Accounting: The Language of Business (Part 24)

“A good accountant never makes mistakes.” —Unknown

Accounting Systems and Internal Controls

(Part E)

by

Charles Lamson

Manual Accounting System: The Revenue and Collection Cycle

The revenue and collection cycle for NetSolutions consists of providing services on account and collecting cash from customers. Revenues earned on account create a customer receivable and will be recorded in a revenue journal. Customers' accounts receivable are collected and will be recorded in a cash receipts journal.

Internal control is enhanced by separating the function of recording revenue transactions in the revenue journal from recording cash collections in the cash receipts journal. For example, if these duties are separated, it is more difficult for one person to embezzle cash collections and manipulate the accounting records.

Revenue Journal

The revenue journal is used only for recording fees earned on account. Cash fees earned would be recorded in the cash receipts journal. The sale of products is recorded in a sales journal, which is similar to the revenue journal. We will compare the efficiency of using a revenue journal with a general journal by assuming that NetSolutions recorded the following revenue transactions in a general journal:

For these four transactions, NetSolutions recorded eight account titles and eight amounts. In addition, NetSolutions made 12 postings to the ledgers---four to Accounts Receivable in the general ledger, four to the accounts receivable subsidiary ledger (indicated by each check mark), and four to Fees Earned in the general ledger. These transactions could be recorded more efficiently in a revenue journal, as shown in Exhibit 5. In each revenue transaction, the amount of the debit to Accounts Receivable is the same as the amount of the credit to fees earned. Therefore, only a single amount column is necessary. The date, invoice number, customer name, and amount are entered separately for each transaction.

EXHIBIT 5

The basic procedure of posting from a revenue journal is shown in Exhibit 6. A single monthly total is posted to Accounts Receivable and Fees Earned in the general ledger. Each transaction, such as the $2,200 debit to MyMusicClub.com, must also be posted individually to a customer account in the accounts receivable subsidiary ledger. These postings to customer accounts should be made frequently. In this way, management has information on the current balance of each customer's account. Since the balances in the customer accounts are usually debit balances, the three-column account form shown in the exhibit is often used.

EXHIBIT 6 Revenue Journal Postings to Ledgers

To provide a trail of the entries posted to the subsidiary ledger, the source of these entries is indicated in the Posting Reference column of each account by inserting the letter R (for revenue journal) and the page number of the revenue journal. A check mark (✓) instead of a number is often inserted in the Posting Reference column of the revenue journal, as shown in Exhibit 6.

If a customer's account has a credit balance, that fact should be indicated by an asterisk or parentheses in the Balance column. When an account balance is zero, a line may be drawn in the Balance column.

At the end of each month, the amount column of the revenue journal is totaled. This total is equal to the sum of the month's debits to the individual accounts in the subsidiary ledger. It is posted in the general ledger as a debit to accounts receivable and a credit to fees earned, as shown in Exhibit 6. The respective account numbers (12 and 41) are then inserted below the total in the revenue journal to indicate that the posting is completed as shown in Exhibit 6. In this way, all of the transactions for fees earned during the month are posted to the general ledger only once---at the end of the month---greatly simplifying the posting process.

Cash Receipts Journal

All transactions that involve the receipt of cash are recorded in a cash receipts journal. Thus, the cash receipts journal has a column entitled Cash Dr., as shown in Exhibit 7. All transactions recorded in the cash receipts journal will involve an entry in the Cash Dr. column. For example, on March 28 NetSolutions received cash of $2,200 from MyMusicClub.com and entered that amount in the Cash Dr. column.

EXHIBIT 7 Cash Receipts Journal and Postings

The kinds of transactions in which cash is received and how often they occur determine the titles of the other columns. For NetSolutions, the most frequent source of cash is collections from customers. Thus, the cash receipts journal in Exhibit 7 has an Accounts Receivable Cr. column. On March 28, when MyMusicClub.com made a payment on its account, NetSolutions entered MyMusicClub.com in the Account Credited column and entered 2,200 in the Accounts Receivable Cr. column.

The other Accounts Cr. column in Exhibit 7 is used for recording credits to any account for which there is no special credit column. For example, NetSolutions received cash on March 1 for rent. Since no special column exists for rent revenue, NetSolutions entered the rent revenue in the Account Credited column and entered 400 in the Other Accounts Cr. column.

Postings from the cash receipts journal to the ledgers of NetSolutions are also shown in Exhibit 7. This posting process is similar to that of the revenue journal. at regular intervals, each amount in the Other Accounts Cr. column is posted to the proper account in the general ledger. The posting is indicated by inserting the account number in the Posting Reference column of the cash receipts journal. The posting reference CR (for cash receipts journal) and the proper page number are inserted in the Posting Reference columns of the accounts.

The amounts in the Accounts Receivable Cr. column are posted individually to the customer accounts In the accounts receivable subsidiary ledger. These postings should be made frequently. The posting reference CR and the proper page number are inserted in the Posting Reference column of each customer's account. A check mark is placed in the Posting Reference column of the cash receipts journal to show that each amount has been posted. None of the individual amounts in the Cash Dr. column is posted separately.

At the end of the month, all of the amount columns are totaled. The debits should equal the credits. Because each amount in the Other Accounts Cr. column has been posted individually to a general ledger account, a check mark is inserted below the column total to indicate that no further action is needed. The totals of the Accounts Receivable Cr. and Cash Dr. columns are posted to the proper accounts and the general ledger, and their account numbers are inserted below the totals to show that the postings have been completed. 

Accounts Receivable Control and Subsidiary Ledger

After all posting has been completed for the month, the sum of the balances in the accounts receivable subsidiary ledger should be compared with the balance of the accounts receivable controlling account in the general ledger. If the controlling account and the subsidiary ledger do not agree, the error or errors must be located and corrected. The balances of the individual customer accounts may be summarized in a schedule of accounts receivable. The total of NetSolutions' schedule of accounts receivable, $5,650, agrees with the balance of its accounts receivable controlling account on March 31, 2023, as shown below. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., 192-196*

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