To establish a new Revenue Producing Activity (RPA) account in fund 101, fund 136 or fund 128:
Most revenue producing activities (RPAs) in the schools and colleges will be recorded on fund 136. The exceptions are below:
A very common problem with revenue producing activities is that a rate is set based on what sounds reasonable or what others are charging for similar services. In order to make sure the operation is solvent, the cost of providing the product or service has to be calculated.
Another common problem is that rate calculations are overly complicated or do not result in an accurate cost. Following are guidelines that should keep things relatively simple while resulting in an accurate cost. These should cover most activities. At times, though, a different methodology might make sense.
If the product being sold is a by-product of another process, then it may not be possible to calculate the cost of providing the service. Examples are milk or crops sold by Ag Research Stations or offspring of animals used in research. It is not necessary to calculate the cost of producing by-products.
When charging internal customers (UW-Madison departments, UW System institutions and Wisconsin State Agencies), the rate must be set at or below the cost of providing the product or service. Calculations supporting the rates must be kept on file and be available for review by auditors.
Federal requirements do not allow for discounts that favor one class of internal customers over another. However, it is allowable to create a rate subsidy by charging a portion of a customer’s rate to an internal departmental funding source. This is referred to as a rate subsidy. Or, rates for all customers may be held down through an operational subsidy, which provides funding for the operation as a whole.
Rates charged to external customers (faculty, staff, students, corporations, other universities, general public, etc.) are governed by the UW Regent Policy 12-1 on Competition with the Private Sector.
With few exceptions as outlined in the policy, external customers are to be charged, at minimum, the full cost of providing the product or service, including indirect costs. The indirect cost rate is available at the Research and Sponsored Programs website. Market rate may be charged if higher than full cost recovery. By-products, such as crops or milk, may be sold at market rate.
Rates charged to external customers will almost always be higher than cost. This will generate a profit that may be used to reduce rates to internal customers or to support other departmental activities. Approximately 7% of this profit should be set aside to pay for the annual centralized services assessment. This is charged to fund 136 activities and is based on expenditures net of sales credits. Some schools and colleges also charge an assessment to cover their administrative costs.
Billings should be processed on a routine basis, preferably monthly. Delays in billing can cause problems for customers who need to close out grants. Customers should be provided a statement showing how the amount billed was calculated. The billing itself should be entered through the JET tool or through the Inter Departmental Billing Form available on the Accounting Services web site. If the division processes billings centrally, they may allow for other options, such as an Excel file in a format that may be imported to JET.
All internal billings should be processed after the product or service has been provided. Pre-payments are not permitted.
Instructions for billing other UW System institutions are available at the Business Services web site. For purposes of processing billings, follow instructions for billing external customers when billing Wisconsin State agencies.
The expenditure side of the transaction should be on the appropriate expenditure account code for the product or service sold. Account 2650 (internal services) is commonly used for the sale of services. The full account code manual is available at the Accounting Services web site.
Revenue should be coded to account 9050—internal sales credits along with the related program code for the activity.
UW-Madison does not have a standard tool for producing invoices to bill external customers. Some departments have billing modules built into software used for managing their activities. Others use Word, Excel, Quickbooks, Great Plains Dynamics, or similar tools. Accounting Services does have an invoice template available in Excel on their web site.
Regardless of the billing method, good internal controls should be in place including separation of duties and routine follow-up on unpaid invoices.
Billing should be timely, preferably on a monthly basis. A good business practice is to send second notices after 30 days, but a longer time period might be appropriate, depending on the customer base. For example, if customers are state agencies or other universities that tend to pay in 30 to 45 days, then a second notice after 60 days might make more sense. Unpaid accounts after the second notice may require collection. Refer to Accounting Services Policy 401 for guidance on next steps.
Any activity that sells products or services to external customers will accept payments through cash or credit cards, whether payment is collected in advance, at point-of-sale or through billing after the fact. Internal control principles for handling cash and checks should be in place including bank deposits on at least a weekly basis, separation of duties, physical security of the cash and checks, and reconciliation of sales records and bank deposits to WISDM.
• Accounting Services Policy 402 – Revenue Accounting provides detailed procedures for handling revenue.
Additional controls may be required with other forms of payments, such as credit cards, ACH or wire transfers. Departments that are interested in accepting these types of payments will need to work with Accounting Services-Cash Management.
• Accounting Service Polices 404 – Credit Card Merchant Services and PCI Compliance provides detailed procedures.
With the exception of deposits to fund 101, the external sales credit account code (9051) should not be used. Refer to the list of revenue codes on the Accounting Services web site. Use program code R with revenue codes.
Sales to external customers may be subject to Wisconsin Sales Tax. Wisconsin Department of Revenue Publication 204, available on their web site, outlines the types of products and services subject to sales tax and identifies customers that are tax exempt. If a sale is taxable, this will need to be indicated on the receipt deposit form. Accounting Services will deduct the sales tax from the deposit and remit it to Wisconsin Department of Revenue. The full amount of the deposit will be shown in WISDM to allow reconciliation to bank deposit records. Sales tax will be reversed as a separate entry.
If the activity maintains an inventory of products for sale, good controls over recordkeeping and access to the products should be in place. For sales to internal customers, records should be available for audit showing what was purchased, the date and the funding source charged. Records should be kept showing the items in stock including quantity on hand and the original cost, as well as the price to be charged to customers. A system should be in place to physically count items on hand and compare them to inventory records at least annually. This may be a complete annual inventory or portions of the inventory may be counted throughout the year. Counts may need to be done more frequently if there are large differences. If that happens, procedures should be reviewed to determine the reason.
Shortages, breakage, spoilage and obsolete items that will not be sold are costs of the operation and may be recovered in the rates charged to customers.
Purchases of items to be inventoried should be made using the account code 3790—materials for resale. Internal customers will be charged using the appropriate related expenditure code for the item.
A clearing account is an account that is used solely for holding revenue or expenses that will ultimately be matched by incoming transactions that will clear the balance to zero when all outstanding items are cleared.
This type of account may be found on fund 136, but is not used for sales of products and services. Procedures should be in place to match incoming and outgoing transactions on a routine basis. At any point in time, the cash surplus or deficit in the account should be reconcilable to the outstanding items. To the extent possible, items should be cleared by the end of each fiscal year.
If an activity is exclusively selling to internal customers and has no inventory or capital equipment, the target cash balance should be zero after all billings are processed.
If the activity involves investment in inventory or capital equipment, or if there are outstanding accounts receivable or deferred revenue, then cash balance may not be a good indicator of financial status. If the amounts are material, then accrual accounting may make more sense. Total assets (cash, receivables, inventories, capital equipment minus depreciation) minus liabilities (deferred revenue, accounts payable) is the calculation of net worth. (Click HERE for a cash to accrual template) The target balance for this calculation is zero if the customers are all internal. If there are external customers, net worth may be positive because of the collection of overhead included in rates. Refer to Guidelines for Fund 136 Auxiliary Balances for more information.
Revenue that has been deposited but has not yet been earned should be reported as deferred revenue. Before the end of the fiscal year this revenue should be transferred to the new fiscal year.
Accounting Services will also ask departments with accounts receivable, inventories, or deferred expenses to complete forms so these amounts may be recorded on the University’s financial statements.
If the department completes accrual-basis financial statements, the amounts reported to Accounting Services should be reconciled to the financial statements.
Information regarding deferred revenue and year-end reports is available at the Accounting Services web site.