Key objectives:
1. Identify the accounts and classes of transactions in the sales and collection cycle. 2. Describe the business functions and related documents and records in the sales and collection cycle. 3. Understand internal control and design appropriate tests of controls and substantive tests of transactions for sales. 4. Understanding the accounting and controls for sales returns and allowances. 5. Understand internal control and design appropriate tests of controls and substantive tests of transactions for cash receipts.
6. Understanding the accounting and controls for write-offs of uncollectible accounts.
1. Introduction to Transactions (Figure 14-1, p. 442 of text)
The accounting for these transactions should be familiar. Sales and cash receipts are examined simultaneously because they are interrelated, and both affect accounts receivables. (Tests applied to each balance/transaction in parentheses.)
|Accounts receivable |
|Beginning |Cash receipts (TOT) |
|balance (PY) |Sales returns |
| |and allowances |
|Sales on | |
|account (TOT) |Bad debt |
| |charge-off |
|Ending | |
|balance (TODB) | |
Sales returns and bad debts are non-cash credits to accounts receivable (TOT and TODB). Both activities and ending balanced are tested using analytical procedures.
2. Documents in the cycle - The attached chart (p. 106-107) can be used to familiarize you with the documents in the cycle when studying Table 14-2 and Table 14-3 in