What are the 3 transaction cycles?

Transaction process system helps a business to process all the transactions as the required information is gathered, modified and recovered in this system. Expenditure cycle, conversion cycle and revenue cycle are the sub-part of the transaction process.

The three transaction cycles that exist in a business are as follows:

• Expenditure cycle: An expenditure cycle is related to the decisions of buying the goods and services by the consumers.
• Conversion cycle: A conversion cycle is a metric performance that measures the number of days taken by the company to convert the investment into inventory.
• Revenue cycle: In revenue cycle, businesses record all the transactions from the sale to the receipt of payment.

The transaction cycles are sets or transactions in business which are interconnected to each other. When the accountants in an accounting firm Johor Bahru are doing accounting tasks, they will aggregate most of the business transactions into a few transaction cycles, which are the financing cycle, payroll cycle, expenditure cycle and revenue cycle according to their nature. Below are the details of these cycles:

Financing cycle

In this cycle, the company will issue debt instrument to its lenders. Then, they will pay for the debt and the associated interest. Besides, it may choose to issue equity shares to the investors and pay dividend to them periodically when the company made profits. The transactions in this cycle can be more diverse when compared to other cycles, and the sum of money involved in it is a lot larger (Also see How Can Startups Raise Their Capital?).

Payroll cycle

The company will record the employee’s working hours, confirm the overtime they have worked, calculate gross salary, minus the amount with unpaid leave, if any. After completing these steps, the company will make the payroll payment and issue the pay slips so the employees receive the calculation breakdown.

Expenditure cycle

Some people would call the expenditure cycle as the purchasing cycle. When the company wants to order some goods from its supplier, it will issue a purchase order. After receiving the goods, the accountant will record an accounts payable using double entry accounting and eventually pay the supplier before the due date. In this cycle, there are some ancillary events, for example, the company may choose to use petty cash if the amount associated with the purchase is small.

Revenue cycle

The other name for the revenue cycle is the sales cycle. When a client orders goods from a company, the company will examine the creditworthiness of that order (Also see An Overview of Receivable Turnover). Then, it will send the goods or provide the services to the client before issuing an invoice and collecting the payment from the client.

The accountants play a crucial role in designing a suitable forms, procedures and controls for every transaction cycle mentioned above. This is for the company to minimise the chances of occurance of fraud (Also see How to Ensure an Efficient Internal Audit?) and to make sure that the company has processed all transactions in a consistent and reliable way.

A transaction cycle is an interlocking set of business transactions. Most of these transactions can be aggregated into a relatively small number of transaction cycles related to the sale of goods, payments to suppliers, payments to employees, and payments to lenders. A key role of the accountant is to design an appropriate set of procedures, forms,  and integrated controls for each of these transaction cycles, to mitigate the opportunities for fraud and ensure that transactions are processed in as reliable and consistent a manner as possible. We explore the nature of these transaction cycles below.

Sales Cycle

A company receives an order from a customer, examines the order for creditworthiness, ships goods or provides services to the customer, issues an invoice, and collects payment. This set of sequential, interrelated activities is known as the sales cycle, or revenue cycle. Because the various steps in this cycle cross many departments, it is a good area in which to computerize transactions, so that people throughout the business can access transactions from a central database.

Purchasing Cycle

A company issues a purchase order to a supplier for goods, receives the goods, records an account payable, and pays the supplier. There are several ancillary activities, such as the use of petty cash or procurement cards for smaller purchases. This set of sequential, interrelated activities is known as the purchasing cycle, or expenditure cycle.

Payroll Cycle

A company records the time of its employees, verifies hours and overtime worked, calculates gross pay, deducts taxes and other withholdings, and issues paychecks to employees. Other related activities include the payment of withheld income taxes to the government, as well as the issuance of annual W-2 forms to employees. This cluster of activities is known as the payroll cycle. It can comprise a substantial proportion of all transactions in a service business, where there tend to be many employees.

Financing Cycle

A company issues debt instruments to lenders, followed by a series of interest payments and repayments of the debt. Also, a company issues stock to investors in exchange for periodic dividend payments and other payouts if the entity is dissolved. These clusters of transactions are more diverse than the preceding transaction cycles, but may involve substantially more money.

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