Transaction Cycle: Revenue, Expenditure, HR

• Transaction refers to an agreement between two entities involving the exchange of goods or services.
• Transactions are measurable in economic terms by an organization.
• A transaction changes the financial position of a business and must be recorded.

Transaction Cycle

• It is an interlocking set of business transactions.
• It refers to different categories of business activities.
• Company records and processes information in their accounting systems.
• The cycle encapsulates the entire process from initiation to final posting in financial statements.
• Understanding the cycles helps in organizing data, designing controls, and ensuring accurate transaction recording and processing.

Categories of Transactions

• Revenue and receipts involve the sale of goods, services to customers, and cash collection.
• Expenditures and disbursements (procure to pay) include goods and services acquisition and related payments.
• Human resources and payroll involve acquiring services from employees, paying for those services, and paying government contributions
• Production or conversion involves production for sale.
• Financing and investing include capital generation from outsiders. investment of capital funds to other profitable activities.

Revenue and Receipt Cycle

• Resources are distributed to customers in exchange for promises of future payments.
• Accounts affected include Sales; Sales Returns and Allowances; Sales Discount; Accounts Receivables; Allowance for Bad Debts; Bad Debts Expense; and Cash.
• The flow includes order from customer, order processing, billing and invoice preparations, delivery of goods/services, and payment received

Revenue and Receipt Cycle: Departments Involved

• Sales Department locates and encourages buyers to improve sales
• They negotiate and deal with customers, accept orders, and prepare and distribute Sales Orders (S.O.).
• This department files retention copies, monitors order status, reviews returns, and sends credit memos.
• The controls include an exclusive function to communicate with customers.
• Controls maintain master lists of customers and prices and complete documentation for new customers.
• Credit Department minimizes exposure to high-risk customers.
• The department receiving the Sales Order (S.O.) from Sales conducts credit investigations, approves credit and forwards S.O. to Warehouse.
• Notifications are sent to sales for approvals/denials of credit requests.
• To provide controls, the department must be independent from sales, and maintain a list of approved customers.
• Warehouse (Inventory Control) controls movement, monitors inventory levels and condition.
• They review approved S.O., monitor inventory, update the Sales Department, notify Sales of shipment, release goods, and forward documents to Billing.
• Monitoring inventory levels assures availability and provides reports to the Sales Department regarding inventory.
• Shipping provides reasonable assurance that shipments are authorized.
• They compare sales against inventories, complete shipping documents, notify Sales about goods, and forward information to Billing.
• Pre-numbered shipping documents are used to monitor proper shipments and reports are made for completed orders.
• Billing provides assurance that all shipments are billed.
• Department compares Sales Order (S.O.) and Delivery Receipts (D.R.), prepares Sales Invoices, and sends copies to customers and Accounting.
• Pre-numbered Sales Invoices are used with Sales Orders, ensuring billed Sales Orders are shipped.
• Inventory Accounting provides the costing information of the goods sold and includes information which updates the inventory records.
• Accounts Receivable (AR) updates the subsidiary ledger related to customer accounts.
• General Accounting records the sale and forwards the Sales Invoice (S.I.) to the AR Dept.
• Mail Room receives remittance advice and customer checks.
• They prepare receipt summaries, endorse checks and remittance advice to Treasury, and provide reports to the AR department
• Treasury updates cash records, prepares deposit slips, summarizes summary for AR and General Accounting, deposits collections, and authorizes write-offs of AR.
• Accounting Departments are the Accounts Receivables and the General Accounting departments
• AR department compares remittance advice (mail room) and cash summaries (treasury).
• They must update customer subsidiary ledgers, prepare daily summaries for General Accounting, review individual customer accounts, perform aging of receivables, and recommend write-offs of delinquent accounts.
• General Accounting validates reports and updates the General Ledger.

Revenue and Receipt Cycle: Forms and Documents

• The Sales Order is initiated by the Sales Department and given to customers, Billing, and Shipping.
• The Delivery Receipt is initiated by the Shipping Department and given to the customer, carrier and Billing
• The Sales Invoice includes billing statements; billing will initiate and share with the Customers and the Carrier.
• The Payment Advice (Remittance Advice) initiates, indicating the goods/service are paid and shared with the A/R Department
• A daily Summary is given to the General Accounting, A/R, and Treasury department; it summarizes transactions of all departments involved in the cycle.

Common Internal Controls for the Revenue and Receipt Cycle:

• The initiating department approves the form.
• The initiating department should be held accountable for all forms in their department, like controlling access and monitoring unused forms.
• If approved by management through policies, forwarding of the form can be done electronically.
• The initiating department retains a copy of all forms for filing.

Purchase to Pay (P2P) Expense and Disbursement Cycle

• Resources are acquired from vendors in exchange for obligations to pay, and the entity pays cash to vendors.
• Affected accounts include Purchases, Purchase Returns and Allowances, Accounts Payables, and Cash.
• The flow includes request, source, receipt, process invoice, and payment.
• Requesting Department prepares the requisition slip.
• Purchasing/Procurement meets the requirements to the requesting department at the lowest possible cost
• Those departments receiving approved requisition slips, locating and negotiating vendors, preparing purchase orders with vendors and sending out (to users/receiving/AP), monitoring the P.O. status, and updating the requesting patty.
• Exclusive functions communicate with vendors, and maintains a list of authorized/ accredited vendors while monitoring and comparing pricing
• Receiving Department provides reasonable assurance that received goods are based on approved Purchase Orders (P.O.)
• They should check and verify that the right amounts of the goods are being delivered and their conditions.
• Documents should be prepared by the receiving departments to be sent to the AP and purchasing departments.
• Proper procedures must exist to check the goods which are received.
• Accounts Payable (AP) provides reasonable assurance payments are made for shipments received.
• This includes checking and reviewing Purchase Request (P.R.). Purchase Order (P.O.), the receiving report, and vendor invoices.
• The proper AP Vouchers, as well as a daily summary should be maintained and sent to Treasury and General Accounting.
• It is important to maintain records for AP Vouchers to have the completed attachments.
• Treasury Department Reviews account payable vouchers, then they will prepare check vouchers to be submitted for signing.
• The Treasury deparmtent forwards checks and remittance advice to vendors
• The department's check voucher must contain the word 'stamped', 'paid', 'cancelled, and the check number
• Each Signatories should have an assigned limit and/or co signatories
• No checks should be issued with “cash” payee

Purchase and Pay cycle (P2P) forms and documents

• The Requisition Slip is initiated by the requesting department and used for the purchasing department
• Purchase Orders describe goods to be acquired and can be used between vendor, user and receiving department
• The shipping document describes the goods to b shipped
• The Receiving report describes the goods
• Vendor invoice describes the goods
• Remittance advice informs the seller that the invoice has been paid.
• Daily Summaries is a summary of transactions

Human Resources and Payroll Cycle

• This is part of the expenditure and disbursement cycle, covering the entity's acquisition of services from employees or other personnel.
• Different categories of employee benefits significantly affect major elements of financial statements.
• Significant resources are incurred for most entities.
• It is important when distinguishing different types of workers and types of Employee Benefits
• Types of benefits include Short Term, Long Term, and Retirements
• Services are received from employees in exchange for obligations to pay.
• The entity eventually pays cash to employees.
• Affected accounts include Salaries and wages expense, Salaries and wages payable, Withholding taxes payable, Inventories (for inventoriable salaries and wages), and Cash.
• User Department ensures time records prepared by the employees represent actual hours worked.
• Monitors and approves daily records.
• Requires appropriate review activities to ensure the truthfulness of the DTR information.
• Use reliable computer recording for proper management.
• The HR (Human Resources) Department ensures that those included in the payroll are rendering services to the entity.
• To handle concerns, an entity updates records, forwards related information to payments and determines employee settlement for certain cases.
• access on employees’ files shall be limited to HR to avoid information risk.
• Important to share only the limits of information, and do not want to have excess employee disclosure.
• Payroll Department provides reasonable assurance that payroll calculation is valid.
• Receives and reviews the HR information and also Considers or reconsiders information in rates/deductions/etc
• Payroll records are important as well as employee earning records.
• Management in payroll cannot conduct review for accuracies.
• Treasury department handles payroll registers and payment distribution.
• Separate bank accounts are reserved for payments, and audits are conducted to check the existence of employees along the distribution chain.
• Inventory Accounting records inventoriable costs to customer/jobs.
• The General Accounting reviews this distribution.

Human Resources and Payroll Cycle: Forms/Documents

• HR Records (201 file) contain all employee information.
• Daily Time Record (DTR) describes the number of hours worked by an employee for a particular time period.
• A Payroll Register shows all relevant payroll information.
• The Labor Cost Summary shows all capitalizable payroll information.
• The Employee Earnings Record is an accumulative summary of employee earnings.
• Daily Summary summarizes all transactions by different departments.

Production and Conversion Cycle

• It covers the production of an entity's product for sale.
• Materials, labor, and overhead are converted into finished goods.
• They are all recorded as inputs from the conversion cycle.
• The the primary goal must be the proper valuation of inventories and allocating the right amount of costs and runs.
• This cycle uses inputs from disbursement and expenditure cycle and provides information to revenue and receipt cycle.
• The custody of departments is assigned to the department of physical or financial control Authorization is made with the validation from the outside firms or auditors, and needs to undergo separate management (board of directors, etc.) for special runs.
• Cost Accounting should record costs to the General Ledger.

Finance and Investment Cycle

• Three major categories of Assets include investments, Debts, and Equity.
• Important procedures for accounting include mergers, financial reporting, and all kinds of accounting for Equity.
• Department's controls and departments included are corporate, board of directors, or whatever party who are frequent, and custodian, if there is an auditor,
• Auditors should be reviewed by outside parties (Board of Directors, etc.) and be under competency.

Explore transaction cycles: interlocking business activities recorded in accounting systems. Covers revenue/receipts (sales, cash), expenditures/disbursements (procure to pay), and HR/payroll.