Overview
This lecture covers Chapter 4: the revenue cycle in accounting information systems, focusing on processes, documents, controls, and the impact of automation and reengineering.
Objectives & Introduction
- Discuss tasks performed in the revenue cycle regardless of technology.
- Identify functional departments and flow of revenue transactions.
- Describe documents and accounts used for audit trails, decision-making, and financial reporting.
- Explain risks and controls in the revenue cycle.
- Analyze operational and control implications of automation and reengineering.
Revenue Cycle Overview
- The revenue cycle involves exchanging goods/services with customers for cash or receivables.
- Comprises physical (delivery of goods/services) and financial (cash receipt) phases.
- Divided into two subsystems: sales order processing and cash receipts.
Sales Order Processing System
- Begins with customer placing an order, recorded by the sales department.
- Sales order form contains essential details (e.g., customer info, items, price, discounts).
- Sales order passes to credit department for approval.
- Once approved, documents sent to billing, warehouse, and shipping departments.
- Warehouse picks goods, shipping department prepares packing slip and bill of lading.
- Billing issues invoice, records sales, and updates accounts receivable and inventory.
Sales Returns Process
- Triggered when goods are returned (defective, incorrect, refused).
- Receiving department inspects and prepares return slip.
- Sales department prepares credit memo, which goes to credit manager for approval.
- Billing updates sales returns account, inventory control adjusts stock and forwards records.
- Accounts receivable and general ledger are updated accordingly.
Cash Receipts Processing
- Starts when checks/remittance advice received in the mailroom.
- Mailroom prepares cash receipts list sent to cash receipts, accounts receivable, and controller.
- Cash receipts department verifies checks, prepares journal entry (debit cash, credit A/R), and deposits funds.
- Accounts receivable updates subsidiary ledger; general ledger reconciles postings.
Internal Controls in the Revenue Cycle
- Transaction authorization (e.g., credit approval, validated returns, remittance list).
- Segregation of duties: authorization, recordkeeping, and custody are performed by separate departments.
- Supervision, especially in mailroom (handling cash and remittances).
- Proper recordkeeping and audit trails via pre-numbered source documents.
- Physical and logical access controls for inventory, cash, and accounting records.
- Independent verification and reconciliation among departments.
Computer-Based Revenue Cycle Systems
- Automation uses technology to improve efficiency (e.g., computerized approvals).
- Reengineering restructures business processes for greater efficiency (e.g., real-time updates).
- Computer systems maintain master files (customers, A/R, inventory) and reduce paperwork.
- Batch processing and real-time processing each have advantages.
- Tools like POS systems, electronic data interchange (EDI), and online transactions streamline processes.
Controls in Computerized Environment
- Automated authorizations and decision rules replace manual approvals.
- Segregation of programming, processing, and maintenance duties.
- Enforced access controls (passwords, user IDs) for data security.
- Regular backup of digital files to prevent data loss.
- Independent verification remains essential, even with automation.
Practical Issues
- Small businesses may use PC-based systems, requiring compensating controls for reduced segregation of duties.
- Cloud-based systems allow remote access and streamlined documentation.
- Control measures must be adapted to fit the entity’s size, resources, and risk profile.
Key Terms & Definitions
- Revenue Cycle — process of selling goods/services and collecting payment.
- Sales Order — document that records a customer’s request to purchase goods/services.
- Credit Memo — document authorizing a reduction in receivables due to returns/allowances.
- Packing Slip — document listing items included in a shipment.
- Bill of Lading — shipping document as evidence of transfer of goods.
- Remittance Advice — document sent by a customer to indicate payment details.
- Segregation of Duties — dividing responsibilities among different people to reduce risk of errors/fraud.
- POS (Point-of-Sale) System — computerized system for recording retail sales.
- Electronic Data Interchange (EDI) — computer-to-computer exchange of business documents in standard formats.
Action Items / Next Steps
- Review Chapter 4 and diagrams/flowcharts on revenue cycle processes.
- Prepare questions for clarification on specific processes or controls.
- Read Chapter 5: The Expenditure Cycle (Purchases and Disbursements) before next class.