540 part iii transaction cycles and accounting applications ......at elerbe (e1–e3)...

540 Part III Transaction Cycles and Accounting Applications

Customer Order EntryClerk

WarehouseEmployee

ShippingClerk

Computer

Send Order

Accept Order (E1)

Pick Goods (E2)

Ship Goods (E3)

PS: PackingSlip

P: PickingTicket

B: Bill ofLading

C: Customer

I: Inventory

I: Inventory[allocated]

O: Order

S: Shipment

I: Inventory[sold]

P: PickingTicket

[picked]

PS: PackingSlip [shipped]

Packing Slip

Packing Slip

Picking Ticket

Total

Picking Ticke

Total

Bill of Lading

Total

Figure 11.1Overview ActivityDiagram—Ordering,Picking, and Shippingat ELERBE (E1–E3)

62006_JonesRama_CH11.qxd 5/23/2002 12:47 PM Page 540

Figure 11.2 Overview Activity Diagram—Billing, Collecting, and Depositing at ELERBE (E4–E8)

541The Revenue Cycle Chapter 11

Customer MailClerk

Cashier Controller Computer

Pay

Deposit (E7)

Compare (E8)

I: Invoice

GL: General_Ledger_Transfer

C: Customer[�bal.]

CR: Cash_ Receipt

DS: DepositSlip

AccountsReceivable

Clerk

Packing Slip

PS: PackingSlip

Bill of Lading

Total

B: Bill ofLading

I: Invoice

Invoice

Total

Remittance

RA*

RecordCollection (E6)

Remittance

RA*

Check

Total

CK: Check

List

Check

Total

L: ListCK: Check[endorsed]

C: Customer[�bal.]

GL: General_Ledger_Transfer

S: Shipment

Collect (E5)

CR: CashReceiptsJournal

Cash Receipts

Total

Deposit Slip

Total

SJ*

Sales

Total

Bill customer (E4)

*RA = Remittance Advice, SJ = Sales journal



Inventory

General_Ledger_Transfer

Employee(Shipping

Clerk)

Sales_Order(E1)

Shipment(E3)

Sales_Invoice(E4)

Cash_Receipt(E6)

Deposit(E7)

Employee(Cashier)

Customer

Employee(Order Entry

Clerk)

Employee(AccountsReceivable

Clerk)

Employee(WarehouseEmployee)

Goods/Services

Events Agents

Figure 11.3UML Class Diagram:ELERBE’s RevenueCycle

Table 11.3 Layout of Revenue Cycle Records

MASTER TABLESCustomer Table

Contact_ G/L_ Due_ Credit_ BalanceCustomer# Name Address Person Telephone Sales Days Limit _Due

3451 Educate, Inc. Fairhaven, MA Costa 508-888-4531 4000 30 $12,000 $0

Inventory Table

Budget_ YTD_Default Quantity_ Quantity_ G/L_ G/L_ Sales_ Quantity

ISBN Author Title _Price on_Hand Allocated Sales COGS Quantity _Sold

0-256-12596-7 Barnes Introduction $78.35 0 0 4000 5210 300to Business

EVENT TABLES (related detail tables shown at end)Sales_Order Table (E1)

Order# Date Employee# (Order Entry Clerk) Customer#

219 05/11/03 201-35-8921 3451

Shipment Table (E3)

Shipment# Date Order# Employee# (Warehouse) Employee# (Shipper) Freight

831 05/11/03 219 540-89-5403 027-40-0130 $3.00

(continued)


(Numbers in blue are related to events and are used to link the menu to the annotated narrative inExhibit 11.1, the activity diagrams in Figures 11.1 and 11.2, the UML class diagram in Figure 11.3, andthe record layout in Table 11.3.)


Revenue Cycle Menu

A. Maintain

1. Customer 2. Inventory

B. Record Event

1. Enter sales order (E1)

2. Enter shipment (E3)

3. Enter sales invoice (E4)

4. Enter collections (E6)

5. Enter deposit (E7)

C. Process Data

1. Post 2. Purge records

D. Display/Print Reports

Documents (single entity reports)

1. Sales order, picking ticket, and packing slip (E1)

2. Sales invoice (E4)

3. Customer statements Event Reports

4. New customer orders report 5. Sales journal 6. Cash receipts journal Agent and Resource Reference Lists

7. Customer list 8. Inventory list Summary and Detailed Status Reports for Agents and Resources

9. Open customer orders report 10. Aged accounts receivable—detail 11. Aged accounts receivable—summary 12. Quantity sales by product—summary

E. Query

1. Query events 2. Query customers 3. Query inventory

F. Exit

Revenue Cycle MenuWe will be considering most of the input controls in Exhibit 11.3 as we movethrough the data entry options on the revenue cycle menu. Review the menu choicesfor a common revenue cycle in Figure 11.4, and then complete box 11.e.

Figure 11.4Revenue Cycle Menu


Using Customer File Maintenance to Control RisksCustomer file maintenance plays an important role in reducing the risks identifiedin Exhibit 11.2. The risk of not collecting cash is reduced by requiring that creditsales be made to customers in the Customer Table who are within their credit lim-its. Storing reference data about a customer in a customer record later improvesthe efficiency and accuracy of recording orders and collections. Because the cus-tomer’s address is already included in the master record, there is no need to recordit again for each order that the customer makes. As you can see by looking for-ward to Figure 11.7B on page 553, when recording an order, the order entry clerkdoes not have to type the customer’s name or identification number because the or-der entry screen includes a drop-down list of customers from the Customer Table.

Controls over Customer MaintenanceMaintaining customer records can reduce risks as discussed earlier, but only if ap-propriate care is taken to make sure that only qualified customers are in the mas-ter file and that contact information such as name, address, and telephone numberis accurate. In other words, adequate controls over the process of customer main-tenance are critical. The process of entering a new customer record is difficult tocontrol. The information recorded in the record is new to the system, so there areno other records stored elsewhere that can be compared for accuracy. Commonly,customer records are added individually, not as a batch, so that batch controls arenot available. Even if they were batched, batch controls may not be useful in con-trolling important data such as the customer’s name and address. An incorrectbilling address can mean never collecting an amount owed from a credit sale.


Customer#NameAddressContact PersonTelephoneDefault G/L CR AccountAccount NameDefault Due in DaysCredit LimitCurrent Balance

3451Educate, Inc.Fairhaven, MACosta508-888-45314000Sales30$12,000$0

Maintain Customer = (menu item A1)SAVE

Figure 11.5Maintain CustomerScreen

data entry, the user clicks on SAVE, and the system adds the following record tothe Customer Table.

Customer Table

Cus- Contact Tele- G/L_ Due_ Credit Balancetomer# Name Address _Person phone Sales Days _Limit _Due

3451 Educate, Inc. Fairhaven, MA Costa 508-888-4531 4000 30 $12,000 $0

62006_JonesRama_CH11.qxd 5/23/2002 12:47 PM 49

However, some controls over the process of recording new customers can beapplied; they are similar to the controls over supplier maintenance discussed in Chap-ter 9. Complete box 11.f to develop a list of controls over customer maintenance.

Focus on Problem Solving 11.f

Developing Controls over Customer Maintenance (P4, P5)

Required: The following table lists some controls over supplier maintenance that were given inChapter 4. Reword the controls so that they apply to customer maintenance.

Supplier Maintenance Control Similar Customer Maintenance Control

Access to the supplier maintenance screen in the applica-tion should be limited to the authorized people by password.

The process of adding a supplier should be limited toa qualified person, such as the purchasing officer.

To ensure that suppliers on the list are qualified, thereshould be standard procedures for approving suppliersand monitoring supplier performance.

In many cases, the most important control for accuracyis a careful comparison of the data entered in thescreen with the original source of the information. As an alternative, the same information could be keyed twice, with the system comparing the two data entries.

The solution to this Focus on Problem Solving box appears on page 583. Check your answer and make sure you understandthe solution before reading further.

File Maintenance for Inventory. Before the sale of a new product can berecorded, the product must be added to the Inventory Table. The user selects menuitem A2 from the revenue cycle menu, and the screen in Figure 11.6 appears.


ISBNAuthorTitleDefault Sales PriceDefault GL Sales AccountDefault COGS Account*Quantity on HandQuantity Allocated to Sales OrdersCurrent Year Budgeted Sales Quantity

0-256-12596-7BarnesIntroduction to Business$78.354000521000300

Maintain Inventory = (menu item A2)SAVE

Figure 11.6Maintain InventoryScreen

*Cost of Goods Sold Account#


Some items that ELERBE would include on the sales order form are not in-cluded in this form or the following record in the interest of brevity. Such infor-mation includes the shipping and billing address of the customer (which might differfrom what is stored in the customer record on occasion) and the customer’s pur-chase order number.

The shaded items in this screen were not entered by the user. The Sales_Order#is a computer-generated serial number, and the Employee# is determined based onthe information provided by the order entry clerk at the time of the log-in and, infact, may be recorded but not actually displayed. The default amount for the Priceis taken from the inventory record. The items preceded with an inverted triangle(�) can be entered using a drop-down list.

Figure 11.7B is an example of a sales order data entry screen from PeachtreeComplete Accounting software.


Enter Sales Order (menu item B1)SAVE

219201-35-8921 3451 Educate, Inc.05/11/03

Sales Order#Employee (Order Entry Clerks)Customer#Order DateISBN 0-256-12596-7 0-146-18976-4

BarnesJohnson

Introduction to BusinessPrinciples of Accounting

Quantity 15 1

Price$78.35 70.00

Figure 11.7AEnter Sales Order(E1)

sales orders. The contents of the narrative are reprinted here with separation intosteps.

1. A bookstore manager sends an order with details of all books (ISBN, author,title, publication year, and quantity).

2. The order entry clerk enters the order data into the computer. The computersystem checks whether the order is from an existing customer. If the order isfrom a new customer, the clerk creates a customer record in the CustomerTable. Then, the system checks the Inventory Table to determine whetherinventory is available.

3. The order information is recorded in the Order and Order_Detail tables byELERBE’s computer system.

4. The computer system also updates the Quantity_Allocated field in theInventory Table.

5. The clerk prints two copies of the sales order. The clerk sends one copy ofthe sales order to the warehouse to serve as a picking ticket. The secondcopy serves as a packing slip and is sent to the Shipping Department.

At ELERBE, book orders are received by traditional mail, e-mail, fax, or tele-phone. When the order is received, the order entry clerk selects item B1 from themenu, and the data entry screen in Figure 11.7A is displayed:


Consider the following execution risks pertaining to the sales order cited in box11.g, and answer the questions.


Figure 11.7BSales Order DataEntry Screen inPeachtree CompleteAccounting

After the order entry clerk clicks on SAVE, the following records are created.

Sales_Order Table

Sales_Order_Detail Table

Inventory Table

Employee#Order# Date (Order Entry Clerk) Customer#

219 05/11/03 201-35-8921 3451

Order# ISBN Order_Quantity Quantity_Shipped Price

219 0-256-12596-7 15 0 $78.35

219 0-146-18976-4 1 0 $70.00

In addition, as you can see below, the Quantity_Allocated field in the inven-tory record for ISBN 0-256-12596-7 has been updated from zero to 15. (Assumethat the Quantity_On_Hand had been increased due to prior production.)

YTD_ Budget_Default Quantity_ Quantity_ GL_ GL_ Quantity Sales_

ISBN Author Title _Price On_Hand Allocated Sales COGS _Sold Quantity

0-256- Barnes Introduction $78.35 17 15 4000 5210 30012596-7 to Business


As noted in the narrative for event E2 in Exhibit 11.1:

A warehouse employee uses the picking ticket to locate goods to be picked.In addition to the products and quantities, the picking ticket identifies ware-house locations to make it easy for warehouse employees to assemble theorder. The employee picks the goods from the warehouse for shipping. Hepacks the goods in a package, notes the actual amounts packed on the pick-ing ticket, and sends the package to the Shipping Department.

The shipper will only accept goods for shipment that are accompanied by apicking ticket.

As noted in the narrative for event E3 in Exhibit 11.1:

Once the shipping clerk receives the goods and picking ticket from the ware-house, he reconciles the picking ticket and packing slip and updates thepacking slip for any changes indicated on the picking ticket. He then pre-pares a bill of lading describing the package, carrier, route, etc., and attachesit to the package. The shipping clerk enters the shipment data into the com-puter system. The computer records the shipment data in the Shipment andShipment_Detail tables and updates the Quantity_On_Hand in the InventoryTable. A copy of the packing slip and bill of lading are sent to ELERBE’sAccounts Receivable Department. The clerk gives the package and the origi-nal packing slip to the carrier.

Assume that the picker was able to pick only 14 of ISBN 0-256-12596-7 and1 of ISBN 0-146-18976-4 as shown on the picking ticket in Figure 11.8. The pick-ing ticket called for 15 of the first item because the inventory record indicated thatsufficient quantity was on hand. However, when the picker checked the location,


PICK AND SHIP GOODS (E2, E3)Review the activity diagram in Figure 11.1. As you can see, once an order has beenapproved, a picking ticket and packing slip are printed. The picking ticket goes tothe picker, the employee in the warehouse who will pick the goods, and the pack-ing slip goes to the shipping clerk responsible for shipping.

Review the sample picking ticket in Figure 11.8. The picker uses the ticket asauthority to retrieve items from the warehouse.

Figure 11.8Picking Ticket (E2) Picking Ticket

Customer# 3451 Educate, Inc. Date: 05/11/03 Picker ID LJSO # 219

Ship to: Fairhaven, MA

ISBN Order Quantity Location* Quantity Picked

0-256-12596-7 15 E 123 140-146-18976-4 1 A 101 1

*Location information would come from the inventory record. For the sake of brevity, a Location fieldwas not included in the inventory record shown earlier in the chapter.


Once the new shipping record has been saved, the shipper prints two copies ofthe packing slip which now includes the Shipment# and the actual Quantity_Shipped. One copy of the packing slip is attached to the package before it is givento the carrier. The shipper signs the second copy of the packing slip.

When everything is ready for shipment, the shipper handwrites a bill of lading,listing the number of packages, the weight, and the calculated shipping charge. Healso writes the Shipment# on the document. The carrier signs the document andtakes a copy of it with the packages (with packing slip) for shipment. A copy ofthe signed bill of lading and the packing slip is sent to the Accounts Receivable De-partment as proof of shipment.

Focus on Problem Solving 11.j

Computer-Generated Displays (P5)ELERBE, Inc.

Required: Shaded items in the Enter Shipment screen were not directly entered by the shipper. Whatwere the sources for this information?



Shipment#Employee# (Shipper)Employee# (Warehouse)Order#Customer#DateCarrierFreight CostISBN

0-256-12596-7 0-146-18976-4

831027-40-0130540-89-54032193451 Educate, Inc.05/11/03Express, Inc.$3.00OrderQuantity15 1

Enter Shipment (menu item B2)SAVE

QuantityShipped*00

Quantity OnThis Shipment14 1

only 14 were available. The shipper will count the goods picked and, if this countagrees with the picking ticket, will weigh the package and calculate the shippingcharges. Next, the shipper records the shipment by selecting item B2 from the rev-enue cycle menu, “Enter shipment.” Figure 11.9 shows the data entry screen. Oncethe screen has opened, the system assigns a Shipment# to the shipment. The ship-per enters the Order# taken from the picking ticket and then enters the other in-formation that is not shaded.

Figure 11.9Screen for EnteringShipment Data (E3)

Shaded items were not directly entered by the user. Explain why by following the directions in box 11.j.*Refers to any prior shipments on this order.


Focus on Problem Solving 11.l

Control Benefits of Updates (P5)ELERBE, Inc.

Required: Two of the risks stated earlier are that the company could ship the quantity ordered twiceby mistake or record a single shipment twice. Review your solution to box 11.k. How does your up-date provide information that will reduce the likelihood of those risks?


Once the goods have been shipped, the customer can be billed. The proceduresfor billing are described in the next section.

BILL CUSTOMER (E4)The narrative for event E4 in Exhibit 11.1 summarized the billing process as follows:

At the end of the day, the accounts receivable clerk reviews the packing slipsand bills of lading provided by the shipper and compares them to the ship-ping records displayed on the computer. Once any errors are corrected, theinvoice is recorded in the Sales_Invoice and Sales_Invoice_G/L_Detail Tablesand a sales invoice is printed. When this process is complete, a sales journalis printed listing all of the new invoices. If it appears satisfactory, theinvoices are mailed to the customers, the invoice records are posted, and thebalances due in the Customer Table are updated. In addition, records areadded to the General_Ledger_Transfer Table.

To review the shipping records, the accounts receivable clerk uses the system’squery function and displays a list of all shipping detail records that show a Quantity_Invoiced that is less than the Quantity_Shipped.3 An example of the query resultsis shown in Figure 11.10. The information displayed was taken from the Shipment_Detail Table and the Shipment Table.


3The query used (in SQL) was: SELECT Shipment.[Shipment#], Date, [Order#], ISBN, Quantity_Shipped,Quantity_Invoiced; FROM Shipment INNER JOIN Shipment_Detail ON Shipment.[Shipment#] �

Shipment_Detail.[Shipment#]; WHERE (Quantity_Invoiced�Quantity_Shipped).

Query: Unbilled Shipments

Shipment#: 831 Order#: 219 Date: 05/11/03 ISBN Quantity Shipped Quantity Invoiced 0-256-12596-7 14 0 0-146-18976-4 1 0

Figure 11.10Display of UnbilledShipments

(continued)


The accounts receivable clerk checks to make sure that all of the packing slipsappear on the list of unbilled shipments. She also looks for any unbilled shipmentsfor which she has not received a packing slip. If the comparisons raised questions,she would call the shipper for additional information.

The clerk proceeds to prepare invoices for shipments that have not yet beenbilled. To do this, she selects menu item B3 and enters the Shipment#, 831, as seenin Figure 11.11. She checks the prices and freight charges to make sure they arecorrect. At the time of recording the invoice, the accounts receivable clerk entersthe general ledger account numbers that must be used when the transaction is postedto the general ledger. Positive figures represent debits, and negative figures repre-sent credits. The amount for cost of goods sold is automatically provided as a de-fault by the system based on the inventory method choice (FIFO, LIFO, averagecost, etc.) and inventory cost records.


Shipment#: 832 Order#: 189 Date: 05/11/03 IBSN Quantity Shipped Quantity Invoiced 0-127-35124-8 10 0

Figure 11.10Concluded

Figure 11.11Enter Sales Invoice(E4)

ENTER SALES INVOICE (menu item B3)SAVE

Sales order# 219

Sales order date 5/11/03

Customer# 3451 Educate, Inc.

Author Title ISBN Price

Barnes Introduction to Business 0-256-12596-7 15 $78.35Johnson Principles of Accounting 0-146-18976-4 1 $70.00

OrderQuantity

GL Account# Account name Amount10504200400052101120

Accounts receivableFreight chargeSalesCost of goods soldInventory

$1,169.90 (3.00)

($1,166.90)732

(732)

Sales Invoice # 3003Invoice date 5/12/03Due date 6/11/03

General Ledger Distribution

Data Entry Section

Information Display

Shipment IDEmployee#(shipper)Ship dateFreight ChgPriorShipment00

831

027-40-0130

05/11/03$3.00

Current shipment

141

The data shaded in gray is not entered by user. These items were displayed after the clerk entered the Shipping #, 831.

Note: Figure 7.9 displayed the data entry screen for recording a sales invoice using Great Plains Dynamic software.


Once the clerk clicks on the SAVE button, the following records are createdfor Invoice# 3003.


Sales_Invoice Table

Invoice_ Due_ Original_ Amount_ Post_ G/L_Post_Invoice# Shipment# Date Date Amount Paid Date Date

3003 831 05/12/03 06/11/03 $1,169.90 $0

Sales_Invoice_G/L_Detail Table

Invoice# G/L_Account# Amount

3003 1050 $1,169.90

3003 4200 ($3.00)

3003 4000 ($1,166.90)

3003 5210 $732.00

3003 1120 ($732.00)

When the invoice record has been created, the accounts receivable clerk selectsmenu item D2 and prints the sales invoice shown in Figure 11.12. The sales invoicewill be mailed to the customer after the sales journal is printed and reviewed. Thestub (to the right) is expected to be removed by the customer and returned withthe payment.

ELERBE, Inc.Sales Invoice

Educate, Inc.

Fairhaven, MA

Order#

Shipment#

Customer#

219

831

3451 Invoice#

Invoice Date

Due Date

3003

05/12/03

06/11/03

Invoice#3003

Customer#3451

ISBN0-256-12596-7

0-146-18976-4

Subtotal

Freight

Tax

Amount Due

Quantity Ordered15

1

Quantity Shipped14

1

Price$78.35

70.00

Extended Price$1,096.90

70.00

$1,166.90

3.00

0.00

$1,169.90 $1,169.90

Figure 11.12Sales Invoice

The accounts receivable clerk continues in this fashion, recording and print-ing invoices, one at a time, until all of the unbilled shipping records have beeninvoiced.


Control TradeoffsBilling the customer is obviously important to the company. As noted earlier,ELERBE could have required automatic creation of sales invoice records as soon asa shipping record is created. However, management wanted the accounts receivableclerk to review the sales prices entered by the sales order clerk and the freight chargeentered by the shipping clerk before creating a sales invoice record and billing thecustomer. This is an example of control tradeoffs that companies often face. On theone hand, automatic processes have the potential to eliminate human error; on theother hand, human processing may be preferred when situations are not of the cookie-cutter type. Both automated and human processing have the risk of error.

After the invoice records have been created, the accounts receivable clerk se-lects menu item D5 to print the sales journal, as shown in Figure 11.13. The clerkchooses the option to include only unposted sales invoices.


Figure 11.13Sales Journal Sales Journal

Date printed: 05/12/03Document type: Sales invoice Date range: AllStatus: Unposted only Customer range: All

Date Invoice# Order# Shipment# Amount G/L Account# Total

05/12 3003 219 831 $1,166.90 4000

3.00 4200 $1,169.90

05/12 3004 189 832 650.00 4000

5.00 3520 655.00

Total $1,824.90

4000 � Sales; 4200 � Freight; 3520 � Sales Tax Payable

The accounts receivable clerk reviews the sales journal for any incorrect gen-eral ledger accounts or other data that seem unreasonable.

Assume, for the moment, that ELERBE has a manual general ledger system.The sales journal provides a basis for making a manual journal entry. Because onlyunposted sales invoices are included in the report, we are certain that only newtransactions are reported. Thus, the journal entry will not include anything thathas been journalized before. Make a journal as required in box 11.m.

Focus on Problem Solving 11.m

Using an Event Report as a Basis for Journal Entry (P5)ELERBE, Inc.

Required: Make a single journal entry to record the information in the sales journal in Figure 11.13.The customers have not yet paid for the items. There should be a single debit to Accounts Receivable.

(continued)


Focus on Problem Solving 11.n

Processing Modes (P5)ELERBE, Inc.

Required: Which process is ELERBE using for recording sales invoices: a real-time system, imme-diate recording with batch update, or batch recording with batch update?


Now that the products have been shipped and the customers billed, ELERBEawaits payment by its customers. Collections are discussed in the next section.

COLLECT CASH (E5)The narrative in Exhibit 11.1 on page 538, describes the collection process as follows:

1. The customer receives the invoice, or customer statement, and tears off a stub(remittance advice) which includes the Customer# and the number(s) of theunpaid invoice(s). The customer mails the remittance advice with the check.

2. With another employee present, the mail clerk opens the mail daily and takesout the checks and remittance advice. The checks are endorsed by printingon the back of each check, “For Deposit Only, First National Bank,Account# 5506690203, ELERBE, Inc.”

3. Two copies of a remittance list, showing the Customer# and amount paid byeach customer, are prepared, with a total at the bottom. One copy goes tothe cashier with the checks, and the other copy goes to the accounts receiv-able clerk with the remittance advice.

An example of a remittance list is shown in Figure 11.14. Both clerks mustsign it. This remittance list is unrealistically short; however, it is sufficient for il-lustrative purposes. The payment by customer 3451 is for the invoice that we havebeen following in this chapter (#3003) plus one other.


Figure 11.14Remittance List

Customer# Check# Amount

3451 203 $6,199.90

1094 482 1,000.00

3872 8712 300.00

$7,499.90

Number of checks 3

Remittance List

Customer Checks Received in the Mail

Date: 05/19/03 Mail clerk #1: John StevensMail clerk #2: Jane Watson



Enter Collections (menu item B4)APPLY

Customer#NameAmount paidDate paid

3451Education, Inc.

$6,199.9005/19/03

Apply?

X XTotalAmount selected to applyUnapplied amount

Invoice# OriginalAmount

Amount Paid

Amount Remaining

30033052

$1,169.90$5,030.00

$0$0

$1,169.90$5,030.00$6,199.90

$6,199.90 $0.00

G/LAccount#10001050

AccountNameCashAccountsReceivable

Amount

$6,199.90 (6,199.90)

General Ledger Distribution

The mail clerk makes two copies of the remittance list. As noted in the narra-tive, one copy goes to the cashier along with the checks; the other copy is given tothe accounts receivable clerk with the remittance advice. (You can see this graphi-cally in the activity diagram in Figure 11.2 on page 541.)

RECORD COLLECTION (E6)As the narrative for event E6 explains, it is the accounts receivable clerk who is re-sponsible for recording a cash receipt and reducing a customer’s balance:

The accounts receivable clerk gives each customer credit for payment byrecording the cash receipts in the Cash_Receipt and Cash_Receipt_Detailtables. The clerk prints a cash receipts journal which lists the cash collectionsordered by Customer#. The clerk compares the total on the cash receiptsjournal to the remittance list. If they agree, he posts the batch, a process thatupdates the balance due in the customer’s account, and adds records to theGeneral_Ledger_Transfer Table.

To record the cash receipts, the accounts receivable clerk selects item B4 in therevenue cycle menu, “Enter collections.” The data entry screen is shown in Figure11.15. The clerk first enters the Customer# from the remittance advice. If transac-tion volume becomes high, the company will consider placing characters on the re-mittance advice that can be read by an optical character recognition device. Theremittance advice would be scanned in the same manner as bar codes are scannedat a supermarket.

Once the Customer# is entered, the system presents the user with a list of in-voices for that customer that have not been paid. The clerk selects the ones indi-cated on the remittance list by using the mouse to mark an X in the Apply? column.In Figure 11.15, it can be seen that the full amount of the payment received,$6,199.90, has been applied to the two open invoices by the accounts receivableclerk. The clerk also records the general ledger account#s and amounts to be usedwhen posting the cash receipts to the general ledger.

Figure 11.15Enter Cash Receipts(E6)



The accounts receivable clerk clicks on the APPLY button, and the followingtwo records are created.

Cash_Receipt_Detail Table

Cash_Receipt Table

Employee# G/L_Post_Payment# Date (AR Clerk) Amount Post_Date Date Deposit#

4003 05/19/03 031-42-9517 $6,199.90

Payment# Invoice# Amount

4003 3003 $1,169.90

4003 3052 $5,030.00

Payment# G/L_Account# Amount

4003 1000 $6,199.90

4003 1050 ($6,199.90)

Cash_Receipt_G/L_Detail Table

After engaging in this process for each receipt, the clerk selects menu item D6in the revenue cycle menu, to print the cash receipts journal seen in Figure 11.16.The clerk instructed the system to print only unposted cash receipts. Thus, the listwill include only new cash receipts that have occurred since the last time the cashreceipts journal was printed and cash receipt records were posted.

Figure 11.16Cash ReceiptsJournal

Cash Receipts Journal

Date printed: 05/19/03Document type: Cash receipts Date range: AllStatus: Unposted Customer range: All

Payment# Customer# Date Amount

4003 3451 05/19/03 $6,199.90

4004 1094 05/19/03 1,000.00

4005 3872 05/19/03 300.00

Total $7,499.90

The system for cash collection just described is a batch system. The accountsreceivable clerk can look at the remittance list and find that the batch total thereis also $7,499.90.

The cash receipts journal provides the information needed for making a jour-nal entry. Follow the requirements in box 11.o to prepare a journal entry. Like thesales journal, the cash receipts journal serves as an audit trail supporting the jour-nal entry. Read box 11.p, and determine the steps along the audit trail.

Focus on Problem Solving 11.o

Preparing a Journal Entry Based on Content in an Event Report (P5)ELERBE, Inc.Required: Make a single summary journal entry to record the collections shown in the cash receiptsjournal (Figure 11.16). (continued)



Enter Deposit (menu item B5)SAVE PRINT

Payment#40034004

Date05/19/0305/19/03

Amount$6,199.90$1,000.00

SelectX X

Deposit# 503 Date 05/19/03

Cash Receipts:

Total $7,199.90

Figure 11.17Recording theDeposit E7

Deposit Table (E7)

Deposit# Date Employee# (Cashier) Amount

503 05/19/03 391-87-0202 $7,199.90

Payment# Date Employee# (AR Clerk) Amount Post_Date Deposit# G/L_Post_Date

4003 05/19/03 031-42-9517 $6,199.90 05/19/03 503

4004 05/19/03 031-42-9517 $1,000.00 05/19/03 503

The Deposit Table is not used to update the cash account in the general ledger.That is accomplished by posting the information in the General_Ledger_TransferTable to the General_Ledger_Master Table. Even though the deposit record has nodirect influence on the general ledger, it is an important record because it is usedin the bank reconciliation. Every month, ELERBE reconciles the balance per bankwith the balance per the books, using the information in the Payment Table as tochecks written and the Deposit Table as to deposits made.

The deposit records are also useful as an audit trail. The Deposit# on the deposit record enables the auditor to locate the particular cash receipts that were deposited, and the cash receipts can be traced to the original sales invoice.Through this process, the sales amount is supported by the deposit information inthe bank.

RECONCILE CASH (E8)As the narrative for event E8 in Exhibit 11.1 on page 538 notes:

Daily, the controller compares the amount on the deposit slip to the amounton the cash receipts journal.

Read and respond to the questions in box 11.q to understand the benefit ofthe comparison made by the controller.

Cash_Receipt Table


ELERBE sends statements to its customers with the expectation that they will readthe statement and pay for any unpaid invoices listed. ELERBE does not assess fi-nance charges to its customers. Its customers are primarily college bookstores whooften pay slowly, but rarely default. None of ELERBE’s competitors are assessingfinance charges, so even if ELERBE wanted to, it would not be competitive. Cur-rently, ELERBE sends out all of its customer statements over a two-day period atthe end of each month. However, if the number of customers increases, it may haveto place customers on a staggered four-week cycle. Under this approach, statementswould be sent to 25 percent of its customers during the first week of the month,an additional 25 percent on the second week, and so on.

To print customer statements, the accounts receivable clerk selects item D3 inthe revenue cycle menu. He then indicates the Customer#, or range of Customer#sfor which he wants customer statements printed. Figure 11.18 provides an exam-ple of a customer statement for the customer, Educate, Inc. If the customer makespayment on the $1,000.00 amount due, the remittance advice to the right of thestatement will be removed and sent along with the check.


ELERBE, Inc.Customer Statement

Customer#

Educate, Inc.

Fairhaven, MA

3451

Statement Period: 05/01/03-05/31/03 Customer#

3451

Invoice 3902

$1,000.00

Date05/12/03

05/18/03

05/19/03

05/27/03

Balance Due

Document IDInvoice# 3003

Invoice# 3052

Payment# 4003

Invoice# 3902

Amount$1,169.90

5,030.00

(6,199.90)

1,000.00

$1,000.00

Figure 11.18CustomerStatement—May

As will be explained shortly, there are two kinds of customer statements: openitem and balance forward. The open item system displays all unpaid invoices andany invoices that were paid during the period covered by the report. The customerstatement in Figure 11.18 indicates an open item system.

Print Accounts Receivable Aging Report. Once a month, the credit man-ager prints a detailed aging report showing customer balances and the details of in-voices that have not yet been paid. The report organizes the balances by the amountof time for which the invoice has been past due (e.g., current, 1–30 days, 31–60days, 61–90 days, and �90 days). Such a report can be used to follow up on ac-counts that have not been paid for a long time. The report can also be useful inevaluating an organization’s credit policies. For instance, if the amount of overduebalances is too high, the credit policy may need to be revised.

The accounts receivable aging report, or any other report listing all open invoices,provides an audit trail for the auditor who is trying to verify the amount of accountsreceivable reported in a balance sheet. The grand total at the bottom of the aging re-port should agree with the balance in the general ledger for accounts receivable.


A summary aging report is similar to a detailed aging report, except that indi-vidual invoices are not shown. Instead, only the dollar amounts due in the agingcategories are shown. Figure 11.19 is an example of a summary aging report cre-ated using Great Plains Dynamics software.

Figure 11.19 Accounts Receivable Aging Report—Great Plains Dynamics

Accounts Receivable Management

Brown CorporationAGED TRIAL BALANCE—SUMMARY

System: 12/31/03 User ID: RT SmithRanges:

Customer ID: 604–611 ZIP Code: 60613-60613Account Type: All

Customer Name Account Type Aged As of 12/31/03Total Current Past 1–30 Past 31

604 American Industries Open Item

Terms: 2% 10/Net 30 Totals: $13,600.00 $10,000.00 $3,600.00 $0.00

Credit: $10,000.00

608 National Showcase Open Item

Terms: 2% 10/Net 30 Totals: $ 2,716.00 $ 2,500.00 $ 216.00 $0.00

Credit: $5,000.00

610 Johnson Microwaves Open Item

Terms: Net 30 Totals: $ 1,500.00 $ 1,500.00 $ 0.00 $0.00

Credit: $22,000.00

3 Customer(s) Grand Totals: $17,816.00 $14,000.00 $3,816.00 $0.00

Purge Records. As was noted in Chapter 8, historical and unneeded event recordsaccumulate to the point where they are using up limited on-line storage space andslowing down processes such as adding records to the database and updating sum-mary fields. We use the term purging to mean the systematic deletion of records.Because a company may have thousands of customers with many thousands of salesorder, shipping, invoice, and cash receipt records, it needs to clean out the on-linespace taken by records that are no longer needed.

The extent to which invoice records can be purged depends on whether thecompany uses an open item or a balance forward system. Both systems are de-scribed in the next sections.

Open Item SystemThe rule for open item systems is as follows: All records for unpaid invoices mustbe stored on-line. Paid invoices do not need to be stored on-line unless they werepaid for in the current month (and thus needed for the current month’s statement).



One logical variation on this rule is a policy of not removing a paid invoice recorduntil the customer’s check clears the bank.

Assume that ELERBE uses the open item system for receivables and that Edu-cate, Inc., made a purchase on June 20 for $2,500 worth of goods. No paymentswere made in June. The customer statement for June appears in Figure 11.20.


Figure 11.20Open Item CustomerStatement—June

ELERBE, Inc.

Customer Statement

Customer# 3451 Statement period 06/01/03–06/30/03Educate, Inc.Fairhaven, MA

Date Document ID Amount

05/27/03 Invoice# 3902 $1,000.00

06/20/03 Invoice# 4231 2,500.00

Balance Due $3,500.00

Compare this to the May statement in Figure 11.18 on page 571. You will seethat, as expected, the two paid-for invoices and the payment that appeared in theMay statement do not appear in the June statement. (The remittance stub portionof the June statement is not shown.)

Purging. When an open item system is used, no paid-for invoices appear on thestatement, except for invoices paid during the statement period (one month in this ex-ample). Therefore, records related to the paid invoices can be archived and then deleted.This includes the records in the Sales_Invoice, Sales_Invoice_G/L_Detail, Shipment,Shipment_Detail, Order, and Order_Detail tables. The exception to this occurs whenan order has not yet been completely filled or cancelled. In that case, all of the recordsshould stay on-line until the remainder of the order is either filled or cancelled.

Balance Forward SystemAssume now that ELERBE uses a balance forward system rather than an open itemsystem. Figure 11.21 presents the June customer statement under those conditions.

Figure 11.21Balance ForwardCustomerStatement—June

ELERBE, Inc.

Customer Statement

Customer# 3451 Statement Period 06/01/03–06/30/03

Educate, Inc.Fairhaven, MA Balance Forward $1,000.00

Date Document ID

06/20/03 Invoice# 4231 2,500.00

Balance Due $3,500.00


course of the day, there is great risk that cash may be stolen by a robber or bysomeone in the company. For small convenience stores, where only one employeeruns the operation at any given time, the employee who handles the cash is alsothe one who records the transaction in the cash register.

One of the most important controls in cash and carry operations is the cashregister. Each sale should be recorded by ringing up the cash register and giving thecustomer a recorded receipt and change. If the employee were to take the moneyfrom the customer without ringing up the sale, the employee could keep the moneybecause there would be no record of having received it.

For this reason, employees are required to ring up the sale and give the cus-tomer a receipt. Professional “shoppers,” hired by store owners, test an employee’scompliance by purchasing products and observing the employee. Employees are toldthat they will be checked in this fashion and that they will not know whether ashopper is truly there to buy merchandise or merely to test the employee.

Assuming that all sales are recorded in the cash register, the possibility still ex-ists that the employee will steal cash after the transaction is entered, or that theemployee will make significant mistakes in giving change. Many retail stores re-quire that a cash register reading is taken at the end of the employee’s shift andthat the cash is counted. The daily sales report in Figure 11.22 is a useful and verycommon control device to document sales and cash received.

Assume a company has a policy of starting each day with $100.00 in the reg-ister. After several sales, the employee’s shift ends, the cash is counted, and the dailysales report is prepared.

Figure 11.22 Daily Sales Report

Daily Sales Report

Date: 06/10/03 Employee: Ray JacksonSource of amount

Cash in register—beginning of shift by count $ 100.00 Physical count

Sales 1,400.00 Cash register tape or report

Sales tax collected 15.30 Cash register tape or report

Total to account for $1,515.30 Calculated total

Cash in register—end of day per count:

Currency $1,450.10 Physical count

Checks 64.00 Physical examination

Total in register $1,514.10 Calculated total

The daily sales report in Figure 11.22 could be used as a basis for making thefollowing journal entry:

Cash 1,414.10*Cash Short and Over 1.20

Sales 1,400.00Sales Tax Payable 15.30

*$1,514.10 � $100.00

