INTRODUCTION INTRODUCTION

• Information about revenue cycle activities • Management also has to evaluate the
flows to other accounting cycles, e.g.: efficiency and effectiveness of revenue
– The expenditure and production cycles cycle processes:
– The human resources/payroll cycle – Requires data about:
– The general ledger and reporting function • Events that occur
• Resources used
• Agents who participate
– The data needs to be accurate, reliable, and
timely.

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REVENUE CYCLE BUSINESS

SALES ORDER ENTRY
ACTIVITIES
• Four basic business activities are • Sales order entry is performed by the sales
performed in the revenue cycle: order department.
– Sales order entry • The sales order department typically reports to
the VP of Marketing.
– Shipping
• Steps in the sales order entry process include:
– Billing
– Take the customer’s order
– Cash collection – Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by
customer service or sales order entry)

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 SALES ORDER ENTRY SALES ORDER ENTRY

• Take customer orders • The sales order (paper or electronic)

– Order data are received on a sales order indicates:
document which may be completed and – Item numbers ordered
received: – Quantities
• In the store
– Prices
• By mail
• By phone
– Salesperson
• On a website
• By a salesperson in the field

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SALES ORDER ENTRY SALES ORDER ENTRY

• To reduce human error, customers should • Credit sales should be approved before
enter data themselves as much as the order is processed any further.
possible: • There are two types of credit authorization:
– On websites – General authorization
– On OCR forms
– Via phone menus • For existing customers below their credit limit who
don’t have past-due balances.
• Credit limits vary by customer based on past history
and ability to pay.
• General authorization involves checking the customer
master file to verify the account and status.

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 SALES ORDER ENTRY SALES ORDER ENTRY

• Credit sales should be approved before • How can IT improve the process?
• For
the order iscustomers
processed any further.
who are:
– Automatic checking of credit limits and
– New
• There are– two typesbalances
Have past-due of credit authorization: balances
– General
– Are placing orders that would exceed their credit limit
authorization – Emails or IMs to the credit manager for
• Specific authorization is done by the credit manager,
accounts needing specific authorization
– Specific authorization
who reports to the treasurer.

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SALES ORDER ENTRY SALES ORDER ENTRY

• When the order has been received and the • If there are enough units to fill the order:
customer’s credit approved, the next step – Complete the sales order
is to ensure there is sufficient inventory to
– Update the quantity available field in the
fill the order and advise the customer of inventory file
the delivery date.
– Notify the following departments of the sale:
• The sales order clerk can usually • Shipping
reference a screen displaying: • Inventory
– Quantity on hand • Billing
– Quantity already committed to others – Send an acknowledgment to the customer
– Quantity on order
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 SALES ORDER ENTRY SALES ORDER ENTRY

• If there’s not enough to fill the order, • Accurate inventory records are needed so
initiate a back order. customers can be accurately advised of
– For manufacturing companies, notify the their order status.
production department that more should be – Requires careful data entry in the sales and
manufactured. shipping processes.
– For retail companies, notify purchasing that – Can be problematic in retail establishments:
more should be purchased. • Clerks running a similar item over the scanner
several times instead of running each item
• Mishandling of sales returns such that returned
merchandise isn’t re-entered in inventory records

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REVENUE CYCLE BUSINESS

SHIPPING
ACTIVITIES
• Four basic business activities are • The second basic activity in the revenue cycle is
filling customer orders and shipping the desired
performed in the revenue cycle: merchandise.
– Sales order entry • The process consists of two steps
– Shipping – Picking and packing the order
– Shipping the order
– Billing
• The warehouse department typically picks the order
– Cash collection • The shipping departments packs and ships the
order
• Both functions include custody of inventory and
ultimately report to the VP of Manufacturing.

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 Shipping
Sales Picking List 2.1 SHIPPING
Order Pick &
Entry Pack

Goods &
• The shipping department compares the
Sales
Order
Packing
List
following quantities:
Sales Order
– Physical count of inventory
2.2 – Quantities indicated on picking ticket
Ship
– Quantities on sales order
Bill of Inventory
Lading & Goods
Packing Slip

Billing & Goods, • Discrepancies can arise if:

– Items weren’t stored in the location indicated
Packing Slip,
Accts.
& Bill of Lading
Shipments
Rec.
– Perpetual inventory records were inaccurate
Carrier • If there are discrepancies, a back order is
initiated.
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SHIPPING BILLING

• The clerk then records online: • The third revenue cycle activity is billing
– The sales order number customers.
– The item numbers ordered • This activity involves two tasks:
– The quantities shipped – Invoicing
– Updating accounts receivable
• This process:
– Updates the quantity-on-hand field in the
inventory master file
– Produces a packing slip
• The packing slip lists the quantity and description of
each item in the shipment.
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 BILLING INTRODUCTION

• Accurate and timely billing is crucial. • Steps in database design include the
following:
• Billing is an information processing activity
– Planning
that repackages and summarizes information – Requirements analysis
from the sales order entry and shipping – Design
activities – Coding
• Requires information from: – Implementation
– Shipping Department on items and quantities – Operation and maintenance
shipped
– Sales on prices and other sales terms

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INTRODUCTION ENTITY-RELATIONSHIP DIAGRAMS

• Accountants may provide the greatest value by • An entity-relationship (E-R)

taking responsibility for data modeling—the
process of defining a database to faithfully
diagram is a graphical technique for
represent all aspects of the organization, portraying a database schema.
including interactions with the external – Shows the various entities being
environment. modeled and the important relationships
– Occurs during both requirements analysis and design
stage
among them.
– Two important tools to facilitate data modeling:
• Entity-relationship diagramming
• REA data model

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 ENTITY-RELATIONSHIP DIAGRAMS THE REA DATA MODEL

• An entity is anything about which the • Three Basic Types of Entities

organization wants to collect and store
information. – The REA data model is so named because it
– EXAMPLE: Your university collects and stores classifies entities into three distinct
information about students, courses, enrollment categories:
activity, etc. • Resources that the organization acquires and
• In a relational database, separate tables would uses. • Resources are things that have
be created to store information about each economic value to the organization.
distinct entity.
• In an object-oriented database, separate classes
would be created for each distinct entity.

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THE REA DATA MODEL THE REA DATA MODEL

• Three Basic Types of Entities • Three Basic Types of Entities

– The REA data model is so named because it – The REA data model is so named because it
classifies entities into three distinct classifies entities into three distinct
categories: categories:
• Resources that the organization acquires and • Resources that the organization acquires and
uses. uses.
• Events in which the organization engages • Events in which the organization engages
• These are the various business activities • Agents participating in these events
about which management wants to • Includes people and organizations who
collect information for planning or participate in events and about whom
control purposes. information is desired for planning,
control, and evaluation purposes.
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 STEP THREE: DETERMINE
THE REA DATA MODEL CARDINALITIES OF RELATIONSHIPS
• Customers pay
• Can you identify the resources in this diagram?. for each sale with
Sale
a maximum of
one payment
Inventory Sales Employee (typical for retail
stores).
• Each cash receipt
from a customer
Cash relates to one
Customer (and only one)
Receipt
sale.
• The relationship
between sales
Cash Receive and cash receipts
Employee
Accounts Cash is 1:1.

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STEP THREE: DETERMINE STEP THREE: DETERMINE

CARDINALITIES OF RELATIONSHIPS CARDINALITIES OF RELATIONSHIPS
• Customers pay • Customers make
Sale for each sale with Sale only one payment
a maximum of for a sale.
many payments • Each cash receipt
(installments). from a customer
• Each cash receipt can relate to
from a customer multiple sales
relates to one (e.g., they pay for
Cash (and only one) Cash all sales that
sale. month in one
Receipt Receipt
• The relationship payment).
between sales • The relationship
and cash receipts between sales
is 1:N. and cash receipts
is 1:N.

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 STEP THREE: DETERMINE STEP THREE: DETERMINE
CARDINALITIES OF RELATIONSHIPS CARDINALITIES OF RELATIONSHIPS
• Customers may
Sale make multiple • In other words, the choice of cardinalities
payments for a is not arbitrary.
particular sale.
• A cash receipt • It reflects facts about the organization that
from a customer
may relate to are obtained during the requirements
more than one definition stage of the database design
Cash sale.
Receipt • The relationship process.
between sales
and cash receipts
is M:N.

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STEP THREE: DETERMINE STEP THREE: DETERMINE

CARDINALITIES OF RELATIONSHIPS CARDINALITIES OF RELATIONSHIPS
• Now let’s go back to the REA diagram for Take Order Employee
the revenue cycle and see if we can
complete the cardinalities. Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
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