Revenue Cycle

MGT 549

Revenue Cycle

Last Revised: 04/11/23 07:38

http://www.mgt.unm.edu/

Revenue Cycle Overview

Revenue cycle – activities related to sales of goods and services and related revenue receipt, including:Processing customer sales orders (cash and credit)Processing payments from customersProcessing customer requests for sales returns and

allowancesWrite-off of uncollectible accounts receivablesWrite-down of accounts receivable (allowance for bad

debts)

Importance of Revenue Cycle Activities

Direct interface to customers – make it as pleasant and efficient as possible

Drives important downstream processes such as production and procurement

The “front-door” for incoming cash – important to financial health and a target area for fraud, theft, and material misstatement

Controls outflow of inventory – important to asset control and both the income statement and balance sheet

Sales Order Processing Overview

Hall, Accounting Information Systems 6e (978-0-324-56089-3), Figure 4-1, Copyright © 2008 Cengage Learning

Sales Order Processing - Continued

The previous DFD is relatively logical (independent of system technology)But it’s not completely logical – How can you tell?

Specific systems will vary in:Task orderData connections among tasksDocuments and archive records

Most systems will record account entries as shown in the right half of the diagram

Customer billing and revenue recognition are triggered by shipment

Sales Actions and Documents

Arens & Ward, Systems Understanding Aid 7e (978-0-912503-27-1), page 34, Copyright © 2008 Armond Dalton Publishers

Sales Actions and Documents - Continued

The previous diagram is another view of sales processing that:Emphasizes processes (actions) and documentsIgnores some “nitty-gritty” internal data stores (e.g.,

back orders and shipping log)Omits credit approval

Comparing the previous two diagrams illustrates how two different people can look at the same system, see/emphasize different parts of it, and organize its components differently for presentation and documentation

Sales Order Processing

1. Receive order Not a process in the sense of turning inputs into

outputs Primarily a data routing and synchronization task (not

a process in the logical sense)

2. Credit check The process can interact with internal data stores or

with an external credit verification agency (e.g., Visa) Approved sales order will usually contain some extra

data (e.g., initials or a verification number)


3. Fulfillment (picking and shipping) If sufficient stock exists to fill order then:

Goods are picked and assembled into a shipment Stock records (quantities) are updated A bill of lading and/or packing slip is created and sent to the

customer with the goods (copies or equivalent data stored internally)

Shipment confirmation goes to the billing process If insufficient stock exists to fill the order then:

Goods available are picked and assembled into a shipment Stock records (quantities) are updated A back order is created for goods needed to complete the order The order is stored/marked as open (this data store drives a

periodic or other process that attempts to fill partially-filled orders A bill of lading and/or packing slip is created and sent to the

customer with the goods (copies or equivalent data stored internally)

Shipment confirmation goes to the billing process

Sample Bill of Lading



4. Billing Generate an invoice or payment advice and send to

the customer If order is only partially filled tell the customer

somehow (may be additional data on invoice) Store invoice (source document archive) or equivalent

data

5. Update journals and subsidiary ledgers Sales journal (debit cash or A/R, credit sales) Accounts receivable subsidiary ledger Inventory subsidiary ledger (only of inventory is

tracked per item)


6. Downstream accounting Summarize sales journal Create summary journal entry (Hall calls this a journal

voucher) in general journal Post journal entry to general ledger Reconcile subsidiary ledgers to general ledger

Exercise

Refer to the Sales Order Processing DFD (Hall 6e Figure 4-1):Are there any omissions? If so, what should be added

to the diagram?Are there any errors? If so, how should they be

corrected?How might the diagram be made more logical (less

physical or implementation-specific)?

Sales Return Processing

Think of sales return processing as the opposite of sales order processing:Goods and received and stocked, not picked and

shippedThe bill of lading is a system input, not a system outputReceivables/cash and COGS are creditedSales (or an offset account) and inventory are debited

SimilaritiesApproval process – return authorization, not creditSame journals and subsidiary ledgers are updatedSame general ledger account classes are updated

Sales Returns and Allowances


Sales Returns and AllowancesActions and Documents


Sample Sales Return Request


Cash Receipts Processing

Goals of cash receipts processing subsystem:Get cash in the bank ASAP (that reduces risk and

improves cash flow)Prevent theft/misuse of cashEfficiently handle routine cash inflows (e.g., cash sales

and payments on account)Correctly update accounting recordsGenerate an audit trail

The process has “extra” documents (e.g., the cash prelist) and processes (e.g., deposit reconciliation) to provide additional control

Cash Receipts Processing - Continued


Cash Receipts Actions and Documents



1. Sort cash inflows and prepare cash prelist Separate payments on account from other cash receipts Identify unidentified cash receipts (this may not be a trivial

task!) Prepare cash prelist and route it “around” subsequent

processing steps

2. Prepare deposit Prepare deposit slip and transmit cash, checks, and

deposit slip to bank Deposit confirmation is received unless deposit is made in-

person Large cash deposits may involve a third-party (e.g., Brinks)


3. Update journals and ledgers All receipts are recorded in the cash receipts journal Payments on account are also posted to the A/R subsidiary

ledger

4. Reconcile deposits Deposit confirmation is usually received later Confirmation is verified against the cash receipts journal, general

journal, or both

5. Reconcile bank statements Verify deposits against the cash receipts journal, general journal,

or both

6. Downstream accounting Summarize cash receipts journal Prepare journal entry in general journal Post journal entry to general ledger

Segregation of Functions

Transaction authorization should be separate from transaction processing

Asset custody should be separate from asset record-keeping

The organization should be structured such that perpetrating fraud requires collusion between two or more individuals

Exercise

How should cash receipts processing duties by segregated in order to maximize internal control and minimize risks?

What if you only have two regular employees available for day-to-day processing tasks?

Estimate of Bad Debt ExpenseActions and Documents


Estimate of Bad Debt Expense

This process is typically performed just before financial statements are prepared

Estimate bases:HistoryCurrent trendsMacroeconomic factorsSpecific characteristics of receivables (e.g., age)

A proper audit trail (provision for bad debts memo) should describe the estimate bases and calculations in detail – this and the journal entry are the only audit trail

Sample Aged Accounts Receivable


Aged Accounts Receivable Trial Balance

Aged accounts receivable trial balance serves the following purposes:A basis for estimating bad debtsA basis for targeting collection effortsA reconciliation against the accounts receivable

subsidiary ledger

Uncollectible Receivables Write-OffActions and Documents


Uncollectible Receivables Write-Off

Issues are similar to those of estimating bad debts Differences

There may be additional source documents (e.g., legal notice of bankruptcy and returned mail)

Timing is both event-driven and at end-of-period