Internal Control of Revenue Cycle

Topics: Accounts receivable, General ledger, Inventory Pages: 8 (2286 words) Published: February 13, 2013
Revenue Cycle and Control Activities

The revenue cycle for many companies is considered the primary source to earn revenue from the sale of goods or service. Good controls must be established to maintain the effectiveness of receivables and credit sales, not doing so can harm the company and might be costly to the business. Six classes of internal controls guides us in evaluating and designing transaction processing. They are authorization, supervision, segregation of duties, access control, independent verification, and accounting records. We will discuss each department that is involved in the revenue cycle, it's activities, and control activities.The first section discusses the departments that make the revenue cycle , starting with Sales Department and ending with Billing Department, knowingly that collections must be received and adjustments must be made. The second section discusses the six activities mentioned earlier.


The revenue cycle is composed of five independent (in activities and personnel) departments that are required to make function and make a sale. Each department carry out it's own, and every department depends on the the preceding department in order to function properly. An additional two activities must be considered in the revenue cycle are collection of receivables and adjustments to sales and receivables.

Sales Department

Every sales process starts with receiving a customer purchase order- by mail, in person, or telephone. Thus controlling the customer's orders is carefully done, and operating procedures must be maintained in an adequate manners. The department then identifies and reviews items and quantities to determine whether the order can be placed, then they prepare The Sales Order. The sales order is not the standard format that the seller's order processing system needs. The sales order has vital information, such as the customer's name account number, description of the items sold quantities, and prices. A copy of sales order is placed in the open order file, the customer getting the ordered goods might take days or even weeks. The customer might check about the status of his or her order, order file is updated every time the status of the order changes .It also sets instructions to guide various divisions and department, including credit, finished goods, shipping, billing, and accounts receivable units.

Credit Approval Department

To provide independence to the credit authorization process, the credit department is organizationally and physically separate from the Sales Department. The credit approval department receives a copy of the sales order from the sales department. The document received serves as an authorization to preform a client credit check. The check includes investigating new customers' ability to pay and creditworthiness, and a line of credit is established. Typically new checking new customers take time more that existing customers. A good control activity is a limit test, which measures the customer have unused credit. This process set an upper limit that the customer must not pass, if passing it the purchase order by the customer will be denied.

Warehouse Procedures

After a credit check has been performed and approved, and a sales order is received. The warehouse is responsible of issuing merchandise and items that were mentioned in the sales order to the shipping department. In a typical company that have finished goods in it's inventory, this inventory is supervised and controlled by a storekeeper. He is responsible for issuing the goods. Another control activity must be done is updating the inventory records by the accountant, not by the storekeeper. This separation of duty prevents theft of inventory.

The Shipping department

When receiving the finished goods from the warehouse, the shipping clerk must reconcile the products received from the warehouse with the products mentioned in the sales order. This is an important...
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