LECTURE 5

REVENUE CYCLES

MAJOR BUSINESS ACTIVITIES

Dept involved sales dept, credit dept, warehouse, shipping, AR dept CASH SALES vs CREDIT SALES significant differences on payment terms

CASH SALES PROCESS

1. Sales over counter process customer order pick up goods deliver to customer customer pay cashier cashier issue cash bill/cash receipt from cash register 2. Self service sales customer pick up goods make payment to cashier cashier issue cash bill/cash receipt from cash register 3. Cash on Delivery (COD) process customer order pick up goods deliver to customer (invoice/cash bill attached to goods) customer pay delivery man cash send to cashiers cashier records sales

PROCESSING CUSTOMER ORDERS

1. Accepting requests from customers
Unformatted data, may received in many kind medium: i. purchase order initiated buying organization, evidence of approval by authorized personnel, send by mail, hand delivered or faxed ii. Through sales agent on field sales agent take orders by using customised form iii. Oral request via telephone iv. Written request via email, fax memo or even unformated mailed letters v. Online ordering (standard format)

Customers order translated into sales order form by sales department. Sales order is a standard form facilitates document flow & identification of the items ordered Sales department checks goods availability prior issue sales order Prepare 5 copies of sales order warehouse, shipping, Cash Receipts, AR dept, filing

PROCESSING CUSTOMER ORDERS

Credit Sales Sales order must be approved before send to warehouse 2. Approving credit and credit limits
Every customer is screened for its credit worthiness by credit department or cutomers credit officer/manager before a credit facility is given to customer. once screened, maximum limit on the amount allowed to be outstanding at any point in time credit limit. Credit limit base on the pattern of buying and settling of the amounts outstanding and on internal policies and procedures. Some organisations predetermined certain limit amount of sales order that does not need approval by credit dept Credit department will be stamped or key in approval code in computer system that enable sales order to be send to other departments

Checking Inventory
Sales personnel may confirming availability of oods over the phone Sales order sent to warehouse warehouse clerk check goods availability If available issue picking ticket/stock release used by warehouse employees to pick up and pack goods, update bin cards If unavailable/unsufficient goods:
inform sales office send sales order back to sales office mark unavailable or contact by phone/fax/text/colaborative tools sales office contact customers If customer still want the orders triggered back orders Warehouse informed for back orders warehouse issue purchase requisition to production department or purchase department If customers does not agree with terms, sales order is cancelled, stamped CANCELED

Warehouse issue 2 copies of packing slip filing, shipping dept (attach with packed goods)

DELIVERING GOODS
1. Delivering/shipping goods Customised goods a copy of sales order production department manufacture product finished goods sent to warehouse/store informed sales department warehouse packing goods shipping department dispatch to customer In-house delivery: Shipping department issue 3 copies of Shipping note/Delivery Note upon receiving approved Sales order filing, shipping note signed by customer will be send AR Dept, customers copy independent verification reconcile goods packed with Sales order, packing slip and Delivery Note Shipping employees pack goods suitable for delivery Deliver to customer Use other logistic/courier company services After packed goods suitable for delivery, shipping dept issue 2 copies bill of lading formal contract evidence transfer ownership BOL to record shipment in shipping log a copy send to billing department Courier company send goods

DELIVERING SERVICE
Services can be performed on Suppliers premises or Customers premises Suppliers premises Materials used picked from the stores and recorded, Labour hours spent is recorded. Invoice will charge based on the labour and used good in the service. Service goods are delivered to the customer with 2 copies of the delivery note 1 copy for the customer and 1 copy as an evidence of delivery of services. Customers Premises Labour hours spent are recorded on a job card, sign by the customer as acknowledgement service is rendered. Job card is used as evidence of delivery of labour. Materials used record on the job card also used as evidence of delivery of materials. If services is contracted with a fixed price, time sheet and material sheet is not needed. Acknowledgement of services satisfactory is formally obtained from customer for invoicing purposes.

BILLING & RECORD ACCOUNT RECEIVABLES

Billing process of invoicing, generated by Billing/Invoice department issue Sales Invoice Reflect same information on delivery note/packing slip. Detail on a sales invoice including number, name of the supplier, date, term of payment, description of goods supplied, quantity, discount allowed, GST inclusive price of the taxable supply (if applicable). terms of payment amount owed is to be settled. 2/7 2% discount on the amount owed will be granted if the payment is made within seven days. n/30 net amount is payable within 30 days of the invoice date. 10/eom net amount is to be paid within ten days after the end of the month. Net cash 30 days payment has to be made within 30 days of the end of the month in which delivery is made. Cash on Delivery (COD) 2 copies of invoice sent to the customer 1 customers copy, another returned to cashier with cash payment or evidence of payment (act as a remittance advice).

Invoicing System
1. Pre-invoicing
invoices prepared as soon as sales order is approved. Ensure goods delivered to customer without delay adequate inventory is available by maintaining adequate records. Suitable for mail order companies. invoices are dispatched after the goods are delivered or shipped. Suitable for manufacturing organizations possible delivery delays high

2. Post-invoicing

Accounts receivable is to record the selling activities or provides services to customers which delay the payment at specified future date. Invoice is the source document used to record the amount owed by the customer to the organization in the sales journal. Each customer account in the accounts receivable ledger is posted from sales journal.

Invoicing and maintaining AR

statement of accounts (SOA) sent to customers periodically transactions detail occurred (amounts owed, credit given, payments received and the outstanding balance). Purpose To remind customer of outstanding debt, check accuracy of recorded transactions. Cycle billing determined by selling organisation SOA prepared in subsets of customers at different times, uniform flow of cash collection eg: TNB billing Bad debts owed amount cannot be collected or the cost of collection is too high compared to the amount owed eg: disputed accounts or liquidation process of customers. credit department initiates the write-off of any bad debts.

Managing goods returned

customer returns goods because or unsuitable or damaged Customer send goods to receiving department/customer service department Receiving dept issue 3 copies of Goods Received Note (GRN), records returned product details 1 copy to Billing dept, 1 customers copy, filing Billing dept prepares 3 copies of Adjustment Notes (Credit Notes), 1 send to customer, 1 send to AR dept (update AR accounts, records sales returns journal), filing

COLLECTING CASH
Cash register machine records sales transaction cashier is held accountable. Cash Sales
cashier punch key on cash register, records item and prices, machine calculate total confirm total payment should be paid by customer customer hand over cash cashier punch key for cash received cash register calculate balances cash register print cash receipt (till bill) and till opens cashier put cash in till, calculate cash to give to customer close till, cash register reset for next transaction Usually register records cash transactions in 2 sets of paper roll in the cash register, 1 for the customer as evidence of the purchase, 1 in the cash register (removed by supervisor or authorized person). Supervisor reconciles accumulated total of printout with cash in till. Overide button should be given to authorized personnel only.

Replaced by computers POS system with bar code scanner, enable credit card and debit card usage

COLLECTING CASH
Credit Sales Payment Cash Receipts Customer hand over cash to cashier in cash receipt dept or CSdept. Cashier calculate cash received issue official receipt (OR) update cash a/c Cheque Receipts Customer mails cheques, postal orders and money orders. Cheques are normally crossed, must be bank in. Mail clerk/receptionist opens mail, record particulars of receipts (date, cheque number, drawer, amount) received in 2 copies cheques register/listing. 1 copy attached with cheques sent to person responsible to deposit cheques to bank, 1 listing to cash receipts manager for reconciliation and audit puposes. Other forms of receipt Bank transfers , direct deposits, EFT appear in bank statements Online banking facilities quicker info to reconcile payment of EFT Remitter sends a remittance advice (RA) providing information (date, amount, invoice ref No.) through mail, email or collaborative tools mailing clerk receive RA records in Remittance Advice (RA) listing/register 2 copies RA listing 1 to update bank account, 1 for managers review

COLLECTING CASH
Cash & Cheque Deposit to Bank
Cash Receipt clerk prepare bank/cheque deposit slip, 2 copies Cash Proof form Cash Receipt clerk and despatcher (who sends cash and cheques to bank) signed cash proof form as evident asset custody transferred Cash Receipt clerk gives despatcher a copy of cash Proof form, bank deposit slip Despather bank in cash and cheques, a copy of stamped deposit slip by bank send to cash receipt clerk Cash receipt clerk reconcile cash proof form and stamped bank deposit slip and update bank account and file documents.

Method of crediting receipts Payment received from credit customers are credited to their accounts using 2 methods: 1. Open invoice method - AP clerk or customer determine payment for
specific invoices

2. Balance forward method- payment is credited against total balance and

not individual invoices.

INTERNAL CONTROL PROCEDURES

customers orders received are to be promptly translated into sales order forms If salesperson presents orders in non-official order form, a confirmation is sent to customer before dispatching goods Strict procedures are to be adopted for granting credit based on the credit worthiness of customers A set policy on credit terms and cash discounts is to be established and followed Invoicing for all goods sold and services rendered is done promptly not by sales department Use prenumbered documents Practice independent verification process Access to assets must be restricted to authorized personnel only

COMPUTER APPLICATION SYSTEMS

Computer can used to make order and record the reservation of goods ordered before the dispatch documents are prepared. Computer also can provide information account unreserved stock available for future sales. Production planning report based on the information about orders on hand is produced for the use of the production department. Order completed reports and unfulfilled order reports are extracted periodically for the sales departments use to follow -up customer orders. Cash register fitted with electronic devices is example of typical application of a computer system. This devices reduce the labour required of salesperson. Normal cash register, the information from the price tag of the product will be entered by the salesperson. Using electronic device eliminates this process by reading bar codes that are printed on the package. When the operator passes the side of the package on which the code is printed over a scanner that is connected to the register, the number on the bar code is identified. The machine extracts the detailed information from the computers memory, such as description and price, for each bar code and prints the description and value of the goods purchased. Registers are also used as terminals of a computer, which collect information on the products sold for stock control purposes. When using a scanner, labour is saved because the price tag on each and every item does not need to be changed due to the price can be changed in the memory of the computer. The price changes are normally announced to customers through a price tag placed in front of the goods exhibited for sale. The automatic scanning process also prevents the underpricing of goods due to: 1.staff error when the staff neglect to update the price once the sale is over 2.customers intentionally replacing or swapping price tags. The computer system used in the revenue cycle can either be a single mainframe computer or a number of computers in which the output of one computer becomes input for the other computers.

COMPUTER SYSTEMS IN THE REVENUE CYCLE

Order entry application 1. Customer No. identified, checked by salesperson (or customer) to ensure accuracy 2. Salesperson enters data of customer's order to produce a sales order. 3. clerk may query customer master file to determine a customers balance, credit limit, terms of sale and the status of any past orders. 4. Computer program validates data entered product code, quantity available, verifies order credit limit creates a sales order detail file 5. online real-time processing system, any invalid data will be rejected immediately and the person who enters the data has to decide whether to ignore it or enter the correct data. 6. If the system use batch processing , the computer system produces a rejection report for corrective action when the batch is processed. 7. Order entry application produce two documents that are order acknowledgment (mail to the customer) and sales register (list of sales orders).

COMPUTER SYSTEMS IN THE REVENUE CYCLE

Delivery/shipping application Delivery clerk identify the sales order detail file in the system. Program creates a record for each delivery & reduces the available quantity of each item in the stock records. delivery notes, bill of lading and picking slip are produced. Invoicing application Invoices will be prepared for the goods delivered to customers. Program records sales in appropriate a/cs and produces adjustment notes. Cash collection application RA Data entered into cash collection system to create a cash receipts detail file. Program matches each cash receipt detail record with its appropriate invoice detail record and records invoice is paid. The cash receipts will be post to the appropriate record in the accounts receivable file and the general ledger. produce receipt which acknowledges receipt of cash, deposit slip for banking purposes and detailed cash receipt register.

Master File Maintenance

Customer master file Contain all customers details code number, names, mailing address, shipping address, credit limit, contact person, contact no, email address. Information should be strictly controlled, only authorised person able to change or deletion. main changes including the addition of new customer, the deletion of an existing customer when their information is no longer required, changes on the existing customer on their new credit limit, address or credit term. customer cards will show information extracted from the customer master file. Account receivable master file Contain report on balance due dates, payment due dates and discount due dates for the customer. Transaction processing on invoice, receipts and credit notes will change the data in accounts receivable master file. Access must be controlled to authorised personnel customerprivacy is protected

ROUTINE REPORTS
Customer orders Analyse orders by customers (idetify loyal cutomers), salespeople (evaluate efficiency) Stock reports identify shortage or excess of inventory, slow moving/fast selling decide to focus certain products and promotions. Invoices Analysis how much of sales orders have been converted to invoices. Credit notes Analysis pattern on why they are created, behavior patterns of certain customers or sales staff who most frequently issue them. Cash receipts produce cash receipts pattern planning cash flows Customer statements indicate areas that credit control dept should focus maintain cash flows and prevent bad debts. Sales summaries Analysis of sales information which helps plan sales activities. Sales commission reports Reports indicate the efficiency of salespeople Aged analysis of AR helps credit department to function more effectively.

PERFORMANCE REPORT
Time lapse between each customer order and delivery report to monitor efficiency of sales processing or manufacturing to order Sales call expense in total and by salesperson compares expenses incurred by a salesperson with volume of sales created by that salesperson in order to identify their operating efficiency Time lapse between invoicing and cash collections provides evidence on debt collection efficiency and monitors whether customers are paying as agreed. Variation to average sales as a result of advertising and promotion details the effectiveness of advertising and promotional campaigns Bad debts compared with total credit sales gives efficiency of debt collection and credit control report

CONTROLS IN COMPUTER ENVIRONMENT

Input controls designed to detect and prevent errors during data input. Ensure conversion of data from physical documents into computer readable form is accurate using series of validation procedures. Example 1. the customer number will have a check digit to confirm that it is a valid number. 2. The program ensures that all the compulsory fields for data entry are complete before it moves to accept the next order. Processing controls designed to detect and prevent errors while processing is in progress. incorporated during the development of application system. Example 1. Programs reconcile total amounts input transaction with the totals processed ensure none of transactions are missed out during processing (record count). 2. program verifies an order entry ensure sales do not exceed approved credit limit and do not exceed a preset amount called reasonable and limit check.

CONTROLS IN COMPUTER ENVIRONMENT

Output controls designed to detect and prevent erroneous outputs from computer processing. Example 1. Built in checks similar to processing controls such as the record count, are employed to prevent output errors 2. Assists Investigate any known erroneous output to make sure that it is not a computer problem but rather an input problem. 3. Ensure output is to appropriate people output on individual screen should not be displayed on common wide screen (protect privacy)