PART FIVE
Revenue and Receivables
Choose an organization you know well, and ideally one where you can speak with someone involved in its accounting. Your own current workplace is a natural first choice; if you work for a large company, you can probably just focus on one small part of it, but it will need to have a sales function. You could also choose a local church, school, or other organization where you know someone who knows something about their reporting. If you don’t see an obvious choice, ask a friend or colleague who works in accounting or runs a business, or who might know someone who does.
- Describe the organization you are examining. What are their ongoing major or central operations? For a for-profit organization, this determines the inflows that represent revenue, and the outflows that represent costs of sales. For a not-for-profit organization, this represents their mission.
- Pick up to three of the following questions to ask of the accounting representative in the organization you are highlighting. You should plan to write approximately one- or two-pages total. I encourage you to devote your attention to the questions that are most interesting to you.
• Do you ever have trouble determining whether a payment you receive is actually revenue, rather than some other form of income, like proceeds from a disposition? How do you resolve this issue?
• Are you facing challenges in any of the five steps of revenue recognition? Is it hard to know when you have an enforceable contract, whether performance obligations are distinct, what the transaction price is, how to allocate it, or when you have successfully delivered on their obligations? What causes the challenge and how do you address it?
• Does the firm offer substantial discounts, or experience many returns? Does this cause challenges in reporting gross and net sales? How do you address these?
• Do you have significant accounts receivable that ultimately aren’t paid? If so, how do you estimate the allowance for doubtful accounts?
• Are there ways other organizations like yours manage their revenue or bad debt expense to shift it from one period to another? How and why is this typically done in similar organizations? (Typically, it is better to ask people whether others like them engage in measure management, since they are typically reluctant to talk about their own practices.)
Question Choice 1:
Do you ever have trouble determining whether a payment you receive is revenue, rather than some other
form of income, like proceeds from a disposition? How do you resolve this issue?
“We do not have a defined contract with one single insurance company; therefore, we cannot record a
proceed from a disposition. Hence, our revenue is generated from services rendered to the individual,
which can either be paid by the patient or by extension from his/her insurance company. At times,
insurance companies demand more documentation to satisfy payment, which we swiftly provide, because
the window is so short, if we do not have and expeditious process in place, we will lose the opportunity to
appeal the claim, and then will have to be recorded as a loss.”
Question Choice 2:
Does the firm offer substantial discounts, or experience many returns? Does this cause challenges in reporting gross and net sales? How do you address these?
For companies that sell items, such as clothing or groceries, they have to accommodate for discounts or returns, since the net sales is the sum of a company gross sales minus the returns received, with an additional allowance for discounts. Net sales calculations are difficult to calculate and at times carry an opaque transparency from external analyzers. Moreover, these accounts can often be factored into the reporting of top line revenues reported on the income statement. All Med does not encounter this issue. “We do not offer discounts of any type. Hence, we report our gross sales. However, once in a while the receptionist will forget to request for the co-payment. Then, we will send a letter to the patient requesting payment. If the patient does not pay, at the end of the year, it will be recorded in the bad debt expense/losses account. Fortunately for us, we have good staff, and it rarely requires attention.”
Question Choice 3:
Do you have significant accounts receivable that ultimately are not paid? If so, how do you estimate the allowance for doubtful accounts?
“Fortunately for us, No. Nevertheless, there is always the risk to have some funds trapped at the end of the year related to patients dying or any other reason. With carriers, things can be dicey at times, especially when we are closing yearly reports, since accounts can be received at 30, 60, 90 or even 180 days. At the end of the year, we reconcile the accounts, and make estimations for doubtful receivables debt, depending on the values at the time, we calculate it based on a percentage of the revenue. Those unreceivable accounts are recorded under the expense/losses under the “Bad Debt Expense” account and the percentage in estimation is recoded into the allowance for Doubtful accounts under asset.” Firms that sell products normally have allowance for doubtful accounts—also known as an ADA, an allowance for bad debt or a bad debt allowance—is a contra asset account,’ which is an account that either has a balance of zero or a credit balance, which is associated with your accounts receivable. Moreover, it is a journal entry that reduces the total amount of accounts receivable on a business’ balance sheet to more appropriately reflect the amount of cash that will actually be received. It is account that is an “estimation of the amount of money that is expected to be left unpaid by a company’s customers.”