Streamline your product sales cycle for accounting

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not every company has the same revenue and collection cycle you could encounter a manufacturer that sells goods on credit a retailer that sells goods for cash or a service provider that doesn't sell goods like a massage therapist thus the auditor needs to get an overview of the various activities that make up a company's revenue and collection cycle let's assume the company is a manufacturer that sells goods on credit the revenue and collection cycle will consist of five steps receiving and processing customer orders approving credit delivering goods and services billing customers and managing accounts receivable and collecting and depositing cash let's examine each step in greater detail step one receiving and processing customer orders the revenue and collection cycle begins with a customer order being entered into the company's system the order can be generated through the company's website through the mail or when a customer walks into the company's business some companies keep a customer master file this is a list of all the customers and their information only certain people should be allowed to make changes to the list of customers in their information this is to prevent employees from adding fictitious customers to the list let's move on to step two of the revenue and collection cycle approving credit if the company makes sales on credit it should have a process for evaluating customers credit worthiness the credit approval process should ensure that the customer is credit worthy because bad credit risks lead to bad debt the customer doesn't exceed the credit limit without approval the customer isn't already delinquent and the customer actually exists the customer master files should be periodically updated so that credit checks are made based on updated information as the company might not want to grant credit to a customer that recently declared bankruptcy auditors can perform exception testing on credit checks by seeing if any customers were granted credit when they had already exceeded their credit limit or didn't meet the qualifications for receiving credit if the company relies on third-party credit credit cards such as visa the risk of non-payment shifts to a third party in exchange for a processing fee this is treated as a cash sale as the company isn't granting credit to the customer and is instead receiving payment from the third party whether the company grants credit or not it is critical for the company to protect customers data improperly handling customers information can result in a lawsuit target had to pay 18.5 million after it was in 2013 and customers credit and debit card information was compromised next we'll cover step three of the revenue and collection cycle delivering goods and services manufacturers typically keep inventory in a warehouse the inventory is transferred to the shipping department when a shipping order has been authorized the chain of custody is important employees should be required to sign forms whenever they receive or release inventory the company would thus know which employee to speak with if inventory were to go missing when a carrier arrives to pick up the inventory for delivery the carrier will sign a form called a bill of lading the carrier is acknowledging receipt of the inventory and that the goods have been shipped a packing slip a form that describes the goods being shipped is usually included with the shipment any shipping documents should be pre-numbered this is a simple internal control that makes it easier to see whether a shipment wasn't recorded or whether a shipment was recorded twice the back order master file should be periodically reviewed this is a list of sales that were initiated but not completed it's possible that these orders have been backordered because inventory isn't in stock but it's also possible that the order was shipped and the shipment wasn't recorded in general the company should always make sure that credit approval or payment has occurred prior to shipping the inventory the right number and type of units are being shipped and the billing department is notified after the goods are shipped so that the customer can be sent an invoice we've now reached step four of the revenue and collection cycle billing customers and managing accounts receivable when a shipment is completed the company should file a shipment record and notify billings so they can send an invoice to the customer the sales invoice is a bill sent to the customer that states the amount due and the payment terms the company should make sure the sales invoice includes authorized prices and terms many companies have a priceless master file that shows the prices for its products unauthorized people shouldn't have access to the price list because they can make price changes that affect customer billings it's common for the auditor to vouch invoices or journal entries for sales to the price list to make sure the prices listed in the invoices match the prices from the price list price lists are updated periodically so it's important to use the price list that was in effect at the time of the sale the auditor could also match pre-numbered shipping documents to related sales invoices open or unmatched transactions should then be investigated make sure the quantity of units billed is the same as the quantity shipped make sure that billing adjustments were made for sales returns allowances and discounts and reconcile the accounts receivable control account total the amount per the accounting books to the sum of customers unpaid balances the amount from the customer database or accounts receivable records upon shipment the company should also record sales revenue provided the terms were fob shipping point and an account receivable the company's accounting system will have a sales journal that shows a list of journal entries for recorded sales each sale should have a shipping reference the auditor should check for entries without shipping references as these could be fictitious sales and make sure that no sales were recorded before the shipping date the auditor can also generate sales reports that show sales by employee by region or by week the goal is to detect any unusual patterns such as an unexplained increase in sales the last week of each period followed by a corresponding decrease in sales the first week of the next period this could indicate channel stuffing hang in there we've almost reached the end of the video the last step of the revenue and collection cycle is collecting and depositing cash the company should deposit checks and cash received from customers on a daily basis the journal entries to record cash receipts should be reflected in a corresponding reduction of the receivable for the correct customer the company can check whether cash is being received and recorded by sending periodic statements to customers as the customer will gladly point out any discrepancies the statement should show the amount the customer is paid and the amount the customer owes a statement should be sent if there was any activity in the customer's account even if the balance is zero and that's it my friends i hope you enjoyed the video