TRANSACTION CYCLES Flashcards
What are included in an entity’s transaction cycles?
- Revenue and Receipt Cycle
- Purchasing and Disbursement Cycle
- Personnel and Payroll Cycle
- Inventory and Production Cycle
- Financial and Investing Cycle.
Watch UWorld Roger CPA Review on Youtube for Revenue and Receipt Cycle.
Explain the revenue and receipt cycle.
It involves three phases, namely:
- SALES
- ACCOUNTS RECEIVABLE
- CASH RECEIPTS
Cash has the most inherent risk, therefore several controls are needed.
- The revenue and receipt cycle is triggered by a CUSTOMER PURCHASE ORDER.
- From the customer purchase order, a SALES ORDER IS PREPARED INTERNALLY by the sales department. A sales order is an AUTHORIZATION TO SELL
From here, many things could go wrong.
- A copy of the sales order is sent by the sales department to the credit department to check whether the customer has good credit standing.
- A copy of the sales order is sent by the credit department to the warehouse department to verify whether there is enough inventory to fulfill the order.
- A copy of the sales order is sent by the credit department to the billing department.
- A copy of the sales order is sent by the credit department to the shipping department.
- Once everything is good, the warehouse department sends the goods to the shipping department. Shipping department checks the details of goods, and corroborates the sales order he received earlier from the credit department.
- The shipping department ships the goods and prepares a BILL OF LADING (EXECUTION). The bill of lading gets sent to:
a. Warehouse department to update the inventory
count
b. Billing department to let them collect
c. Customer to let them know the goods are in transit - With the authorized sales order and the bill of lading, a SALES INVOICE IS PREPARED by billing department, a copy of which is sent to the customer and accounting department.
- Accounting department RECORDS the sale in the sales journal evidenced by the sales invoice.
(DR ACC REC, CR SALES) - The customer receives the sales invoice and mails them a CHECK for payment and a REMITTANCE ADVICE.
- The receptionist receives the mail, preparing the check and updating the remittance listing, which contains all the checks received. The receptionist SENDS THE REMITTANCE ADVICE TO THE ACCOUNTING DEPARTMENT TO RECORD THE RECEIPT OF THE CHECK (DR CASH, CR ACC REC)
- At the end of the month, a bank reconciliation is prepared to compare what got deposited and what got recorded.
What is PPN?
Pre-numbered, Pre-printed, Numerically controlled. This applies to documents in the transaction cycles. (Eg: checks)
Why are there multiple copies of a document in a transaction cycle?
Documents have multiple copies because these documents are needed by different departments. These multiple documents are also used as controls, since they are compared every now and then, and differences could mean something is wrong.
What responsibilities must be separated in transaction cycles?
- AUTHORIZATION
- EXECUTION
- RECORDING
- CUSTODY
What document serves as a contract between a carrier and the seller of goods, and initiates shipment of goods?
Bill of Lading.
Most companies recognize sales revenue when?
When the goods are shipped.
What document is used as the basis for recording sales transactions and updating the accounts receivable master file?
Sales invoice.
When companies have customers send payments directly to an address maintained by a bank, this is called?
A lockbox system.
What are fidelity bonds?
A fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees’ fraudulent or dishonest actions. This form of insurance can protect against monetary or physical losses.
At what point do most companies recognize liabilities for the acquisition of goods?
Upon receipt of the goods/service.
