Topic 4: REVENUE AND RECEIPTS CYCLE

Introduction
Students, in the previous topic we discussed the different transaction cycles.
Furthermore, we explained how the internal control system is interlinked and should
be present for a sound system of internal control that adequately addresses the risks
to which an entity's financial reporting is exposed. We will now discuss the transaction
cycle dealing with revenue and receipts.
Richard, Roets, Adams and West (2021:10/3) explain revenue and receipts
transactions. They indicate that this cycle deals with the accounting system and
related internal controls that are put in place to control the sale of the company's goods
or services and the collection of amounts owed regarding those sales.
Some companies receive revenue from fees, interest, dividends, or royalties (see
International Accounting Standard, IFRS 15). Examples of various forms of sales and
services include

• a retail entity selling goods directly to the public (Edgars, Mr Price clothing,
Takealot)

• a wholesale entity selling goods to retailers (Eskort selling processed meat to

Checkers and Pick n Pay, OR Tiger Brands selling shampoo and soap to
Checkers and Pick n Pay)

• a services entity rendering its services to other entities or to members of the public
(Uber Eats delivering food, DHL couriers)

• a mining entity selling minerals it has mined to a refinery or company that will use
it (coal mined sold to Eskom)

• an academic institution rendering academic services to students (Unisa)

• What about a restaurant? A zoo? Or even an airline flying overseas?

Have you noticed that no matter the type of business

entity or the nature of its revenue, if a product is sold or a
service is rendered to a customer, revenue will flow to the
entity?

Based on the accounting description of the revenue and receipts cycle (Richard et al
2021:10/3 & 10/33), the following transactions and balances are included in this cycle:

Statement of financial position Statement of comprehensive

income

Accounts receivable Credit sales (turnover)

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 Sales returns
Discount allowed
Credit losses (bad debts)
Interest received

Cash and cash Cash sales (turnover)

equivalents All receipts (revenue and
other)

We focus in this topic on a trading concern where revenue is earned through buying
and selling goods and services, which can consist of credit sales and/or cash sales.
The aim of this topic is to

• explain and apply the actions, functions and documents in the revenue and
receipts accounting cycle

• explain the risks in this cycle and internal controls applied to mitigate those
risks

• discuss internal control over revenue transactions in a computerised

environment
This topic is divided into the following lessons:

Lessons Title

4.1 Credit sales

4.1.1 Activities and functions in the cycle

4.1.2 Documents used in the cycle

4.1.3 Risks and internal control in the cycle

4.1.4 Computerisation of the cycle

4.1.5 The role of other components of internal control in

the revenue and receipts cycle

4.2 Cash sales

4.2.1 Stages of a cash sale

4.2.2 Risks and internal control over a cash sale

The learning outcomes of this topic are as follows:

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 Learning outcomes
Lesson
Level

4.1 Credit sales • Describe credit sales transactions by referring to 2

the activities, functions and documents associated
with these transactions.

• Identify and explain the risks associated with credit 2

sales transactions and explain and apply the
internal controls that could be implemented to
mitigate the risks.

• Describe and apply internal control in a 2

computerised environment for credit sales
transactions.

4.2 Cash sales • Describe cash sales transactions by referring to 2

the activities, functions and documents associated
with these transactions.

• Identify and explain the risks associated with cash 2

sales transactions.

• Describe and apply the internal controls that could 2

be implemented to mitigate the risks.

LESSON 4.1 CREDIT SALES

INTRODUCTION

4.1.1 Activities and functions in the cycle

Although revenue and receipts systems can vary considerably, Richard et al
(2021:10/6–10/9) describe a system for a business that has conventional revenue and
receipts functions. Note that the functions for credit sales also include the collection of
payments from accounts receivable (trade debtors) and returns. Richard et al
(2021:10/9-10/11) present a flow chart of the cycle for a manual system.

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 STUDY
• Richard et al (2021:10/3–10/11)

Why do you think a company, such as a car dealership, will allow

its customers to buy from it on credit, given the possibility that
they will not settle their debts?

Click on the link below to watch a video of the revenue cycle overview.
https://www.youtube.com/watch?v=Tb0ZZUL_tHk

ACTIVITY 1

Rearrange the following functions in a credit sales transaction in the correct order and
provide a brief explanation of each:

1 Invoicing
2 Credit management
3 Warehouse/despatch
4 Receiving and recording payment from debtors
5 Order department
6 Recording sales and raising the debtor

4.1.2 Documents used in the cycle

The documents in the revenue and receipts transaction cycle, as stated in Richard et
al (2021:10/5-10/6), cover each function in the process including the accounting
records, such as a sales journal, debtors ledger and the general ledger (debtors
control account). These records are usually maintained in the accounting department.

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There are various software packages available which companies can use to manage
their accounting records along with creating the necessary documents. Search for
these software packages on the internet.

STUDY
• Richard et al (2021:10/5-10/6)

After you have studied the documents of the revenue and receipts cycle in your
textbook, complete the following activities where you are expected to search for
examples of these documents on the internet. In your own time you can also search
for examples of the other documents in the cycle to ensure that you know what the
documents look like as they are used in business.

ACTIVITY 2
Do an internet search for an example of a delivery note. Have you noticed that the
item prices are not always displayed on the delivery note? What do you think is the
reason for this?

ACTIVITY 3

Match the documents explained in your textbook to the different functions in the
revenue and receipts cycle mentioned in activity 1.

ACTIVITY 4

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The Consumer Protection Act 68 of 2008, which came into effect on 1 April 2011,
lays down in section 26(3) the following minimum requirements that should be stated
on sales documentation:

1. the supplier's full name, or registered business name, and VAT registration
number, if any
2. the address of the premises at which, or from which, the goods or services were
supplied
3. the date on which the transaction occurred
4. a name or description of any goods or services supplied or to be supplied
5. the unit price of any particular goods or services supplied or to be supplied
6. the quantity of any particular goods or services supplied or to be supplied
7. the total price of the transaction, before any applicable taxes
8. the amount of any applicable taxes
9. the total price of the transaction, including any applicable taxes

REQUIRED
Indicate in which respects the following tax sales invoice does not meet the minimum
requirements as stipulated in the Consumer Protection Act:

TAX INVOICE INV 772

COPRO LIMITED Date: 31 August 20xx

To: Customer A
PO Box A
Durban
4001

Description Total

No XL001 Stapler 2 430,00

No 1185 Paper 49 200,00

No 2.1 Pencils 2 100,00

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Subtotal 53 730,00
VAT 7 522,22
Total 61 252,20

ACTIVITY 5
Search for examples of an order form, delivery note and tax invoice issued by a
company for goods sold by the company.
Indicate which of the information shown on the above documents demonstrates that
the control objectives for financial reporting have been addressed.
Now you can create your own invoice. Go to https://templates.office.com/en-za/sales-
invoice-tm10072676 and create an invoice.

4.1.3 Risks and internal control in the cycle

Risks associated with each of these functions are mentioned in your prescribed
textbook (Richard et al 2019:10/12–10/19; 10/35-10/36) as well as internal controls
(control activities) that could be implemented to mitigate the risks.

STUDY

• Richard et al (2021:10/12–10/19; 10/35-10/36)

Control objectives in the cycle

An entity should avoid the risks faced in the revenue and receipts cycle described in
Adams et al (2019:10/11–10/20; 10/36); otherwise, the revenue and receipts
transactions recorded in the accounting records might be invalid, inaccurate or
incomplete. Therefore, as you learnt in topic 2, application controls are implemented
by the entity to ensure that revenue and receipts transactions are valid, accurate and
complete.

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Can you remember the control objectives? Refer to 2.2.6 in topic 2.
What will the consequence be if a control objective is not achieved for a revenue
transaction? Let’s look at an example.
Example
Fictitious sales are recorded in the financial records. Therefore, the objective of validity
will not be achieved. Revenue will be overstated.

What reasons would a company have to overstate or

understate its revenue?

What personal interest do you think a director of an entity

may have in manipulating revenue?

The control objectives mentioned in 2.2.6 in topic 2 are achieved by implementing an

information system and related internal controls (see Richard et al (2021:10/19-
10/21)). The control objectives can either be achieved manually, where a person
performs the internal control, or automated, where the computer performs the control.
Can you design a process of internal control? Refer to 2.2.6 in topic 2 where we
explained this in detail. Follow these steps to design a process of internal control
relating to the revenue and receipts cycle.

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 • Identify the risks: Indicator and consequence
• e.g. sales are made to customers that are not
Step 1 creditworthy, resulting in bad debt.

• Formulate control control objectives for all

business transactions:
• Validity: Authorised; occured during period
with supporting documentation
• Accuracy: Correct amount and account and
summarised to accounting records
Step 2 • Completeness: All sales recorded promptly,
no omission
• e.g. credit sales are made only to
creditworthy customers (validity)

• Design a system of appropriate internal

Step 3 controls

Diagram 4.1: Design of internal control

Click on the link below to watch a video to help you understand the relationship
between weaknesses, risks and internal controls.

https://web.microsoftstream.com/video/7a82e27a-7771-48cf-9f2a-c910510c3a71

Read the news extract below and spend some time reflecting on
the following question:
Design a system of internal control by using the steps discussed
above to avoid the premature recognition of revenue.

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News extract
Extract from Business Tech, 29 July 2020

JSE fines EOH R5 million for false and misleading reporting

Source: https://businesstech.co.za/news/it-services/420538/jse-fines-eoh-r5-
million-for-false-and-misleading-reporting/

ACTIVITY 6

Answer the following questions regarding the order department of a trading concern
that sells goods on credit (credit sales):
1. Give a system description of the activities in the order department.
2. Name the documents usually encountered in an order department.
3. Explain the control risks that can exist in an order department.
4. Describe the internal controls (control activities) that can be implemented to
mitigate the risks in an order department.

ACTIVITY 7

1. Describe the internal controls that can be implemented to minimise the following
risks associated with credit sales transactions:

• Goods may be removed from the inventory warehouse for

fictitious/unauthorised sales.

• Incorrect goods or quantities could be despatched.

• Goods despatched may not be invoiced.

• Invoices could be duplicated in the sales journal.

• Payments received from customers may not be deposited in the bank due
to theft or carelessness.

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2. Name the internal control objective(s) for financial reporting affected by each of
the risks mentioned in 1 above.

Present your answer in a table.

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4.1.4 Computerisation of the cycle

Richard et al (2021:10/19-10/32) describe an integrated manual and computerised

credit sales system of transactions entered and processed in real time.
You must recap 2.3.1 General controls and 2.3.2 Application controls in topic 2 before
you start this section.

STUDY
• Richard et al (2021:10/19–10/32)
Did you notice that the revenue and receipts transaction automation follows the same
steps as the manual transaction?

ACTIVITY 8
Search for an example of a debtors masterfile online. Answer the following
questions:
1. Describe the application controls that should be present in a computerised
environment to ensure that only authorised amendments are made to the
debtors masterfile in a credit sales accounting system.
2. For each of the objectives of control, mention things that could go wrong (risks)
if there are no application controls over amendments to the debtors masterfile.

ACTIVITY 9

1. Explain what the term "real time" means and what the effect on the application
control of batching will be.

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2. Describe the application controls that should be present to ensure that orders
received from customers are accurately entered into the computerised credit
sales system.

Use the framework described in 2.3.1 and 2.3.2 in topic 2 to answer the question.

Computer technologies used in the cycle

Companies and organisations may apply various computer technologies in the
revenue and receipts cycle.
Read the following sections in your textbook for examples:

Electronic messaging system

STUDY
• Richard et al (2021:9/21–9/26)

Electronic funds transfer (EFT)

STUDY
• Richard et al (2021:9/26–9/29)

Trading on the internet

Richard et al (2021:9/30) state that many organisations have decided to sell their
products over the internet, providing them with a wider platform to market and sell their
products.

Can you identify the risks that may arise when trading on the
internet?

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 Can you identify the controls that should be implemented to
address the risks identified?

STUDY
• Richard et al (2021:9/29–9/33)

Point of sale system and barcode scanning

A point of sale system (POS), also referred to as a checkout system, typically consists
of an electronic cash register (either a till or a computer, or a till connected to a
computer), a barcode scanner connected to the cash register and a software
application loaded on the till/computer.
Have you ever bought goods from a store like Checkers or clothes from Mr Price or
Ackermans and wondered how the cashier obtains the price form on the screen of the
till/computer?
The shops normally use a barcode scanning facility where the cashier will scan the
barcode of a customer's selected items at the till with either a handheld or fixed
barcode scanning device.
How is the correct price displayed on the till screen?
The till is linked to the price list masterfile in the store's computer system in order to
display the price of the product on the till screen. Furthermore, the scanner is also
linked to the inventory masterfile in order to display the product's description. A receipt
with the product's price and description can be printed for the customer, and the
transaction recorded in the correct amount.

M-commerce
Richard et al (2021:9/3-9/4) state that mobile applications are becoming an alternative
and very lucrative sales channel.
Mobile commerce (m-commerce) is any business transaction which is initiated by
using a mobile device, such as a cellphone. It is buying and selling goods and services
through a wireless handheld device. An example of m-commerce is Takealot locally
and Amazon internationally. Customers can purchase goods using applications that
online retailers make available for download.
“In 2020 COVID-19 propelled mobile usage forward — achieving growth that would
have otherwise taken 2 to 3 years," comments Lexi Sydow, Sr Market Insights
Manager, App Annie. UK retail sales on mobile were up 30% compared to Q1 2020
and 25% stronger than the pre-COVID Q4 2019, as online users increasingly go
mobile.

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Globally, mobile is driving the consumers’ shift to online with shoppers spending an
impressive 1.6 trillion hours on their mobiles in 2020 – and producing growth in m-
commerce that would have taken "three to four years" under normal circumstances.
The same risks and controls that apply to trading on the internet as set out in your
textbook (Richard et al 2021:9/29–9/33) apply to m-commerce.

STUDY
• Richard et al (2021:9/3–9/6), sections 9.1.3.1 and 9.1.3.4

• Richard et al (2021:9/29–9/33)

Can you identify the risks of m-commerce?

What control measures should a company put in place to

prevent the information keyed in by the customer from being
inaccurate or incomplete, resulting in orders which cannot be
filled?

4.1.5 The role of other components of internal control

in the revenue and receipts cycle
We focused in 4.1.3 on the control activities and in 4.1.4 on the information system
components of internal control. How are the other components of internal control
affected? Read the following section to see how.

STUDY
• Richard et al (2021:10/35–10/36)

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SUMMARY
In this lesson we explained and applied the actions, functions and documents of credit
sales transactions. The risks and internal control in credit sales were also explained
and applied, as well as internal control over credit sales transactions in a computerised
environment.

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LESSON 4.2 CASH SALES
INTRODUCTION
Cash sales transactions occur daily in many business entities. Cash transactions carry
a high risk of fraud and theft, over which management should implement a strict
system of internal control (Richard et al 2021:10/3 & 10/32-10/35).

4.2.1 Stages of a cash sale

In a cash sales transaction, payment is received from the customer when the goods
are supplied to the customer. In broad terms, a cash sales transaction follows the
same process as a credit sales transaction.

STUDY
• Richard et al (2021:10/33) section 9.2

4.2.2 Risks and internal control over a cash sale

As stated in Richard et al (2021:10/32), the main risk associated with cash sales
transactions is theft. This risk is increased in smaller businesses which do not always
have the resources to implement the necessary internal controls.

STUDY
• Adams et al (2019:10/32–10/35) sections 9.1 and 9.3

ACTIVITY 10

The following are a few things that can go wrong with cash sales transactions:

1. Cash sales could be recorded but the cash is not deposited in the cash register
drawer.
2. Cash could be received from customers, but the cash sales transactions are not
recorded.
3. Cash could be stolen after the cash register is "cashed up" for the day.

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4. Customers could leave without paying for goods taken.
5. An armed robbery could take place, resulting in cash stolen from cash registers.

REQUIRED
Describe the internal controls that could be implemented to mitigate these risks.

You can now attempt the self-assessment questions on myUnisa under the online
assessment tab.

SUMMARY
In this lesson you learnt about the stages of a cash sale transaction, as well as the
risks associated with cash sales. The internal controls over cash sales transactions
were also explained and applied.

CONCLUSION
In this topic, Revenue and receipts cycle, we explained and applied the activities,
functions and documents in the revenue and receipts cycle. The risks and internal
control in this cycle were also explained and applied, as well as internal control over
credit sales transactions in a computerised environment. Furthermore, we discussed
what computer technologies are used in the cycle. The topic concluded with cash
sales.

In the next topic we will explain and apply the acquisitions and payments business
cycle, as well as the applicable internal controls in the cycle.

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