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Chapter 4

Chapter 4

The Revenue Cycle

The Revenue Cycle

 Accounti

 Accounting Informating Information Systemon Systems,s, 5 5thth edition edition

James A. Hall James A. Hall

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O,-ectives )or Chapter 4

O,-ectives )or Chapter 4

• TTaasskkssppeerrfforormmeeddiinntthheerreveveennuueeccyyccllee,,rreeggaarrddlleessssooff t

thhe e tteecchhnnoollooggy y uusseedd •

• FFuunnccttiioonnaal l ddeeppaarrttmmeenntts s iin n tthhe e rreevevennuue e ccycyclle e aannd d tthhee flo

flow w oof f rreevevennuue e ttrraannssaaccttiioonns s tthhrroouuggh h tthhe e oorrggaanniizzaattiioonn • • DDooccuummeennttss, , jjoouurrnnaallss, , aannd d aaccccoouunntts s neneeeddeed d ffoor r aauuddiitt t trraaiillss,,tthheemmaaiinntteennaanncceeooffrreeccoorrddss,,ddeecciissiiononmmaakkiinngg,, a annd d finafinanncciiaal l rreeppoorrttiinngg •

• RRiissks ks aassssocociiaatteed d wwiitth h tthhe e rreevevennuue e ccycyclle e aannd d tthhee c coonnttrroollsstthhaattrreedduucceetthheesseerriisskkss • • TThheeooppeerraattiioonnaallaannddccoonnttrroolliimmpplliiccaattiiononssooff t tecechhnnoollooggy y ususeed d tto o aauuttomomaatte e aannd d rreeeennggiinneeeer r tthhee r

(4)
(5)

O,-ectives )or Chapter 4

O,-ectives )or Chapter 4

• TTaasskkssppeerrfforormmeeddiinntthheerreveveennuueeccyyccllee,,rreeggaarrddlleessssooff t

thhe e tteecchhnnoollooggy y uusseedd •

• FFuunnccttiioonnaal l ddeeppaarrttmmeenntts s iin n tthhe e rreevevennuue e ccycyclle e aannd d tthhee flo

flow w oof f rreevevennuue e ttrraannssaaccttiioonns s tthhrroouuggh h tthhe e oorrggaanniizzaattiioonn • • DDooccuummeennttss, , jjoouurrnnaallss, , aannd d aaccccoouunntts s neneeeddeed d ffoor r aauuddiitt t trraaiillss,,tthheemmaaiinntteennaanncceeooffrreeccoorrddss,,ddeecciissiiononmmaakkiinngg,, a annd d finafinanncciiaal l rreeppoorrttiinngg •

• RRiissks ks aassssocociiaatteed d wwiitth h tthhe e rreevevennuue e ccycyclle e aannd d tthhee c coonnttrroollsstthhaattrreedduucceetthheesseerriisskkss • • TThheeooppeerraattiioonnaallaannddccoonnttrroolliimmpplliiccaattiiononssooff t tecechhnnoollooggy y ususeed d tto o aauuttomomaatte e aannd d rreeeennggiinneeeer r tthhee r

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R E V E N U E C Y R E V E N U E C Y C LC L EE (( S U B S YS U B S Y S TS T E ME M )) SS a la l e s e s OO rr d e rd e r BB ii ll ll ii n gn g / / AA c c oc c o uu nn tt ss RR e c e ie c e i  a ! a ! ll ee CC a sa s " R" R e c e ie c e i # t# t s /s / CC oo ll ll e c te c t ii oo nn ss S " i # # i n g S " i # # i n g $$ %%  CC rr e d ie d i t t / / CC u s tu s t o o  e re r S e r  i c e S e r  i c e **

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(9)

Journal ouchers/0ntries

Journal ouchers/0ntries

Ho1 do 1e *et them2

Ho1 do 1e *et them2

33 illin* epartment

illin* epartment prepares a -ournal voucher6

prepares a -ournal voucher6

 Accounts Receivable

 Accounts Receivable DR DR  S

Saallees s CCR  R  

33 Inventory Control

Inventory Control ept. prepares a -ournal

ept. prepares a -ournal

voucher6

voucher6

C

Coosst t oof f GGoooodds s SSoolld d DDR R  IInnvveennttoorry y CCR  R  

33 Cash Receipts prepares a -ournal voucher6

Cash Receipts prepares a -ournal voucher6

C

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(11)

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

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(15)
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(19)

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<

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(21)

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

(22)
(23)

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

(24)
(25)
(26)
(27)
(28)
(29)

%ales Return Journal 0ntry

/> posts the )ollo1in* to control accounts6

Inventory—Control

DR 

Sales Returns and Allowances

DR 

Cost of Goods Sold

CR 

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(31)
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(33)
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(35)

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

(36)
(37)

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.

(38)
(39)
(40)
(41)

 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<

(42)
(43)

%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

(44)
(45)

%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

(46)
(47)

%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

(48)
(49)

 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 

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(51)

 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.

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(53)

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

(54)
(55)

 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

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(57)

 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 Is<  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.

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(59)

Computer&ased Accountin* %ystems

3 CA% 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

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(63)

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

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 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

(68)
(69)

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.

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(73)

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.

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(75)

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.

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(79)

Reen*ineerin* sin* 0I

3 0I 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.

(80)
(81)

EDI System

Purchases %ystem 0I Translation %o)t1are 0I Translation %o)t1are Communications  %o)t1are Communications   %o)t1are Other  7ail,oB Company  A=s mail,oB Company =s mail,oB %ales Order  %ystem Application Software Application Software irect Connection A! Company A Company B

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(83)

Reen*ineerin* sin* the

Internet

3 Typically( no )ormal ,usiness a*reements

eBist as they do in 0I.

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*.

(84)
(85)

CA% 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.

(86)
(87)

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

(88)
(89)

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&copy 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

(90)
(91)

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 *eneral led*er   8 inventory control  8 payroll

 8 cash dis,ursements

 8 purchases and accounts paya,le  8 cash receipts

(92)

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