revenuecycle.com CHAPTER 4 REVENUE CYCLE By Group 1 Adriano, Dandred Galang, Jeremy Bitangcol, Hanna Dee Nilo, Jane Dhalie Transaction processing system Transaction Cycles REVENUE CYCLE EXPENDITURE CYCLE CONVERSION CYCLE Learning Objectives Understand the fundamental tasks performed in the revenue cycle, regardless of the technology in place. Be able to identify the functional departments involved in revenue cycle activities and trace the flow of revenue transactions through the organization. Be able to specify the documents, journals, and accounts that provide audit trails, promote the maintenance of historical records, support internal decision making, and sustain financial reporting Understand the risks associated with the revenue cycle and recognize the controls that reduce those risks. Be aware of the operational and control implications of technology used to automate and reengineer the revenue cycle. theconceptualsystem.com tHE CONCEPTUAL SYSTEM overviewoftherevenuecycle.com overview of the revenue cycle 1. Sales Order 5. Cash Receipts or Collections 4. Billing or Accounts Receivable 2. Credit or Customer Service 3. Shipping figure 4-1 dfd of sales order processing system Receive order The sales process begins with the receipt of a customer order. figure 4-2 sales order check credit The customer's creditworthiness needs to be established. Pick goods Stock Release Document (Picking Ticket) - this document identifies the items of inventory that must be located and picked from the warehouse shelves. Ship goods Shipping Department Packing Slip Shipping Notice Verified Stock Release figure 4-3 bill of lading bill customer The billing function awaits notification from shipping before it bills. the billing function performs the following record-keeping tasks: 1 3 2 Sends the stock release document Forwards the to the update ledger copy of the inventory records sales order to the task. update accounts receivable task. Records the sale in the sales journals. figure 4-1 dfd of sales order processing system salesjournal.com Sales journal - is a special journal used for recording completed sales transactions. figure 4-4 journal voucher update inventory records The inventory control function updates inventory subsidiary ledger accounts from information contained in the stock release document. figure 4-5 inventory subsidiary ledger Cost of Goods Sold Inventory - Control XXX XXX update Accounts receivable records Customer records in the accounts receivable (AR) subsidiary ledger are updated from information provided by the sales order (ledger copy). figure 4-6 Accounts receivable subsidiary ledger Post to general ledger The general ledger function has received journal vouchers from the billing and inventory control tasks and account summary from the AR function. Information serves two purposes 1. The general ledger uses the journal vouchers to post the following control accounts: Accounts Receivable Control XXX Cost of Goods Sold XXX Inventory Control XXX Sales XXX Information serves two purposes 2. This information supports an important independent verification control. www.salesreturnpr salesreturnprocedures.com Sales return procedures The company shipped the wrong merchandise. The goods were defective. The product was damaged in shipment. The buyer refused the delivery because the seller shipped the goods too late or they were delayed in transit. prepare return slip A return slip is a document recording the counting and inspection of items returned, prepared by the receiving department employee. PREPARE CREDIT MEMO A credit memo is a document used to authorize the customer to receive credit for the merchandise returned. Credit memo APPROVE CREDIT MEMO The approved credit memo is issued when the credit manager evaluates the circumstances of the return and makes a judgment to grant (or disapprove) credit. UPDATE SALES JOURNAL UPDATE INVENTORY AND AR RECORDS UPDATE GENERAL LEDGER update general ledger DEBIT CREDIT Inventory Control xxxx Sales Return and Allowances xxxx Cost of Goods Sold xxxx Accounts Receivable Control xxxx www.cashreceiptp cashreceiptprocedures.com cash receipt procedures The sales order procedures described a credit transaction that resulted in the establishment of an account receivable. Payment on the account is due some future determine. date, Cash future event. which receipt the terms procedure of apply trade to this www.cashreceiptp cashreceiptprocedures.com cash receipt procedures Cash receipt procedures involve receiving and securing the cash, depositing the cash in bank, matching the payment with customer and adjusting the correct account, and properly accounting for and reconciling the financial details of the transactions. OPEN MAIL AND PREPARE REMITTANCE LIST The remittance advice is a source document that contains key information required to service the customers account. The remittance list is a cash prelist, where all cash received is logged. remittance advice www.cashreceiptp cashreceiptprocedures.com OPEN MAIL AND PREPARE REMITTANCE LIST Customer's check and remittance advices are received in the mail room. The mail room clerk prepares a cash prelist (remittance list) and sends the the prelist and the checks to cash receipts. The prelist is also sent to the AR and the controller. The cash receipts journals are records that include details of all cash receipts transactions, including cash sales, miscellaneous cash receipts, and cash received. A deposit slip is a written notification accompanying a bank deposit that specifies and categorizes the funds (such as checks, nbills, and coins) being deposited. RECORD AND DEPOSIT CHECKS www.cashreceiptp cashreceiptprocedures.com RECORD AND DEPOSIT CHECKS Cash receipts: verifies the accuracy and completeness of the checks updates cash receipts journal prepares a deposit slip prepares a journal voucher to send to the general ledger UPDATE ACCOUNTS RECEIVABLE RECORDS The remittance advices are used to post to the customer's accounts in the AR subsidiary ledger. Periodically, a summary of the postings is sent to the general ledger. UPDATE GENERAL LEDGER reconciles the journal voucher from cash receipts with the summaries from the AR. updates the general ledger control accounts www.cashreceiptp cashreceiptprocedures.com RECONCILE CASH RECEIPTS AND DEPOSITS A clerk from the controller’s office (or an employee not involved with cash receipts procedures) reconciles cash receipts by comparing (1) a copy of the prelist, (2) deposit slips, and (3) related journal vouchers. Physical Systems Definitions Physical accounting information systems are a combination of computer technology and human activities. Physical System 1.) Illustrate functionality Objective of this section AIS and work pattern. 2. Demonstrate how internal profile control changes the mix changes. as Basic technology Revenue Cycle The computers used in these systems are independent. Therefore, information between are flows departments communicated via hard-copy documents. Basic Technology revenue cycle Sale Department The process begins with a customer contacting the sales department by relephone, mail, e-mail, fax, or inperson. The sales department clerk manually records the details on a sale order. essential Credit Department Approval This department customer's credit verifies worthiness the by using the department computer to review the customer's credit history in the customer record file. Warehouse The warehouse clerk received the stock release copy of the sale orders and uses this to located the inventory. Shipping Department This department products received reconciles from the the warehouse with the shipping notice copy of the sales order received earlier. Billing Department This department products received reconciles from the the warehouse with the shipping notice copy of the sales order received earlier. AR, Inventory, General Ledger Department These departments respective subsidiary update their ledger. The clerks search their respective files for the corrent records nu entering primary key data from the sales orders into their computer systems. AR, Inventory, General Ledger Department These departments respective subsidiary update their ledger. The clerks search their respective files for the corrent records nu entering primary key data from the sales orders into their computer systems. BASIC TECHNOLOGY CASH RECEIPT SYSTEM Mail room is a room in which incoming and outgoing mail is processed and sorted. Mail Room A Cash receipts journal is a specialized accounting journal and it is referred to as the main entry book used in an accounting system to keep track of the sales of items when cash is received, by crediting sales and debiting cash and transactions related to receipts. Cash Receipt The accounts receivable department is in place to organize and process the receivables of a company from its customers. Accounts Receivable General Ledger Department is responsible for general accounting functions including preparing journal entries, entering deposits, maintaining balance sheet schedules and ledgers and account and bank reconciliations in accordance with GAAP General Ledger Department The Controller's Office is responsible for governance and conduct of key aspects of the entity's financial operations Controller's Office Advanced Technology Revenue Cycle Advanced technologies allow systems designers to integrate accounting and other business functions through a common information system. The objective of integration is to improve operational performance and reduce costs by identifying and eliminating nonvalue-added tasks. INTEGRATED SALES ORDER PROCESSING SYSTEM Sales Procedures The process begins with sales clerk receiving customer orders, which may be hard-copy documents or may be received via e-mail, fax, or phone. INTEGRATED CASH RECEIPT SYSTEM Revenue Cycle Risk and Internal Controls The objective of internal controls is to mitigate the risk from errors and fraud. Internal Control - is the processed designed and effected by those charged with governance, management and personnel to provide reasonable assurance about the achievement of the entity's objectives. Physical Controls IT Controls -General Controls -Application Controls Risk of Selling to Un-Creditworthy Customers Physical Controls Transaction Authorization The objective of transaction authorization is to ensure that only valid transactions are processed. Segregation of Duties An objective of segregation of duties separate transaction authorization transaction processing. is to from IT Controls Automated Credit Checking The objective of automated credit checking to determine the creditworthiness of the client. Risk of Shipping Customers Incorrect items or quantities Physical Controls Independent Verification The objective of independent verification is to verify the accuracy and completeness of tasks performed by other functions process. IT Controls Scanner Technology Product code scanners in the warehouse and shipping department will reduce the risk of human error in picking and shipping incorrect products. Automated Inventory Ordering An automated inventory management system allows retailers and wholesalers to manage their inventory in real-time. The systems simplify workflows and save time. IT Controls Automated Inventory Ordering If the Quantity-on-hand< Reorder point and On-Order Field = zero Risk of Inaccurately Recording Transactions in Journals and Accounts Risk of Inaccurately Recording Transactions in Journals and Accounts Sales to customers are incorrectly calculated Sales are recorded in wrong period Customers are billed for items they did not received Customer cash receipt are inaccurately posted to accounts or are posted to the wrong customer accounts Summaries of sales, accounts receivable, cash receipt, and inventory levels are incorrectly posted to their respective general ledger accounts Physical Controls Transaction Authorization The objective of transaction authorization is to ensure that only valid transactions are processed. Accounting Records Accounting records include records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices which is important in audit trail. Physical Controls Prenumbered Documents Such as sales order, shipping notices, remittance advices and so on are sequentially numbered by the printer and allow every transactions to be identified uniquely. Special Journals Special journals are specialized lists of financial transaction records. Physical Controls Subsidiary Ledgers Such as sales order, shipping notices, remittance advices and so on are sequentially numbered by the printer and allow every transactions to be identified uniquely. General Ledgers General Ledger the record-keeping system for a company's financial data, with debit and credit account records validated by a trial balance. Physical Controls Files Customer order file shows the status of customer orders Shipping log specifies orders shipped during the period. Customer records file provides customer credit data Back-order file contains customer orders for outof-stuck items Journal voucher file is a compilation off all journal vouchers posted to the ledger Physical Controls Independent Verification The objective of independent verification is to verify the accuracy and completeness of tasks performed by other functions process. IT Controls Data Input Edits Automated Posting to Subsidiary and GL Accounts File Backup Risk of misappropriation of cash receipt and inventory In the absense of proper control, cash from customer payments is at risk of being skimmed before being recorded or embezzled after it has been received. While inventory can be stolen and sold for cash. Physical COntrols Transaction Authorization The presense of an extra remittance advices as they flow through the system. The presence of an extra remittance advice in the AR department or the absence of a customer's check in the cash receipts department would be detected when the batch is reconciled with the prelist. Supervision Detecting crimes after the fact accomplish little which means that prevention is the best solution. Therefore, organization must rely on supervision to lessen if not avoid problems. By supervising employees, we would be able to potentially avoid such weakness. Access Controls The following physical access controls should be in place to help prevent and detect unauthorized access to the firm's asset: - Warehouse security, such as fences, alarms, and guards. - Depositing cash daily in the bank. - Using a safe or night deposit box for cash - Locking cash department. drawers and safes in the cash receipts Segregation of Duties This control ensure that no single individual processes entirely. or a department transaction in its IT Controls Multilevel Security The segregration accomplished security duties through procedures individual's of access processes and data. multilevel that to are limit an authorized
