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The Revenue/Receipt Cycle

Sweet Rhinn

on 2 October 2012

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The REVENUE and RECEIPT Cycle - encompasses both the sale of goods or services to customers (revenue) and the collection of cash (receipt). This cycle is related to each of the other three transaction cycles, since it... receives resources and information provided by the financing and conversion cycles
provides resources and information to the expenditure/disbursement cycle Two major business functions are associated with the cycle.. resources (goods or services) are sold to customers in exchange for promises of future payment
cash is collected from customers The Scope of Revenue/Receipt Cycle Business Functions Common Activities Common Entries Common Forms resources are sold to customers in exchange for promises for future payments
cash is collected from customers for resources sold to them customer orders (order entry)
credit approval
inventory control
cash collection (and deposits)
sales returns sales
sales discounts
sales returns and allowances
cash receipts
allowance for uncollectible accounts
write-off or specific uncollectible accounts customer order
sales order
shipping document
sales invoice
customer remittance advice Paper or electronic documents affecting the revenue/receipt cycle include: CUSTOMER ORDER (a request from a customer to purchase goods) SALES ORDER
(identifies goods ordered by a customer, including relevant information about price, quantity, payment terms, etc. SHIPPING DOCUMENT
(identifies good shipped, and represents a contract between the seller and carrier; a shipping document is often in the form of a bill of lading, a Uniform Commercial Code document used by common carriers) SALES INVOICE
(identifies goods sold and represents formal notice to a customer about the amount and terms of payment; often called the bill) CUSTOMER REMITTANCE ADVICE
(accompanies a sales invoice but is intended to be returned with a customer's payment; a returned remittance advice indicates the purpose of a cash payment, facilitating, handling and recording) CREDIT SALES SUMMARY OF CREDIT SALES ACTIVITIES Customer Order Department
Accept customer order
Prepare sales order, distribute copies, and retain copy in unfilled order file Credit Department
Review sales order and investigate customer credit information
Initial copy of sales order if credit is approved and forward the order to Inventory Control. If credit is denied, notify the Customer Order department Inventory Control
Review sales order
Initial copy of sales order to authorize the release of goods from the warehouse
Forward goods and a copy of the sales order of Shipping, and retain a file copy of the sales order Shipping
Compare sales order from Inventory Control with sales order from Customer Order
Examine goods from warehouse and compare with sales order
Prepare goods for shipment and compare shipping documents
Release goods to carrier and obtain receipt
Notify Customer Order department that goods have been shipped
Forward copy of sales order and shipping documents to Billing, retain file copy of sales order and shipping documents Billing
Compare documents from Shipping with sales order from Customer Orders
Prepare sales invoice, send copy to customer and to Inventory Accounting along with copy of sales order and shipping documents, and retain file copy
Prepare daily sales summary, send copy to General Accounting, and retain file copy Recording
Inventory Accounting : Enter cost information on sales invoice, update inventory records, and forward sales invoice and related documents to General Accounting
General Accounting Record sales and forward sales invoice and related documents to Accounts Receivable
Accounts Receivable: Post sale to customer's account and file sales invoice and relaed documents CASH COLLECTION CASH COLLECTION
The Revenue/Receipt is completed for a transaction when cash is collected for the goods and services sold. SALES RETURNS AND ALLOWANCES
Customer requests for adjustments on returns. Goods should be reviewed by personnel independent of cash collection and recording. An approved request is documented as a credit memo, copies of which are forwarded to Accounts Receivable for posting and to Inventory Control. UNCOLLECTED ACCOUNTS
Accounts Receivable personnel should review individual customer accounts periodically as a check against unauthorized credit limits and prepare monthly Accounts Receivable trial balance for reconciliations with general ledger controls accounts. In addiion, Accounts Receivable balance are aged periodically and reviewed by personnel independent of the Credit department.
Note: Delinquent accounts should be reviewed periodically by personnel who report to the treasurer and are independent of recording functions. Control Activities Types of Errors or Frauds That
Could Occur If Objective Is Not Met Control Activities Designed to
Prevent or Detect
Errors or Frauds Transaction Authorization Customers' credit should be approved
prior to shipping goods. Shipments could be made to unauthorized
parties, potentially resulting in uncollectible accounts receivable. Perform a credit check for all new
Prepare and periodically update lists of
authorized customers, indicating a
maximum credit limit for each
customer. Maintain updated lists of authorized
prices and sales terms.
Establish procedures for reviewing and
approving prices and sales terms
before shipment. Orders could be accepted at unauthorized
prices or unfavorable sales terms,
potentially resulting in reduced revenues
or inadequate cash flows. Unit prices and sales terms should be
established for all products or services. Sales-related deductions and
adjustments should be made in
accordance with management's
authorization. Unauthorized deductions or adjustments
could be granted to undeserving
customers, potentially resulting in
uncollectible receivables.
Otherwise collectible accounts receivable
could be written off, potentially resulting
in failure to realize the service potential of asset. Establish written criteria and policies for
granting sales deductions and
Prenumber and control credit memoranda
or other related forms. Shipments could be delivered to the wrong
party, potentially resulting in uncollectible accounts receivable.
Shipments could be delivered too late,
potentially resulting in returned goods and canceled sales.
Incorrect shipments could be delivered,
potentially resulting in returned goods and canceled sales. Verify that ordered products are in stock,
and therefore can be shipped on a
timely basis.
Limit access to shipping documents to
authorized personnel.
Document policies and procedures for
scheduling shipments. Transaction Execution Approved orders should be shipped in
accordance with customer specifications
and on a timely basis. Shipments could go unbilled, potentially
resulting in loss of revenue.
Shipments could be billed late, resulting in
delayed cash payments from customers. Prenumber bills of lading and assure that
related billings are made on periodic
(e.g., daily) basis.
Establish procedures for prompt reporting
and investigation of shipments not
billed (and billings not shipped).
Require prompt delivery of bills of lading
(and related sales orders) to the
billing department. All shipments should be followed by
prompt billing. Total input documents (e.g., number of
documents, dollar amounts) and
reconcile appropriates journals and
Establish processing and recording
Compare actual and planned (e.g.,
forecasted, budgeted) results, and
analyze variances. General ledger account balances may be
inaccurate, potentially resulting in
misstated financial statements. Sales, cash receipt, and related
transactions should be recorded at the
correct amounts, in the proper period,
and should be properly classified. Recording Reconcile totals of individual customer
accounts with control totals.
Promptly investigate correspondence
from customers.
Reconcile input totals with processed and
output totals.
Review customer statements for accuracy
and follow up discrepancies. Summaries of detailed accounts may not
agree with control accounts, potentially resulting in adjusting journal entries
prompted by inaccurate information.
Transactions may be posted to improper
customer accounts, potentially resulting in improper billings. Billings, collections, and related
adjustment transactions (e.g., returns
and allowances) should be posted
accurately to individual customer
accounts. Periodically substantiate and evaluate
recorded account balances.
Reconcile subsidiary ledgers with general
ledger control accounts.
Establish policy and procedures manuals,
organization charts, and supporting
documentation (e.g., compare selected
customer balances with underlying
Follow up promptly on customer
complaints. Accounts may include error or frauds,
potentially resulting in materially
misstated financial statements.
Management decisions may be based on
erroneous data, potentially resulting in improper decisions. Recorded accounts receivable balances
(and related transactions) should fairly reflect underlying transactions and
events. Establish the cash receipts function in a
centralized location.
Require daily reconciliation of cash receipts
records with bank deposit slips.
Prenumber and control cash remittance
Prepare separate lists of incoming cash
receipts in the mailroom.
Separate responsibility for handling and
recording cash.
Establish periodic procedures for reconciling
cash records with bank statements.
Establish physical barriers over cash and
unused checks.
Maintain insurance and fidelity bonds for
personnel handling cash.
Maintain listings - and signature samples -
of authorized signatories.
Inform the bank that no checks payable to
the company are to be cashed (i.e.,
deposited only)
Restrictively endorse checks received from
customers. Cash receipts on credit sales could be lost or
diverted, potentially resulting in
overstated accounts receivable and
unrecorded cash.
Cash receipts on noncredit sales could be
unreported, potentially resulting in
unrecorded cash.
Cash shortages could go undetected,
potentially resulting in lost cash and
overstated cash balances. Access to cash and cash-related records
should be restricted to personnel
authorized by management. Access to Assets Segregate responsibilities for authorization,
execution, and recording functions.
Prenumber and control custody of forms and
documents. Records or assets may be misused, potentially
resulting in misappropriated assets. Access to shipping, billing, inventory
control, and accounting records should
be restricted to personnel authorized management. Control Objectives, Potential Errors or Frauds,
and Control Activities THANK YOU! Mail Room Cash Receipts Customer Order
Department Credit
Department Inventory
Control Shipping Billing Revenue/Receipt Cycle
Potential Errors or Irregularities
Specific Control Procedures ORDER ENTRY
Potential Errors / Irregularities
Shipments could be made o customers who would eventually not pay their accounts
Unauthorized adjustments could be made
Shipments not based on approved customers' orders could be made
Goods to be shipped may not meet customers' specifications and may result to dissatisfaction and significant returns or uncollectible accounts
Specific Control Procedures
Approval of customers, credit limits and terms, and prices. Such approval should be made by persons not involved in order entry function. Updated lists of customers, credit limits and terms, and prices should be made available to sales department personnel.
Use of prenumbered sales or work orders and accounting for its completeness
Follow-up missing documents. Results of follow-up procedures done should be reviewed and approved by a designated official.
Adequate written procedures for order entry function SHIPPING
Potential Errors / Irregularities
Unauthorized shipments could be made
Customers could be billed for goods that were not received
Unbilled shipments
Specific Control Procedures
Shipments should not be made without approved customer orders
Physical count and inspection of goods at the time of shipment
Use of prenumbered shipping documents and accounting for its completeness
Maintaining records of unmatched (undelivered checks)
Follow-up procedures on missing shipping documents and unmatched orders
Review and approval of follow-up procedures done
Adequate written procedures for shipping function BILLING
Potential Errors / Irregularities
Unbilled shipments
Customers could be over / under invoiced
Specific Control Procedures
Use of prenumbered sales invoices and accounting for its completeness
Follow-up of missing documents. Review and approval of follow-up procedures done.
Calculation of control totals for posting to control (general ledger) accounts before invoices are routed to accounts receivable accounting for posting to subsidiary ledgers
Comparison of invoiced prices and quantities to shipping documents, approved sales orders, and standard price lists
Checking the accuracy of invoice extensions and foorings by persons other than those who prepare invoices
Adequate written procedures for billing function ACCOUNTING
Potential Errors / Irregularities
Invalid transactions could be taken up to conceal errors or irregularities
General and subsidiary ledgers could be forced balance
Cash receipts could be misappropriated and covered-up by taking up invalid adjustments to accounts receivable balance such as unauthorized write-offs
Specific Control Procedures
Sales and accounts receivable balances should be periodically compared to balances of prior periods, budgeted amounts, or averages published by the industry in which the company operates
The subsidiary ledgers should be maintained by persons other than those who maintain the control account, prepare, check, or approve accounts receivable documents, or those involved in the cash receipts function
Periodic (e.g., monthly) statements of accounts should be sent to customers. Exceptions noted by customers should be promptly investigated
Periodic review of customers' accounts with credit balances
Preparation of accounts receivable aging schedule
Identification of worthless accounts for write-offs
Periodic review of the adequacy of valuation allowances such as bad debts, returns, and discounts
Adequate written procedures for accounting function CASH RECEIPTS
Potential Errors / Irregularities
Cash receipts could be misappropriated
Delays in recording cash receipts
Specific Control Procedures
Use of prenumbered official receipts and accounting for its completeness
Preparation of a list of cash receipts at the time of receipt
Restrictive endorsement of checks received (e.g., for deposit only to the accounts of...)
Establishment of control totals for posting to control accounts before cash receipt documents are routed to the accounts receivable subsidiary ledgers clerk
Comparison of actual amount received with the initial cash receipts records
Comparison of cash receipts record with bank-validated deposit slips, cash receipt book, and bank statement
Adequate written procedures for cash receipts function SALES RETURNS AND ALLOWANCES
Potential Errors / Irregularities
Customers may be given credit for goods returned but were not received
Damaged merchandise may be included in inventories as its original cost
Unrecorded returns
Goods returned in the current period may not be included in the inventory account
Specific Control Procedures
The description, condition, and quantity of goods returned should be checked at the time of receipt
Use of prenumbered receiving reports and credit/debit memos
Accounting for the numerical sequence of receiving reports and debit/credit memos and follow-up of missing documents. A designated official should review and approve the results of follow-up procedures done.
Receiving reports should be matched with debit/credit memos
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