Revenue Cycle

Submitted to:

Mrs. Concepcion Rasalan-Racaza

Submitted by:
Abangan, Shaira Cristy F. Baquerfo, Richelle Eve. B. Dy, Jaecelle Margrett G. Go, Shaun Anthony T. Largo, Edsa Mae G. Ventura, Cleo Ariana T. Marjadas, Jamaica J. Pagulayan, Lilli Pearl A. Potolin, Justice Rey B. Taveros, Maxine Ann M. Tiu, Matthew Allen O.

Submitted on:
June 19, 2013

Table of Contents Description of Activities Documents and Records Position Titles Controls Related Account Titles

Description of Activities
The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. It is the primary external exchange of information with customers.

There are four basic business activities in the revenue cycle which comprise of: Sales order entry Shipping Billing Cash collections Sales Order Entry The revenue cycle is triggered by a notification from the customer that he wishes to order a certain good or service from the entity. The sales clerk is the one who receives the notification and checks with their system concerning the availability of the goods. Once confirmed, the sales clerk prepares the sales order. It contains the customer number, customer address, the product ID and quantity ordered. He calls the credit department for approval of the sales order. This is a control intended to safeguard the entity from customers who may be unable to pay for the goods or services they procure. Upon approval, the sales clerk notifies the customer to know the order has been accepted, and sends the warehouse department, shipping department, and the accounts receivable department a copy of the sales order. He retains a copy to be filed alphabetically. The sales clerk also responds to any inquiry the customer may have. Shipping The sales clerk prepares both the pocking ticket and the packing slip. The picking ticket triggers the pick and pack process and authorizes the release of the goods to the shipping department. He sends the picking ticket to the warehouse, and the packing slip to the shipping department. The shipping department then compares the physical count of inventory with the quantities indicated on the picking ticket and with the quantities indicated on the copy of the sales order that was sent directly to shipping from sales order entry. If they agree with each other, then the shipping department sends the goods to the customer. The shipping clerk also updates the inventory master file and a shipping document, most often a multicopy (three copies) bill of lading. The original copy of the bill of lading is sent to the customer, another copy is forwarded to the accounts receivable department , and the last copy is retained by the shipping clerk numerically. Billing The accounts receivable department clerk compares the bill of lading to the sales order and compares the prices with a standard price list. The accounts receivable clerk will then prepare a multicopy sales invoice (pre-numbered) and also records the billing after matching the information in the sales order, bill of lading, and sales invoice. The recording of the transaction updates the accounts receivable master file, sales transaction file, and sales journal.

As a control method, every week, the controller will account for all bill of ladings and sales invoices, and every day the bill of ladings and duplicates of sales invoices are compared. Every month, the accounts receivable master file will be compared to the general ledger by the controller. An accounts receivable trial balance is also reviewed by the controller to check for any bad debts, and any possible uncollectible accounts are to be approved by the president through an uncollectible account authorization form before being written off by the accounts receivable clerks through the general journal. The maintenance of accounts receivable can be done two ways through the open-invoice method or the balance-forward method. In the open-invoice method, the customer pays by invoices. Two copies of the invoice are sent to the customer, and the customer is asked to send their payment with one copy of the invoice. The invoice returned with the payment is called the remittance advice. In the balance forward method, customers pay their accounts based on a monthly statement. Monthly statements list any new transactions since the prior statement and contain the current balance of the customers account. Included in the monthly statement is a stub which includes pre-printed information with customer name, account number, and balance. This stub is returned with the payment, and it serves as the remittance advice. Remittances are then applied against the customers balance as opposed to the invoice. Cash Collection The cashier, who reports to the treasurer, handles customer remittances. He prepares a prelisting of the checks received and daily cash summary and deposits the checks in the bank. The remittance advices, however, are forwarded to the accounts receivable department by the mailroom clerk. The daily cash summary is also forwarded to the accounts receivable department. The accounts receivable department clerk matches the remittance advices with the daily cash summary. He then records the remittance/s and cancels it against the customers account or the invoice, depending on which billing method is used. Recording the remittance will result in the updating of the cash receipts transaction file, the cash receipts journal and general journal. Exceptions: Sales Returns and Allowances Once in a while, customers return items. Should a return occur, the receiving dock clerk will notify the credit manager of goods that have been received from the customer and returned to the warehouse. The credit manager then issues a credit memo which authorizes the crediting of the customers account. The credit memo is sent to the accounts receivable clerk in charge of recording customer accounts. He uses the credit memo to update the sales returns and allowances journal and accounts receivable master file.

Documents and Records

Sales Order Entry Type of Document/ Record 1. Customer Order Description It is a document specifying the kind and amount of goods ordered by customer. It is used to customer orders. process Business Activities involved Sales order entry

2. Sales Order

Sales order entry to Shipping Shipping

3. Picking Ticket

It authorizes the warehouse to pick the goods from the shelf and send them to shipping. A contract between the shipper and the carrier in which the carrier agrees to transport the goods to the shippers customer. It is attached to the outside of a package and identifies the customer and the contents of the package. It contains a record for each inventory item in each inventory or warehouse location It is a business document used to notify the customer of an obligation to pay the seller for the merchandise. It contains the description and the quantity of goods sold, the price, freight charges, insurance terms, and other relevant data. It is a collection of sales invoice. It is a computergenerated file that includes all sales transaction processed by the accounting system for a period. It is a listing or report generated from the sales transaction file that

4. Bill of Lading

Shipping

5. Packing Slip

Shipping

6. Inventory Master File

Shipping

7. Sales Invoice

Billing

8. Sales Transaction File

Billing

9. Sales Journal or Listing

Billing

typically includes the customer name, date, amount and account classification/s for each transaction. 10. Accounts Master File Receivable It is a repository of all unpaid invoices issued by an organization awaiting final disposition. It is a list or report that shows the amount receivable from each customer at a point in time. It is prepared directly from the accounts receivable master file, and is usually an aged trial balance. It is a document that lists all transactions with a certain customer, including both sales and payments. It is a business document used by the payer to notify the payee of the items being paid. It is usually from the payee sent to the payer, the returned by the payer with information of the items being paid, together with the payment. It is prepared by the mailroom clerk, which is then sent to the accounts receivable department for comparison with the remittance advices. It contains the checks (and cash) received for the day. It is created when the customers payments are recorded; it contains a detail of each payment as reflected on the RA accompanying the payment. It is a listing or report generated from the cash receipts transaction file and includes all transactions for a given Billing

11. Accounts Receivable Trial Balance

Billing

12. Monthly Statement

Billing

13. Remittance Advice

Cash Collections

14. Daily Cash Summary

Cash Collections

15. Cash Receipts Transaction File

Cash Collections

16. Cash Receipts Journal or Listing

Cash Collections

17. Credit Memo

18. Sales Returns and Allowances Journal

19. Uncollectible Account Authorization Form

20. General Journal

21. General Ledger

period. It indicated a reduction in the amount due from a customer because of returned goods or an allowance. It takes the same form as the sales invoice, but supports reduction rather than increases in accounts receivable. It is used to record sales returns and allowances. It serves the same function as the sales journal. It is used internally to indicate authority to write an account receivable off as uncollectible. It is the simplest type of journal. It is used when no special journal exists to record a transaction, usually when a transaction occurs infrequently. The general ledger is a complete repository of all the transactions that occur over a companys life.

Exception: Returns Allowances

Sales and

Exception: Returns Allowances

Sales and

Exception: Write-offs

Exception: Write-offs and Provision for Bad Debts

Billing

Position Titles
Position 1. Sales Clerk Description The sales clerk will receive the customer order, submit it to the credit manager for approval, checks for the availability of goods, and prepare the sales order. The credit manager decides how much credit is to be allowed to each customer, providing general and specific authorization for credit limits. He also issues credit memos for sales returns and allowances. The warehouse clerk will print the picking ticket generated from the sales order and, with this authorization, pick the authorized goods from the warehouse and sends it to shipping. The shipping clerk performs three-way checking between the quantity of inventory released, the quantity asked by the sales order, and the quantity stated on the picking ticket. He also prepares the multicopy bill of lading to be sent to the A/R department and customer, updates the inventory master file, and prepares the packing slip. Personnel from the shipping department will pack the ordered items and send them to the customer along with the bill of lading and packing slip. Accounts receivable clerks will be in charge of preparing a sales invoice after comparing the bill of lading to the sales order. They will send the sales invoice to the customer, and file a duplicate. Theyre also in charge of preparing monthly statements and recording remittances as well as credit memos and write-offs. The controller reviews monthly statements for possible bad debts and compares the accounts receivable master file to the general ledger accounts. He also compares bill of ladings to sales invoices. The president authorizes the write-off of bad debt accounts. The mailroom clerk opens envelopes from customers and sends the remittance advices to the A/R department. The cashier receives all the cash payments from the customers. Activities Involved Sales Order Entry

2. Credit Manager

Sales Order Entry Exceptions: Sales Returns and Allowances Shipping

3. Warehouse Clerk

4. Shipping Clerk

Shipping

5. Shipping Personnel

Shipping

6. Accounts Receivable Clerk

Billing Cash Collection Exception: Sales Returns and Allowances Billing

7. Controller

8. President 9. Mailroom Clerk

Billing Cash Collections

10. Cashier

Cash Collections

Controls
Segregation of duties Proper segregation of duties helps prevent various types of misstatement due to both errors and fraud. Some examples of segregation of duties in the revenue cycle are: - Separation of the responsibility for handling cash and responsibility for recording sales and cash receipts transaction information - Separation of the credit-granting function from the sales function - Separation of the responsibility of making internal comparison and responsibility of recording the original data Proper Authorization There must be proper authorization in three key points: 1. Credit must be properly authorized before a sale takes place 2. Goods should be shipped only after proper authorization (someone other than the warehouse personnel authorized the shipment) This establishes, for the shipping personnel, that someone other than the warehouse personnel authorized the shipment. 3. Prices, including basic terms, freight, and discounts, must be authorized. The use of authorized credit memoranda helps prevent improper authorization of accounts receivable adjustment. One-for-one checking - Comparing picking ticket to picked goods ensures that the correct goods are picked from the shelf and that any errors are detected and corrected in a timely manner - Comparing shipment to sales order and picking ticket ensures that the shipment will be authorized and accurate. - Sales invoice is matched with shipping documents (bill of lading) and sales order to prevent discrepancies between the goods shipped and the quantity and amount billed to the customer. Control against theft - Restrict physical access to inventory; document all internal transfers of inventory; perform periodic physical counts of inventory and reconciliation of counts of recorded amounts - Segregation of duties; minimization of cash handling; lockbox arrangements; prompt endorsement and deposit of all receipts - Periodic reconciliation of bank statement with records by someone not involved in cash receipts processing Adequate Documents and Records Retention of the different departments of the sales, shipping, billing and collection documents will allow for verification by parties both external and internal to the entity. Also, sufficient record-keeping procedures must exist within the revenue cycle for efficiency and effectiveness of operations. Pre-numbered Documents and Periodic Reconciliation It is meant to prevent and detect both the failure to bill or record sales and the occurrence of duplicate billings and recordings.

Backup and disaster recovery procedures; access controls (physical and logical) This control ensures the prevention of loss of data, and in case an incident occurs wherein loss of data is inevitable, data can still be retrieved from other databases and sources. The operations of the entity will not be encumbered further damage can be avoided. Mailing of monthly statements It encourages customers to respond if the balance is incorrectly stated. These must not be assigned to persons who are responsible for handling cash or, keeping sales or accounts receivable records. Clerical accuracy checks on invoices Verifying the accuracy of invoices helps prevent errors that may result to improper billing of the customer and error in the amount of cash collection. Maintain tickler file Reviewing file of open sales orders is meant to detect any shipments that should have taken place. This will ensure that all shipments are made in a timely manner. Review shipped not billed sales orders will ensure that all shipping notices are billed in a timely manner.

Regular confirmation of customer accounts The customer can review the report of open invoices to determine that they are valid and accurate. This means that the customer can contribute to the control over the revenue cycle. Reconcile shipping notices and picking tickets, bar code scanners, data entry controls This control is designed to prevent wrong quantities, items, or address which may cause customer dissatisfaction. Reconcile accounts receivable subsidiary ledgers with general ledger, monthly statements to customers, and edit and batch totals This control is designed to prevent incorrect posting of accounts receivable and incorrect records. Use of chart of accounts and review of account codings This control is performed to update the accounts used in the revenue cycle (additions, deletions, or modifications of accounts and account codings). Sales and profitability analysis, accounts receivable aging, and cash budgets to track operations Use of budgets and analysis of variances These controls are done to monitor and evaluate the performance of the revenue business process, and to ensure efficiency and effectiveness of operations.

Related Account Titles

1. Sales -a revenue account that reports the sales of merchandise. Sales are reported in the accounting period in which title to the merchandise was transferred from the seller to the buyer. 2. Accounts Receivable (sometimes Notes Receivable) -represents money owed by entities to the firm arising from the sale of products or services on credit. Accounts Receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer. 3. Cash or Cash in Bank -a current asset account which includes currencies, coins, checking accounts, and undeposited checks received from customers. The amounts must be unrestricted. 4. Sales Returns and Allowances -a contra revenue account that reports a. the merchandise returned by a customer and; b. the allowances granted to a customer because the seller shipped improper or defective merchandise. This will reduce the sellers account receivable and is subtracted from sales to arrive at net sales. 5. Sales Discount A contra revenue account that reports the discounts allowed by the seller if the customer pays the amount owed within a specified. This will reduce the sellers account receivable and is subtracted from sales to arrive at net sales. 6. Allowance for Uncollectible Accounts 7. -is a contra asset account associated with Accounts Receivable. When the balance of the Allowance for Uncollectible Accounts is subtracted from the balance in Accounts Receivable the result is known as the Net Realizable Value of Accounts Receivable. The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry maybe a percentage of sales or it might be based on an aging analysis of an Accounts Receivable. 8. Bad Debts Expense -is an operating expense resulting from making sales on credit and not collecting the customers entire Accounts Receivable balances. 9. Inventory -a current asset whose ending balance should report the carrying amount (lower of cost or NRV) of the merchandisers products awaiting to be sold. The inventory of a manufacturer should report the cost of its Raw Materials, Work in Process and Finished Goods. The cost of inventory should include all costs necessary to acquire the items and to get them ready for sale. 10. Cost of Goods Sold -is the cost of the merchandise that a retailer, distributor, or manufacturer has sold. The Cost of Goods Sold is reported on the Income Statement and can be considered as an expense of the accounting period.