Revenue cycle. First, all revenue cycles begin














Revenue Cycle

Lucas Ley

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Stephen F Austin State University


Revenue Cycle

Cycle’s are carried out in every form of business that exists today. Depending
on the type of business the revenue cycle can differ, according to James Hall the
revenue cycle can be “the direct exchange of finished
goods or services for cash in a single transaction between a seller and a
buyer”. (Hall, 2011, p. 153) However, most revenue cycles are not this simple
and require various steps. Companies that are in the business of manufacturing
usually have many steps required in order to complete a revenue cycle. While
revenue can differ depending whether they are manufacture based or service
based, they generally are made up of four steps; sales order entry, shipping,
billing and cash collection.

The sales order entry step has two vital steps that are essential
to beginning the revenue cycle. First, all revenue cycles begin at the same
point, which is the business receives an order from a customer. Orders are
typically done “by mail, by telephone, or from a field representative who
visited the customer.”(Hall 2011, p.154) Since these are informal order
request, a business must put it into a formal sales order. Although it is
possible to use a customers purchase order as a formal document if the customer
provided a formal purchase order. After the sales order is created a credit
check must be done on the customers in order to determine their
creditworthiness. According to Investopedia, a credit check indicates, “Whether a company is a good candidate
to lend money to or do business with”(Fontinelle, 2015, p.1).

This ensures to the company that they are not engaging in business with a party
who does not have the means to repay them. The credit approval then “triggers the continuation
of the sales process by releasing sales order information simultaneously to
various tasks.”(Hall 2011, p. 154) Since the credit check process may require an
extended period of time, the supplier may be required to update the customer on
the status of the order. The credit approval ends the sales order process and
allows for the continuation of the revenue cycle.

The next step of the cycle is the picking and shipping of the
actual items of inventory for the order. After the customer’s credit is approved
a picking slip is then provided to the warehouse in order to fill the order. Simultaneously,
the shipping department will receive a shipping notice and packing slip. The
picking slip indicates which items are required for the order and the quantity
that is required. This slip also “provides formal authorization for warehouse
personnel to release the specified item”. (Hall, 2011, p.156) Meaning that once
the warehouse receives the picking slip they are able to pull the parts
required for the order and send them to packing. After the items are collected
using the picking slip, they are then sent to shipping who “reconciles the
physical items with the stock release picking slip, the packing slip, and the
shipping notice to verify that the order is correct” (Hall, 2011, p. 157) The
packing slip will then be included with items being shipped in order to provide
the customers with a list of the items they are receiving. The shipping notice
will be sent to billing “as evidence that the customer’s order was filled and
shipped (Hall, 2011, p.157).  The receipt
of shipping notice from the billing department then signals the billing process
to begin.

            The billing
process begins with creation of a sales invoice; a sales invoice is “document
sent to a customer with a list of products or services they have bought and
their prices, any sales tax, the total amount, and the date before which the
customer must pay” (Cambridge Dictionary) The creation of the sales invoice
then signals the business to update the sales journal. The sales journal is
intended to for “recording completed sales transactions” (Hall, 2011, p.157). Upon
the completion of updating the sales journal, the business should then look to
update their accounts receivable. Updating accounts receivable is done to
ensure that every customer’s outstanding balances are kept up with and updated
for each transaction. The business should then update their inventory records
according to their company’s inventory system. This allows for the inventory to
be accounted for correctly at all times. Lastly, the company should post this
transaction onto to their general ledger in order for the future preparation of
financial statements.

            The last step of the revenue cycle
is the collecting of cash; this can be done in a variety of ways. One way that a
company can collect cash is through the mail by check. In order to process the
checks accurately, a “cash receipts employee verifies the accuracy and
completeness of the checks against the prelist” (Hall, 2011, p.163). Once the
amount is verified to be correct the cash receipt can then be entered into the
cash receipt journal. At the days end a deposit slip is to be prepared with the
total of the cash receipts for the day and sent to the bank along with the
actual checks from the customers. Then the accounts receivable account should
be updated to reflect the cash received. Another option for collecting cash is
a Electronic Fund Transfer, an Electronic Fund Transfer is defined by the
Department of Homeland Security as “Any transfer of funds, other than a
transaction originated by cash, check, or similar paper instrument, that is
initiated through an electronic terminal, and that instructs or authorizes a
financial institution to debit or credit an account”(DHS, 2003, p.2). The process after the cash
is collected through an Electronic Fund Transfer is the same as receiving a
check other than having to submit a deposit slip.

Many of the steps and processes in the Revenue Cycle are complex
and can be confusing to an individual with little knowledge of accounting. This
allows for their to be a handful of potential threats that must be recognized
in order to create a mistake free revenue cycle. In order to prevent these
threats a business should adopt certain controls. For example, Transaction
Authorization may be implemented “to ensure that only valid transactions are
processed” (Hall, 2011, p. 167). Credit Checks are one vital tool used to
ensure that the transaction is valid, if a customer with poor credit is able to
purchase goods and do not pay for them in the future then the transaction is
not considered valid. Segregation of Duties are essential in in protecting the
company from mistakes as well as fraud. This can be seen in the separation of
transaction authorization and transaction processing, the sales department may
be more inclined to boost their numbers by approving a customer with bad
credit, to prevent this the credit checks are done by separate department
entirely. Then are simple controls like supervision, supervision may be
required in the mailroom where the checks are received in order to prevent any
sort of fraud. Another place supervision may be required is in the warehouse to
prevent the theft of merchandise by warehouse employees. These controls along
with a few other similar controls help minimize the threats that the revenue
cycle is susceptible to.

There are a number of steps required in order create a cohesive
and effective revenue cycle. It is essential as accountants that these steps be
carried out in a manner that allows the company to record data for
decision-making, reduce the threats and use information gathered to make key
decisions. Whether a manufacturing based business or a service based business
each company has their own formula in order to create a fluid and mistake free
revenue cycle.


























Definition of Sales Invoice.

(n.d.). Retrieved December 04, 2017, from

Fontinelle, A. (2015, January
12). Business Credit Score. Retrieved December 04, 2017, from

Hall, J. A. (2011). Accounting Information Systems (7th
ed.). Mason, OH: Cengage Learning.

United States, Department of
Homeland Security, Management Directives System. (2003, January 3). Retrieved December 4, 2017,

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