Revenue Cycle

Lesson:

The revenue cycle in accounting and auditing involves the sequential processes from initiating a sale to collecting cash, which auditors test for risks like revenue overstatement through procedures such as vouching and confirmations.

Here are the key steps:

1. Sales Order Entry - The vendor receives a customer’s purchase order and creates an internal sales order to formally initiate the transaction.
2. Credit Approval - The vendor's credit department (which must be independent of the sales department) reviews the customer's creditworthiness and provides formal authorization to proceed with the sale.
3. Inventory Picking - The vendor's warehouse department receives the approved sales order and picks the physical goods from the shelves to prepare them for shipment.
4. Shipping - The shipping department verifies the goods against the sales order and prepares a bill of lading, which serves as the primary evidence that the goods have been transferred to a carrier.
5. Billing/Invoicing - The billing department performs a three-way match of the sales order, shipping documents, and the invoice to ensure the customer is charged only for what was actually ordered and shipped.
6. Accounts Receivable Recording - The accounting department uses the sales invoice to record the transaction in the sales journal and update the customer’s individual balance in the accounts receivable subsidiary ledger.
7. Cash Collections - The vendor receives the customer's payment.
8. Depositing and Posting - The vendor's treasurer deposits the physical cash into the bank, while the vendor's accounts receivable department updates the ledger to reflect that the customer’s debt has been satisfied.

Answer:

Explanation:

The vendor receives a customer’s purchase order and creates an internal sales order to formally initiate the transaction.