chapter
12
The revenue cycle
Learning objectives
–To learn about the revenue cycle business
activities.
–To learn to flow chart the revenue cycle
business activities.
–To understand the processing of the revenue
cycle transactions using a computer.
–To know what the control practices and
procedures are in the revenue cycle.
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-1
key terms
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balance forward method
bill of lading
billing
cash on delivery
credit limit
cycle billing
delivery note
Goods and Services Tax
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open invoice method
picking slip
post-invoicing
pre-invoicing
remittance advice
statement of accounts
tax invoice
terms of payment
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-2
Revenue cycle
• Deals with transaction processing involved in
selling goods or services
• Sales can be made for cash or on credit
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-3
Revenue cycle business activities
Main functions (cash sale):
• accepting customer requests for goods or services
• delivery of goods or services
• invoicing
• dealing with returned goods
• receiving and recording customer payments
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-4
Revenue cycle business activities
Additional functions (credit sale):
• approving credit and credit limits
• recording accounts receivable
• sending periodical statements to customers
• dealing with bad debts
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-5
Revenue cycle business activities
Categories of activities in revenue cycle:
1. processing customer orders
2. delivery/shipping
3. invoicing
4. accounts receivable ledger
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-6
Processing customer orders
• Customer orders:
– accepting requests from customers
– preparing sales order
• Approving credit and credit limits:
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screening new customers
setting maximum limit
processing requests to increase limit
periodic checks on existing customers
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-7
Delivery/shipping of goods or
providing a service
• Delivery/shipping of goods:
– receiving sales order
– preparing the dispatch order and delivery notes
• Providing a service:
– recording labour and materials used (job card)
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-8
Invoicing
and recording accounts receivable
• Details on sales invoice:
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invoice number
name of supplier
ABN
date of invoice
description of goods
quantity of goods
GST inclusive price
discount allowed
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-9
Terms
• 2/7 - 2% discount if account is paid within 7 days
• n/30 - net amount payable within 30 days
• 10/eom - payment required within 10 days after the
end of the month
• net cash 30 days - payment required within 30 days
of the end of the month in which delivery is made
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-10
Types of invoicing
• Pre-invoicing:
– invoice prepared when sales order is approved
• Post-invoicing:
– invoice prepared and dispatched after delivery of
goods or services
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-11
Accounts receivable ledger
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Customers referred to as debtors
Accounts receivable is an asset
Subsidiary ledger maintains asset details
Source document for this ledger is sales invoice
issued
• Statement of accounts sent to customers at end of
each period showing details of account transactions
and outstanding balance
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-12
Accounts receivable ledger
• Credit or adjustment notes:
– prepared when goods are returned
– recorded in sales returns journals
• Bad debts:
– amounts owing by debtors that are unable to be
collected
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-13
Accounts receivable ledger
• Revenue cycle ends with customer payments
that may take the form of:
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cash – from cash sales
cheques – most common form of payment
bank transfers
direct deposits or EFT
• Details of all payments are recorded in the
cash receipts journal
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-14
Sales function
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-15
Sales returns function
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-16
Internal controls procedures for the
revenue cycle
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Prompt transfer of customer orders to sales orders
Strict procedures for granting credit
Set policy on credit amounts and terms and discounts
Prompt invoicing in separate department
Segregation of duties on
– dispatch
– invoice preparation
• Proper authorisation procedures for discounts, returns and
allowances and bad debt write offs
• Sequentially pre-numbered invoices, receipts etc.
• Cash registers with sealed till roles
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-17
Computer application systems for
the revenue cycle
Computers play an important role where large numbers
of transactions are processed:
– record the information in the same categories as a
manual system
– quickly produce the documentation required
– record reservation of goods and services ordered
– easily generate detailed reports for management use
– reduce labour costs
– reduce errors in pricing etc.
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-18
Controls in the computer
environment
Application controls required:
• Input controls
– detect and prevent errors when data is input
• Processing controls
– detect and prevent errors while processing is in progress
• Output controls
– detect and prevent errors in outputs from processing
© 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information &
Reporting Systems by A. Aseervatham and D. Anandarajah. Slides prepared by
Kaye Watson.
12-19