A sales order application system comprises the procedures involved in accepting and shipping customer orders and preparing invoices that describe products, services, and assessments. The sales order is the interface between the various functions necessary to process a customer order. These functions are sales order, credit, finished goods, shipping, billing, accounts receivable, and General ledger.
The sales order function initiates the processing of customer orders with the preparation of a sales order. The sales order contains descriptions of products ordered, their prices, and descriptive data concerning the customer, such as name, shipping address, and, if necessary, billing address. At this point, the actual quantities shipped and freight charges (if any) is not known. The seller will prepare the invoice once the goods are sent, and a notice has been forwarded to billing. Because the invoice is prepared after shipping, separate order and billing is also called post billing.
A customer’s credit standing should be verified before the shipment of goods. For regular customers, the credit check involves determining that the total amount of credit granted does not exceed management’s general or specific authorization. For new customers, a credit check is necessary to establish the terms of sale to the customer. The sales order function should be subject to the control of an independent credit function to maintain the separation of duties.
Once credit has been approved, the sales order function distributes the sales order set. One copy of each sales order is forwarded to billing. These are filed as open orders, allowing the billing function to anticipate the receipt of matching shipping advice from the shipping function. One copy – usually called the packing slip copy – is forwarded to shipping. This copy authorizes shipping to receive goods from finished goods for shipping. Another copy – traditionally called the stock copy – is forwarded to finished goods. This copy allows finished goods to release goods from its custody for shipment to customers.
In some cases, a customer’s order may require that a production order be issued to produce the goods because they are not in stock. Such situations arise when the order is for a unique non-stock item. They also may appear as standard company practice due to either the customized nature of the product or a short production cycle that alleviates the need for an inventory of finished goods. Such situations also occur when items are out – of- stock and must be back-ordered. Suppose the time between receiving the order and the actual shipment of the order is significant. An acknowledgment copy of the sales order may be sent to the customer to notify the customer of their order received and processed.
Finished goods pick the order as described on the sales order’s stock copy (copy 3). Stock records are updated to reflect the actual quantities to be forwarded to shipping. Actual amounts are noted on the sales order’s stock copy, which is then forwarded along with shipping goods. Shipping should sign the stock copy to acknowledge receipt of the quantities noted thereon from finished goods.
Shipping accepts the order for shipment after matching the packing slip copy to the sales order’s stock copy. Shipping documentation is prepared according to the situation. Frequently this requires the preparation of a Bill of lading. A bill of lading is the documentation exchanged between a shipper and a carrier like a trucking company. The bill of lading documents freight charges and the transfer of goods from the shipping company to the transportation company. Frequently, freight charges are paid by the shipper but billed to the customer on the sales invoice. The packing slip copy of the sales order is usually included with the customer’s order when it is shipped.
The shipping department forwards shipment documentation to the billing function. This documentation is termed the shipping advice and is usually the stock copy of the sales order and a copy of the bill of lading. Billing pulls the related open order documentation, verifies the order, then prepares the invoice by extending the charges for actual quantities shipped, freight charges (if any), and taxes (if any). Invoices are mailed to customers. Invoices are posted in a sales journal, and posting copies are sent to accounts receivable. Periodically, a journal voucher is prepared and forwarded to the general ledger function for posting to the general ledger.
Accounts Receivable and General Ledger
The distinction between billing and accounts receivable is vital to maintain the separation of functions. Billing is responsible for invoicing individual sales transactions, and accounts receivable maintains customer- accounts information and sends periodic statements of account to customers. Billing does not have access to financial records (the receivables ledger), and the financial records are independent of the invoicing operation. Note that the control total of postings to the accounts receivable ledger sent to the general ledger by accounts receivable is compared to the general voucher sent from billing to validate postings to the general ledger. In the same practice, the distinction between shipping and finished goods is essential to establishing the accountability for the release of finished goods from Inventory.
Types of Sales Order Systems
Various relationships between the order, billing, and shipping functions are feasible, depending on the circumstances—the primary consideration in preparing the invoice. In a complete pre-billing system, the complete invoice is prepared simultaneously with the shipping order. In this case, the shipping order is usually a copy of the invoice. This system minimizes paperwork. The invoice is released after the goods are shipped. A complete pre-billing system requires all invoicing information to be known before preparing the invoice/shipping order set. This requires few back orders or other Inventory problems. Also, freight and additional charges must be either absorbed by the seller or standardized (e.g., add 50 cents for postage). Any change between the customer order as prewritten and as actually shipped requires a new invoice and the original invoice’s destruction. If such situations are constant, complete pre-billing is very inefficient.
In a separate order and billing system, the shipping order is prepared separately from the invoice. The invoice is scheduled after the goods have been prepared for shipment. A separate order and billing system is necessary when there is a significant difference between the information on the shipping order (internal to the seller) and the invoice. For example, technical specifications in the shipping order may not be required or desired on the invoice. Excessive backorder and out-of-stock conditions also warrant this approach because the invoice’s final content cannot be determined until the goods are ready for shipment. In many industries, alterations and substitutions of goods ordered are allowed by customary trade practices. In retailing, for example, different styles or colors may be substituted in an order for clothing. The changed specifications from the customer’s order must be shown on the invoice. In other instances, several shipments are made to the same customer over a specific period under a single blanket order. That being said, there is no one-to-one correspondence between the customer order and the subsequent invoices. Typically one blanket order requires several separate invoices – one for each shipment made under the blanket order.
Incomplete prebilling is a third type of sales order system. The incomplete prebilling system is very similar to a separate order and billing system. The distinction is that the invoice is originally prepared by the sales order department rather than a sales order. The invoice is completed to the extent possible, but because actual quantities shipped and freight charges (if any) cannot be known with certainty until shipment, the invoice is incomplete. This invoice is then distributed in the same fashion as the sales order in a separate order and billing system – with copies to finished goods, shipping, and billing- except that multiple copies of the invoice are sent to billing. When billing receives notification of shipment, it pulls its copies of the invoice and completes them. In separate order and billing, billing separates the original copy of the invoice when it receives shipment notification.
Both separate order and billing and incomplete billing are post billing systems. Incomplete billing is commonly used in manual systems, as only one document (an invoice) rather than two documents (a sales order and an invoice) must be prepared. This reduces the transcript of information and thus is often more efficient in a manual system.
Note that the sales order is primarily an internal document. On the other hand, the invoice is the customer’s formal notification of the shipment amount. Note also that the term “invoice” and “bill” can be used interchangeably. A bill of lading is an invoice for freight charges. Separate order and billing might also be called separate order and invoicing.