REVENUE AND EXPENDITURE CYCLE APPLICATIONS

The application systems emphasize the concept of organizational independence

(separation of functions) in the design of application systems. Organizational
independence requires that the custody of an asset be under a separate authority from
record-keeping functions related to that asset (Bodnar and Hopwood, 1998:253)
Revenue Cycle Applications
This includes the functions required to exchange its products/ services with customers
eg. Credit granting, order taking and processing, shipment of goods, billing and accounts
receivable. The following Exhibit 1 focuses on sales order processing.
8

Shipping

Finished
goods

Customer
1

Accounts
receivable

Credit
2

4
11

Sales order

13
Customer
Data

Billing

10

12

General
ledger
(Adapted from Bodnar and Hopwood, 1998: 254)

Data flow key

1 Order

2 Sales order

3 Approved sales order

4 Shipping order

5 Packing slip

6 Billing memo

7 Shipping advice

8 Shipment

9 Shipping advice

10 Invoice

11 Posting memo

12 Journal voucher

13 Control total
The sales order interfaces the various functions necessary to process a customer order in
the order: sales order, credit, finished goods, billing, accounts receivable and general
ledger.
Sales order initiates the processing of customer orders with the preparation of a sales
order with the following details: description of goods ordered, prices, customer name,
shipping address and / billing address. Sometimes these two are different: organizations
sometimes have centralized buying while others are decentralized.
The invoice is normally prepared after goods are shipped and this event is notified to
billing, which is also known as post billing.
Credit standing is verified before shipment of goods (old customer) whose credit limits
are pre-specified by the organization i.e. not to exceed a total amount of credit granted
and specific authorization should this limit be breached. For a new customer, a credit
check is done where the normal Cs of credit granting is done, trade references sort. Sales
order function is separate from the credit function and is subordinated to it.
Distribution of sales order set:
i)
To billing to be filed as open orders which allows the billing function to
anticipate, receive and match shipping advices from shipping function. Hence
6 and 9 should independently confirm 1,2,3.
ii)
The packing slip copy to shipping.
iii)
The stock copy to finished goods for shipping which authorizes finished
goods to release goods from its custody for shipment to customers.
In some cases where the warehouse does not have the goods in stock, a production order
is issued to produce the goods ordered. It is good practice if this procedure is taken to
communicate with the customer that their order is being attended to and a timeframe is
indicated.
Finished goods packs the order on the stock copy and updating stock records to show the
actual quantities to be shipped. The actual quantities are noted on stock copy of sales

order to be attached to goods to shipping. Shipping signs the stock copy to acknowledge
receiving the finished goods and accepting custodianship of assets.
Shipping matches the packing slip copy with the stock copy of sales order, prepares a bill
of lading (a document exchanged between a shipper and a carrier/ trucker). BOL
documents freight charges, and the transfer of goods from the shipping company to the
transporter, e.g. Unifreight, DHL. These freight charges are billed to the shipper who the
bills the customer on the sales invoice. Included with the customers order is the packing
slip copy.
Billing receives documentation of the shipment from shipping (shipping advice) consists
of the stock copy of the sales order and a copy of the BOL. Billing pulls the relevant
open order documentation, verifies the order, prepares the invoice by extending the
charges for actual quantities supplied, freight charges and taxes involved. Invoices are
then mailed, faxed or e-mailed to accounts receivable. A journal voucher is prepared and
dispatched to the general ledger function for posting to the general ledger.
Accounts Receivable and General Ledger.
Billing and accounts receivable are separated. Billing is responsible for invoicing
individual sales transactions, accounts receivable maintain customer accounts
information and sends periodic statements of accounts to customers. Billing does not
have access to the records (the receivable ledger) and the financial records are
independent of the invoicing operation. The control total of postings to accounts
receivable ledger sent to general ledger by accounts receivable is compared to the journal
voucher from billing to validate the postings to general ledger.
Shipping and finished goods should be distinct. (Bodnar and Hopwood, 1998:253-259;
Lucas, 1997: 395)
Accounts Receivable System.
A greater part of the current assets of organizations are in accounts receivable. An
accounts receivable system is kept to facilitate credit sales and control this asset for the
organization. The accounts receivable application generally runs with little senior
management oversight(because it is) a highly structured application with rules that can
be followed by a clerical staff. (Lucas, 1997:7, 475; OBrien,2004:157-8)
A lot of what has been said on accounts receivable function above applies here. Accounts
receivable is the amount owed by customers for goods and services sold or rendered on
credit. Accounts receivable maintains customer credit and payment history information
used in the administration of the organizations policy. A subsidiary of the ledger of
individual accounts is kept with a control account in the general ledger. The total on the
control account should equal or reconcile with the total of the individual balances on the
subsidiary relevant. Debits and credits are posted to the individual accounts, ageing

schedules are prepared as a by-product of sending statements periodically and

management sometimes requires special credit reports.
Normally, there are two approaches to Accounts Receivable application:
Open-item processing where a separate record is kept in the accounts receivable
system for each of the customers unpaid invoices
Balance-forward processing where a customers remittances are applied against a
customers total outstanding balance rather than a customers individual invoices.
The first approach seems to have more merit since the payments received from customers
knock off particular invoices and not just a total. If a dispute arises, which invoice was
not paid or contributes to the outstanding balance?
Accounts receivable System
Cash
receipts

General
Ledger

Customers

1
10
Customer
data

12

Accounts
Receivable

Detail

13
11

Internal
Audit

Credit
Manager

9
4

9
Billing

3
7

Receiving
15
(Source, Bodnar and Hopwood,1998:262)
Data flow key

Treasure
r

14

1 Remittance advices

2 Control total

3 Sales return memo

4 Sales return advice

5 Credit memo

6 Write-off memo

7 Write-off advice

8 Aged Trial Balance

10 Control total

11 Worthless Account List 12 Statements

13 Total write-offs

14 Write-off confirmation 15 Write-off memo.

9 JV

Cash receipts receive customer remittance slip, forwards the receipts to accounts
receivable for crediting of customers account. Accounts receivable has no access to the
cash/ cheque accompanying the remittance advice slip.
Billing issues invoices, credit memos and similar adjustments which are routed to
accounts receivable for posting to customer accounts to separate functions. Billing has no
direct access to accounts receivable records.
Accounts receivable has been dealt with above save the following:
The credit department receives the Aged Trial balance from accounts receivable.
Credit department: approves sales returns, allowances, other adjustments to customer
accounts; reviews aged trial balance to monitor customers credit worthiness; initiates
write-off memos to charge accounts to bad debts expense.
General ledger maintains the accounts receivable control account; debits and credits are
posted to the accounts receivable control accounts from JV/ control totals sent to GL
directly from accounts receivable. Reconciliation is an important control in the accounts
receivable application system.
Sales returns and allowances: these need careful control. Allowances arise when damaged
goods, shortages and clerical errors occur. Seller and buyer agree to reduce amounts
owed by buyer. There is a negotiated price/amount. Goods are retained or destroyed by
customer; credit department reviews and approves allowance. After this approval, billing
issues a credit memo to document the reduced amount on customers account.
Write-off of accounts receivable.
Central to this function is the analysis of past due accounts using an aged trial balance
follow up letters, collection agencies engagedbut still bad debts remain part of doing
business. Credit manager initiates a write-off memo; treasurer approves this and accounts
receivable is authorized to write-off the account. Copy of authorization is sent to Internal
Audit for record keeping. Accounts receivable closes account, and Internal Audit write
directly to customer this development so that employees do not intercept remittances on
account and arrange the account to be written-off and stop billing of customer.

Expenditure cycle applications.

This functions to acquire goods and services for the organization to operate and or for
resale, PPE etc.
Process involves vendor selection, requisition, purchasing, receiving, accounts payable,
payroll accounting.
Purchasing may be centralized or decentralized but the former results in quantity
discounts, a stronger market position, better inventory control and buyer specialization.
There are five functions:
a) users initiate a requisition for materials needed.
b) Bids / quotations are sort from vendors, a purchase order is issued by purchasing
department.
c) Goods are received, a GRN or goods received note is issued by receiving dept.
after inspecting goods received.
d) Invoice from supplier is matched with purchase order and receiving report for
accuracy, approval for payment.
e) A cheque is issued and sent to vendor with appropriate remittance advice slip,
previous documents are stamped PAID to avoid duplication.
Purchase Application System
6
Receiving

3
5
2

Stores

Vendor

10

Purchasing
4
11
Accounts
payable

13
12

Cash disbursement

Vendor data
(Source, Bodnar and Hopwood,1997: 267)
Data flow key
1 Requisition

2 Acknowledgement

3 Purchase order

4 Purchase advice

5 Receivable advice

7 Receiving advice

8 GRN

10 Invoice

11 Approved invoice

6 Shipment
9 Notice of receipt
12 Voucher package

13 Payment.
Requisition (Stores): Outsiders or end-users initiate requests to purchase. Stores issues
purchasing requisitions dully approved.
Purchasing: purchasing dept. selects vendor, arrange for terms and deliveryif within
budget.
Purchasing dept overrides if there are insufficient funds, lack of authorization.
Purchasing dept may return to originating dept for modification.
Issues purchase order for requisition.
Distributes copies to vendor, accounts payable, user dept, receiving dept. User dept
reviews purchase order.
Receiving: separate and independent of the stores function
Purchase order sent to this dept. authorizes it to receive shipment from vendor on
delivery.
Independently count shipment
Prepares a GRN.
Supervisor compares PO with quantities received .
Stores: acknowledges receipt of goods from receiving by signing the receiving report /
GRN. Forwards the receiving report to accounts payable.
Accounts payable: does the payments to vendors using a set of 4 formspurchase
requisition, p o , g r n, invoice to document a purchase transaction.
A voucher system creates control over purchasing activity. It is a review technique to
ensure that all appropriate documentation is assembled, verified, reviewed prior to actual
paymenta k a the matching process and assumes that documentation evidences the
execution of the procedural steps in paying vendors.
Approved voucher is forwarded to cash disbursements for paying.
Payroll system
A payroll system involves all phases of payroll processing and personnel reporting.
System provides a means of promptly and accurately paying employees, generates the
necessary payroll reports and supplies management with the required employees skills
information.
Deductions:

Withholding taxes, specialized deductions , gvt reporting and internal personnel

requirements ( though some organizations do not involve personnel matters much in the
payroll system).
Payroll processing is very complex since there are frequent changes to the tax regime,
social obligations and the need for confidentiality. Due to taxes and regulation changes,
the life cycle of the payroll system short. E.g in 2007, in Zimbabwe, there have been two
changes to the tax regime already before year end.

Production

Personnel

Payroll data

2
details
Payroll
Timekeepin
g

Payee

6
Cash
Disbursements

10
11

12

8
Cost
distribution

Bank
General
ledger

13

Internal
Audit
(Source, Bodnar and Hopwood,1998: 275)
Data flow key
1 Authorisations
2 Job time summary
5 payroll register
6 paychques
10 pay cheques
11 voucher cheques
13 bank statements
Personnel is :

3 Time cards
4 Job time reports
7 voucher cheques 8 voucher 9 JV
12 cancelled cheques

 Responsible for placing people on the companys payroll, specifying rates of pay,
authorizing all deductions from pay.
Responsible for authorizing all changesadd, delete employees, change pay rates
or levels of deductions from pay.
Distinct from time-keeping, from payroll preparation function.
Timekeeping
Function is responsible for the preparation and control of time reports and job
time tickets.
Collects and maintain time cards or time reports; reconciling these data to job
time summary reports received from production. Job time summary reports
indicate the jobs employees were assigned ti in production
Reconciles time reports to the related job time summary reports received from
production and forwards cards to the payroll dept.
Payroll
Actually computes the payroll independently from the preparation of input data
on which pay is based, time reports, personnel data.
Payroll register computes net pay i.e. gross pay less deductions.
Accounts payable get a copy of the payroll register to initiate the recording of a
voucher for the payroll. These days cheques are not used much as there is the
RTGSS or electronic funds transfers from employers account (s) to employee
account.