Three processes that constitute the revenue cycle: Sales Order, Sales Return and Cash Receipts

procedures

Sales Order

1. Receive order

 Receipt of customer order indicating the type and quantity of merchandise desired.
o Not yet in a standard format, it can be sent through email or a representative who will
visit the entity
o If from an entity: they can send a copy of their purchase order
 Transcribe in a sales order which contains vital info such as customer’s name, address, account
number, the description of the item sold, its quantity and prices
 A copy is placed in a customer open order file which enables the employees to update the
document for any changes and respond to questions.

2. Check Credit

 Establishing the creditworthiness of the customers

 Credit approval process is an authorization control
 Send a copy of the sales order to the check-credit task for approval
 The returned approved sales order triggers the continuation of the sales process

3. Pick Goods

 Picking ticket (stock release document) is sent to the pick goods function in the warehouse.
o Picking ticket- contains the inventory that must be picked from the warehouse, formal
authorization for the warehouse clerk to release the items
 Verified stock release document is sent to ship goods task
o If the stock is insufficient, it is adjusted to reflect the actual amount going to the
customer. A back order record is prepared until the inventories arrive from the supplier.
 Adjusts stock records to reflect the reduction in inventory

4. Ship Goods

 The shipping department receives the packing slip and shipping notice
o Shipping notice- contains the date of shipment, the items & quantities shipped, freight
charges
o Packing slip- will travel with the goods to describe the goods
 The shipping clerk reconciles the physical items with the packing slip, shipping notice and
stock release
o The ship goods function serves as an independent verification control, last chance to
correct any error
 The bill of lading is prepared
o The shipping clerk also packages the goods, attaches the packing slip, completes the
shipping notice
o Bill of lading- a contract between the seller and the shipping company to transport the
goods to the customer. It establishes the legal ownership of the goods.
 Once the items are shipped, the shipping clerk updates the customer open order file and
forwards the shipping notice.

5. Bill Customer

 Customers are billed after the shipment

  The bill customer function receives a copy of the sales order placed in an S.0. pending file until
the shipping notice arrived which contains the actual goods shipped
 A sales invoice is sent to the customer
 Records the sale in the sales journal
 Forwards the ledger copy of the sales order to the update AR tasks
 Sends the stock release document to the update inventory records task
 The entries in the sales journal are summarized in the sales journal voucher file which is sent
to the general ledger for posting

6. Update Inventory Records

 The stock release document is used to update the inventory subsidiary ledger accounts
o Dr. COGS Cr. Inventory

7. Update Accounts Receivable

 Update the subsidiary ledger from the sales order (ledger copy)

8. Post to general ledger

 Posting the control accounts of the AR, Inventory and Sales entries
o For independent verification controls

Sales Return Procedures

1. Prepare return Slip

 Prepares a return slip

o The goods will go to the warehouse to be restocked together with the return slip
 Second copy is sent to the sales function to prepare a credit memo

2. Prepare credit memo

 Credit memo- authorization for the customer to receive credit for the merchandise returned
 Sent to the billing transaction to reversed the sales transaction

3. Approve Credit Memo

 Approved credit memo- credit manager evaluates the circumstances of the return and make a
judgment to grant or disapprove credit.

4. Update Sales Journal

 Record a contra entry in the sales journal

5. Update Inventory and AR records

6. Update General Ledger

 Dr. Inventory, Sales RA Cr. COGS, AR

Cash Receipt Procedures

1. Open Mail and Prepare Remittance Advice

 Remittance advices- contain info needed to service individual customer accounts, includes
payment date, amount, account number
 Remittance list- all cash received Is recorded
2. Record and deposit check

 Cash receipts journal- where the reconciled remittance list and check is recorded after
 Bank deposit slip- amount of the day’s receipts and forwarded to bank

3. Update the Accounts Receivable

 Remittance advices are used

4. Update General Ledger

 Uses the journal voucher and account summary, the general ledger function reconciles the
figures, posts to the cash and AR control account and files the journal voucher

5. Reconcile Cash Receipts and deposits

 A controller reconciles cash receipts by comparing the documents: copy of the prelist, deposit
slips received from the bank and related journal vouchers

Revenue Cycle Controls

 Transaction Authorization- Ensure valid transactions are processed

o Sales Processing
 Credit check
 Return Policy
o Cash Receipts
 Remittance List
 Segregation of Duties
o Authorization, Custody, Recording
 Supervision
 Accounting Records- Audit Trail
 Access Controls
 Independent Verification- prevents and detects unauthorized and illegal access to the firm’s
assets. Examples: warehouse security, depositing cash daily in the bank, using a safe or night
deposit
 Independent Verification- verify accuracy and completeness of tasks that other functions in the
process perform

Physical Systems

 Serve as a visual training to promote better understanding of key concepts

 Reinforce the importance of segregation of duties through departmental boundaries
