Professional Diploma in Bookkeeping Cash Receipts

Summary Notes
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PROFESSIONAL DIPLOMA IN BOOKKEEPING
Lesson outcomes By the end of this lesson, you should be able to:
Describe the revenue cycle
Identify the different types of revenue that can be earned.
Describe the various revenue models
Reflect the journals in the accounting records using the Cash Receipts Journal
Identify in which circumstances to grant a discount
Describe the impact of discounts allowed in the accounting records
Practical lesson outcome: The practical outcome is to be able to apply all the skills learnt in
this lesson and the previous one to capture all cash receipts in the cash receipts journal.
Introduction You may have heard the expression; money
makes the world go round. It means that
money is quite important, irrespective of
where you live, your background or even
your beliefs. Everyone needs money,
whether you place any importance on it or
not. You do not get more liquid than cash as
you can use it straight away to make
purchases and settle debt in your personal
capacity, you would be reliant on your
monthly salary to pay the bills and purchase
the necessary items in order to live as
without your income. This task could prove
quite challenging. So, therefore, as a
business owner, you can imagine the value
of receiving cash from your clients or
customers as soon as possible to fund your
operating expenses, which allows you to
continue to do business. Cash flow is one of
the most crucial cycles in business because
as another saying goes, cash is king.
Did you know?
name is Mick Jagger.
It includes four key steps
There may be more steps depending on your specific business model
The main steps include ordering, delivering, billing and settlement
These four steps will apply to all revenue models
The documents required in each step are key to ensuring that the sales process is robust,
which will minimise the risk of fraud, error, and incomplete records
This is important from a financial, as well as an operational perspective as delivering quality
products or services and keeping your customers or clients happy will ultimately result in
creating more financial transactions
This will include a customer or client submitting a request to the business to inquire about
whether there is stock available or whether the service required is offered
Other inquiries include whether the required quantity is available and the cost of the items
From a service perspective, this step would involve looking at the capacity of the business to
deliver the service by looking at the number of hours it would require providing the desired
service and the cost per hour rate
At this point, an order form or quote must be created
Once the order or quote is accepted, the next step is the delivery
Overview of the revenue cycle
1. Ordering
This entails the physical delivery of goods to your customers or the rendering of the service
Requires that there be sufficient stock on hand to fulfil the order or the appropriate capacity to
deliver the service
If you sell face to face or have a physical walk-in store, it is at this point that the customer
would already be in possession of the item prior to making payment
Example: At a restaurant, you would place your order and then receive your food
The delivery methods will vary depending on the type of business
Fulfilling the order creates an obligation on the customer or client to make
payment
This involves creating an invoice
The invoice will contain the same information as the sales order or quote as well as the payment
terms and banking details for customers to effect payment
Depending on the specific business model, the payment terms and methods of payment allowed
will differ
You can request cash up front, cash on delivery, or may extend credit terms, allowing the
customer to settle between seven and thirty days
For types of payments, you may want to only accept cash or allow online secure payments if
comfortable with the service fees
2. Delivery
3. Billing
Requires cash to flow
Whether the payment is made immediately or after a period, the bill must get settled
Example: After having a meal at a restaurant, one would request the check, which must be settled
irrespective of whether you have finished all your food and before you are able to leave the restaurant
The order in which the revenue cycle takes place is flexible
Example: When ordering takeout, one generally makes payment before receiving the food.
The last step in the cycle is where returns of products or any complaints from clients regarding
services will take place, which would warrant a write-off or any other adjustment
Sales order
Sales quote
Invoice, which is the supporting document to prove the sale has taken place
The invoice is a key document for auditors as well as the Revenue Service
Proof of payment received from the customer or client in the form of a receipt
Receipts are vital for protecting your business as well as the customer
These receipts generally take the form of the documents printed by the card machine if paying
using a debit or credit card or can be generated as another form showing the amount remitted
4. Settlement
As part of the finance processes, maintaining various lists are essential to keep track of items
such as customers
This is known as a master list
It is essentially a list of static information pertaining to a list of items such as the name,
address, terms of payment and other contact details of your customers
This information is not expected to change very often, if at all
Another key list is a price list, once this is set, prices should generally not fluctuate often
except to include an inflationary increase year on year
Master lists are efficient
It is a central place containing all the information you need to know about your
customers
It reduces the risks of delivering goods to the incorrect address as this information is pre-
populated and easily accessible for double-checking prior to delivery
If there is a vetting process before adding customers to the master database, there will be
peace of mind knowing you are transacting with trustworthy clients or customers
This also limits the risk of defaulting on payments
Revenue in the income statement
Bank in the balance sheet
Accounts receivable in the balance sheet
Master lists
Accounts impacted
This is closely linked to ensuring you continue to make more and more sales going
forward
It covers the process of managing the relationship with customers or clients and dealing
with customer queries
All interactions with customers are an opportunity to impress and ensure the best
service is delivered to keep them coming back for more
As a rule of thumb is it is generally much easier to retain a customer than to attract one, and it
starts with good service
Types of revenue
A revenue model is one element of the big picture business model
A mechanism of deciding how to generate revenue
Comprises various components:
Cost of products or services
The payment methods you will make available to customers
All these aspects can also be managed electronically using software called the
Revenue Management System
It uses data to make better financial and operational decisions
Revenue models
When considering the value proposition of the business, a key decision is
whether it will be in the form of selling goods or rendering a service
Once this is determined, the core business must be determined
Revenue generated from the core business is classified as operating income
It has been earned in the ordinary course of operating the business
Any income over and above this generated because of other events is known as
non-operating income
To determine whether income is operating or non-operating, the core activities
of the business must be understood
Operating income will be deemed as sales in the income statement
Examples of non-operating income include rental interest and dividends
Example: In Joe's lemonade business, the money earned from the sale of his bottles of fresh
homemade lemonade can be classified as operating income as this is his value proposition. Should he
sell his juicer in the future and make a profit, this would be deemed as non-operating as he is not in
the business of selling juicing machines.
Once the source of operating income is determined, there are various means of earning that
income called revenue streams
This should not be confused with revenue models
A revenue stream is one way of earning revenue, and there could be more than one
revenue stream in a business
A revenue model is a broader umbrella with a focus on managing each of the revenue
streams in a strategic way
There are four key streams:
Transaction based being the sale of goods
Services from rendering services
Recurring from ongoing services or after sales services
It is very important to select your revenue model very carefully
There are many models to choose from
A list of popular revenue streams:
Subscriptions
Leasing
Pay-per-user
Donations
Licensing
Commission
Once ready to recognise revenue, the process of determining whether revenue can when it should
be recognised begins
It starts with whether the transaction meets the definition as well as the recognition criteria
For goods, per the International Accounting Standards number 18, paragraph 14, there
are five key parts that need to be satisfied:
1. Risks and rewards of ownership
2. No managerial involvement
3. Amount reliably measurable
Recognition criteria
The crux of the recognition criteria for goods is the passing of risks and rewards to the customer
and removing all further managerial involvement
This means the seller and business owner, no longer lay any claim to the product
The recognition criteria for services can be found in paragraph 20 of IAS 18:
o Amount reliably measurable
o Stage of completion reliably measurable
The first three recognition criteria are the same as for goods with one extra
requirement that the stage of completion be reliably measurable
This is particularly important for project-based revenue streams with services rendered over a
period
Therefore, it may not be possible to recognise all the revenue upfront
Example: In the case of Mary's delivery business, as soon as she has made a delivery of the flowers, the
service is 100% complete so she can then recognise 100% of the revenue at the billing stage.
Cash receipts journal
It is also known as the book of first entry
It is where cash receipts first enter the accounting records
In this ledger, every transaction with a cash component will be recorded, including owner’s
investments, cash loans from lending institutions and proceeds from the sale of assets
received in cash
Handy for analysing your transactions in terms of assessing how much of the sales is because
of immediate cash receipts as opposed to sales made on credit
CRJ
It can track income from non-operating transactions
At the end of the reporting period, the totals of the CRJ will be posted to the general ledger
It makes the GL less cluttered
As a rule of thumb, businesses will generally have one CRJ per month per bank account
The process is simplistic:
It is triggered with the issuing of the invoice being the supporting document
The journals are captured and then used to update the subsidiary ledger
The totals of the subsidiary ledger are then posted to the general ledger
Date
The layout of the cash receipts journal is not prescriptive
Can include the analysis columns to track cash sales, credit sales and other income
It is a group of accounts similar in nature
The totals of will roll up and be reflected as one value in the master account on
the general ledger
Subsidiary ledgers
Transactions:
1) Joe made cash sales on the 5th of August for $ 4 000 and issued invoice 002
2) A customer F Baker settled her invoice 003 on the 12th of August. The amount owing is $
750
3) The business earned interest on the positive bank balance of $ 100 on the last day of the
month
4) A customer P Jones settled his invoice 004 on the 27th of August. His balance owing is $
900 but Joe granted him a discount of $ 150.
Solution to Weekly Challenge:
Produce all the general journals for the transactions in Exercise 1:
No. Dr/Cr Account Dr
Cr ACC01 Sales 4000
GJ07 Dr ACC05 Cash 750
Cr ACC06 Debtors 750
Dr ACC11 Discount Allowed 150
Cr ACC06 Debtors 900
Debtor P Jones settled his account on 27 Aug and received a discount of $ 100
Cr ACC12 Interest earned 100
Earned interest on positive bank balance
CASH RECEIPTS JOURNAL
Receivable Cash Sales Other
05-Aug 002 Cash sales $ 4 000.00 ACC01 Sales Invoice 002 $ 4 000.00
12-Aug 003 F Baker settled $ 750.00 BAK01 Invoice 003 $ 750.00
27-Aug 004 P Jones settled $ 750.00 JON01 Invoice 004 $ 900.00
31-Aug Bank Statement
Interest earned $ 100.00
An effective trick is to offer discounts to entice customers to buy your products or request your
services
For retention offering discounts to loyal customers is sure to gain loyalty
Good quality and good prices will boost your reputation and ensure you do not
lose any of your customers to competitors
If there is a lot of stock on hand and it is moving very slowly, a sale or substantial
discount will assist
Discounts have an impact on the financial records and need to be reflected in
the books
First reduce revenue as the discount allowed to customers cannot be classified
as sales
The full amount will be recorded against the receivable to clear the customer
balance
The remainder is put to another income statement account to ensure the rules of double-entry
are adhered to
Making sales will attract tax
The tax consequences will vary from country to country and state to state
Ensure you check the laws that will be applicable to your business
If in doubt, always consult with a tax expert
Sales tax is levied at the point of sale
The cost is borne by the customer and then paid over to the Revenue Service by the seller
Discounts allowed
Other considerations
• www.profitwell.com/blog/11-popular-types-of-revenue-models-used-today
References • Blakely-Gray, 2018. What are the types of revenue small business owner's need to
know?. [Online]
Available at:
Available at: https://www.slideshare.net/hcc79/the-revenue-cycle
Available at: https://www.slideshare.net/rachmatfernando/revenue-cycle-47118167
• Indeed, 2020. What is revenue? Definition, types of revenue and examples. [Online]
Available at: https://www.indeed.com/career-advice/career-development/revenue-
Available at: https://bizfluent.com/about-5374277-revenue-cycle.html

Professional Diploma in Bookkeeping Cash Receipts

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