TRANSACTION CYCLES
Accounting 531
Lecture and Study Notes (October 2021)
REVENUE AND COLLECTION CYCLE
The revenue cycle involves accounting transactions resulting from economic events that produce
revenue for the accounting entity. The major events occurring in the revenue cycle are:
A. Receiving an order from a customer.
B. Delivering goods or services to the customer.
C. Requesting payment from the customer.
D. Receiving the payment.
For many businesses, sales are made on credit and thus, objectives for the revenue cycle include
control of debtors as well. For trading concern, the classes of transactions in the revenue and
collection cycle involve:
A. Sales, both in cash and on credit.
B. Sales adjustments such as discounts, returns and allowances and uncollectible accounts
provisions and write offs.
C. Cash receipts, both cash sales and collections on accounts.
The following are the typical accounts affected by the revenue and collection cycle:
A. Sales.
B. Accounts receivable and notes receivable.
C. Sales returns and allowances and sales discount.
D. Cash in bank for the debits in the account.
E. Allowance for uncollectible accounts.
F. Uncollectible accounts expense.
G. Merchandise inventory or finished goods inventory.
DOCUMENTS USED IN THE CYCLE
Documents used by companies in revenue and collection cycle vary depending in a company’s
nature of business, size and style of operation. The following are the important documents and
records typically used in the revenue and collection cycle:
A. Customer’s purchase order – a request for merchandise by a customer. It may be received
by telephone, letter, a printed form that has been sent to prospective and existing customers,
through salespeople, or in other ways.
A written purchase order from a customer provides evidence that a customer actually ordered
the goods. Purchase order numbers are generally recorded on sales invoices so that the
auditor can determine the purchase order to which an invoice relates. Sellers generally
maintain a file of each customer’s purchase orders.
B. Sales order – a pre-numbered document for recording the description, quantity, and related
information for goods ordered by a customer. This is frequently used to show credit approval
and authorization for shipment.
A sales order contains a seller’s understanding of the sales terms. A seller should account for
the numerical sequence to help ensure that shipments are made for sales orders and that all
sales are billed.
C. Shipping document or bill of lading – a pre-numbered document prepared to initiate
shipment of the goods, indicating the description of the merchandise, the quantity shipped, and
other relevant data.
The signature of the carrier or the customer on the bill of lading provides externally created
evidence that the goods have been shipped. Sellers should account for the numerical
, A sales invoice indicates credit terms, shipping terms and price charged for merchandise.
Sellers should account for the numerical sequence to help ensure that all sales are recorded.
E. Credit memo – a pre-numbered document indicating a reduction in the amount due from a
customer because of the returned goods or an allowance granted. It often takes the same
general form as a sales invoice, but it supports reductions in accounts receivable rather than
increases.
A credit memo provides evidence that a seller has reduced the amount previously billed to a
customer. Sellers should account for the numerical sequence to help ensure that all credit
memos are recorded.
F. Remittance advice – a document that a customer attaches to a check in payment of an
invoice. The document may be a turnaround document, a part of a check, or a statement
identifying the invoices being paid. Remittance advices facilitate recording cash receipts. If a
customer does not return remittance advice, the employee opening the mail generally prepares
one.
A remittance advice usually indicates the date and amount of payment and the invoices paid.
Sellers generally file remittance advices by date.
G. Uncollectible account authorization form – a pre-numbered document used internally,
indicating authority to write an account receivable off as uncollectible.
The document provides evidence that all accounts receivable written off were authorized.
H. Monthly statement – a document sent to each customer indicating the beginning balance of
accounts receivable, the amount and the date of sale, cash payments received, credit memos
issued and ending balance due.
The document provides evidence that customers are updated of their remaining balance due
to the seller.
ACCOUNTING RECORDS USED IN THE CYCLE
In revenue and collection cycle, several accounting records are used. For every sales or collection,
some or all of the accounting records should be updated. The following are the accounting records
usually used in revenue and collection cycle:
A. Sales journal – a journal for recording sales transactions. A detailed sales journal includes
each sales transaction. It usually indicates gross sales for different classifications, such as
product lines, the entry to accounts receivable, and miscellaneous debits and credits. The
sales journal can also include sales return and allowances transactions.
B. Sales returns and allowances journal – a journal used to record returns of goods or
adjustment to invoice prices.
C. Cash receipts journal – a journal used to record all transactions for which a special journal
has not been created (example: estimate of uncollectible accounts expense and write off of
accounts identified as uncollectible.
D. Accounts receivable master file or subsidiary ledger – a file for recording individual sales,
cash receipts, and sales returns and allowances for each customer and maintaining customer
account balances.
E. Accounts receivable trial balance – a listing of the amount owed by each customer at a point
in time. This is prepared directly from the accounts receivable master file.
Accounting 531
Lecture and Study Notes (October 2021)
REVENUE AND COLLECTION CYCLE
The revenue cycle involves accounting transactions resulting from economic events that produce
revenue for the accounting entity. The major events occurring in the revenue cycle are:
A. Receiving an order from a customer.
B. Delivering goods or services to the customer.
C. Requesting payment from the customer.
D. Receiving the payment.
For many businesses, sales are made on credit and thus, objectives for the revenue cycle include
control of debtors as well. For trading concern, the classes of transactions in the revenue and
collection cycle involve:
A. Sales, both in cash and on credit.
B. Sales adjustments such as discounts, returns and allowances and uncollectible accounts
provisions and write offs.
C. Cash receipts, both cash sales and collections on accounts.
The following are the typical accounts affected by the revenue and collection cycle:
A. Sales.
B. Accounts receivable and notes receivable.
C. Sales returns and allowances and sales discount.
D. Cash in bank for the debits in the account.
E. Allowance for uncollectible accounts.
F. Uncollectible accounts expense.
G. Merchandise inventory or finished goods inventory.
DOCUMENTS USED IN THE CYCLE
Documents used by companies in revenue and collection cycle vary depending in a company’s
nature of business, size and style of operation. The following are the important documents and
records typically used in the revenue and collection cycle:
A. Customer’s purchase order – a request for merchandise by a customer. It may be received
by telephone, letter, a printed form that has been sent to prospective and existing customers,
through salespeople, or in other ways.
A written purchase order from a customer provides evidence that a customer actually ordered
the goods. Purchase order numbers are generally recorded on sales invoices so that the
auditor can determine the purchase order to which an invoice relates. Sellers generally
maintain a file of each customer’s purchase orders.
B. Sales order – a pre-numbered document for recording the description, quantity, and related
information for goods ordered by a customer. This is frequently used to show credit approval
and authorization for shipment.
A sales order contains a seller’s understanding of the sales terms. A seller should account for
the numerical sequence to help ensure that shipments are made for sales orders and that all
sales are billed.
C. Shipping document or bill of lading – a pre-numbered document prepared to initiate
shipment of the goods, indicating the description of the merchandise, the quantity shipped, and
other relevant data.
The signature of the carrier or the customer on the bill of lading provides externally created
evidence that the goods have been shipped. Sellers should account for the numerical
, A sales invoice indicates credit terms, shipping terms and price charged for merchandise.
Sellers should account for the numerical sequence to help ensure that all sales are recorded.
E. Credit memo – a pre-numbered document indicating a reduction in the amount due from a
customer because of the returned goods or an allowance granted. It often takes the same
general form as a sales invoice, but it supports reductions in accounts receivable rather than
increases.
A credit memo provides evidence that a seller has reduced the amount previously billed to a
customer. Sellers should account for the numerical sequence to help ensure that all credit
memos are recorded.
F. Remittance advice – a document that a customer attaches to a check in payment of an
invoice. The document may be a turnaround document, a part of a check, or a statement
identifying the invoices being paid. Remittance advices facilitate recording cash receipts. If a
customer does not return remittance advice, the employee opening the mail generally prepares
one.
A remittance advice usually indicates the date and amount of payment and the invoices paid.
Sellers generally file remittance advices by date.
G. Uncollectible account authorization form – a pre-numbered document used internally,
indicating authority to write an account receivable off as uncollectible.
The document provides evidence that all accounts receivable written off were authorized.
H. Monthly statement – a document sent to each customer indicating the beginning balance of
accounts receivable, the amount and the date of sale, cash payments received, credit memos
issued and ending balance due.
The document provides evidence that customers are updated of their remaining balance due
to the seller.
ACCOUNTING RECORDS USED IN THE CYCLE
In revenue and collection cycle, several accounting records are used. For every sales or collection,
some or all of the accounting records should be updated. The following are the accounting records
usually used in revenue and collection cycle:
A. Sales journal – a journal for recording sales transactions. A detailed sales journal includes
each sales transaction. It usually indicates gross sales for different classifications, such as
product lines, the entry to accounts receivable, and miscellaneous debits and credits. The
sales journal can also include sales return and allowances transactions.
B. Sales returns and allowances journal – a journal used to record returns of goods or
adjustment to invoice prices.
C. Cash receipts journal – a journal used to record all transactions for which a special journal
has not been created (example: estimate of uncollectible accounts expense and write off of
accounts identified as uncollectible.
D. Accounts receivable master file or subsidiary ledger – a file for recording individual sales,
cash receipts, and sales returns and allowances for each customer and maintaining customer
account balances.
E. Accounts receivable trial balance – a listing of the amount owed by each customer at a point
in time. This is prepared directly from the accounts receivable master file.
