THE REVENUE CYCLE

A Hypothetical Manufacturing Firm

➢ The recurring set of business activities and data processing operations associated with providing goods and services to customers
and collecting cash in payment for those sales.
➢ Information about revenue cycle activities also flows to the other accounting cycles
o The expenditure and production cycles use information about sales transactions to initiate the purchase or production of
additional inventory to meet demand
o The human resources management/payroll cycle uses information about sales to calculate sales commissions and
bonuses.
o The general ledger and reporting function uses information produced by the revenue cycle to prepare financial
statements and performance reports.

I. SALES PROCESSING SYSTEM

➢ Sales order procedures include the tasks involved in receiving and processing a customer order, filling the order and
shipping products to customer, billing the customer at the proper time and correctly accounting for the transaction
A. Receive Order (Sales Department)
▪ Sales process begins with the receipt of a customer order indicating the type and quantity of merchandise
desired.
▪ Because the customer order is not in a standard format that the seller’s order processing system needs, the first
task is to transcribe it into a formal sales order.
• Orders may arrive by mail, by telephone or from field representative who visited a customer.
• When the customer is also a business entity, the order is often a copy of the customer’s purchase
order.
▪ The sales order captures vital information such as:
• Customer’s name
• Address
• Account number
• Name of items to be sold
• Description of the item
• Quantity
• Unit price
▪ After creating a sales order, a copy of it is placed in the customer open order file for future reference.
• The task of filling an order and getting the product to the customer may take days or even weeks;
during this period, customers may contact their suppliers and check the status of the order.
• The customer record in the open order file is updated each time the status of the order changes such
as credit approval, back order and shipment.
• The open order file thus enables customer service employee to respond promptly and accurately to
customer questions.
▪ The Sales Department is the one responsible in answering customer’s inquiries such as:
• Product of the company
• Approval of orders
• Back Orders
• Shipment of orders
B. Check Credit (Credit Department)
▪ Before processing the order further, the customer’s credit worthiness needs to be established; the
circumstances of the sale will determine the nature and degree of credit check.
• New customers may undergo a full financial investigation to establish a line of credit.
• If the order came from an existing customer, the entity has to check whether the customer:
o Has an existing liability
o Pays its obligation on a timely manner
o Has exceeded its credit limit.
▪ The credit approval process is an authorization control and should be performed as a function separate from
the sales order activity.
▪ Approved sales order from the credit department triggers the continuation of the sales process, and is
released to:
• Sales Department (to answer customer’s queries)
• Warehouse (as a notice that goods will soon to be picked up)
• Shipping Department (to serve as a notice and for checking purposes)
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 • Billing Department (for checking purposes when preparing invoice)
C. Pick Goods (Warehouse)
▪ Upon receipt of the approved sales order, a warehouse personnel will prepare a Pick Ticket to authorize
another warehouse personnel to pick the goods stated in the order.
▪ The pick ticket identifies the items of inventory that must be located and picked from the warehouse.
▪ After the designated warehouse personnel picked the stock, the order is verified for accuracy, and a Stock
Release document will then be prepared and will be sent to
• Shipping Department (together with the goods released)
• Inventory Control Department (accounting for inventory)
▪ The stock release will serve as a document which:
• Legalized the actual release of the goods in the warehouse.
• Represents reduction in inventory records (warehouse and accounting records)
▪ Another warehouse employee adjusts the stock records to reflect the reduction in inventory upon receiving a
copy of the stock release; take note that these stock records are not formal accounting records for controlling
inventory assets, and are used for warehouse management purposes only.
▪ A Back Order is prepared and sent to the Sales Department (receive order function) if the inventory levels are
insufficient to fill in the order.
• Back order/s stay on file until inventories arrive from the supplier
• Back ordered items are processed and shipped first before new sales are processed.
D. Ship Goods (Shipping Department)
▪ Upon receiving the goods from the warehouse, the shipping clerk reconciles the physical items with stock
release document and approved sales order to verify that the order is correct and complete.
▪ The shipping clerk then packages the goods, attaches a packing slip, completes the shipping notice and
prepares a bill of lading (in case of outsourced shipping function).
• Bill of Lading is a formal contract between the seller and the shipping company to transport the
goods to the customer; this document established legal ownership and responsibility for goods in
transit.
• Packing Slip is a summary list of what is included in the shipment; attached to the packaging where
the goods are being held.
• Shipping Notice is a formal notification that the goods ordered are en-route to their destination. A
copy of this should be sent to the Sales Department for customer relation purposes and to the Billing
Department for Invoice preparation.
▪ Once the goods are transferred to the carrier for shipment:
• The shipping clerk records the shipment in the shipping log;
• Forward the shipping notice and stock release to the billing function as proof of shipment and;
• Send notice to the customer service to update the customer’s open order file.
▪ The shipment of goods marks the completion of the economic event and the point at which the customer
should be billed.
▪ The ship goods function serves as an important independent verification control point and is the last
opportunity to detect errors before shipment.
E. Bill Customer (Billing Department)
▪ The approved sales order from the Sales Department is placed in a Sales Order Pending File until the receipt
of the shipping notice and packing slip, which describes what product/s were actually shipped to the customer.
▪ Unit prices, taxes and freight charges are added to the invoice copy of the sales order.
▪ The completed Sales Invoice is the customer’s bill, which formally depicts the charges to the customer, and a
copy of the document will be forwarded to:
• Accounts Receivable – Subsidiary Ledger Department, to update the subsidiary ledger of the
customers.
• Inventory Control Department, to update subsidiary ledger of the inventories sold evidenced by the
stock release document.
▪ The billing function also maintains the Sales Journal, which will be updated after preparing the Sales Invoice.
▪ Periodically, a sales report (which is composed of all sales for the given period) is prepared for the General
Ledger Department for posting.
▪ Billing awaits notifications from shipping before it bills the customer to avoid problems such as:
• Billing customers for goods not shipped.
• Wrong amount or information in the sales invoice.
F. Update Inventory (Inventory Control Department)
▪ The inventory control department reduces inventory subsidiary ledger from information contained in the Stock
Release document, the proof of the reduction is evidenced by receipt the Sales Invoice from the billing
function.

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 ▪ Periodically, the financial value of the total reduction in inventory is summarized in a journal voucher and
sent to the General Ledger function for posting.
G. Update Accounts Receivable (Accounts Receivable Department)
▪ Customer records in accounts receivable subsidiary ledger are updated from information provided by the Sales
Invoice received from the billing function.
▪ Every customer has an account record in AR subsidiary ledger containing the following:
• Name
• Address
• Current balance
• Available credit
• Transaction dates
• Invoice numbers
• Credits for payments, returns and allowances
▪ Periodically, the individual account ending balances are summarized in a report that is sent to the General
Ledger function for posting.
H. Post to General Ledger
▪ By the end of the period, the general ledger function has received journal vouchers from the billing and
inventory control tasks and an account summary from the AR function.
▪ To post the transactions in their respective control accounts.
• Accounts Receivable (Dr) – from the Accounts Receivable Department
• Cost of Goods Sold (Dr) – from the Inventory Control Department
• Inventory (Cr) - from the Inventory Control Department
• Sales (Cr) – from the Billing Department
o Sales Return Procedures
▪ An organization can expect that a certain percentage of its sales will be returned.
▪ This occurs for a number of reasons, such as:
• The company shipped the customer the wrong merchandise
• The goods were defective
• The product was damaged in shipment
• The buyer refused delivery because the seller shipped the goods too late or they were delated in
transit.
▪ The procedure for a Sales Return are:
• Prepare Return Slip
o Prepared by the receiving department of the buyer after inspection, checking, and counting
the goods delivered.
• Prepare Credit Memo
o Upon receipt of the return slip, the sales employee prepares a credit memo
• Approve Credit Memo
o The credit manager evaluates and make a judgement to grant or disapprove the credit memo.
o The approved credit memo will be forwarded to:
▪ Billing Department, for recognizing Sales Return in the Sales Journal
▪ Inventory Control Department, to adjust inventory and cost of goods sold
▪ Accounts Receivable Department, to adjust the customer’s subsidiary ledger
• Update Sales Journal
o Upon the receipt of the approved credit memo, the sales return transaction is recorded in the
sales journal.
• Update Inventory
o Adjust inventory and cost of goods sold
• Update Accounts Receivable
o Adjust the customer’s subsidiary ledger
• Update General Ledger

II. CASH RECEIPT PROCEDURES

➢ The sales procedures mentioned described a credit transaction where most sales were on account, that results in the
establishment of accounts receivable of each customer.
➢ Payment for those receivables will be due at some point, in which cash receipts procedures will apply for the collection.
A. Open mail and prepare remittance list
▪ A mail room employee opens envelopes containing customers’ payments and the attached remittance advices.
• Remittance advice contains information needed to service individual customers’ accounts. This
includes
o Payment date
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 o Account number
o Amount paid
o Check number
o Invoice Number (to what invoice the payment was applied)
▪ Mail room personnel route the checks and remittance advices to an administrative clerk who endorses the
checks for deposit, and reconciles the amount on each remittance advice with the corresponding check.
▪ The clerk then records each check on a form called a Remittance List, where all cash received is logged, then
the clerk prepares three copies of the remittance list:
• The original copy is sent with the checks to the record and deposit function.
• The second copy goes with the remittance advices to the update Accounts Receivable function.
• The third copy goes to a reconciliation task.
B. Record and Deposit Check
▪ A cash receipt employee verifies the accuracy and completeness of the checks against the remittance list.
▪ Any checks possible lost or misdirected between the mail room and this function are identified.
▪ After reconciling the remittance list to the checks, the clerk prepares a bank deposit slip showing the amount
of the day’s receipts and forwards this along with the checks to the bank.
▪ Upon deposit of the funds, the bank teller validates the deposit slip and returns it to the company for
reconciliation.
▪ The employee records the check in the Cash Receipts Journal using the validated deposit slips.
▪ At the end of each period, a summary of cash receipts will be sent to the General Ledger function for posting.
C. Update Accounts Receivable
▪ The remittance advices together with the remittance list are used to post to the customer’s accounts in the AR
subsidiary ledger.
▪ Periodically, the changes in account balances are summarized and forwarded to the general ledger function.
D. Update General Ledger
▪ Upon receipt of the journal voucher and the account summary, the general ledger function reconciles the
figures, posts to the cash and AR control accounts and files the journal voucher.
• Cash (Dr)
• Accounts Receivable (Cr)
E. Reconcile Cash Receipts and Deposits
▪ Periodically, a clerk from the controller’s office reconciles cash receipts by comparing a copy of the prelist,
deposit slips received from the bank and the related journal vouchers.

III. Threats and Controls in the Revenue Cycle

Activities Threats Controls

General ➢ Inaccurate or invalid master ➢ Use of an ERP System
data ➢ Data processing integrity controls
➢ Unauthorized disclosure of ➢ Restriction of access to master data
sensitive information ➢ Review of all changes to master data
➢ Loss or destruction of data ➢ Access controls
➢ Poor performance ➢ Backup and disaster recovery procedures
➢ Managerial reports
Sales Order Entry ➢ Incomplete/inaccurate orders ➢ Data entry edit controls
➢ Invalid orders ➢ Restriction of access to master data
➢ Uncollectible accounts ➢ Digital signatures or written signatures
➢ Stockouts or excess inventory ➢ Credit limits
➢ Loss of customers ➢ Specific authorization to approve sales to new
customers or sales that exceed a customer’s credit limit
➢ Aging of accounts receivable
➢ Perpetual inventory control system
➢ Training
➢ Periodic physical counts of inventory
➢ Sales forecasts and activity reports
Warehousing and ➢ Picking the wrong items or the ➢ Bar-code and RFID technology
Shipping wrong quantity ➢ Reconciliation of picking lists to sales order details
➢ Theft of inventory ➢ Restriction of physical access to inventory
➢ Shipping errors (delay or failure ➢ Documentation of all inventory transfers
to ship, wrong quantities, wrong ➢ Periodic physical counts of inventory and
items, wrong addresses, reconciliation to recorded quantities
duplication) ➢ Reconciliation of shipping documents with sales
orders, picking lists, and packing slips
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 Billing/ Accounts ➢ Failure to bill ➢ Separation of billing and shipping functions
Receivable Updating ➢ Billing errors ➢ Periodic reconciliation of invoices with sales orders,
➢ Posting errors in accounts picking tickets, and shipping documents
receivable ➢ Configuration of system to automatically enter pricing
➢ Inaccurate or invalid credit data
memos ➢ Restriction of access to pricing master data
➢ Data entry edit controls
➢ Reconciliation of shipping documents (picking tickets,
bills of lading, and packing list) to sales orders
➢ Data entry controls
➢ Reconciliation of batch totals
➢ Mailing of monthly statements to customers
➢ Reconciliation of subsidiary accounts to general ledger
➢ Segregation of duties of credit memo authorization
from both sales order entry and customer account
maintenance
➢ Configuration of system to block credit memos unless
there is either corresponding documentation of return
of damaged goods or specific authorization by
management
Cash Collections ➢ Theft of cash ➢ Segregation duties—the person who handles (deposits)
➢ Cash flow problems payments from customers should not also
o Post remittances to customer accounts.
o Create or authorize credit memos.
o Reconcile the bank account.
➢ Immediately upon opening mail, create list of all
customer payments received.
➢ Prompt, restrictive endorsement of all customer checks
➢ Having two people open all mail likely to contain
customer payments
➢ Use of cash registers
➢ Daily deposit of all cash receipts
➢ Lockbox arrangements, EFT, or credit cards
➢ Discounts for prompt payment by customers
➢ Cash flow budgets

END

Prepared by:
EUREZE LHOED G. TABAR
CPA,MBA,CrFA

Sources:
➢ Accounting Information System Ninth Edition by James A. Hall
➢ Accounting Information System Thirteenth Edition by Marshall Romney, Paul John Steinbart

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