Revenue Cycle (2)

7/28/2019 Revenue Cycle (2)

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Revenue

CycleSubmitted 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.

Marjadas, Jamaica J.Pagulayan, Lilli Pearl A.Potolin, Justice Rey B.Taveros, Maxine Ann M.Tiu, Matthew Allen O.

Ventura, Cleo Ariana T.

Submitted on:June 19, 2013


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Description of ActivitiesThe 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 paymentfor 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 acertain good or service from the entity. The sales clerk is the one who receives the notification andchecks with their system concerning the availability of the goods. Once confirmed, the sales clerkprepares the sales order. It contains the customer number, customer address, the product ID andquantity ordered. He calls the credit department for approval of the sales order. This is a controlintended to safeguard the entity from customers who may be unable to pay for the goods or servicesthey procure.

Upon approval, the sales clerk notifies the customer to know the order has been accepted, andsends the warehouse department, shipping department, and the accounts receivable department acopy of the sales order. He retains a copy to be filed alphabetically. The sales clerk also responds to anyinquiry the customer may have.

Shipping

The sales clerk prepares both the pocking ticket and the packing slip. The picking ticket triggersthe 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 quantitiesindicated on the picking ticket and with the quantities indicated on the copy of the sales order that wassent directly to shipping from sales order entry. If they agree with each other, then the shippingdepartment sends the goods to the customer. The shipping clerk also updates the inventory master fileand a shipping document, most often a multicopy (three copies) bill of lading. The original copy of thebill 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 andcompares the prices with a standard price list. The accounts receivable clerk will then prepare amulticopy sales invoice (pre-numbered) and also records the billing after matching the information inthe sales order, bill of lading, and sales invoice. The recording of the transaction updates the accountsreceivable master file, sales transaction file, and sales journal.


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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. Anaccounts receivable trial balance is also reviewed by the controller to check for any bad debts, and anypossible uncollectible accounts are to be approved by the president through an uncollectible accountauthorization 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-invoicemethod 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 paymentwith one copy of the invoice. The invoice returned with the payment is called the remittance advice. Inthe balance forward method, customers pay their accounts based on a monthly statement. Monthlystatements list any new transactions since the prior statement and contain the current balance of thecustomers account. Included in the monthly statement is a stub which includes pre -printed informationwith customer name, account number, and balance. This stub is returned with the payment, and itserves as the remittance advice. Remittances are then applied against the customers balance asopposed to the invoice.

Cash Collection

The cashier, who reports to the treasurer, handles customer remittances. He prepares aprelisting of the checks received and daily cash summary and deposits the checks in the bank. Theremittance advices, however, are forwarded to the accounts receivable department by the mailroomclerk. The daily cash summary is also forwarded to the accounts receivable department. The accountsreceivable department clerk matches the remittance advices with the daily cash summary. He thenrecords the remittance/s and cancels it against the customers account or the invoice, depending onwhich billing method is used. Recording the remittance will result in the updating of the cash receiptstransaction 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 willnotify the credit manager of goods that have been received from the customer and returned to thewarehouse. The credit manager then issues a credit memo which authorizes the crediting of thecustomers account. The credit memo is sent to the accounts receivable clerk in charge of recordingcustomer accounts. He uses the credit memo to update the sales returns and allowances journal andaccounts receivable master file.


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Documents and Records Sales Order Entry

Type of Document/Record

Description Business Activitiesinvolved

1. Customer Order - It is a document specifyingthe kind and amount of goods ordered bycustomer.

Sales order entry

2. Sales Order - It is used to processcustomer orders.

Sales order entry toShipping

3. Picking Ticket - It authorizes thewarehouse to pick thegoods from the shelf andsend them to shipping.

Shipping

4. Bill of Lading - A contract between theshipper and the carrier inwhich the carrier agrees totransport the goods to theshippers customer.

Shipping

5. Packing Slip - It is attached to the outsideof a package and identifies

the customer and thecontents of the package.

Shipping

6. Inventory Master File - It contains a record foreach inventory item in eachinventory or warehouselocation

Shipping

7. Sales Invoice - It is a business documentused to notify thecustomer of an obligation

to pay the seller for themerchandise. It containsthe description and thequantity of goods sold, theprice, freight charges,insurance terms, and otherrelevant data.

Billing

8. Sales Transaction File - It is a collection of salesinvoice. It is a computer-generated file that includesall sales transactionprocessed by theaccounting system for aperiod.

Billing

9. Sales Journal or Listing - It is a listing or reportgenerated from the salestransaction file that

Billing


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typically includes thecustomer name, date,amount and accountclassification/s for eachtransaction.

10. Accounts ReceivableMaster File

- It is a repository of allunpaid invoices issued byan organization awaitingfinal disposition.

Billing

11. Accounts ReceivableTrial Balance

- It is a list or report thatshows the amountreceivable from eachcustomer at a point intime. It is prepared directlyfrom the accountsreceivable master file, andis usually an aged trialbalance.

Billing

12. Monthly Statement - It is a document that listsall transactions with acertain customer, includingboth sales and payments.

Billing

13. Remittance Advice - It is a business documentused by the payer to notify

the payee of the itemsbeing paid. It is usuallyfrom the payee sent to thepayer, the returned by thepayer with information of the items being paid,together with thepayment.

Cash Collections

14. Daily Cash Summary - It is prepared by themailroom clerk, which is

then sent to the accountsreceivable department forcomparison with theremittance advices. Itcontains the checks (andcash) received for the day.

Cash Collections

15. Cash ReceiptsTransaction File

- It is created when thecustomers payments arerecorded; it contains adetail of each payment asreflected on the RAaccompanying thepayment.

Cash Collections

16. Cash Receipts Journal orListing

- It is a listing or reportgenerated from the cashreceipts transaction fileand includes alltransactions for a given

Cash Collections


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period.17. Credit Memo - It indicated a reduction in

the amount due from acustomer because of returned goods or an

allowance. It takes thesame form as the salesinvoice, but supportsreduction rather thanincreases in accountsreceivable.

Exception: SalesReturns andAllowances

18. Sales Returns andAllowances Journal

- It is used to record salesreturns and allowances. Itserves the same functionas the sales journal.


19. Uncollectible AccountAuthorization Form

- It is used internally toindicate authority to writean account receivable off as uncollectible.

Exception: Write-offs

20. General Journal - It is the simplest type of journal. It is used when nospecial journal exists torecord a transaction,usually when a transactionoccurs infrequently.

Exception: Write-offsand Provision for BadDebts

21. General Ledger - The general ledger is acomplete repository of allthe transactions that occur

over a companys life.

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Position TitlesPosition Description Activities Involved

1. Sales Clerk The sales clerk will receive the customer order,submit it to the credit manager for approval, checksfor the availability of goods, and prepare the salesorder.

Sales Order Entry

2. Credit Manager The credit manager decides how much credit is tobe allowed to each customer, providing general andspecific authorization for credit limits. He also issuescredit memos for sales returns and allowances.

Sales Order Entry

Exceptions: SalesReturns andAllowances

3. Warehouse Clerk The warehouse clerk will print the picking ticketgenerated from the sales order and, with this

authorization, pick the authorized goods from thewarehouse and sends it to shipping.

Shipping

4. Shipping Clerk The shipping clerk performs three-way checkingbetween the quantity of inventory released, thequantity asked by the sales order, and the quantitystated on the picking ticket. He also prepares themulticopy bill of lading to be sent to the A/Rdepartment and customer, updates the inventorymaster file, and prepares the packing slip.

Shipping

5. Shipping Personnel Personnel from the shipping department will packthe ordered items and send them to the customer

along with the bill of lading and packing slip.

Shipping

6. Accounts ReceivableClerk

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 salesinvoice to the customer, and file a duplicate. Theyrealso in charge of preparing monthly statements andrecording remittances as well as credit memos andwrite-offs.

Billing

Cash Collection


7. Controller The controller reviews monthly statements forpossible bad debts and compares the accountsreceivable master file to the general ledgeraccounts. He also compares bill of ladings to salesinvoices.

Billing

8. President The president authorizes the write-off of bad debtaccounts.

Billing

9. Mailroom Clerk The mailroom clerk opens envelopes fromcustomers and sends the remittance advices to theA/R department.

Cash Collections

10. Cashier The cashier receives all the cash payments from thecustomers.

Cash Collections


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ControlsSegregation 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 andcash 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 AuthorizationThere must be proper authorization in three key points:

1. Credit must be properly authorized before a sale takes place2. Goods should be shipped only after proper authorization (someone other than the warehouse

personnel authorized the shipment) This establishes, for the shipping personnel, that someoneother 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 receivableadjustment.

One-for-one checking- Comparing picking ticket to picked goods ensures that the correct goods are picked from theshelf 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 beauthorized and accurate.

- Sales invoice is matched with shipping documents (bill of lading) and sales order to preventdiscrepancies 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 willallow 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 duplicatebillings and recordings.


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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 isinevitable, data can still be retrieved from other databases and sources. The operations of the entity willnot 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 topersons 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 thecustomer 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 havetaken 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 atimely manner.

Regular confirmation of customer accounts

The customer can review the report of open invoices to determine that they are valid and accurate. Thismeans 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 customerdissatisfaction.

Reconcile accounts receivable subsidiary ledgers with general ledger, monthly statements to

customers, and edit and batch totalsThis 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, ormodifications 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, andto ensure efficiency and effectiveness of operations.


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Related Account Titles1. Sales

-a revenue account that reports the sales of merchandise. Sales are reported in theaccounting period in which title to the merchandise was transferred from the seller to thebuyer.

2. Accounts Receivable (sometimes Notes Receivable)-represents money owed by entities to the firm arising from the sale of products or serviceson credit. Accounts Receivable is typically executed by generating an invoice and eithermailing or electronically delivering it to the customer.

3. Cash or Cash in Bank-a current asset account which includes currencies, coins, checking accounts, andundeposited checks received from customers. The amounts must be unrestricted.

4. Sales Returns and Allowances

-a contra revenue account that reportsa. the merchandise returned by a customer and;b. the allowances granted to a customer because the seller shipped improper or defectivemerchandise.This will reduce the seller s account receivable and is subtracted from sales to arrive at netsales.

5. Sales DiscountA contra revenue account that reports the discounts allowed by the seller if the customerpays the amount owed within a specified.This will reduce the sellers account receivable and is subtracted from sales to arrive at netsales.

6. Allowance for Uncollectible Accounts7. -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 Receivablethe result is known as the Net Realizable Value of Accounts Receivable. The credit balance inthis account comes from the entry wherein Bad Debts Expense is debited. The amount in thisentry maybe a percentage of sales or it might be based on an aging analysis of an AccountsReceivable.

8. Bad Debts Expense-is an operating expense resulting from making sales on credit and not collecting thecustomers 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 manufacturershould 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 forsale.

10. Cost of Goods Sold-is the cost of the merchandise that a retailer, distributor, or manufacturer has sold. The Costof Goods Sold is reported on the Income Statement and can be considered as an expense of the accounting period.

Revenue Cycle (2)

Documents

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