The Revenue Cycle

The revenue cycle deals with the delivery of products or services to customers and consequent collection of cash from customers. The standard transaction flow in the revenue cycle can be characterized as follows: sales order comes in from the customer; credit department approves credit; warehouse assesses the inventory and releases goods; shipping department ships the goods; the customer is billed based on the sales order and shipping documents; and eventually cash is collected from the customer. Traditionally, the sales department received sales orders by paper, fax, EDI and, sometimes, even verbally. The incoming sales order is in fact a purchase order from the customer, often times in the customer company document format. The purchase order then gets converted to the standard sales order and processed. If an order arrives through EDI, then purchase and sales order formats are pre-approved and based on partner agreements. The majority of companies will input the sales order in their accounting system. It will be routed to the credit department for credit approval. The credit will be approved based on prior history of the customer or, if the customer is new, by obtaining relevant credit information. The approved sales order will be forwarded to the warehouse. Here, inventory availability will be checked, goods will be released and stock release documents will be generated. The shipping department will ship goods when those arrive on the shipping docks. The documents involved are a shipping notice and bill of lading.

The Expenditure Cycle

The expenditure cycle consists of the ordering of goods and services from suppliers and consequent payments to the suppliers. The generic transaction flow in the expenditure cycle can be described as follows: inventory control reviews inventory records to determine order requirements. A purchase requisition(s) is created and forwarded to the purchase department. The requisition contains details of items and quantities required. The purchase department selects suppliers by using the approved list of suppliers or any other standard operating procedure established by the organization. The supplier is selected and a purchase order is created and forwarded to that supplier. Another copy of the purchase order goes to the inventory control department to notify it that goods are on order. The supplier ships goods to the warehouse, and a receiving report is created. The receiving report is forwarded to inventory control and accounts payable. Inventory control updates inventory records based on the receiving report.

Electronic Data Interchange

Before the dawn of the computer age, intra- and inter-business activities, especially purchasing and selling of products and services, were paper-intensive. Paper documents such as purchase orders, invoices, shipping notices, and bills of lading needed to be prepared in multiple copies. These copies had to be approved, signed, preserved in files for a certain duration, forwarded to trading partners and processed in a myriad of ways. Purchasing and selling activities rippled through the entire organization and tied in manufacturing, logistics, accounting, finance and human resources, among other areas. The documents then multiplied exponentially. Additionally, these documents were organization-specific, meaning there were no standard formats. The lack of standard format resulted in extra processing time; incoming purchase orders needed to be converted into the organization’s sales order. In the 1960s, giant corporations had to deal with a mountain of paperwork and employ armies of clerks to process those documents. The associated costs and their effect on the bottom line alarmed managers. The idea of electronic surrogates for these documents and Electronic Data Processing (EDP) began to look attractive. In the late 1960s, the idea of an electronic exchange of standardized documents had taken a firm root in the transportation industry. The age of EDP has arrived and EDI was on the forefront of the wave and became more sophisticated over the next several decades.

A Framework for Digital Accounting

The term digital refers to digits or numbers; however, in the computer science lexicon this term refers to the representation of information in 0s and 1s, which can be read, written and stored using machines. The prefix “e” refers to electronic, meaning use of electricity in powering machines such as computers. Digital accounting, or e-accounting, as a corresponding analog, refers to the representation of accounting information in the digital format, which then can be electronically manipulated and transmitted. Digital accounting does not have a standard definition but merely refers to the changes in accounting due to computing and networking technologies. Accounting, the art and science of measuring business performance, has evolved with business, more so with information technology. Punch cards and mainframes, databases and data warehouses, personal computers and productivity software, specialized accounting software and Enterprise Resource Planning (ERP) systems, Local Area Networks (LANs) and Wide Area Networks (WANs), among other things, have left their mark on accounting theory and practice. For example, data-entry mechanisms, data storage and processing mechanisms, end reports, internal controls, audit trails and skill sets for accountants have been in continual flux for the past several decades.

Controls, Security, and Audit in Online Digital Accounting

Internal controls have existed since the dawn of business activities. Internal controls are basically systems of checks and balances. The purpose is to keep the organization moving along desired lines as per the wishes of the owners and to protect assets of the business. Internal controls have received attention from auditors, managers, accountants, fraud examiners and legislatures. Sarbanes Oxley Act 2002 now requires the annual report of a public company to contain a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management’s assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting. Section 404 of the Act also requires the auditor to attest to and report on management’s assessment of effectiveness of the internal controls in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

Financial Management, Strategic Management and Digital Accounting

A dominant trend in information technology is the convergence of different software functionalities. Even after the dot-com bust or, perhaps because of it, the convergence has gathered steam. Different tools and techniques get concentrated in one solution or software in a short duration. Distinct techniques and technologies, such as accounting software, Web-based businesses, supply chain management, data warehouses and artificial intelligence, are converging as the organizations move from ERP to ERP II, integration of internal functions to integration across supply chain, and the Internet to Internet 2. Today’s ERP software packs all applications into one monster package and offers tremendous functionalities.

The Gender Ledger Cycle

The general ledger cycle consists of posting of entries from special journals, subsidiary ledgers, and general journal to general ledger; as well as generating financial, managerial and special reports. Accounting transactions are first recorded in special and general journals from source documents and posted to subsidiary and general ledgers. At the end of the accounting period, an unadjusted trial balance is prepared. Then adjusting entries are made based on information from the controller and treasurer. The general ledger can then be used to generate required reports. Once the financial statements are finalized, accounting books are closed via closing entries, and a post-closing trial balance is prepared. The traditional use of a general ledger has been for generating financial reports for investors. Every student of accounting knows this.

The Conversation Cycle

The conversion cycle spans a range of activities — product design, production planning and control, and cost accounting. Product design is a collaborative activity and can involve a number of specialists from different functional areas. Production planning and control involves planning production by optimizing factors such as customer demand, availability of materials and labor, capacity constraints, distribution constraints and storage constraints, to mention a few. Planned manufacturing activities are carried out by processing raw materials though a combination of machines and humans and creating a finished product. The cost accounting system provides data useful for evaluating production function, determining product costs and generating information for inventory valuation for external reporting purposes.

The Evolution of Accounting Software

In the late 1950s and early 1960s, mega corporations of the day began to handle data that rivaled government requirements. This data could not be handled manually, let alone cost-effectively. Accounting and financial information, due to its repetitive nature and heavy volume, became a prime candidate for automation. Initial accounting programs were written for mainframe computers, not surprisingly, since IBM and its Big Irons ruled the computer world. Early mainframe computers were large, due to the ferrite core memory, and cumbersome. The processing intelligence was centralized in the mainframe. Mainframes served a large number of users, and data was processed in a batch mode. Users submitted data using dumb terminals and jobs were processed based on the length of the queue and priority of the jobs. Mainframes provided a high level of security and reliability. Minicomputers, pioneered by the Digital Equipment Corporation, had similar capabilities but were smaller and less powerful. Currently, distinctions between mainframes and minis are very blurred, and for our purposes make very little practical difference.

The XML-Based Web Languages and Accounting

The Internet spins a vast web of information across the globe. Data and information flow freely — available to anyone for learning, understanding and analysis. Organizations can cooperate across departments, regions and countries. ERP II and ECM herald the era of intra- and inter-business collaboration. Sounds wonderful – what is the problem? The problem is as old as mainframe vs. PC and Windows vs. Macintosh. Data can move freely but are not standardized. Data streams have no universal meanings; consequently, data are not understood by all systems, analyzed easily, translated across different languages and human readable, among other things. Specialized hardware and software is needed for data decoding, and if the required tools are not available, then you are out of luck. This problem is not only confined to the Internet. A great deal of money (by one estimate, almost 20% of the U.S. gross national product) is spent on generating new information, and more than 90% of this information is in documents, not in databases. Businesses in the U.S. produce approximately 100 billion documents per year. This information is stored in various formats across a range of computer systems. These disparate storage formats cause severe problems in accessing, searching and distributing this information. Any solution (a combination of information technology products and services) that manages information across diverse software and hardware platforms must address a few key requirements. First, these solutions should be transparent to users. The technical details should not be handled by users. Second, users should be able to save data and information in the desired format; for example, databases, text files or proprietary formats. Third, a solution must intelligently retrieve data and information. This solution should be knowledgeable regarding meaning of the information itself. Finally, such solution should be capable of providing the desired output — print, screen, Web or CD/DVD format.