Identify the accounts and the classes
of transactions in the sales and
collection cycle.
ACCOUNTS AND CLASSES OF TRANSACTIONS IN
THE SALES AND COLLECTION CYCLE
There are five classes of transactions in the sales
(presumptive fraud risk) and collection cycle:
1. Sales (cash and sales on account)
2. Cash receipts
3. Sales returns and allowances
4. Write-off of uncollectible accounts
5. Estimate of bad debt expense
Largest P/L and subjectivity/estimate.
Sales on Credit/cash
Oct. 1 Account Receivable/cash 50,000
Sales 50,000
Cash Receipt
Nov 1 Cash 20,000
Account Receivable 20,000
Nov 6 Sales Returns and Allowance 50,000
Account Receivable 50,000
Nov 25 Allowance for Bad Debt 1,000
Account Receivable 1,000
Dec 31 Bad Debt Expense 2,000
Allowance for Bad Debt 2,000
BUSINESS FUNCTIONS IN THE CYCLE AND
RELATED DOCUMENTS AND RECORDS
There are eight business functions within the sales and collection
cycle:
1. Processing customer orders; email, telephone, fax, phone, purchase order
Sales order (prenumbered helps completeness and existence).
Shipping, billing, and Accounting.
2. Granting credit:
Is this an approved customer. Should we sell to?
Good control. Allowance for bad debt
Computer might process this step after checking customer balance and credit
limit.
3. Shipping goods:
Company gives up the asset. shipping document (prenumbered helps
completeness and existence. Bill the customer! Billing and accounting and
customer.
***Electronic shipping documents may generate the related sales invoices and
BUSINESS FUNCTIONS IN THE CYCLE AND
RELATED DOCUMENTS AND RECORDS
4. Billing/accounting department: Bills customers and create a
new serially number sales invoice. Customer and Accounting
Billing/accounting role is important: (matching of documents,
shipping, order, invoice also check arithmetic, pricing,
discounts so on)
A. All shipment made are billed (completeness)
B. No shipment has been billed more than once (occurrence)
C. Each customer is billed for the proper amount (accuracy)
A/R is created based on matching documents received from
various sources. Sales journal is updated,
++++At this point goods are shipping and customer is billed+++
BUSINESS FUNCTIONS IN THE CYCLE AND
RELATED DOCUMENTS AND RECORDS
5. Processing and recording cash receipts: Risk: Theft. Remittance advice
record of cash received. If none, create one.
Prelisting of cash receipts: prepared by someone with no record keeping
responsibilities. Verified that cash was received. A/R notified to update record
and general accounting
Lockbox system is an alternative or EFT
Cash Receipts Transaction File: includes all cash receipts transactions processed by
the accounting system for a period such as a day, week. Same as Sales transaction
file.
Cash Receipts Journal or Listing
generated from the cash receipts transaction file and includes all transactions for a time period. The
same transactions, including all relevant information, are included in the accounts receivable master
file and general ledger.
BUSINESS FUNCTIONS IN THE CYCLE AND
RELATED DOCUMENTS AND RECORDS
6. Processing and recording sales returns and allowances:
Company prepares a receiving report (serially numbered) for returned goods
and returns them to storage.
Recorded in the sales returns and allowances transaction file, as well as the
accounts receivable master file.
Credit memos are issued for returns and allowances to aid in maintaining
control and to facilitate record keeping. supports reductions in accounts
receivable rather than increases.
BUSINESS FUNCTIONS IN THE CYCLE AND
RELATED DOCUMENTS AND RECORDS
7. Writing off uncollectible accounts receivable:
Uncollectible authorization form (serially number)
issued based on company’s guidelines; customer
bankruptcy, over 180 days past due, turned to
collection agency
8. Providing for bad debts:
Companies cannot expect to collect on 100% of
their sales, Comply with matching principle. Most
companies record this transaction at the end of
each month or quarter. General Journal
