Chapter 11: The Billing/Accounts Receivable/Cash Receipts (B/AR/CR) Process

1. Chapter 11:The Billing/Accounts Receivable/Cash Receipts (B/AR/CR) Process Accounting Information Systems, 9e Gelinas ►Dull ► Wheeler © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. Learning Objectives • Describe the relationship between the B/AR/CR process and its business environment. • Illustrate the potential of the B/AR/CR process to assist management decision making. • Summarize how enterprise systems, e-business and other technologies can improve the effectiveness of the B/AR/CR process. 2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Learning Objectives (cont’d) • Depict the logical and physical characteristics of the B/AR/CR process. • Prepare a control matrix for some typical billing and cash receipts processes, including an explanation of how business process control plans can accomplish operations and information process control goals. 2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Introduction The billing/accounts receivable/cash receipts (B/AR/CR) process is an interacting structure of people, equipment, activities, and controls designed to create information flows and records that accomplish the following: • Support the repetitive work routines of the cashier, and the credit and accounts receivable departments. • Support the problem-solving processes of financial managers. • Assist in the preparation of internal and external reports. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Horizontal View of the B/AR/CR Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. Description of Horizontal Information Flows © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Optimizing Cash Resources • Treasurer’s goal: make funds available to acquire assets, make investments, or reduce interest charges. • Billing’s goal: get invoices to customers quickly, hopefully reducing the time it then takes to obtain customer payments. • Having the B/AR/CR process produce invoices automatically helps ensure that invoices are sent to customers shortly after the goods have been shipped. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Electronic Bill Presentment and Payment (EBPP) Systems • Electronic bill presentment and payment (EBPP) systems: B2C systems that use a Web site to post customers’ bills and to receive their electronic payments. Types of EBPP systems: • Biller direct method, whereby a company posts its bills/invoices to its own Web site (or to a Web site hosted for it by a third party). • Consolidation/aggregation method, in which bills are not posted to the billing company’s Web site but are posted to a Web site hosted by the billing company’s own bank or by a company such as Fiserv. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Cash Receipts Management • The treasurer’s goal is to reduce float and hasten the availability of good funds. • Float: when applied to cash receipts, is the time between the payment by the customer and the availability of good funds. • Good funds: funds on deposit and available for use. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Cash Receipts Management (cont’d) • Procedures designed to reduce or eliminate the float associated with cash receipts: • Credit card: a method of payment whereby a third party such as a bank removes from the collector the risk of not collecting the amount due from a customer. • Debit card: form of payment authorizing the collector to transfer funds electronically from the payer’s bank account to the collector’s bank account. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Accelerating Cash Receipts • Electronic funds transfer (EFT): general term used to describe a variety of procedures for transmitting cash funds between entities via electronic transmission instead of using paper checks. Includes wire transfers, credit and debit card processing, as well as payments made via the ACH Network. • Automated Clearing House (ACH) Network: batch processing system for the interbank clearing of electronic payments. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Accelerating Cash Receipts (cont’d) • Lockbox: postal address maintained by a third party—typically a bank—which is used solely for the purpose of collecting checks. • Remote deposit capture uses scanners to capture check images and to use those images, instead of the paper check, to make a deposit to a checking, savings, or money market account. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Credit Card Transaction Flow © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. The Fraud Connection • B/AR/CR process provides opportunity to manipulate final results such as revenue and AR by violating GAAP revenue recognition rules. • Improper segregation of duties between handling cash and recording cash transactions can result in misappropriating cash: • Lapping: fraud by which funds being paid by one customer are stolen, and the theft is covered up by applying funds from another customer to the first customer’s account. Rotation of duties and forced vacations help prevent this type of fraud. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. B/AR/CR–Context Diagram © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. B/AR/CR–Level 0 Diagram © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. B/AR/CR Process–Diagram 1 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Perform Billing • Major output of the billing process is the invoice, a business document used to notify the customer of an obligation to pay the seller for the merchandise (or service) ordered and shipped (or provided, if a service). • Process 1.1 validates sale by comparing the details on the sales order notification (what was supposed to be shipped) to those shown on shipping’s billing notification (what was shipped). © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Process 1.2: Prepare invoice Process 1.2 performs the following actions: • Obtains from the customer master data certain standing data, such as the bill-to address, needed to produce the invoice. • Creates the invoice and sends it to the customer. • Updates the accounts receivable master data. • Adds an invoice to the sales event data (i.e., the sales journal). • Notifies the general ledger process that a sale has occurred (GL invoice update). An immediate update of the GL for a single sale. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Sample SAP Invoice Data Screen © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. B/AR/CR Process–Diagram 2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Sample Accounts Receivable Aging Report © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. B/AR/CR Process–Diagram 3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Process 3.1: Compare Payment and Remittance Advice • Remittance advice (RA): business document used by the payer to notify the payee of the items being paid. • Process 3.1 first validates the remittance by comparing the payment notice to the RA. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Process 3.2: Record Customer Payment • Uses the RA to update the accounts receivable master data to reflect the customer’s payment. • Records the collection in the cash receipts events data and notifies the general ledger process of the amount of cash deposited. This is an immediate update of the GL for a single cash receipt. • Process 3.2 is a controller function, is typically performed by the payment applications section of the accounts receivable department. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. B/AR/CR Logical Data Descriptions • Accounts receivable master data: Repository of all unpaid invoices issued by an organization and awaiting final disposition. • Two types of accounts receivable systems exist: • Balance-forward • Open-item © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Balance-forward System • AR records show a customer’s balance – current, past-due, and current account activity, including current charges, finance charges for past-due balances, and payments. • Monthly statements display previous balance, payments, and balance forward, to which is new charges are added to get the current balance due. • Unpaid current balances are rolled into the past-due balances. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Open-item System • Appropriate where invoices are prepared and sent for each sale. • In the AR master data, each record consists of individual open invoices, to which payments and adjustments are applied. • Periodic statements list invoices and payment details. • Monthly, or at specified times, customer accounts are aged and an aging schedule is printed. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. B/AR/CR Event Data Stores • Sales event data store: invoice (sales) records. Is a sales journal in a manual process. • Accounts receivable adjustments events data store: records from sales returns, bad debit write-offs, estimated doubtful accounts, etc. • Cash receipts event data store: details of customer payments. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. E-R Diagram (Partial) for the B/AR/CR Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Selected Relational Tables (Partial) for the B/AR/CR Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Selected Relational Tables (Partial) for the B/AR/CR Process (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. Types of Billing Systems • Pre-billing system • Invoice prepared upon acceptance of customer order (after inventory and credit checks). • There is little or no delay between receiving order and shipping. • Post-billing system • Invoices are prepared after goods are shipped and shipping notice compared to sales order notice. • There may be a delay between receiving the order and shipping. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. System Flowchart of the Billing Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

35. Control Matrix for the Billing Business Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

36. Validity for the Billing Process • Valid shipping notice inputs are: properly authorized and reflect actual credit sales; for example, a shipping notice should be supported by a valid sales order and a real shipment, and the invoice should be prepared using authorized prices, terms, freight, and discounts. • If a billing process is completed without a real shipment (a genuine sale), revenues will be overstated. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

37. Key Billing Controls • Review shipped not billed sales orders (tickler file): monitor sales orders that have been shipped but not yet billed. • Compare input shipping notice to sales order master data:ensures that the invoice, accounts receivable, and revenue accurately reflect the items and quantities ordered by, and shipped to, the customer. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. Key Billing Controls (cont’d) • Independent billing authorization: establishes that the shipment is supported by an actual sales order (a copy of the sales order from customer service or the open sales order records on the sales order master data). Assumes a segregation of duties among sales (customer service), shipping, and billing. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

39. Key Billing Controls (cont’d) • Check for authorized prices, terms, freight, and discounts to ensure that invoices, accounts receivable, and revenue reflect prices, terms, freight, and discounts authorized by management. • Independent pricing data: assumes segregation of duties between those who approve unit prices and those involved in the selling function. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

40. Key Billing Controls (cont’d) • Confirm customer accounts regularly: The customer can be used as a means of controlling the billing process; the customer can review the report of open invoices to determine that the invoices are valid and accurate. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

41. System Flowchart of the Cash Receipts Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

42. Control Matrix for the Cash Receipts Process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

43. Validity for the Cash Receipts Process • Valid RA inputs (i.e., cash receipts) are those that represent funds actually received and for which cash discounts have been authorized and approved. • If a cash receipts process is completed without actual funds, assets will be misstated (AR too low and cash too high). © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

44. Key Cash Receipts Controls • Immediately endorse incoming checks: to protect payments from being fraudulently misappropriated, checks should be restrictively endorsed as soon as possible following their receipt in the organization. • Immediately separate checks and remittance advices: RAs should be immediately separated from the checks to accelerate deposits and reduce opportunities to divert cash and undertake lapping. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

45. Key Cash Receipts Controls (cont’d) • Lockbox: payments are sent directly to a third-party lockbox service for more secure, timely, efficient, and accurate processing. • Turnaround documents: the remittance advice is the stub from a statement or invoice and can processed more efficiently and accurately. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

46. Key Cash Receipts Controls (cont’d) • Reconcile bank account regularly: reconcile bank statement to the cash receipts event data to ensure that all valid deposits were recorded correctly. Should be performed by someone other than those that handle cash receipts and disbursements. • Monitor open accounts receivable: regularly review and follow-up on accounts receivable aging reports to ensure that payments are received in a timely manner. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.