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💞In this setion we will study about revenue cycle conceptually
💞We will trace the sequence of activties through three process that constitute the revenue cycle for most retail, wholesale, and manufacturing organization.
💞These are sales order procedures, sales return procedures and cash receipts procedures.
💞This discuss is intended to be technology-neutral, we focus what conceptual need to be done not how it is accomplished.

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💞includes task involved in receiving and processing customer order, filling the order and shipping product to the customer, billing the customer at the proper time, and corretly accounting for the transaction.

RECEIVE ORDER
💞Receive order from customer. Order may be receive by mail, telephone or from a filed representative who visit the customer.
💞When order is not receive in the physical document, the first task is to transcribe it into a formal sales order
💞At this point, financial information such as taxes, discount and freight charge may or may not be included
💞A copy of sales order will be place in the customer order file for future reference

CHECK CREDIT
💞At this point, customer creditworthiness will be check.
💞The circumstances of the sales will be determine the nature and degree of the credit check

PICK GOODS
💞Receive order forwards the stock release document to the pick goods function in the warehouse.
💞After stock have been pick, the order is verified for accuracy and the good, along with verified stock release document, are sent to the ship good task
💞If inventory level is insufficient to fill the order, employee will prepares a back-order record which stays on file until the inventories receive from supplier
💞Back order item is ship  before new sales process
💞Finally warehouse employee adjust the stock record to reflect reduction in inventory

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SHIP GOODS
💞Before good have been ship, the ship department receive the packing slip and shipping notice from receive order function.
💞Packing slip ultimately travel with the goods to customer
💞The ship notice will later be forwarded to the billing functions evidencce that customer order was filled and shipped
💞The shipping clerk packages the good, attaches the packing slip, complete the shipping noties and prepares a bill of lading
💞Onces the goods are transfer to the carrier, the shipping clerk records the shipment in the shipping log, forward the shipping notice and the stock release to bill-customer function as proof of shipment and updates the customer order file to reflect the shipped status of the transaction.

BILL CUSTOMER
💞The billing function awaits notification from shipping before it bills
💞The bills-customer function receive the sales order(invoice copy) from the receive order task. This document is placed in an S.O. pending file until receipt of the shipping notice
💞Sales journal is a special journal used for recording completed sales transaction

UPDATE INVENTORY RECORDS
💞The inventory control function updates inventory subsidiary ledger account from information contained in the stock release doument

UPDATE ACCOUNT RECEIVABLE RECORDS
💞At this point, customer record in the account receivable subsidiary ledger are updated from information provided by the sales order

POST TO GENERAL LEDGER
💞By the close of transaction process period, general ledger function has received journal voucher from billing and inventory control task and an account summary from AR function.
💞This information set out of two purpose, first, the GL used the voucher to post to appropiate control account. Second, this information supports an important independent verification control.

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💞Return product can occur when:
-Company shipped the customer the wrong merchandise
-Good was defective
-Product was damaged in shipment
-Buyer refused delivery because the seller shipped the good too late or delayed

PREPARE RETURN SLIP
💞When the item was returned, receiving department employee counts, inspects and prepares a return slip describing the item
💞Good along with this slip go to the warehouse to restock, then send the second copy of this slip to the sales function to prepare a credit memo

PREPARE CREDIT MEMO
💞This document is the authorization for the customer to receive credit for the merchandise return
💞If the clerk has sufficient general authority to approve the return, the credit memo sent directly to the billing function, where the customer sales transaction is reversed.

APPROVE CREDIT MEMO
💞The credit manager evaluates the circumstances of the return and makes a judgment to grant credit
💞The manager returns the approved credit memo to the sales department

UPDATED SALES JOURNAL
💞The transaction is recorded in the sales journal as a contra entry.
💞Credit memo then forwarded to inventory control function for posting
💞In the end, total sales return are summarized in a journal voucher and sent to the GL department

UPDATE INVENTORY AND AR RECORDS
💞The inventory control function adjusts the inventory records and forwards the credit memo to AR, where the customer account is also adjusted.
💞Inventory control sends a journal voucher summarizing the total value of inventory return to the updated general ledger task
💞AR submits an AR account summary to the general ledger function

UPDATE GENERAL LEDGER
💞GL reconcile the figures when receiving the journal voucher and account summary information and post them to the related account.

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💞It describe a credit transaction that result in the establishment of an account receivable
💞Payment on the account is due to some future date.
💞It involve receiving and secuing the cash, depositing the cash in the bank, matching the payment with the customer and adjusting the correct account and properly accounting for and reconciling the financial details of transaction

OPEN MAIL AND PREPARE REMITTANCE LIST
💞Employee open envelopes containing customer payment and remittance advices
💞Mail room personnel route the check and remittance advice to administrative clerk who endorses the check FOR EPOSIT ONLY and reconcile the amount on each remittace advice with the corresponding check
💞Then, clerk record on a form called remittance list

RECORD AND DEPOSIT CHECKS
💞Cash receipts employee verifies the accuracy and completeness of the check against the prelisr
💞After reconcile the prelist to the checks, employee records the check in the cash reipts journal
💞Next, clerk prepare a bank deposit slip to show the amount of the days receipts and forwards this along with the check to the bank
💞The bank teller validates the deposit slip and returns to the company for reconciliation
💞Lastly, cash receipts employee summarizes the journal entries and sends a journal voucher with the suitable entry to GL function.

UPDATE ACCOUNTS RECEIVABLE RECORDS
💞Remittance advices are used to post to customers account in AR subsidiry ledger
💞Change in account balance summarized and forwarded to GL function

UPDATE GENERAL LEDGER
💞Upon receipts of journal voucher and the account summary, the GL function reconcile the figures, post the cash and AR control account and files the journal voucher

RECONCILE CASH RECEIPTS AND DEPOSITS
💞Employee from this department reconcile cash receipts by comparing this folowing documents
💞a copy of the prelist
💞deposit slips received from the bank
💞related journal voucher

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📢 Advanced technologies allow systems designers to integrate accounting and other business functions through a common information system.
📢Objective : integration is to improve operational performance and reduce costs by identifying and eliminating nonvalue-added task
📌INTEGRATED SALES ORDER PROCESSING SYSTEM
[Comparing integrated sales order with basic technology System ]

1) Integrated Sales Order System updated function of credit checking, accounts receivable ,customer billing, inventory updating and posting to the general ledger performed automatically by Central Computer System
vs   🏌️‍♀️
Basic technology System
📢 Use Labor intensive to perform updating task

2) Integrated Sales Order System
📢 Cheaper and far less prone to error
vs  🏌️‍♀️

Basic technology System
📢 Labor-intensive activities add greatly to to operating cost and contribute to human error

3)  Integrated Sales Order System
📢Refocused on exception-based problem solving

vs 🏌️‍♀️
Basic technology System
📢Focus on day-to-day clerical task
Result: Integrated Sales Order Processing System have smaller department but more efficient than the basic technology counterparts.

📌      SALES PROCEDURES
1) The system accesses the inventory subsidiary file and checks the availability of the inventory items requested .it then performs a credit checks by reviewing the customer's credit record in the credits history file. The file contains information such as the customer's credit limit ,current balance ,date of last payment ,and current credit status .Based on programmed criteria, the customers request for credit is either approved or denied

2) If credits approved, the system  adds a record to the sales invoice file, transmits a digital stock release documents to the warehouse, and sends a digital copy of the packing slip to the shipping department

3) The warehouse clerks terminal printout of the electronic transmitted stock release documents. The clerk picks out the goods and sends them to the shipping department, accompanied by a copy of the stock release.

4)Shipping department reconciling the goods wit the packaging slip, preparing them for a shipment and selecting a carrier. The shipping clerks will transmits a digital shipping notice to signal that transaction is complete.

5) The systems also automatically performs the following task:

Updates the customer's credit history record to reflect the sale

Reduces the quantities on hand

Determines the inventory quantity-on-hand has fallen below reorder point and if so adds a record to the purchase requisition file.

Places an "on-order" flag in the inventory record

Shipped date were added to indicate order's status .The shipped sales invoices in the file provide a chronological record of total sales for the period (equivalent to the sales journal, and the unpaid shipped invoices at any point in time constitute the organization's accounts receivable

Updates the General Ledger

The system produces and distributes various management records.

📌INTERGRATED CASH RECEIPTS SYSTEM
📢  MAIL ROOM

The clerks opens the envelopes containing checks and remittance advices and sort checks foe deposit only

the clerks reconcile the checks and remittance advices and prepares remittance list .

The documents are sent to cash receipts department

📢 Cash Receipts Department

The clerks prepare deposit slips

The clerks accesses and cash receipts system and creates a record in the remittance file for each remittance advice received.

The clerks file the remittance list, remittance advices and one copy of the deposit slip.

The end of the day, checks were deposit to the bank

📌 AUTOMATIC DATA PROCESSING PROCEDURES
When the cash receipts data entry is complete:

Closes  the sales invoice

Post to the general ledger accounts.

prepares and distributes various management reports, including transaction listing ,discrepancy (out of balance) reports and general ledger change reports.

📌 CONTROLLER'S OFFICE
Clerks in the controller's office periodically performs a reconciliation of remittance lists bank deposits slips, cash receipts journals and the GL cash accounts.

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REVENUE CYCLE RISKS AND INTERNAL CONTROLS

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REVENUE CYCLE RISKS AND INTERNAL CONTROLS

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objective

1. to mitigate the risk from errors and fraud

primary risks associated with revenue cycle transactions:

* Selling to un-creditworthy customers

Selling on credit to customers who have not been properly vetted can lead to excessive bad debt
losses

Physical Controls
TRANSACTION AUTHORIZATION
to ensure that only valid transactions are processed.
SEGREGATION OF DUTIES
-to separate transaction authorization from transaction processing
-To provide independence to the credit authorization process

IT Controls
AUTOMATED CREDIT CHECKING
Credit checking is performed automatically by the
the system as a programmed process control

* Shipping customers the wrong items or incorrect quantities
result in damaged customer relations. excessive sales returns, lost future sales, and accounting errors

Physical Controls
INDEPENDENT VERIFICATION
verifies that the goods sent from the
warehouse are correct in type and quantity

IT Controls
SCANNER TECHNOLOGY
the system will verify that the items selected match those on the sales order

AUTOMATED INVENTORY ORDERING
When an inventory record is updated to reflect sales, the computer logic should check to determine if the reduction in inventory drops the inventory quantity-on-hand to a point below the inventory reorder point.

* Inaccurately recording sales and cash receipts transactions in journals and accounts
some common revenue cycle errors
~ Sees for Customers are incorrectly calculated
~Sales are recorded in the wrong period.
~customers are billed for items they did not receive (back-ordered),
~ Customer cash receipts are inaccurately posted to accounts or are posted to the wrong customer
accounts.
~Summaries of sales, accounts receivable, cash receipts, and inventory levels are incorrectly posted to their respective GL accounts.

Physical Controls
TRANSACTION AUTHORIZATION
provides a means for verifying that customer checks and remittance advice match in amount and represent valid transactions.

ACCOUNTING RECORDS
allows independent auditors to trace transactions through various stages
of processing

PRENUMBERED DOCUMENTS
is a sequentially numbered by the printer and allow every transaction to
be identified uniquely.

SPECIAL JOURNALS
the system provides a concise record of an entire class of events by grouping similar transactions together into special journals

SUBSIDIARY LEDGERS
the inventory and  AR subsidiary ledgers
The sale of products reduces
quantities-on-hand in the inventory subsidiary records and increases the customers’ balances in the AR subsidiary records. Then, the receipt of cash reduces customers’ balances in the AR subsidiary records. Lastly, it will provide links back to journal entries and to the source documents that captured the events

GENERAL LEDGERS
-the basis for financial statement
preparation
Revenue cycle transactions affect the following GL accounts: sales, inventory, cost of
goods sold, AR, and cash

FILES
the RC employs several temporary and permanent files that contribute to the
audit trail
~ Customer order file shows the status of customer orders
~The shipping log specifies orders shipped during the period
~Customer records file provides customer credit data
~Back-order file contains customer orders for out-of-stock items
~Journal voucher file is a compilation of all journal vouchers posted to the general ledger

INDEPENDENT VERIFICATION
to verify the accuracy and completeness of tasks performed by other functions in the process

Independent verification controls in the RC exist in:
~The shipping department reconciles the goods being shipped against the packing slip to ensure that the customer is receiving the correct items and quantities
~the billing function reconciles the original sales order with the shipping notice to ensure that customers are billed for only quantities shipped and that sales are recorded in the sales journal only after the goods have been shipped and in the correct period
~ Prior to posting to control accounts, the general ledger function reconciles vouchers and summary reports prepared independently in different functional areas. The billing function
summarizes the sales journal, inventory control summarizes changes in the inventory, the cash receipts function summarizes the cash receipts journal, and accounts receivable summarizes the AR subsidiary ledger.

IT Controls
DATA INPUT EDITS
the basic assumption in transaction processing system design is that master
files, such as inventory, accounts receivable, and the general ledger, are “clean” and error-free.

1. Cheeks for missing data, numeric-alphabetic data, and valid data values would reduce the risk of undetected data entry errors by clerks in the accounts receivable, inventory control, billing,
and cash receipts departments.

2. Check digit edits provide control over accessing the wrong accounts when posting customer sales and cash receipts transactions. Long customer account numbers are susceptible to transcription and transposition errors during data entry. Check digit controls reduce such errors in both basic and advanced technology systems.

AUTOMATED POSTING TO SUBSIDIARY AND GL ACCOUNTS
the system was performed manually by accounting automated in the advanced technology system.

FILE BACKUP
To reduce the risk of data loss

* Misappropriation of cash receipts and inventory
cash from customer payments is at risk of being “skimmed” before it is recorded or “embezzled after it has been received and recorded.

Physical Controls
TRANSACTION AUTHORIZATION
provides control against
theft of checks and remittance advice as they flow through the system

SUPERVISION
need supervision because:
~the mailroom is a risk
~to achieve adequate separation of functions

ACCESS CONTROLS
to help prevent
and detect unauthorized access to the firm’s assets by :
* 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 drawers and safes in the cash receipts department

SEGREGATION OF DUTIES
ensures that no single individual or department processes a transaction in its entirety

1.The cash receipts function, which has custody of the cash asset, should be separated from the accounts receivable function that records the payment in the customer records. An individual
with responsibility for both tasks could perpetrate a lapping fraud or possibly steal the customer’s check and write off the AR as a bad debt.
2.The individual performing the cash receipts function should not have access to the general ledger cash account. He or she could remove cash from the firm and adjust the cash account to cover the act.
3.Inventory warehouse personnel who have physical custody of inventory assets should not also
be responsible for the accounting task of updating the inventory records. Combining these tasks would open the door to fraud and material errors. A person with combined responsibility could steal or lose inventory and adjust the inventory records to conceal the event.

IT Controls
MULTILEVEL SECURITY
computer processes and data are highly concentrated and accessible through a common central application

* Unauthorized access to accounting records and confidential reports
motives:
~attempts to perpetrate a fraud such as creating a false sales order and wiping out an accounts receivable balance
~theft of data such as stealing a customer list for a competitor and downloading customer credit card numbers and PINs to be sold over the Internet
~Malicious acts such as corrupting and deleting financial data

Physical Controls
ACCESS CONTROLS
all hard-copy accounting records should be kept in secure areas and access to them should be restricted on a need-to-know basis

SEGREGATION OF DUTIES
certain record-keeping tasks needs to be separated specifically the subsidiary ledgers (AR and subsidiary), the journal (sales and cash receipt)

IT Controls
PASSWORDS
Digital accounting records are vulnerable to unauthorized and undetected access

MULTILEVEL SECURITY
employs programmed techniques that permit simultaneous access to central system by many users with different access privilege but prevent
them from obtaining information for which they lack authorization

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Doing Business Via EDI
-Many organizations have reengineered their sales order process through electronic data interchange (EDI).
-EDI is the intercompany exchange of computer-processable business information in standard format.
-EDI technology was devised to expedite routine transactions between manufacturers and wholesalers, and between wholesalers and retailers.
-EDI is more than just a technology.
-EDI poses unique control problems for organizations.

Doing Business on the Internet
-Thousands of organizations worldwide have home pages on the Internet to promote their products and solicit sales.
-Typically, Internet sales are credit card transactions that are sent to the seller’s e-mail file.
-To expedite processing, some organizations employ intelligent agents (software programs) that review and validate Internet orders automatically as they are received.
-Example include B2B and business-to-consumer (B2C)
-Connecting to the internet exposes the organization to threats from computer hackers, viruses and transaction fraud.
-Most organizations take these threats seriously and implement controls, including password techniques, message encryption, and firewalls to minimize their risk.

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💡Basic Technology Purchases Processing system

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💡Basic Technology Purchases Processing system

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[Following Section outline the key activities in this system]

✏️ Inventory Control
Clerk prints purchase requisition from their PC by accessing the purchase requisition file
✏️ Copy of the requisition file is sent to the Purchasing Department
✏️ One Copy is placed in the hard copy open purchase requisition file
✏️ Note that to provide proper authorization control, the inventory control department is segregated from the purchasing department ,which executes the purchase transaction

💡      Purchasing Department

✏️ Receive the purchase requisition and recorded to the digital open purchase order file
✏️ The clerk prints a multipart PO for each vendor ,1 copy sent to vendor and 1 copy is sent to inventory control, where the clerks file it with open purchase requisition.
✏️ 1 copy of the PO is sent to the AP for filing in the AP pending file.1 copy (the blind copy) is sent to the receiving department ,it's filed until the inventories arrive
✏️ The clerk files the last copy along with the purchase requisition in the department

💡  Receiving
The receiving department clerk receives the goods and the packing slips and reconciles the goods with the blind copy of the PO
The receiving clerk adds a digital record to the receiving report file and prints a multipart receiving hard copy
One copy of the receiving report and the physical inventories are sent to the storeroom
Another copy is sent to the purchasing department ,the purchasing clerks reconciles it with the open PO and closes the digital record in the open file.
The purchasing department then files the hard-copy receiving report along with the previously filed purchase requisition and the PO
Purchasing clerks files the hard-copy receiving report along with the previously filed the purchase requisition and the PO
The third copy of the receiving report is sent to inventory control where the clerks updated the digital inventory subsidiary ledger
The systems removes automatically removes the' on-order flag' that was set when the purchase requisition was created
The inventory control clerk then files the hard-copy receiving report, PO and the purchase requisition .
The fourth copy of the receiving report is sent to the AP department ,where it is filed in the AP pending file
The receiving clerk files the blind copy PO and the packing slip in the receiving department

💡 AP Department
When the supplier's invoice arrives ,the AP clerk reconciles the invoice, purchase order, and receiving report and prepares an AP packet
The clerk next records the transaction in the digital purchases journal, and posts the liability to the supplier's account in the AP subsidiary ledger
The clerk then files the AP packet in the open AP file

💡 General Ledger Department
Receives a journal voucher from the AP department and an account summary from inventory control
The general ledger clerk reconciles these and posts to the inventory and AP control accounts .
Expenditure cycle is completed

💡  Basic Technology Cash Disbursements System
(The tasks performed in each of the key processes are discussed next)

💡 AP Department
Each day the AP clerks reviews the AP packets in the open AP file for items due and sends the supporting documents to the cash disbursements

💡 Cash Disbursements Department
✏️ The cash disbursements clerk receives the AP packets and reviews the  documents for completeness and clerical accuracy
✏️ The checks and with the supporting documents ,Goes to the cash disbursements department manager ,or treasures ,for his or her signature and mailed to the supplier
✏️ The clerks returns the AP packet and check copy to the AP department and files one copy of the checks
✏️Finally ,the clerks summarizes the entries made to the check register and sends a journal voucher to the general ledger department

💡 AP DEPARTMENT
✏️ Upon receipt of the AP packet , the AP clerk removes the liability by debiting the vendor's digital AP subsidiary record

✏️The AP packet is filed in the closed AP file.

✏️ Finally, the clerks sends an AP summary to the general ledger department

💡 General Ledger Department

✏️ Based on the journal voucher from the cash disbursements and the account summary from the accounts payable,
✏️the general ledger clerk uses the department PC to post to the GL control accounts and files the documents

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- POS systems are used extensively in grocery stores, department stores and other types of retail organizations.
- It involves the exchange goods directly for cash in a transaction that is consummated at the point of sale.
- Example: The organization maintains no customer accounts receivable; All transactions are for cash, checks, or bank credit/debit cards.
: The inventory is kept on the store’s shelves, not in a separate  warehouse.

DAILY PROCEDURES
1)First, the checkout clerk scans the Universal Product Code (UPC) label on the items being purchased with a laser light scanner.
2)When all the UPCs are scanned, the system automatically calculates taxes, discounts and the total for the transaction.
3)The clerk enters the transaction into the POS system via the register’s keypad, and a record of the sale is added to the sales journal in real time.
4)At the end of the clerk’s shift, a supervisor unlocks the register and retrieves the internal tape.
5)Often, small discrepancies exist because of errors in making change for customers.
6)When the contents of the cash drawer have been reconciled, the cash receipts clerk prepares a cash reconciliation form and gives one copy to the sales clerk as receipt for cash remitted.

END-OF-DAY PROCEDURES
1)At the end of the day, the cash receipts clerk prepares a three-part deposit slip for the total amount of the cash received. One copy is filed and the other two accompany the cash to the bank.
2)Finally, a batch program summarizes the sales and cash receipts journals, prepares a journal voucher and posts to the GL accounts.

POINT-OF-SALE CONTROL ISSUES
-Authorization: This process involves validating credit card charges and establishing that the customer is the valid user of the card.

-Supervision: The POS environment places both inventory and cash at risk because customers have direct access to inventory and cash can be removed from the cash drawer by dishonest employee. Supervision using surveillance cameras and shop floor security personnel can reduce these risks.

-Access Control: The organization must restrict access to cash assets because POS systems involve cash transactions. This can be accomplished with a physical lock and key or password control.

-Accounting Records: The internal cash register’s tape is an important accounting document because this tape records all sales transactions processed at the register. Only the clerk’s supervisor should have access to the tape to balance the cash drawer at the end of the shift.

-Independent Verification: The cash drawer should contain cash and credit card vouchers equal to the amount recorded on the tape.