Chapter 4

Direct exchange of finished goods or services for cash in a single transaction between a seller and a buyer.

Revenue cycle

More complex revenue cycles process sales on credit.

True

Two phases of revenue transactions.

Physical phase and financial phase

Involving transfer of assets or services from the seller to the buyer.

Physical phase

Involving the receipt of cash by the seller in payment of the account receivable.

Financial phase

As a matter of processing convenience, most firms treat physical and financial phase as a separate transaction.

True

Major subsystems of of revenue cycle.

Sales order processing system and cash receipts subsystem

Three processes that constitute the revenue cycle for most retail, wholesale, and manufacturing organizations.

Sales order procedures, sales return procedures, and cash receipts procedures.

Include tasks involved in receiving ad processing a customer order, filling the order and shipping products to the customer, billing the customer at the proper time, and correctly accounting for the transaction.

Sales order procedures

The sales process begins with the receipt of a __customer order__ indicating the type and quantity of merchandise desired

Receive order

At this point, the customer order is not in a standard format and may or may not be a physical document

Receive order

Orders may arrive by mail, by telephone, or from a filed representative who visited the customer

Receive order

When the customer is a business entity, the order is often a copy of the customer’s purchase order; a __purchase order__ is an expenditure cycle document

Receive order

Because the customer order is not in the standard format that the seller’s order processing system needs, the first task is to transcribe it into a formal __sales order__

Receive order

The __sales order__ captures vital information such as the customer’s name, address, and account number; the name, number, and description of the items sold; and the quantities and unit prices of each item sold

Receive order

Captures vital information such as the customer’s name, address, and account number; the name, number, and description of the items sold; and the quantities and unit prices of each item sold

Receive order

o   At this point, financial information such as taxes, discounts, and freight charges may or may not be included

Receive order

o   After creating the sales order, a copy of it is placed in the __customer open order file__ for future reference

Receive order

After creating the sales order, a copy of it is placed in the _____________________ for future reference

Customer open order file

The customer record in the open order file is updated each time the status of their order changes such as credit approval, on back-order, and shipment

Receive order

o   The open order file thus enable customer service employees to respond promptly and accurately to customer questions

Receive order

o   Before processing the order further, the customer’s creditworthiness needs to be established

Check credit

o   The circumstance of the sale will determine the nature and degree of the credit check

Check credit

For example, new customers may undergo a full financial investigation to establish a line of credit. Once a credit limit is set, however, credit checking on subsequent sales may be limited to ensuring that the customer has a history of paying his or her bills and that the current sale does not exceed the pre-established limit.

Check credit

o   The credit approval process is an authorization control and should be performed as a function separate from the sales activity

Check credit

o   The receive-order task sends the __sale orders (credit copy)__ to the check-credit task for approval

Check credit

o   The __returned approved sale order__ then triggers the continuation of sales process by releasing sales order information simultaneously to various tasks

Check credit

Triggers the continuation of sales process by releasing sales order information simultaneously to various tasks

Returned approved sales order

Documents involved

Stock release, packing slip, shipping notice, and sales invoice

o   The receive order activity forwards the __stock release__ document (also called the __picking ticket__) to the pick goods function, in the warehouse

Pick goods

o   This document identifies the items of inventory that must be located and picked form the warehouse shelves

Stock release document or picking ticket

o   It also provides formal authorization for warehouse personnel to release the specified items

Stock release document or picking ticket

o   After picking the stock, the order is verified for accuracy and the goods and __verified stock release__ document are sent to the ship goods task

Pick goods

o   If inventory levels are insufficient to fill the order, a warehouse employee adjust the verified stock release to reflect the amount actually going to the customer

Pick goods

o   The employee then prepares a __back-order record__, which stays on file until the inventories arrive from the supplier

Pick goods

o   Back-ordered items are shipped before new sales are processed

Pick goods

o   The warehouse employee adjusts the __stock records__ to reflect the reduction in inventory

Pick goods

o   These stock records are not the formal accounting records for controlling inventory assets

Pick goods

o   Before the arrival of the goods and the verified stock release document, the shipping department receives the __packing slip__ and __shipping notice__ from the receive order function

Ship goods

The __packing slip__ will ultimately travel with the goods to the customer to describe the contents of the order

Ship goods

o   The __shipping notice__ will later be forwarded to the billing function as evidence that the customer’s order was filled and shipped

Ship goods

o   This document conveys pertinent new facts such as the date of shipment, the items and quantities actually shipped, the name of the carrier, and freight charges

Shipping notice

In some systems, the shipping notice is a separate document prepared within the shipping function

Ship goods

o   Upon receiving the goods from the warehouse, the shipping clerk reconciles the physical items with the stock release, the packing slip, and the shipping notice to verify that the order is correct

Ship goods

This function serves as an important independent verification control point and is the last opportunity to detect errors before shipment

Ship goods

a formal contract between the seller and the shipping company (carrier) to transport the goods to the customer

Bill of lading

o   This document establishes legal ownership and responsibility for assets in transit

Bill of lading

o   Once the goods are transferred to the carrier, the shipping clerk records the shipment in the shipping log, forwards the shipping notice and the stock release to the bill-customer function as proof of shipment, and updates the customer’s open order file.

Ship goods

o   The shipment of goods marks the completion of the economic event and the point at which the customer should be billed

Bill customer

o   Billing before shipment encourages inaccurate record keeping and inefficient operations

Bill customer

o   When the customer order of originally prepared, some details such as inventory availability, process, and shipping charges may not be known with certainty

Bill customer

In the case of back-orders, for example, suppliers do not typically bill customers for out-of-stock items

Bill customer

o   Billing for goods not shipped causes confusion, damages relations with customers, and requires additional work to make adjustments to the accounting records.

Bill customer

o   To prevent such problems, the billing function awaits notification from shipping before it bills

Bill customer

o   Upon credit approval, the bill-customer function receives the sales order (invoice copy) from the receive order task

Bill customer

o   This document is placed in an S.O. pending file until receipt of the shipping notice, which describes the products that were actually shipped to the customer

Invoice copy

o   Upon arrival, the items shipped are reconciled with those ordered and unit prices, taxes, and freight charges are added to the invoice copy of the sales order. The completed sales invoice is the customer’s bill, which formally depicts the charges to the customer

Bill customer

o   In addition, the billing function performs the following record keeping–related tasks:

§  Record the sales in the sales journal

§  Forwards the ledger copy of the sales order to the update accounts receivable task

§  Sends the stock release document to the update inventory records task

§  Special journal used for recording completed sales transaction

Sales journal

§  The details of sales invoices are entered in the journal individually

Sales journal

Represents a general journal entry and indicates the general ledger accounts affected

Journal voucher

Updates inventory subsidiary ledger accounts form information contained in the stock release documents

Inventory control function

Every inventory item has its own record in the ledger

Perpetual inventory system

o   Customer records in the accounts receivable (AR) subsidiary ledger are updated from information the sales order (ledger copy) provides

Update AR

Every customer has account record in the AR subsidiary ledger containing, at a minimum, the following data

customer name; customer address; current balance; available credit; transaction dates; invoice numbers; and credits for payments, returns, and allowances

o   By the close of the transaction processing period, the general ledger function has received journal vouchers from the billing and inventory control tasks and account summary from the AR function

Post to general ledger

o   Because general ledgers are used to prepare financial statements, they contain only summary figures (no supporting detail) and require only summary posting information

Post to general ledger

* An organization can expect that a certain percentage of its sales will be returned. This occurs for a number of reasons, some of which may be:

o   The company shipped the customer the wrong merchandise

o   The goods were defective

o   The product was damaged in shipment

o   The buyer refused delivery because the seller shipped the gods too late or they were delayed in transit

\-       When a return is necessary, the buyer requests credit for the unwanted products

Sales return procedures

\-       This involves reversing the previous transaction in the sales order procedure

Sales return procedures

o   When items are returned, the receiving department employee counts, inspects, and prepares return slip describing the items

Prepare return slip

o   The goods, along with a copy, of the return slip, go to the warehouse to be restocked

Prepare return slip

o   The employee then sends the second copy of the return slip to the sales function to prepare a credit memo

Prepare return slip

o   Upon receipt of the return slip, the sales employee prepares a credit memo

Prepare credit memo

o   This document is the authorization for the customer to receive credit for the merchandise returned

Credit memo

o   In cases in which specific authorization is required (that is, the amount of the return or circumstances surrounding the return exceed the sales of employee’s general authority to approve), the credit memo goes to the credit manager for approval

Prepare credit memo

o   However, if the clerk has sufficient general authority to approve the return, the credit memo is sent directly to the billing function, where the customer sales transaction is reversed

Prepare credit memo

o   The credit manager evaluate the circumstances of the return and makes a judgment to grant (or disprove) credit

Approve credit memo

o   The manager then returns the approved credit memo to the sales department

Approve credit memo

o   Upon receipt of the approved credit memo, the transaction is recorded in the sale journal as a contra entry

Update sales journal

o   The credit memo is then forwarded to the inventory control function for posting

Update sales journal

o   At the end of the period, total sales returns are summarized in a journal voucher and sent to the general ledger department

Update sales journal

Adjusts the inventory records and forwards the credit memo to accounts receivable, where the customer’s account is also adjusted

Inventory control function

o   Periodically, inventory control sends a journal voucher summarizing the total value of inventory returns to the general ledger update task

Update inventory control and AR Records

o   Similarly, accounts receivable submits and AR account summary to the general ledger function

Update inventory control and AR Records

\-       They involve receiving and securing the cash; depositing the cash in the bank; matching the payment with the customer and adjusting the correct among; and properly accounting for and reconciling the financial details of the transaction

Cash receipts procedures

o   A mail room employee opens envelopes containing customers’ payments and __remittance advices__

*Open mail and prepare remittance advice*

contain information needed to service individual customer accounts

__Remittance advices__

o   This includes payment date, account number, amount paid, and customer check number

__Remittance advices__

form of a turnaround document

__Remittance advices__

o   Its importance is most apparent in firms that process large volumes of cash receipts daily

__Remittance advices__

o   Errors are avoided and operational efficiency is greatly improved when using remittance advices

*Open mail and prepare remittance advice*

o   The clerk then records each check on a form called __remittance list__ (or cash prelist), where all cash received is logged

*Open mail and prepare remittance advice*

o   A cash receipts employee verifies the accuracy and completeness of the checks against the prelist

*Record and deposit checks*

o   Any check possibly lost or misdirected between the mail room and this function are thus identified

*Record and deposit checks*

o   After reconciling the prelist of the checks, the employee records the check in the __cash receipts journal__

*Record and deposit checks*

o   All cash receipts transactions, including cash sales, miscellaneous cash receipts, and cash received on account, are recorded in the cash receipts journal

*a.    Record and deposit checks*

o   The clerk prepares a bank __deposit slip__ showing the amount of the day’s receipts and forwards this along with the checks to the bank

*a.    Record and deposit checks*

o   Upon deposit of the funds, the bank teller validates the deposit slip and returns it to the company for reconciliation

   *Record and deposit checks*

The remittance advices are used to post to the customers’
accounts in the AR subsidiary ledger. Periodically, the changes in account balances are summarized and
forwarded to the general ledger function.

Update AR