Revenue Cycle
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Every sale a company makes moves through the same four checkpoints, each one producing its own paper trail. The exam tests both the sequence and the documents.
What are the four steps in the revenue process?
- Receive the purchase order and convert it into a sales order
- Ship the goods
- Bill the customer and make the journal entries
- Collect the payment
Picture an airplane manufacturer. An order arrives, the plane gets built, and the company ships it. Only after shipping does the company bill the customer — that order matters.
You can't bill a customer until you've shipped the goods. Billing triggers the journal entry (debit accounts receivable, credit revenue), so billing ahead of shipment means recording revenue that hasn't been earned yet.
What do the purchase order and sales order show?
These two documents mirror each other: the purchase order comes from the customer to the vendor, and the sales order is the vendor's version of the same document. Either way, it lists the quantity of goods ordered, the price, the payment terms, the total amount due, and the shipping destination.
What documents travel with the shipment?
Two documents accompany the goods once they ship:
- Bill of lading. When a third-party carrier handles the shipment, this document sets the terms of that shipping contract between the company and the carrier. It shows the quantity of goods shipped and carries both the shipper's and the carrier's signatures.
- Packing slip. A simple statement of what's included in this particular shipment — for the airplane manufacturer, a packing slip confirming one airplane is inside.
What does the sales invoice show?
The sales invoice tells the customer what they owe. Since billing can't happen before shipping, the invoice only goes out once the goods are on their way. It carries the invoice date, the items ordered, the total amount due, and instructions for how to pay.
What is a remittance advice?
A remittance advice is the document a customer sends back with their payment, identifying which invoice (or invoices) that payment is meant to cover. It's what lets the company apply an incoming payment to the correct customer account instead of guessing.
Remittance advices matter for internal control, not just bookkeeping. Whoever opens the mail and logs remittance advices generally shouldn't also be the person handling cash or posting to accounts receivable — that separation is what keeps one person from skimming a payment and hiding it by adjusting the customer's balance.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
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