The Revenue Cycle:Manual Systems

Manual Systems

The purpose of this section is to support the system concepts presented in the previous section with models depicting people, organizational units, and physical documents and files. This section should help you envision the segregation of duties and independent verifications, which are essential to effective internal control regardless of the technology in place. In addition, we highlight inefficiencies intrinsic to manual systems, which gave rise to modern systems using improved technologies.

SALES ORDER PROCESSING

The system flowchart in Figure 4-12 shows the procedures and the documents typical to a manual sales order system. In manual systems, maintaining physical files of source documents is critical to the audit trail. As we walk through the flowchart, notice that in each department, after completion of the assigned task, one or more documents are filed as evidence that the task was completed.

Sales Department

The sales process begins with a customer contacting the sales department by telephone, mail, or in per- son. The sales department records the essential details on a sales order. This information will later trigger many tasks, but for the moment is filed pending credit approval.

Credit Department Approval

To provide independence to the credit authorization process, the credit department is organizationally and physically segregated from the sales department. When credit is approved, the sales department clerk pulls the various copies of the sales orders from the pending file and releases them to the billing, ware- house, and shipping departments. The customer order and credit approval are then placed in the open order file.

Warehouse Procedures

The next step is to ship the merchandise, which should be done as soon after credit approval as possible. The warehouse clerk receives the stock release copy of the sales order and uses this to locate the inventory. The inventory and stock release are then sent to the shipping department. Finally, the warehouse clerk records the inventory reduction in the stock records.

The Shipping Department

The shipping clerk reconciles the products received from the warehouse with the shipping notice copy of the sales order received earlier. As discussed previously, this reconciliation is an important control point, which ensures that the firm sends the correct products and quantities to the customer. When the order is correct, a bill of lading is prepared, and the products are packaged and shipped via common carrier to the customer. The clerk then enters the transaction into the shipping log and sends the shipping notice and stock release to the billing department.

The Billing Department

The shipping notice is proof that the product has been shipped and is the trigger document that initiates the billing process. Upon receipt of the shipping notice and stock release, the billing clerk compiles the relevant facts about the transaction (product prices, handling charges, freight, taxes, and discount terms) and bills the customer. The billing clerk then enters the transaction into the sales journal and distributes documents to the AR and inventory control departments. Periodically, the clerk summarizes all transactions into a journal voucher and sends this to the general ledger department.

Accounts Receivable, Inventory Control, and General Ledger Departments Upon receipt of sales documents from the billing department, the AR and inventory control clerks update their respective subsidiary ledgers. Periodically they prepare journal vouchers and account summaries, which they send to the general ledger department for reconciliation and posting to the control accounts.

SALES RETURN PROCEDURES

Figure 4-13 illustrates the procedures and documents used for processing sales returns.

Receiving Department

The sales return process begins in the receiving department, where personnel receive, count, inspect for damage, and send returned products to the warehouse. The receiving clerk prepares a return slip, which is forwarded to the sales department for processing.

Sales Department

Upon receipt of the return slip, the clerk prepares a credit memo. Depending on the materiality and circumstance of the return, company policy will dictate whether credit department approval (not shown) is required.

Processing the Credit Memo

The objective of the sales return system is to reverse the effects of the original sales transaction. Billing records a contra entry into sales return, and allowance journal inventory control debits the inventory records to reflect the return of goods. The AR clerk credits the customer account. All departments periodi- cally prepare journal vouchers and account summaries, which are then sent to the general ledger for reconciliation and posting to the control accounts.

CASH RECEIPTS PROCEDURES

Figure 4-14 presents a system flowchart depicting the cash receipts procedures.

Mail Room

Customer payments and remittance advices arrive at the mail room, where the envelopes are opened. The checks are sent to the cashier in the cash receipts department, and the remittance advices are sent to the AR department.

Cash Receipts

The cashier records the checks in the cash receipts journal and promptly sends them to the bank, accompanied by two copies of the deposit slip. Periodically, the employee prepares a journal voucher and sends it to the general ledger department.

Accounts Receivable

The AR department uses the remittance advices to reduce the customers’ account balances consistent with the amount paid. The AR clerk prepares a summary of changes in account balances, which is sent to the general ledger department.

General Ledger Department

Upon receipt of the journal voucher and account summary from cash receipts and AR, respectively, the general ledger clerk reconciles the information and posts to the control accounts.

Controller’s Office

Because cash is a liquid asset and subject to misappropriation, additional controls are necessary. In this case, someone from the controller’s office periodically performs a bank reconciliation by comparing de- posit slips returned from the bank, account summaries used to post to the accounts, and journal vouchers.

Concluding Remarks

We conclude our discussion of manual systems with two points of observation. First, notice how manual systems generate a great deal of hard-copy (paper) documents. Physical documents need to be purchased, prepared, transported, and stored. Hence, these documents and their associated tasks add considerably to the cost of system operation. As we shall see in the next section, their elimination or reduction is a primary objective of computer-based systems design.

Second, for purposes of internal control, many functions such as the billing, AR, inventory control, cash receipts, and the general ledger are located in physically separate departments. These are labor-intensive and thus error-prone activities that add greatly to the cost of system operation. When we examine computer-based systems, you should note that computer programs, which are much cheaper and far less prone to error, perform these clerical tasks. The various departments may still exist in computer-based systems, but their tasks are refocused on financial analysis and dealing with exception-based problems that emerge rather than routine transaction processing.