Page 192 - Accounting Information Systems

CHAPT E R 4 The Revenue Cycle 163

UPDATE SALES JOURNAL. Upon receipt of the approved credit memo, the transaction is recorded
in the sales journal as a contra entry. The credit memo is then forwarded to the inventory control function
for posting. At the end of the period, total sales returns are summarized in a journal voucher and sent to
the general ledger department.

UPDATE INVENTORY AND AR RECORDS. The inventory control function adjusts the inventory
records and forwards the credit memo to accounts receivable, where the customer’s account is also
adjusted. Periodically, inventory control sends a journal voucher summarizing the total value of inventory
returns to the general ledger update task. Similarly, accounts receivable submits an AR account summary
to the general ledger function.

UPDATE GENERAL LEDGER. Upon receipt of the journal voucher and account summary informa-
tion, the general ledger function reconciles the figures and posts to the following control accounts:

DR CR
Inventory—Control XXX.XX
Sales Returns and Allowances XXXX.XX
Cost of Goods Sold XXX.XX
Accounts Receivable—Control XXXX.XX

CASH RECEIPTS PROCEDURES
The sales order procedure described a credit transaction that resulted in the establishment of an account
receivable. Payment on the account is due at some future date, which the terms of trade determine. Cash
receipts procedures apply to this future event. They involve receiving and securing the cash; depositing
the cash in the bank; matching the payment with the customer and adjusting the correct account; and
properly accounting for and reconciling the financial details of the transaction. The DFD in Figure 4-9
shows the relationship between these tasks. They are described in detail in the following section.

OPEN MAIL AND PREPARE REMITTANCE ADVICE. A mail room employee opens envelopes
containing customers’ payments and remittance advices. Remittance advices (see Figure 4-10) contain in-
formation needed to service individual customers’ accounts. This includes payment date, account number,
amount paid, and customer check number. Only the portion above the perforated line is the remittance
advice, which the customer removes and returns with the payment. In some systems, the lower portion of
the document is a customer statement that the billing department sends out periodically. In other cases, this
could be the original customer invoice, which was described in the sales order procedures.
The remittance advice is a form of a turnaround document, as described in Chapter 2. Its importance is
most apparent in firms that process large volumes of cash receipts daily. For example, processing a check
from John Smith with no supporting details would require a time-consuming and costly search through
perhaps thousands of records to find the correct John Smith. This task is greatly simplified when the cus-
tomer provides necessary account number and posting information. Because of the possibility of tran-
scription errors and omissions, however, sellers do not rely on their customers to provide this information
directly on their checks. Errors are avoided and operational efficiency is greatly improved when using
remittance advices.
Mail room personnel route the checks and remittance advices to an administrative clerk who endorses
the checks ‘‘For Deposit Only’’ and reconciles the amount on each remittance advice with the correspond-
ing check. The clerk then records each check on a form called a remittance list (or cash prelist), where all
cash received is logged. In this example, the clerk prepares three copies of the remittance list. The original
copy is sent with the checks to the record and deposit checks function. The second copy goes with the
remittance advices to the update AR function. The third goes to a reconciliation task.

RECORD AND DEPOSIT CHECKS. A cash receipts employee verifies the accuracy and complete-
ness of the checks against the prelist. Any checks possibly lost or misdirected between the mail room and