Chapter 11 The Billing/Accounts

Receivable/Cash Receipts (B/AR/CR) Process

Accounting Information Systems 8eUlric J. Gelinas and Richard Dull

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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.

• 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.

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IntroductionThe billing/accounts receivable/cash receipts (B/AR/CR) process is an interacting structure of people, equipment, methods, and controls designed to create information flows and records that accomplish the following:

– Support the repetitive work routines of the credit department, the cashier, and the accounts receivable department.

– Support the problem-solving processes of financial managers.

– Assist in the preparation of internal and external reports.

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Horizontal View B/AR/CR

1. Shipping department informs the accounts receivable department (billing section) of shipment.

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Horizontal View B/AR/CR

2. Accounts receivable department (billing) sends invoice (2a) to customer, accounts receivable department (cash applications [2b]), and general ledger process (2c).

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Horizontal View B/AR/CR

3. Customer makes payment on account.

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Horizontal View B/AR/CR

4. Cashier sends deposit to bank (4a) and informs accounts receivable department (cash applications [4b]) and general ledger process (4c) of payment.

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Horizontal View B/AR/CR

5. Accounts receivable (cash applications) informs general ledger process of payment.

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Cash Receipts Management• In the billing function, the goal is to 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.

• Electronic bill presentment and payment (EBPP) systems help achieve more timely billing and cash receipts at reduced costs (Technology Summary 11.1).

• Treasurer’s goal is to reduce float - the time between the customer tendering payment and the availability of good funds (funds on deposit and available for use).

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Cash Receipts Management• Procedures designed to reduce or eliminate the float associated

with cash receipts:

– Credit card • For a fee, a third party removes from the risk of non-collection

of the account receivable. • Collecting company submits charges to the credit card

company for immediate payment. • The credit card company bills the consumer.

– Debit card • Authorizes the collector to transfer funds electronically from the

payer’s bank account to the collector’s bank account.

– Electronic banking websites & customer self-service systems

• Convenient ways for customers to pay bills (electronic banking website) or obtain information and correct errors (customer self-service systems).

Credit Card Transaction Flow

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The Fraud Connection• B/AR/CR process provides opportunity to manipulate

final results.

• Revenues and AR can be inflated by violating GAAP revenue recognition rules.

• Improper segregation of duties between handling cash and recording cash transactions can result in misappropriating cash:

– Lapping occurs when funds being paid by one customer are stolen and the theft is covered up by applying funds from another customer and so on.

– Some lapping frauds become so large that the employee has to manipulate the accounting records after hours.

– Rotation of duties and forced vacations help prevent this type of fraud.

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B/AR/CR Context Diagram

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B/AR/CR –

Level 0 Diagram

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B/AR/CR Process - Diagram 1Perform Billing

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Sample SAP Invoice Data Screen

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B/AR/CR Process Diagram 2:Manage Customer Accounts

Sample Accounts Receivable Aging Report

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B/AR/CR Process Diagram 3:Receive Payment

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Data Descriptions in B/AR/CR

• A/R master data– Repository of all unpaid invoices issued by an

organization and awaiting final disposition.

– Two types of accounts receivable systems exist:

(a) Balance-forward

(b) Open-item

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Balance-forward System

• AR records show a customer’s balance - current and past-due and current account activity.

• Monthly statements display previous balance, payments, and balance forward which is added to new charges to get the current balance due.

• Unpaid current balances are rolled into the past-due balances.

• Electric and gas utility companies typically use balance-only systems.

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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 (new and settled within the current period) and payment details.

• Each open invoice is grouped by aging category and aged individually.

• Monthly, or at specified times, customer accounts are aged and an aging schedule is printed.

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Data Descriptions in B/AR/CR

• Sales event data– one or more invoice records (details contained in

invoice data)

• A/R adjustments data– write-offs, estimated doubtful accounts, sales returns,

etc.– journal voucher #, transaction code, authorization

• Cash receipts data– details of customer payments

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E-R Diagram (Partial)

for B/AR/CR

B/AR/CR Process Relational Tables

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Types of Billing Systems

• 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.

• Pre-billing system

– Invoice prepared upon receipt of order (after inventory and credit checks).

– There is little or no delay between receiving order and shipping.

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System Flowchart

of the Billing

Function

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Control Matrix for theBilling

Process

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System Flowchart

of the Cash

Receipts Process

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Control Matrix for the Cash Receipts Function