibility: AR function
Actions:
Use remittance advices to post payments to customer accounts
Periodically summarize changes and send to general ledger

4. Update General Ledger

Responsibility: General ledger function
Actions:
Reconcile journal voucher and AR summary
Post to control accounts (Cash and AR)
File journal voucher
 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

5. Reconcile Cash Receipts and Deposits
Responsibility: Independent clerk (e.g., from controller’s office)
Actions:
Periodic reconciliation (weekly/monthly)
Compare:
Prelist copy
Bank deposit slips
Journal vouchers
 What are the three processes that
constitute the revenue cycle?

Cash Receipts Procedures

 What are the
Revenue Cycle
Controls?
 What are the Revenue Cycle Controls?

1. Transaction Authorization
Ensures only valid transactions are processed.
Credit Check:
Performed by the credit department.
Evaluates customer creditworthiness before approving sales.
Varies by customer relationship and transaction size.
Return Policy:
Credit department also authorizes returns.
Approval depends on sale nature and return circumstances.
Specific vs. general authority guides refund/credit decisions.
Remittance List (Cash Prelist):
Verifies match between checks and remittance advices.
Authorizes posting to customer accounts.
 What are the Revenue Cycle Controls?

2. Segregation of Duties
Prevents any one person from controlling a transaction end-to-end.
Rule 1: Authorization separate from processing.
Credit department is independent from sales.
Prevents sales staff from bypassing credit checks.
Rule 2: Asset custody separate from record keeping.
Inventory: Warehouse holds assets; inventory control maintains
records.
Cash: Cash receipts department handles cash; AR updates records.
Rule 3: Structure requires collusion for fraud.
Separate maintenance of:
Subsidiary ledgers (AR, inventory)
Journals (sales, cash receipts)
General ledger
 What are the Revenue Cycle Controls?

3. Supervision

Compensates for limited staff or potential control gaps.

Mail Room Risk:
Employee has access to both cash and remittance advice.
Potential for theft and document destruction.
Supervision deters fraud and promotes accountability.
 What are the Revenue Cycle Controls?

4. Accounting Records
Supports audit trail and error detection.
Prenumbered Documents:
Unique identifiers for tracking transactions.
Examples: sales orders, shipping notices, remittance advices.
Special Journals:
Group similar transactions for clarity.
Revenue cycle uses:
Sales journal
Cash receipts journal
Subsidiary Ledgers:
Detail-level records for:
Inventory (decreases with sales)
Accounts Receivable (increases with sales, decreases with
payments)
 What are the Revenue Cycle Controls?

4. Accounting Records
General Ledger:
Summary-level control accounts:
Sales
Inventory
Cost of Goods Sold
AR
Cash
Updated via journal vouchers.
Files Supporting Audit Trail:
Open sales order file
Shipping log
Credit records file
Sales order pending file
Back-order file
Journal voucher file
 What are the Revenue Cycle Controls?

Advantages of Real-Time Processing

Real-time systems enhance operational efficiency and customer
satisfaction while reducing costs.

Key Benefits:
Shortened Cash Cycle
Eliminates delays between order and billing
Enables same-day shipping and billing
Competitive Advantage
Immediate inventory visibility for sales staff
Reduces back-orders and improves customer satisfaction
Error Reduction
Real-time editing catches errors early (e.g., wrong address, item,
price)
Improves accuracy and operational effectiveness
Reduced Paper Usage
Minimizes hard-copy documents
Digital records are cheaper, cleaner, and audit-friendly
 What are the Revenue Cycle Controls?

Automated Cash Receipts Procedures

Automates traditional batch-based cash receipt systems to improve control and efficiency.
Mail Room
Separates checks and remittance advices
Prepares a remittance list
Sends:
Checks + list Cash Receipts Department
Advices + list Accounts Receivable (AR) Department
Cash Receipts Department
Reconciles checks with remittance list
Prepares deposit slips and journal voucher via terminal
Deposits cash at day’s end
Files remittance list and deposit slip copy
Accounts Receivable Department
Reconciles remittance advices with remittance list
Creates cash receipts transaction file via terminal
Files documents for recordkeeping
Data Processing Department
Reconciles journal voucher with transaction file
Updates:
AR subsidiary ledger
General ledger control accounts (AR—Control and Cash)
Produces transaction listing for AR reconciliation
 What are the Revenue Cycle Controls?

Point-of-Sale (POS) Systems

Traditional revenue cycle systems assume credit-based transactions with accounts

receivable.
POS systems are designed for cash-based transactions, common in retail environments.

Key Characteristics of POS Systems

Used In: Grocery stores, department stores, and other retail businesses.
Transaction Type: Immediate exchange of goods for:
Cash
Checks
Bank credit cards
No Credit Extension:
No customer accounts receivable maintained.
Inventory Handling:
Inventory is stored directly on store shelves.
No separate warehouse involved.
Customer Interaction:
Customers select items themselves.
Bring items to checkout for transaction processing.