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Revenue and Receipts Cycle - Coggle Diagram
Revenue and Receipts Cycle
Characteristics And Activities in the Cycle
Accounts affected in this cycle:
Statement of Comprehensive Income:
Settlement discount
Bad debt written off
Sales returns
Cost of sales
Sales
Statement of Financial Position:
Accounts receivable
Bank
Provision for bad debt
Inventory
VAT
The
journal entries that will be processed
for this cycle are as follows:
DR.
Bank
/
Receivables
CR.
Sales
DR.
Cost of sales
CR.
Inventory
The revenue transactions of an organisation comprise the
means by which it earns income from its ordinary business activities
.
Main Components and
Functions of The Revenue and Receipts Cycle
The
main components
in the cycle are.
Credit Sales
Receipts from Debtors
Sales Adjustments
.
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i.) Credit Sales
Credit Sales is a type of transaction where a
customer purchases goods or services on credit.
There are
five functional areas
within Credit Sales:
Ordering function
,
Dispatch function
,
Invoicing function, Revenue recording function
, and
Credit management function.
Each functional area
has a specific purpose
and
involves different documentation, processes
, and
controls
.
Understanding the
role and responsibilities
of each functional area is
crucial in managing credit sales effectively
.
Credit Sales:
Ordering Function
The ordering function is
crucial for recording customer orders
and
initiating action to fill them
. Here are the
key activities and controls that need to be in place
for the ordering function:
The following
documents are needed
for the ordering function:
Price lists
Credit application form
Internal sales order
Credit Bureau information
Customer order
Implementing these
key activities
and
controls
, the ordering function
can effectively record customer orders
and initiate action to fill them.
Creating an
Internal Sales Order
The ISO should:
Contain customer details
Specify the quantity ordered
Be numerical
Contain prices per official price list
Be authorized
by the credit manager/sales manager
Identifying customer types
There are
two types of customers
:
new customers
and
existing customers.
New customers
have to
go through a credit application process:
Credit application process includes
credit limit establishment
by the
credit department
information capture on the permanent master file
background checks to determine creditworthiness
And
changes to details being authorized by the credit controller.
completing an application form
Existing customers:
If it’s
a valid customer (already has an account)
, the client should
present either an identity number
or
account number.
The
credit limit
should
be checked
, and if the
credit limit has been exceeded
, the
order cannot be accepted
.
Generating an Internal Sales Order (ISO)
The person responsible for ordering will
generate an ISO when an order is received from a customer
.
Credit Sales:
Dispatch Function
The purpose of dispatch
is to fill accepted orders promptly and accurately
,
ensure only authorized orders are acted upon
, dispatch only
goods authorized by properly authorized picking slips
and
accompanied by accurate and complete delivery notes
, and ensure prompt dispatch of goods that have been picked to the correct customer.
Documentation:
Delivery note
Back order note
Picking
slip
List of deliveries
Activities and Controls
for Ordering Function:
Counter sales
Items checked to the invoice
Customer signs delivery note
or
invoice
Gate control
Guards count goods and agree with delivery note
Quantity on delivery note checked against quantity being delivered
Delivery of goods
Sequentially
numbered delivery note
with
quantity
and
goods description
Client
signature
for
receipt of goods
Recorded in
register
and
issued in duplicate copy
Controls must be sound to prevent theft
Transferred to dispatch
Goods are
packed, labeled, and delivered
Segregation of duties is important.
Dispatch function is manual
Person responsible for
picking goods using a signed picking slip
Back order note created for out-of-stock items
Credit Sales:
Invoicing Function
Activities and Controls for Ordering Function
On the
return of a signed delivery note
from the customer:
Obtain quantities on the invoice
from the delivery note
Obtain price
on the invoice from the
price list
Produce a
numerical list of delivery notes
and
invoices
, and
follow up on missing numbers by a senior person
Review calculations
by an
independent person
Match the delivery note with the ISO and
generate an invoice
Purpose of Invoicing is
to notify the customer promptly of amounts due for goods supplied
Documentation
Sales invoice
Price lists
Credit Sales:
Recording Function
Record sales made and
raise corresponding debtor/receivable promptly
Documentation
Sales journal
Debtors ledger
Invoice
General ledger
Activities and Controls:
S
equence checks
on invoices if there are
missing or duplicate numbers followed up
Trace posting:
Sales journal
–
debtors ledger
–
general ledger
C
ompare the invoice to DN
check for the following:
Description
Prices
Quantity
M
onthly statements
sent out by
independent person.
Invoices must be
recorded accurately
and
entered against correct debtor
Credit Sales:
Credit Management Function
Credit management function
aims to minimize bad debt losses and prompt payment by debtors
.
Documentation:
Age analysis
Monthly statement
All
records kept in the cycle are relevant
Credit bureau information
Activities and controls needed for the ordering function:
Credit application process
Identify debtor to be handed over to lawyers
Receipts from Debtors and Cash Sales
R
eceipts from debtors
and
cash sales
are two
important sources of revenue for businesses
. Cash Sales
Receipts from Receivables
Proper
documentation
,
processing
, and control measures must
be in place to ensure accuracy and prevent fraud
:pencil2:
Cash Sales
Activities and Controls for Cash Sales
Credit/Debit card receipts
On-line authorisation
from the banks
Invoice signed by customer
Depositing of money
List total of cash on
daily cash summary sheet
Cashier to
count cash at end of day
/
shift
in the
presence of the cash controller
Total of
cash summary sheet compared
to
cash register
Investigate any differences
C
ash summary sheet signed by cashier
and
cash controller
as proof that function
was performed
.
P
repare bank deposit slip
by
independent person
(segregations of duties)
C
ompare bank stamped deposit slip
to
daily summary sheet
and
bank statement
Cash receipts
Count cash
(Independent cash count and sign off)
Cash sales refer to
transactions where the customer pays with cash
over the counter or with
debit/credit cards
.
The cashier
must provide a receipt for every cash sale
and keep the money in the till until cash up is performed.
Documentation
Receipts
:pencil2:
Receipts and Recording of Receipts
The
process of receiving payments
from customers
on credit or through installment plans
Documentation
Bank deposit slip
Cash Receipts Journal
Receipt
Debtors Ledger
Remittance advice
General Ledger
Customer
Remittance register
Activities and Controls that need to be in Place for the Receipts from Debtors
Depositing of money:
Keep detailed cash records
Cashier should
not have access to cash records
(
segregation of duties
)
Cash on the premises must be
locked away in safe
C
ash book balance must be reconciled
regularly
to bank statement
(Bank reconciliation – Will be dealt with in detail in the Bank and Cash Cycle)
Money received
must be
deposited as soon as possible
(following day)
Settlement discounts:
Settlement discounts are
granted according to fixed company policy
Management
monitors discounts granted
and
goods returned
Receipts:
U
nused books under strict control
(lock away in safe)
Used books returned
and
locked away
Should
be pre-numbered
Keep a
register of receipt books used
and
returned
Cancelled receipts -
all copies marked and kept
All
payments received via mail
are recorded in a
mail register
Administration of receipts:
Discounts
granted
are
independently reviewed
Calculations are
independently reviewed
A
debtors' control account
is kept and is
regularly reconciled with the debtors' ledge
r
Payments allocated to debtor's account and accounting period according to the payment advice
A
daily cash receipt summar
y is prepared,
balanced with cash
and independently reviewed.
Payments allocated to debtor's account and accounting period according to the payment advice
Payments and discounts are recorded on the date of receipt.
Payments on debtors' accounts are supported by:
Cash Receipt Summary
Deposit slip
A
sequentially numbered receipt
Sales Adjustment
The role of this function is
to control goods returned by customers
Documentation
Credit note returns
and
allowances
journals
Debtors Journal
Goods returned vouchers
General ledger
This includes
bad debts write-offs
,
returns
and
corrections
and
discounts
A
ctivities and Controls
that need to be in Place for the Payments to Creditors/Payables Function
Adjustments
:
Discounts
;
Returns
and
corrections
;
Ensure accuracy recording and authorisation;
Writing off
bad debt
.
Controls
:
Authorisation
;
Segregation of duties;
Formal documentation;
Monitoring & supervision
.
Good returned
:
Recorded on return and debtors account debited and
A
goods returned voucher
and
credit note
is issued.