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154 PART II Transaction Cycles and Business Processes

The Conceptual System

OVERVIEW OF REVENUE CYCLE ACTIVITIES
In this section we examine the revenue cycle conceptually. Using data flow diagrams (DFDs) as a guide,
we will trace the sequence of activities through three processes that constitute the revenue cycle for most
retail, wholesale, and manufacturing organizations. These are sales order procedures, sales return proce-
dures, and cash receipts procedures. Service companies such as hospitals, insurance companies, and banks
would use different industry-specific methods.
This discussion is intended to be technology-neutral. In other words, the tasks described may be per-
formed manually or by computer. At this point our focus is on what (conceptually) needs to be done, not
how (physically) it is accomplished. At various stages in the processes we will examine specific docu-
ments, journals, and ledgers as they are encountered. Again, this review is technology-neutral. These
documents and files may be physical (hard copy) or digital (computer-generated). In the next section, we
examine examples of physical systems.

Sales Order Procedures
Sales order procedures include the tasks involved in receiving and processing a customer order, filling
the order and shipping products to the customer, billing the customer at the proper time, and correctly
accounting for the transaction. The relationships between these tasks are presented with the DFD in
Figure 4-1 and described in the following section.

RECEIVE ORDER. The sales process begins with the receipt of a customer order indicating the type and
quantity of merchandise desired. At this point, the customer order is not in a standard format and may or
may not be a physical document. Orders may arrive by mail, by telephone, or from a field representative
who visited the customer. When the customer is also a business entity, the order is often a copy of the cus-
tomer’s purchase order. A purchase order is an expenditure cycle document, which is discussed in Chapter 5.
Because the customer order is not in the standard format that the seller’s order processing system needs,
the first task is to transcribe it into a formal sales order, an example of which is presented in Figure 4-2.
The sales order captures vital information such as the customer’s name, address, and account number;
the name, number, and description of the items sold; and the quantities and unit prices of each item sold.
At this point, financial information such as taxes, discounts, and freight charges may or may not be
included. After creating the sales order, a copy of it is placed in the customer open order file for future
reference. The task of filling an order and getting the product to the customer may take days or even
weeks. During this period, customers may contact their suppliers to check the status of their orders. The
customer record in the open order file is updated each time the status of the order changes such as credit
approval, on back-order, and shipment. The open order file thus enables customer service employees to
respond promptly and accurately to customer questions.

CHECK CREDIT. Before processing the order further, the customer’s creditworthiness needs to be estab-
lished. The circumstances of the sale will determine the nature and degree of the credit check. For example,
new customers may undergo a full financial investigation to establish a line of credit. Once a credit limit is
set, however, credit checking on subsequent sales may be limited to ensuring that the customer has a history
of paying his or her bills and that the current sale does not exceed the pre-established limit.
The credit approval process is an authorization control and should be performed as a function separate
from the sales activity. In our conceptual system, the receive-order task sends the sales order (credit
copy) to the check-credit task for approval. The returned approved sales order then triggers the continua-
tion of the sales process by releasing sales order information simultaneously to various tasks. Several
documents mentioned in the following sections, such as the stock release, packing slip, shipping notice,
and sales invoice, are simply special-purpose copies of the sales order and are not illustrated separately.

PICK GOODS. The receive order activity forwards the stock release document (also called the picking
ticket) to the pick goods function, in the warehouse. This document identifies the items of inventory that