PP 04 New

Chapter
4
The
Revenue
Cycle
Accounting Information
Systems 9e
James A. Hall
2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Objectives for Chapter 4

Understand the fundamental tasks performed in the
revenue cycle, regardless of the technology in place.
Identify functional departments in the revenue cycle and
the flow of revenue transactions through the organization.
Specify documents, journals, and accounts needed for
audit trails, records, decision making, and financial
reporting.
Understand risks associated with the revenue cycle and
the recognize controls that reduce these risks.
Be aware of operational and control implications of
technology used to automate and reengineer the revenue
cycle.
2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Conceptual System: Sales Order

Procedures
Receive order.
Begins with receipt of customer order which is transcribed
into a formal sales order which is placed in the customer
order file for future reference. May take days or weeks.
Check credit.
Before processing order, creditworthiness must be established.
Pick goods.
The stock release or picking ticket provides authorization to
warehouse personnel to release goods which are sent to
shipping along with the verified stock release.
Warehouse employees adjust stock records to reflect
inventory reduction and prepares back-order records if
insufficient goods.

Procedures
Ship goods.
Shipping department uses the packing slip and shipping
notice to reconcile goods received from the warehouse.
Goods are packaged, bill of lading is prepared, goods are
given to carrier, and shipment is recorded in the shipping
log.
Bill customer.
Done after shipment by sending a completed sales invoice.
Billing record-keeping includes recording the sale in the sales
journal.
The sales journal is a special journal used for recording
completed sales transactions. Entries are summarized in a
sales journal voucher used to update the GL control account.

Procedures
Update inventory records.
The inventory control function updates inventory
subsidiary ledger accounts from the stock release
document information.
Update accounts receivable records.

Customer records in the accounts receivable (AR)
subsidiary ledger updated from the sales order
ledger copy.
Post to general ledger.

General ledger function uses journal vouchers to
update control accounts.
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The Conceptual System: Sales Return

Procedures
Prepare return slip.
Customer records in the accounts receivable (AR)
subsidiary ledger updated from the sales order ledger
copy.
Prepare credit memo.

If clerk has authorization, sent directly to billing function.
Approve credit memo.

Credit manager evaluates and return the approved
credit memo to the sales department.
Update sales journal.

Update inventory and AR records.
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The Conceptual System: Cash Receipt

Procedures
Open mail and prepare remittance list.
Remittance advice is a turnaround document.
Record and deposit checks.

After reconciling, employee records check in the cash
receipts journal and prepares a bank deposit slip.
Update accounts receivable records.

Update general ledger.
Reconcile cash receipts and deposits.
Employee not involved in cash receipts process
reconciles receipts by comparing (1) a copy of the
prelist, (2) deposit slips and (3) related journal vouchers.
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Physical Systems
Physical accounting information systems combine
technology and human activity.
Smaller businesses tend to rely less on technology, whereas
larger companies tend to employ advanced technologies.
Nature of the mix employed in a system impacts the
internal controls needed to control the system.
Computers in basic technology revenue systems are

independent.
Information between departments is communicated via

hard-copy documents.
Maintaining physical files of source documents is critical to
the audit trail.
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Physical Systems: Basic Sales Order Processing

Begins with a customer placing an order.
Sales department captures details on a sales order form.
Credit department verifies credit and approves order.
Warehouse sends inventory to shipping and records
inventory reduction.
Shipping reconciles order, prepares bill of lading, ships
items, records transaction and sends stock release to
billing.
Billing department bills customer and updates sales
journal.
AR and inventory clerks update subsidiary ledgers.
Journal vouchers and summaries are periodically sent to GL for

reconciliation and posting.
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Physical Systems: Basic Cash Receipts

Processes
Checks and remittance advices received in mail room.
Clerk reconciles items, endorses checks, prepares remittance list
and sends checks and list copy to cash receipts department.
Remittance advices and list copy sent to AR.
Cash receipts clerk records checks in cash receipts journal,

prepares deposit slip and sends checks to bank.
Periodically a journal voucher is sent to GL department.
AR updates customer balances and sends summary to GL.

GL clerk reconciles amounts and posts to control accounts.
Controller clerk performs periodic bank reconciliations.
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Physical Systems: Advanced Technology

Advanced technologies allow integration of
accounting with other business systems through a
common information system.
Objective is to improve performance and reduce costs.
Can significantly alter and simplify the revenue cycle.
Remittance advices and list copy sent to AR.
With an integrated sales order processing system

many functions are performed automatically to the
center computer system.
These labor intensive activities increase operating costs
and contribute to human error.
Technology reduces costs and errors, increasing efficiency.
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Physical Systems: Integrated Cash Receipts

Checks and remittance advices received in mail room.
Clerk reconciles items, endorses checks, prepares remittance
list and sends checks, remittance advices and list to cash
receipts.
Cash receipts clerk reconciles checks and creates a

record in the cash receipts journal for each remittance
advice, and prepares deposit slip.
Member of security group deposits checks in bank.
System automatically closes sales invoice, posts to GL,

and prepares and distributes various management
reports.
Controller clerk periodically reconciles remittance lists,
deposit slips, cash receipts journal and GL cash account.
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Physical Systems: Risks and Internal

Controls
Primary risks associated with revenue cycle transactions:
Undetected data input errors:
IT controls include data checks and check digit edits to help
prevent errors.
Selling to un-creditworthy customers:

Physical controls include proper transaction authorization,
including a segregation of duties between transaction
authorization and transaction processing.
IT controls include automatic credit checking.
Shipping incorrect items or quantities:

Physical controls include independent verification.
IT controls include scanner technology and automated ordering.
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Controls
Inaccurately recording transactions in journals
and accounts.
Physical controls include transaction authorization,
accounting records, prenumbered documents, special
journals, subsidiary ledgers, general ledger control
accounts, files and independent verification:
Shipping department reconciles goods being shipped against
packing slip to ensure customer is receiving correct items and
quantity.
Billing function reconciles original sales order with shipping notice
to ensure bills are correct and sales are recorded properly.
GL function reconciles journal vouchers and summary reports
prepared independently in different functional areas before
posting to control accounts.
IT controls include automated postings and file backups.

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Controls
Misappropriation of cash receipts and inventory.
Physical controls include transaction authorization, supervision
(especially in the mail room), access controls and segregation of
duties:
Cash receipts function should be separate from the AR function.
Cash receipts clerk should not have access to GL cash.
Personnel with physical custody of inventory should not update records.
IT controls include multilevel security.
Unauthorized access to accounting records and reports.

Motives include attempt to create a fraud, data theft and
malicious acts.
Physical controls include access controls and segregation of
duties such that the perpetration of a fraud requires collusion.
IT controls include passwords and multilevel security.
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Physical Systems: Multilevel Security

Employs programmed techniques that permit
simultaneous access to a central system by many
users with different access privileges.
Users are prevented from obtaining information for
which they lack authorization.
Two common multilevel security methods:

Access control list (ACL) method assigns privileges
directly to individuals which is burdensome in large
organizations.
Role-based access control (RBAC) creates standard
tasks called roles that are assigned specific privileges.
Once a role is created, individuals are assigned to it.
Easy to add or delete roles as job responsibilities change.
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Physical Systems: Point-of-Sale (POS)

Systems
POS systems used extensively in retail establishments.
Customers pick items from shelves and take them to a cashier.
Clerk scans the Universal product code (UPC) of items.

Price and description retrieved from inventory file.
Inventory levels are updated and reordered as needed.
System automatically calculates taxes, discounts and total.

Non-cash payments are approved via online connection.
At shift end, money and receipts reconciled to the internal

cash register tape with cash over and shorts accounts for.
Cash receipts clerk prepares deposit slip for total daily cash
receipts and batch program posts entry to the GL.
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Physical Systems: POS Control Issues

Authorization:
Clerk should match customer signature with credit card.
Supervision:
Surveillance cameras and floor security help prevent
shoplifting and employee theft.
Access Control:
Separate cash drawers, locked showcases and magnetic tags
attached to merchandise help control theft.
Accounting records:
Only supervisors should access internal cash register tapes.
Independent verification:
Cash drawers should be reconciled to internal register tapes.
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Physical Systems: Reengineering

Electronic data interchange (EDI) expedites
transactions.
Customers computer automatically orders inventory as needed.
Seller processes order with little or no human involvement.
Binding terms specified in a trading partner agreement.
Control problems include ensuring only valid transactions are
processed and that accounting records are not compromised.
Doing business on the Internet involves both business-tobusiness (B2B) and business-to-consumer (B2C)
transactions.
Opens the door to thousands of business partners without formal
trading agreements.
Risks include threats from computer hackers, viruses and
transaction fraud.
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Chapter

Objectives for Chapter 4

The Conceptual System: Sales Order

The Conceptual System: Sales Order

The Conceptual System: Sales Order

Update accounts receivable records.

Post to general ledger.

The Conceptual System: Sales Return

Prepare credit memo.

Approve credit memo.

Update sales journal.

The Conceptual System: Cash Receipt

Record and deposit checks.

Update accounts receivable records.

Computers in basic technology revenue systems are

Information between departments is communicated via

Physical Systems: Basic Sales Order Processing

Journal vouchers and summaries are periodically sent to GL for

Physical Systems: Basic Cash Receipts

Cash receipts clerk records checks in cash receipts journal,

AR updates customer balances and sends summary to GL.

Physical Systems: Advanced Technology

With an integrated sales order processing system

Physical Systems: Integrated Cash Receipts

Cash receipts clerk reconciles checks and creates a

System automatically closes sales invoice, posts to GL,

Physical Systems: Risks and Internal

Selling to un-creditworthy customers:

Shipping incorrect items or quantities:

Physical Systems: Risks and Internal

IT controls include automated postings and file backups.

Physical Systems: Risks and Internal

IT controls include multilevel security.

Unauthorized access to accounting records and reports.

Physical Systems: Multilevel Security

Two common multilevel security methods:

Physical Systems: Point-of-Sale (POS)

Clerk scans the Universal product code (UPC) of items.

System automatically calculates taxes, discounts and total.

At shift end, money and receipts reconciled to the internal

Physical Systems: POS Control Issues

Physical Systems: Reengineering

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