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What Is The Sales and Collection Cycle

The Sales and Collection Cycle involves recording sales transactions that debit accounts receivable and credit sales revenue, and collecting cash that debits cash and credits accounts receivable. It includes additional transactions like returns, allowances, write-offs, and bad debts. The cycle typically begins with a customer purchase order, followed by credit approval, shipping, invoicing, and cash receipt recording. Key internal controls relate to segregation of duties, pre-numbered documents, monthly statements, and exception reporting. Confirmations sent to customers are a common test to verify account balances.

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122 views

What Is The Sales and Collection Cycle

The Sales and Collection Cycle involves recording sales transactions that debit accounts receivable and credit sales revenue, and collecting cash that debits cash and credits accounts receivable. It includes additional transactions like returns, allowances, write-offs, and bad debts. The cycle typically begins with a customer purchase order, followed by credit approval, shipping, invoicing, and cash receipt recording. Key internal controls relate to segregation of duties, pre-numbered documents, monthly statements, and exception reporting. Confirmations sent to customers are a common test to verify account balances.

Uploaded by

sajiah
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What is the Sales and Collection Cycle?

The Sales and Collection Cycle, also known as the Revenue, Receivables,
and Receipts (RRR) Cycle, is comprised of various classes of transactions.
The sales class and receipts class of transactions are the typical journal
entries that debit accounts receivable and credit sales revenue, and debit
cash and credit accounts receivable, respectively. These are the recording of
the sales and cash collection of the sale.

Additionally, there are other classes of transactions in the sales and


collection cycle that include sales returns and allowances, debit sales
returns, credit accounts receivable, write-offs of uncollectible receivables
(debit allowance for doubtful accounts, credit accounts receivable), and bad
debt expenses (debit bad debt expense and credit allowance for doubtful
accounts). We focus here on the more common journal entries.

Important Business Functions and Related Documents

Although many companies follow different internal processes and use more
electronic-based methods, the following flowchart is a typical business
process in the sales and collection cycle.

The process usually begins when a customer approaches the company and
files a customer purchase order. The sales department receives the
document and prepares a sales order that is then sent to the credit
department for a credit check. Remember that salespeople will not perform
credit checks because their position as a salesperson may impact their
credit decisions on customers. This is called segregation of duties.
Once the credit department approves the customer and the order, the sales
order is sent to the shipping department, which will generate a shipping
document, also referred to as a bill of lading or a waybill. The approved
sales order and the shipping document are then sent to the accounts
receivable clerk, who then generates a sales invoice and makes the
necessary journal entry. And finally, once the cash is received from the
customer, accounting or treasury records the credit to cash and debits the
balance in accounts receivable.

Internal Controls for Sales Class of Transactions

Remember that for classes of transactions, there are five


applicable assertions: cut-off, classification, completeness, occurrence,
and accuracy. An internal control pertaining to the occurrence assertion is
that each sales transaction is supported by the necessary documents, such
as the approved sales order, shipping documents, and invoice.

Other internal company controls include requiring approval for selling


goods to new customers, sending out monthly statements to customers,
complaints received being independently followed up, and reviewing
exception reports that include large or unusual sales transactions.

In terms of the completeness assertion, shipping documents are typically


sequentially pre-numbered so that any duplicate transaction or a missing
transaction can be properly accounted for. Whether the sales transaction
actually occurred usually involves backward testing. This means that the
auditor will first look at the financial statements/ledger and trace the sale
back to its source documents to see if they are genuine. Completeness
testing, however, is the opposite. The auditor will start from the source
documents and confirm whether all transactions are fully recorded on the
ledger.

Internal Controls for Cash Receipts

Some internal controls for the cash receipts class include the segregation of
duties between the cash handler and the record-keeper, and monthly bank
reconciliations. These two controls pertain mainly to the occurrence
assertion. In terms of the completeness assertion, monthly customer
statements are a strong control, as well as the use of remittance invoices or
pre-listing of cash, and the reconciliation of the documents with deposit
slips.

Confirmations as Tests of Details of Balances

Remember that substantive tests comprise substantive analytical


procedures and tests of details of balances. Analytical procedures include
trend and ratio analyses and, for accounts receivable, it typically includes
analysing accounts receivable turnover numbers or the number of days
sales in accounts receivable and their trends and relationship with industry
numbers. Tests of details of balances for accounts receivable are most
commonly confirmations. They include confirmation letters sent to
customers to verify whether the balance on the ledger is correct. There are
two types of confirmations: positive and negative.

Positive     Negative

Type A Type B

Requests that the customer Asks the customer to indicate the Requests that th
respond whether or not the amount owed at a certain date if the customer
balance is correct (i.e. fill in the blank) amount in the le

Requests that the customer Higher quality evidence but Lower quality
respond whether or not the usually has a lower response rate confirmations
balance is correct
More common approach,
usually has a better response
rate
 

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