Chapter 4

The Revenue Cycle

Introduction to Accounting Information

Systems, 7e
James A. Hall
Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Objectives for Chapter 4
Tasks performed in the revenue cycle, regardless of the
technology used
Functional departments in the revenue cycle and the
flow of revenue transactions through the organization
Documents, journals, and accounts needed for audit
trails, records, decision making, and financial reporting
Risks associated with the revenue cycle and the controls
that reduce these risks
The operational and control implications of technology
used to automate and reengineer the revenue cycle

Hall, Introduction to Accounting Information Systems, 7e 2

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Manual Sales Order Processing System

Figure 4-12
Hall, Introduction to Accounting Information Systems, 7e 3
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Manual Sales Order Processing System (cont.)

Figure 4-12
Hall, Introduction to Accounting Information Systems, 7e 4
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Sales Order Processing
Begins with a customer placing an order
The sales department captures the essential details on a
sales order form.
The transaction is authorized by obtaining credit approval
by the credit department.
Sales information is released to:
Billing
Warehouse (stock release or picking ticket)
Shipping (packing slip and shipping notice)

Hall, Introduction to Accounting Information Systems, 7e 5

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Sales Order Processing
The merchandise is picked from the Warehouse and sent
to Shipping.
Stock records are adjusted.
The merchandise, packing slip, and bill of lading are
prepared by Shipping and sent to the customer.
Shipping reconciles the merchandise received from
the Warehouse with the sales information on the
packing slip.
Shipping information is sent to Billing. Billing compiles
and reconciles the relevant facts and issues an invoice to
the customer and updates the sales journal. Information
is transferred to:
Accounts Receivable (A/R)
Inventory Control
Hall, Introduction to Accounting Information Systems, 7e 6
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Sales Order Processing

A/R records the information in the customers account in the

accounts receivable subsidiary ledger.

Inventory Control adjusts the inventory subsidiary ledger.

Billing, A/R, and Inventory Control submits summary

information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in the
G/L.

Hall, Introduction to Accounting Information Systems, 7e 7

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Journal Vouchers/Entries
How do we get them?
Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
Inventory Control Dept. prepares a journal
voucher:
Cost of Goods Sold DR
Inventory CR
Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
Hall, Introduction to Accounting Information Systems, 7e 8
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Sales Returns Procedures

Figure 4-13
Hall, Introduction to Accounting Information Systems, 7e 9
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Conceptual System: Sales
Return Procedures
Prepare return slip.
Customer records in the accounts receivable (AR)
subsidiary ledger updated from the sales order ledger
copy.
Prepare credit memo.
If clerk has authorization, sent directly to billing function.
Approve credit memo.
Credit manager evaluates and return the approved
credit memo to the sales department.
Update sales journal.
Update inventory and AR records.
Hall, Introduction to Accounting Information Systems, 7e
2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
10
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Sales Return Journal Entry
G/L posts the following to control accounts:

InventoryControl DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts ReceivableControl CR

Hall, Introduction to Accounting Information Systems, 7e 11

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Flowchart of Cash Receipts System

Figure 4-14
Hall, Introduction to Accounting Information Systems, 7e 12
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Cash Receipts Processes
Customer checks and remittance advices are
received in the Mail Room.
A mail room clerk prepares a cash prelist and sends the
prelist and the checks to Cash Receipts.
The cash prelist is also sent to A/R and the Controller.
Cash Receipts:
verifies the accuracy and completeness of the checks
updates the cash receipts journal
prepares a deposit slip
prepares a journal voucher to send to G/L
Hall, Introduction to Accounting Information Systems, 7e 13
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cash Receipts Processes
A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
Periodically, a summary of the postings is sent to G/L.
G/L department:
reconciles the journal voucher from Cash Receipts with
the summaries from A/R
updates the general ledger control accounts
The Controller reconciles the bank accounts.

Hall, Introduction to Accounting Information Systems, 7e 14

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Summary of Internal Controls

Hall, Introduction to Accounting Information Systems, 7e 15

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Authorization Controls
Proper authorization of transactions (documentation)
should occur so that only valid transactions get
processed.
Within the revenue cycle, authorization should take place
when:
a sale is made on credit (authorization)
a cash refund is requested (authorization)
posting a cash payment received to a customers
account (cash pre-list)

Hall, Introduction to Accounting Information Systems, 7e 16

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Segregation of Functions
Three Rules
1. Transaction authorization should be separate
from transaction processing.
2. Asset custody should be separate from asset
record-keeping.
3. The organization should be so structured that
the perpetration of a fraud requires collusion
between two or more individuals.

Hall, Introduction to Accounting Information Systems, 7e 17

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Segregation of Functions
Sales Order Processing
credit authorization separate from SO processing
inventory control separate from warehouse
accounts receivable sub-ledger separate from
general ledger control account
Cash Receipts Processing
cash receipts separate from accounting records
accounts receivable sub-ledger separate from
general ledger

Hall, Introduction to Accounting Information Systems, 7e 18

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Supervision

Often used when unable to enact appropriate

segregation of duties.

Supervision of employees serves as a deterrent

to dishonest acts and is particularly important in
the mailroom.

Hall, Introduction to Accounting Information Systems, 7e 19

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Accounting Records
With a properly maintained audit trail, it is
possible to track transactions through the
systems and to find where and when errors were
made:
pre-numbered source documents
special journals
subsidiary ledgers
general ledger
files

Hall, Introduction to Accounting Information Systems, 7e 20

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Access Controls

Access to assets and information (accounting

records) should be limited.

Within the revenue cycle, the assets to protect

are cash and inventories and access to records
such as the accounts receivable subsidiary
ledger and cash journal should be restricted.

Hall, Introduction to Accounting Information Systems, 7e 21

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Independent Verification
Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
shipping verifies the goods sent from the warehouse are
correct in type and quantity
warehouse reconciles the stock release document
(picking slip) and packing slip
billing reconciles the shipping notice with the sales
invoice
general ledger reconciles journal vouchers from billing,
inventory control, cash receipts, and accounts receivable

Hall, Introduction to Accounting Information Systems, 7e 22

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Automating the Revenue Cycle
Authorizations and data access can be performed through
computer screens.
There is a decrease in the amount of paper.
The manual journals and ledgers are changed to disk or
tape transaction and master files.
Input is still typically from a hard copy document and goes
through one or more computerized processes.
Processes store data in electronic files (the tape or disk)
or prepare data in the form of a hardcopy report.

Hall, Introduction to Accounting Information Systems, 7e 23

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Revenue Cycle Databases
Master files Other Files
customer master file shipping and price data
reference file
accounts receivable master
file credit reference file (may not
be needed)
merchandise inventory
salesperson file (may be a
master file master file)
Transaction and Open Sales history file
cash receipts history file
Document Files
accounts receivable reports
sales order transaction file file
open sales order
transaction file
sales invoice transaction file
cash receipts transaction file
Hall, Introduction to Accounting Information Systems, 7e 24
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Automating the Revenue Cycle

Revenue cycle programs can include:

formatted screens for collecting data
edit checks on the data entered
instructions for processing and storing the data
security procedures (passwords or user IDs)
steps for generating and displaying output
To understand files, you must consider the record design
and layout.
The documents and the files used as input sources must
contain the data necessary to generate the output reports.

Hall, Introduction to Accounting Information Systems, 7e 25

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Computer-Based Accounting Systems
CBAS technology can be viewed as a continuum
with two extremes:
automation - use technology to improve
efficiency and effectiveness
reengineering use technology to
restructure business processes and firm
organization

Hall, Introduction to Accounting Information Systems, 7e 26

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Example: Automated Batch Sales

Figure 4-16

Hall, Introduction to Accounting Information Systems, 7e 27

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reengineering Sales Order Processing Using
Real-Time Technology
Manual procedures and physical documents are replaced by
interactive computer terminals.
Real time input and output occurs, with some master files
still being updated using batches.
Real-time - entry of customer order, printout of stock
release, packing slip and bill of lading; update of credit
file, inventory file, and open sales orders file
Batch - printout of invoice, update of closed sales order
(journal), accounts receivable and general ledger control
account

Hall, Introduction to Accounting Information Systems, 7e 28

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Real-Time Sales Order System

Figure 4-18
Hall, Introduction to Accounting Information Systems, 7e 29
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Advantages of Real-Time
Processing
Shortens the cash cycle of the firm by reducing the
time between the order date and billing date
Better inventory management which can lead to a
competitive advantage
Fewer clerical errors, reducing incorrect items
being shipped and bill discrepancies
Reduces the amount of expensive paper
documents and their storage costs

Hall, Introduction to Accounting Information Systems, 7e 30

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Reengineered Cash Receipts
The mail room is a frequent target for reengineering.
Companies send their customers preprinted envelopes
and remittance advices.
Upon receipt, these envelopes are scanned to provides a
control procedure against theft.
Machines are open the envelopes, scan remittance
advices and checks, and separate the checks.
Artificial intelligence may be used to read handwriting,
such as remittance amounts and signatures.

Hall, Introduction to Accounting Information Systems, 7e 31

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Automated Cash Receipts

Hall, Introduction to Accounting Information Systems, 7e 32

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Point-of-Sale Systems
Point of sale systems are used extensively in retail
establishments.
Customers pick the inventory from the shelves and take
them to a cashier.
The clerk scans the universal product code (UPC). The POS
system is connected to an inventory file, where the price and
description are retrieved.
The inventory levels are updated and reorder needs can
immediately be detected.

Hall, Introduction to Accounting Information Systems, 7e 33

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Point-of-Sale Systems
The system computes the amount due. Payment is either
cash, check, ATM or credit card in most cases.
No accounts receivables
If checks, ATM or credit cards are used, an on-line link to
receive approval is necessary.
At the end of the day or a cashiers shift, the money and
receipts in the drawer are reconciled to the internal cash
register tape or a printout from the computers database.
Cash over and under must be recorded

Hall, Introduction to Accounting Information Systems, 7e 34

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Point-of-Sale System

Figure 4-20
Hall, Introduction to Accounting Information Systems, 7e 35
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Reengineering Using EDI

EDI helps to expedite transactions.

The customers computer:
determines that inventory is needed
selects a supplier with whom the business has a formal
business agreement
dials the suppliers computer and places the order
The exchange is completely automated.
No human intervention or management

Hall, Introduction to Accounting Information Systems, 7e 36

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EDI System
Company A Company B
Sales Order
Application Purchases System Application
System Software
Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

As mailbox Bs mailbox

Hall, Accounting Information Systems, 7e

Other 37
Mailbox
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Reengineering Using the Internet
Typically, no formal business agreements exist as
they do in EDI.
Most orders are made with credit cards.
Mainly done with e-mail systems, and thus a
turnaround time is necessary
Intelligent agents are needed to eliminate this time lag.
Security and control over data is a concern with
Internet transactions.

Hall, Introduction to Accounting Information Systems, 7e 38

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Hall, Introduction to Accounting Information Systems, 7e
2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
39
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Risks and
Internal Controls
Primary risks associated with revenue cycle transactions:
Undetected data input errors:
IT controls include data checks and check digit edits to help
prevent errors.
Selling to un-creditworthy customers:
Physical controls include proper transaction authorization,
including a segregation of duties between transaction
authorization and transaction processing.
IT controls include automatic credit checking.
Shipping incorrect items or quantities:
Physical controls include independent verification.
IT controls include scanner technology and automated ordering.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
40
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Risks and
Internal Controls
Inaccurately recording transactions in journals and
accounts.
Physical controls include transaction authorization, accounting
records, prenumbered documents, special journals,
subsidiary ledgers, general ledger control accounts, files and
independent verification:
Shipping department reconciles goods being shipped against
packing slip to ensure customer is receiving correct items and
quantity.
Billing function reconciles original sales order with shipping notice
to ensure bills are correct and sales are recorded properly.
GL function reconciles journal vouchers and summary reports
prepared independently in different functional areas before posting
to control accounts.
IT controls include automated postings and file backups.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
41
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Risks and
Internal Controls
Misappropriation of cash receipts and inventory.
Physical controls include transaction authorization, supervision
(especially in the mail room), access controls and segregation
of duties:
Cash receipts function should be separate from the AR function.
Cash receipts clerk should not have access to GL cash.
Personnel with physical custody of inventory should not update
records.
IT controls include multilevel security.
Unauthorized access to accounting records and reports.
Motives include attempt to create a fraud, data theft and
malicious acts.
Physical controls include access controls and segregation of
duties such that the perpetration of a fraud requires collusion.
IT controls include passwords and multilevel security.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
42
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Multilevel
Security
Employs programmed techniques that permit
simultaneous access to a central system by many
users with different access privileges.
Users are prevented from obtaining information for which
they lack authorization.
Two common multilevel security methods:
Access control list (ACL) method assigns privileges
directly to individuals which is burdensome in large
organizations.
Role-based access control (RBAC) creates standard
tasks called roles that are assigned specific privileges.
Once a role is created, individuals are assigned to it.
Easy to add or delete roles as job responsibilities change.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
43
duplicated, in whole or in part, except for use as permitted in a license distributed with
Hall, Introduction to Accounting Information Systems, 7e
2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
44
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Point-of-Sale
(POS) Systems
POS systems used extensively in retail establishments.
Customers pick items from shelves and take them to a cashier.
Clerk scans the Universal product code (UPC) of items.
Price and description retrieved from inventory file.
Inventory levels are updated and reordered as needed.
System automatically calculates taxes, discounts and
total.
Non-cash payments are approved via online connection.
At shift end, money and receipts reconciled to the internal
cash register tape with cash over and shorts accounts for.
Cash receipts clerk prepares deposit slip for total daily
cash receipts and batch program posts entry to the GL.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
45
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: POS Control
Issues
Authorization:
Clerk should match customer signature with credit card.
Supervision:
Surveillance cameras and floor security help prevent shoplifting
and employee theft.
Access Control:
Separate cash drawers, locked showcases and magnetic tags
attached to merchandise help control theft.
Accounting records:
Only supervisors should access internal cash register tapes.
Independent verification:
Cash drawers should be reconciled to internal register tapes.

Hall, Introduction to Accounting Information Systems, 7e

2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
46
duplicated, in whole or in part, except for use as permitted in a license distributed with
 Physical Systems: Reengineering
Electronic data interchange (EDI) expedites transactions.
Customers computer automatically orders inventory as needed.
Seller processes order with little or no human involvement.
Binding terms specified in a trading partner agreement.
Control problems include ensuring only valid transactions are
processed and that accounting records are not compromised.
Doing business on the Internet involves both business-to-
business (B2B) and business-to-consumer (B2C)
transactions.
Opens the door to thousands of business partners without formal
trading agreements.
Risks include threats from computer hackers, viruses and
transaction fraud.
Hall, Introduction to Accounting Information Systems, 7e
2011 Cengage Learning. All2015
Rights Cengage
Reserved. MayLearning. Allcopied
not be scanned, rights reserved.
or duplicated, May
or posted to a not beaccessible
publicly copied, scanned,
website, orin part.
in whole or
47
duplicated, in whole or in part, except for use as permitted in a license distributed with