Revenue Cycle

Now, we will transition into a section on business processes. This area will cover major sections like revenue and expenditures, detailing their significant steps, along with the critical documents involved. We’ll begin with the revenue process, discussing the four steps involved, then moving on to crucial revenue documents such as the sales order, sales invoice, and remittance advice.

Firstly, let’s discuss the four steps in the revenue process, which include:

1. Receiving Purchase Order & Convert it Into a Sales Order

2. Shipping Goods

3. Billing the Customer & Making Journal Entries

4. Collecting the Payment

We first receive the purchase order, then convert it into a sales order. Then we ship the goods, bill the customer and make journal entries. Lastly, we collect the payment.

Let’s imagine we are an airplane manufacturer. When an order arrives for a new plane, we manufacture it, then we ship the goods (i.e., the planes). After that, we bill the customer.

It’s essential to note that we can’t bill a customer until we’ve shipped the goods. When we bill the customer, we can also make the journal entries into the system (debit to accounts receivable, credit to revenue). After we bill the customer, we collect the payment from them.

Study Tip: We can’t bill a customer until we’ve shipped the goods.

Now, let’s discuss various documents for the revenue process. First, we have a purchase order/sales order. These two documents are very similar. The purchase order comes from the customer to the vendor, and the sales order is the vendor’s version of the purchase order. This document will mention the quantity of goods that the customer wants, the price they’re willing to pay for it, the terms of payment, the total amount they would have to pay, and where to ship the goods.

The next document in the revenue process is called the bill of lading. This document is for the terms of a shipment contract. This is assuming we’re using a third-party carrier to ship our goods. We create the airplane, hire a company to ship it for us, and have this bill of lading to agree on the terms between us and the shipping company. This document will show the number of goods being shipped, it will feature the shipper’s signature and also the carrier’s signature, and include other relevant information for the shipment.

Following that, we have the packing slip in the revenue process. This document is used when shipping the goods and simply states what is included in the shipment. In our example with the airplane manufacturer, when they ship the airplane, they include a packing slip that says one airplane is included.

The final document in the revenue process is called the sales invoice. This will show what the customer owes us. Remember, we’re not allowed to bill a customer until we have shipped\ the goods to them. We then send them an invoice, it will have the date of the invoice, display the different items they ordered, show the total amount they owe us, and indicate how they can make payment to us. This is the sales invoice.