Dynamics GP – Revenue Cycle And Cash Receipt
Most enterprises, both for profit and not for profit, generate revenue through activities that constitute their revenue cycle. The revenue cycle is the simplest form if the direct exchange of finished goods or services is made on cash in a single transaction between a seller and a buyer and is more complex when sales is processed on credit basis. Many days or weeks may pass between sales processing and the subsequent receipt of cash. This time lag splits the revenue transactions into two phases:
- the physical phase, involving the transfer of assets or services from seller to the buyer
- the financial phase, involving the receipt of cash by the seller in payment of the account receivable
Hence, the revenue cycle actually consists of two major subsystems (assuming sales on credit basis):
- the sales order processing system and
- the account receivable system
Sales Order Processing
A sales order application system comprises the procedures involved in accepting and shipping customer orders and in preparing invoices that describe products services, and assessment.
The sales order is the interface between the various function necessary to process a customer order. These functions are sales order, credit, finished goods, shipping, billing, accounts receivable, and general Ledger.
The sales process begins in the sales department with the receipt of a customer order indicating the type and quantity of merchandise being requested.
The sales order captures such vital information as the name and address of the customer making the purchase; the customer’s account number; the name, number, and description of the items sold; the quantities and unit prices of each item sold, and other financial information such as taxes, discounts, and freight charges.
After processing sales order the sales department produces multiple copies of sales order to distribute for credit authorizations, packing slips, stock release documents, shipping notices, sales invoices, and ledger posting. In an actual system, the various sales order copies would be numbered or color-coded to signify their purpose and distribution. After preparing the sales order, the sales clerk files one copy of it in the customer open order file for future reference to facilitate communication with customer in their order status. To facilitate customer inquiries, the open order file should organize and filed alphabetically by customer name.
A credit department is responsible to determine whether the customer is credit worthy or not before the shipment of goods made. For regular customers, the credit check involves determining that the total amount of credit granted does not exceed management’s general or specific authorization. For new customers, a credit check is necessary to establish the terms of sale to the customer. The sales order function and credit valuation should be separated to maintain good internal control system by separation of duties.
Once credit has been approved, the sales order function distributes the sales order set. One copy of each sales order is forwarded to billing, allowing the billing function to anticipate the receipt of matching shipping advices from the shipping function. One copy-usually called the packing slip copy-is forwarded to shipping. This copy authorizes shipping to receive goods from finished goods for shipping. Another copy-usually called the stock copy-is forwarded to finished goods. This copy authorizes stores to release goods from its custody for shipment to customers.
In some cases, a customer’s order may require that a production order be issued to produce the goods, because the goods are not in stock. Such situations arise when the order is for a special nonstick item or they are customized in their nature.
Finished Goods Department
The sales department sends the stock release (also called the picking ticket) copy of the sales order to the warehouse. This document identifies which items of inventory must be located and picked from the warehouse shelves. It also provides formal authorization for the warehouse clerk to release custody of the specified assets. After picking the stock, the clerk initials the stock release copy to indicate that the order is complete and accurate. Any out-of-stock items are noted on the stock release copy. One copy of the stock release travels with the goods to the shipping department, and the other is filed in the warehouse to provide a record of the transaction. Shipping should sign the stock copy to acknowledge receipt of the quantities noted thereon from finished goods. The clerk then adjusts the stock records to reflect the reduction in inventory. The stock records are not the formal accounting records for these assets. Charging the warehouse clerk with responsibility for asset custody and record-keeping would be a weakness in internal control. The inventory accounting records are kept in the inventory control department.
Before the arrival of the goods and the stock release copy, the shipping department receives the packing slip and shipping notice copies from the sales department. The packing slip travels with the goods to the customer to describe the contents of the order. The shipping notice informs the billing department that the customer’s order has been filled and shipped. This document contains such pertinent facts as the date of shipment, items and quantities shipped the carrier, and freight charges.
Upon receiving the goods from the warehouse, the shipping clerk reconciles the physical items with the stock release documents, the packing slip, and the shipping notice to verify the correctness of the order. This is an important step and the last opportunity to detect errors before shipment. This shipping clerk packages the goods, attaches the packing slip to the container, completes the shipping notice, and prepares a bill of lading. The bill of lading is a formal contract between the seller and the shipping company (carrier) that transports the goods to the customer. This document establishes legal ownership and responsibility for assets in transit.
The shipping clerk transfers custody of the goods, the packing slip, and two copies of the bill of lading to the carrier, then performs the following tasks:
- Records the shipment in the shipping log
- Sends the stock release document and the shipping notice to the billing department as proof of shipment.
- Files one copy each of the bill of lading and the shipping document.
Shipping forwards documentation of the shipment to the billing function. This documentation is termed the shipping advice and is usually the stock copy of the sales order and a copy of the bill of lading. Billing pulls the related open order documentation, verifies the order, then prepares the invoice by extending the charges for actual quantities shipped, freight charges (if any) , and taxes (if any). Invoices are mailed to customers. Invoices are recorded in the sales journal and posting copies are sent to accounts receivable. Sends the shipping document to the sales department to close the open customer file. Periodically, a journal voucher is prepared and forwarded to the general ledger function for posting to the general ledger.
The sales journal is a special journal for recording sales transactions. Each sales invoice is entered in the journal as a separate item. At the end of the period the clerk summarizes these entries and prepares a journal voucher that is sent to the general ledger for posting.
Each journal voucher represents a general journal entry and identifies the general ledger accounts affected. Current transactions, adjusting entries, and closing entries are all entered into the general ledger.
Accounts Receivable Department
The accounts receivable department posts from the ledger copy of the sales order to the customer accounts in the accounts receivable subsidiary ledger.
Each ledger copy of the sales order increases a customer’s account for the full amount of the sale. After posting, the AR clerk files the ledger copy. Periodically, the clerk summarizes the individual account balance into a single figure and sends this to the general ledger.
General Ledger Department
By the close of the processing period, the general ledger has received journal vouchers from the billing and an account summary from the accounts receivable department.
The account summary independently provided by the accounts receivable department is used to verify the internal accuracy of the overall process. By reconciling journal vouchers and account summaries received from operating departments, the general ledger can detect many types of errors.
The above-discussed functions in an organization’s sales order application are clearly shown on the following flow diagram.