Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval,

and Wong-On-Wing

Chapter 12: The Revenue

Cycle

Slides Authored by Somnath

Florida Atlantic University

Bhattacharya, Ph.D.

Introduction
Revenue Cycles tend to be similar for
all types of firms.
Two subsystems perform the
processing steps within the revenue
cycle:
The Sales Processing System
The Cash Receipts Processing System

Objectives of the Revenue

Cycle
To record sales orders promptly and accurately
To verify that the customers are worthy of credit
To ship the products or perform the services by agreed
dates
To bill for products or services in a timely and an
accurate manner
To record and classify cash receipts promptly and
accurately
To post sales and cash receipts to proper customers
accounts in the accounts receivable ledger
To safeguard products until shipped
To safeguard cash until deposited

Marketing/Distribution
Marketing Management has the
objectives of
Determining and satisfying the
needs of customers
Generating sufficient revenue to cover
costs and expenses
Replacing assets
Providing an adequate return on
investment

Finance/Accounting
With respect to the Revenue
Cycle, the objectives are
limited to
Cash Planning and Control
Data pertaining to sales and customer
accounts
Inventory control
Information pertaining to cash, sales, and
customers

Input Documents Pertaining to

the Revenue Cycle
Customer Order
Sales Order
Order
Acknowledgement
Picking List
Packing Slip
Bill of Lading
Shipping Notice
Sales Invoice

Remittance Advice
Deposit Slip
Back Order
Credit Memo
Credit Application
Salesperson Call
Report
Delinquent Notice
Write-off Notice
Cash Register Receipts

Figure 12-2

DFD of a Sales & Receivables

Processing System
Order Data
Customer

1.0

Credit
Data

Receive &
Enter Sales
Order

Customer Data
Shipping Data

Customer

General Ledger
Account Data

Inventory Data
2.0
Ship
Goods to
Customers

Accountants &
Managers

3.0
Bill
Customer

Order Data
Receivables Data

Figure 12-5. See

Textbook for details

Inventory Data

Sales Data

4.0
Prepare
Accounting
Analyses &
Reports

Customer Data

Pricing Data
Sales History

Credit Sales Processing

System
Order Entry
Customer Order
Picking List

Shipping
Bill of Lading

Billing
Preparing Analyses & Reports
Invoice Register
Accounts Receivable Summary

Handling Sales Returns & Allowances

Credit Memos

Processing Back Orders

Cash Receipts Processing

System
Remittance Entry
Remittance List
Lockbox

Depositing Receipts
Deposit Slips
Cash Receipts Transaction Listing

Posting Receipts
Balance Forward Method
Open Invoice Method

Preparing Analyses & Reports

Collecting Delinquent Accounts
Write-off Notice

Web-Based Systems

Electronic commerce
Larger customer base
Quicker processing of transactions
Less paperwork
Greater efficiency & productivity
Self-service
AICPAs Web-Trust and competing
services

Information Output

Operational Listings & Reports

Inquiry Display Screens
Scheduled Managerial Reports
Demand Managerial Reports

Operational Listings and

Reports

Monthly statement
Open orders report
Sales Invoice register
Shipping register
Cash receipts journal
Credit memo register

Scheduled Managerial
Reports
Accounts receivable aging schedule
Reports on critical factors
Average dollar value per order
Percentage of orders shipped on time
Average number of days between the order
date and shipping date

Sales analyses

Salesperson
Sales region
Product lines
Customers
Markets

Cash flow statements

Demand Managerial
Reports
Demand reports are ad hoc nonscheduled reports
What-if scenarios

Types of Managerial Decisions

Pertaining to the Revenue Cycle
Marketing decisions
Which types of markets and customers are to be served?
Which specific products are to be provided to customers,
including new products to be introduced?
What prices are to be charged, and what discounts are to be
allowed?
What after-sales services are to be offered?
What channels of distribution are to be employed?
What advertising media are to be employed, and in what mix?
What organizational units are to be incorporated within
the marketing function?
What marketing plans and budgets are to be established for the
coming year?

Figure 12-17

Types of Managerial Decisions

Pertaining to the Revenue Cycle
Financial Decisions
What criteria are to be employed in granting credit to
potential customers?
What collection methods are to be employed in
minimizing bad debts?
What accounts receivable records are to be maintained
concerning amounts owed by customers?
What sources, other than receipts from sales, are to be
employed in obtaining needed funds for operations?
What financial plans and cash budgets are to be
established for the coming year?

Figure 12-17 Continued

Typical Files Associated

with the Revenue Cycle
Master Files

Customer master file

Accounts receivable master file
Merchandise inventory master file

Transaction & Open Document Files

Sales order file

Open sales order file
Sales invoice transaction file
Cash receipts transaction file

Other Files

Shipping & Price data reference file

Credit reference file
Salesperson file
Sales history file
Cash receipts history file
Accounts receivable report file

Figure 12-18

A Layout of an Accounts
Receivable Record
Customer Customer Credit
Account
Name
Limit
Balance

Figure 12-19

Balance
Year-toBeginning date
of Year
Sales

Year-toCurrent
date
Account
Payments Balance

Relational Data Structure for the

Sales Aspect of the Revenue Cycle
Customer Customer Customer Phone Credit Trade Account Balance Year-to-date Year-to-date
Number
Name
Shipping Number Limit Discount Beginning of Year Sales
Payments
Address
Allowed

Sales
Order

Product
Number

Quantity
Ordered

Sales
Order Expected Salesperson Customer
Order Date Delivery Code
Number
Number
Date

Product Description Warehouse Unit of Reorder Economic Unit Name of Quantity on Quantity on
Number
Location Measure Point Reorder Cost Preferred Order
Hand
Quantity
Supplier
Sales
Customer Sales Billing Shipping
Terms Total
Invoice Number Order (Invoice) Document
Sales
Number
Number Number
Amount

Sales
Invoice
Number

Product
Number

Unit
Price

Quantity Shipped
and Sold

Figure 12-21

Risk Exposures in the

Revenue Cycle - I
Risk

Exposure

1) Credit sales made to customers

who represent poor credit risks

1) Losses from bad debts

2) Unrecorded or unbilled shipments

2) Losses of revenue; overstatement

of inventory and understatement of
accounts receivable in the balance
sheet
3) Alienation of customers and
possible loss of future sales; losses of
revenue

3) Errors in preparing sales invoices

Figure 12-22

Risk Exposures in the

Revenue Cycle - II
Risk

Exposure

4) Misplacement of orders from

customers or unfilled backorders

4) Losses of revenue and alienation of

customers

5) Incorrect posting of sales to

accounts receivable records

5) Incorrect balances in accounts

receivable and general ledger account
records
6) Posting of revenues to wrong
6) Overstatement of revenue in one
accounting periods, such as premature year (year of premature booking) and
booking of revenues
understatement of revenue in the next

Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - III
Risk

Exposure

7) Fictitious credit sales to nonexistent Overstatement of revenues and

customers
accounts receivable
8) Excessive sales returns and
allowances with certain of the credit
memos being for fictitious returns
9) Theft or misplacement of finished
goods in the warehouse or on the
shipping dock

Figure 12-22 (continued)

8) Losses in net revenue, with the

proceeds from subsequent payments
by affected customers being
fraudulently pocketed
9) Losses in revenue; overstatement
of inventory on the balance sheet

Risk Exposures in the

Revenue Cycle - IV
Risk
10) Fraudulent write-offs of
customers accounts by unauthorized
persons

Exposure

10) Understatement of accounts

receivable; losses of cash receipts
when subsequent collections on
written-off accounts are
misappropriated by perpetrators of the
fraud
11) Theft (skimming) of cash receipts, 11) Losses of cash receipts;
especially currency, by persons
overstatement of accounts receivable
involved in the processing; often
in the subsidiary ledger and the
accompanied by omitted postings to
balance sheet
affected customers accounts
12) Lapping of payments from
12) Losses of cash receipts; incorrect
customers when amounts are posted account balances for those customers
to accounts receivable records
whose records are involved in the
lapping
Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - V
Risk

Exposure

13) Accessing of accounts receivable,

merchandise inventory, and other
records by unauthorized persons
14) Involvement of cash, merchandise
inventory, and accounts receivable
records in natural or human-made
disasters
15) Planting of virus by disgruntled
employee to destroy data on magnetic
media

13) Loss of security over such records,

with possibly detrimental use made of
the data accessed
14) Losses of or damages to assets

Figure 12-22 (continued)

15) Loss of customer accounts

receivable data needed to monitor
collection of amounts from previous
sales

Risk Exposures in the

Revenue Cycle - VI
Risk

Exposure

16) Interception of data transmittal

between customers and the web site

16) Loss of data which may be used to

the detriment of customers

17) Unauthorized viewing and

alteration of other customer account
data via the Web
18) Denial by a customer that an
online order was placed after the
transaction is processed

17) Loss of security over customer

records resulting in misstatement of
accounts receivable balances
18) Loss of sales revenues

Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - VII
Risk

Exposure

19) Use of stolen credit cards to place 19) Loss of shipped goods for which
orders via the Web
payments will not be received
20) Breakdown of the web server due
to unexpectedly high volume of
transactions

Figure 12-22 (continued)

20) Loss of sales revenues and

alienation of customers

Typical Control Objectives

for the Revenue Cycle
All customers accepted for credit sales are credit-worthy
All ordered goods are shipped, and all services are
performed by dates that are agreeable to all parties
All shipped goods are authorized and accurately billed
within the proper accounting period
All sales returns and allowances are authorized and
accurately recorded and based on actual return of goods
All cash receipts are recorded completely and accurately
All credit sales and cash receipts transactions are posted
to proper customers accounts in the accounts
receivable ledger
All accounting records, merchandise inventory,
and cash are safeguarded

General Controls of the

Revenue Cycle - I
Organizational Controls
Units with custodial functions should be
kept separate from each other
Custodial functions should furthermore
be segregated from record-keeping
functions
For computerized systems, systems
development should be kept separate
from systems operations

General Controls of the

Revenue Cycle - II

Documentation Controls
Asset Accountability Controls
Management Practice Controls
Data Center Operations Controls
Authorization Controls

General Controls of the

Revenue Cycle - III
Access Controls
Assigned passwords that authorized clerks must enter to
access accounts receivable and other customer-related files, in
order to perform their strictly defined tasks
Terminals that are restricted in the functions they allow to be
performed with respect to sales and cash receipts transactions
Logging of all sales and cash receipt transactions upon their
entry into the system
Frequent dumping of accounts receivable and merchandise
inventory master files onto magnetic tape backups
Physically protected warehouses and safes
A lockbox collection system in situations where feasible

Application Controls of the

Revenue Cycle: Input - I
1) Prepare pre-numbered and welldesigned documents relating to sales,
shipping, and cash receipts, with each
prepared document being approved by an
authorized person
2) Validate data on sales orders and
remittance advices as the data are
prepared and entered for processing. In
computer-based systems, validation should
be performed by means of programmed
edit checks. When data are keyed into
computer-readable medium, key
verification is also appropriate

Application Controls of the

Revenue Cycle: Input - II
3) Correct errors that are detected during
data entry and before the data are posted
to the customer and inventory records
4) Precompute batch control totals relating
to key data on sales invoices (or shipping
notices) and remittance advices. These
precomputed batch control totals should be
compared with totals computed during
postings to the accounts receivable ledger
and during each processing run. In the
case of cash receipts, the total on
remittance advices should also be
compared with the total on deposit slips

Application Controls of the

Revenue Cycle: Processing - I
1) Move ordered goods from the finished goods
warehouse and ship the goods only on the basis
of written authorizations such as stock request
copies
2) Invoice customers only on notification by the
shipping department of the quantities that have
been shipped
3) Issue credit memos for sales returns only when
evidence (i.e. receiving report) has been received
that the goods were actually returned
4) Verify all computations on sales invoices before
mailing and postings to proper customers
accounts. Also, compare the sales invoices
against shipping notices and open orders, in order
to ensure that the quantities ordered reconcile
with the orders shipped and back-ordered

Application Controls of the

Revenue Cycle: Processing - II
5) Verify that total amounts posted to the
accounts receivable accounts from batches of
transactions agree with precomputed batch totals,
and post the total amounts to the appropriate
general ledger accounts
6) Deposit all cash received intact and with a
minimum of delay, thus eliminating the possibility
of cash receipts being used to pay employees or
to reimburse petty cash funds
7) Correct errors that are made during processing
steps, usually by reversing erroneous postings to
accounts and entry of correct data. The audit trail
concerning accounts being corrected should show
the original errors, the reversals, and the
corrections

Application Controls of the

Revenue Cycle: Output
1) Prepare monthly statements, which should
be mailed to all credit customers, especially if
the balance forward approach is employed
2) File copies of all documents pertaining to
sales and cash receipts transactions by
number, with the sequence of numbers in each
file being periodically checked to see if gaps
exist. If transactions are not supported by
preprinted documents, as often is the case in
online computer-based systems, assign
transaction numbers to the transactions
3) Prepare printed transaction listings and
account summaries on a periodic basis in order
to provide audit trail and a basis for review

Web Security Procedures

Authentication
Authorization
Use of an Access Control List

Accountability
Data Transmission
Disaster Contingency & Recovery
Plan

Accounting Information Systems:

Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing

Copyright 2000 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the express
written permission of the copyright owner is unlawful. Request for
further information should be addressed to the Permissions Department,
John Wiley & Sons, Inc. The purchaser may make back-up copies for
his/her own use only and not for distribution or resale. The publisher
assumes no responsibility for errors, omissions, or damages, caused by
the use of these programs or from the use of the information contained
herein.