ACCOUNTING TRANSACTION CYCLE

CHAPTER NO. 4

Economic Events

Event are actually an action which is taken by the business organization and affects the assets, liabilities, owners, equity is called an economic events.

The accounting system records this economic event in the form of transaction, then transactions are recorded in journal by using specific rules of accounting.

The Cycle of Business Activities

A series of activities which are involved in a business is called cycle of business activities. Every business operation is different from each other but however, there are certain basic activities which are performed by every business in order to produce revenue. That is why it is called cycle of business activity.

Cycle of Business Activity

Conversion(Conversion cycle)

Sales (Revenue Cycle) Input acquisition (Expenditure Cycle)

CapitalInvestment

(Financial cycle)

Capital Investment

Capital Investment . . .The cycle of business activities begins when

capital is invested in a business. Generally Accepted Accounting Principles (GAAP) require recognizing the business as an entity separate from the sources of this capital.

. . . This is the first activity of the business cycle which is concerned with the acquiring of money (investment) which is required to produce goods or services in order to generate revenue.

Continu…

The investment comes from the following sources. From Owner:

If the investment is done by the owner of a business then it is called owners equity.

From Creditors: If the investment comes from borrowing then it is called long term

debt or current liabilities.

The main economic events which occur during this activity are the following:

1- Rising of capital

2- using capital to acquire productive assts.

2-Input Acquisition:

This is the second activity in business cycle which is concerned with the acquisition of materials required for the increase of capital of the business. The input acquisitions are different for different businesses.

During the input acquisition the following four economic events occur.

1- Ordering for input 2- Receiving the input3- Recording an obligation to pay for them 4- Pay for the inputs

3-Conversion: This is the third activity in the cycle of business

activities which is concerned with the conversion of inputs to the output. The conversion activity is different in different businesses e.g.

The manufacturing companies use raw materials and apply the labors and overheads to produce goods.

The services companies convert inputs that are predominately labor into outputs in the form of services.

A single economic event which occurs during this activity is the “consumption of labor, material and overhead to produce saleable products.”

4-Sales: This is the fourth and the last activity of the cycle

of business activity. This is concerned with the sales of goods and services, which has been produced during the conversion activity. In order to produce profit due to which additional investment becomes a valuable for the business.

During the sales activity the four economic events occur.

1- Receive the customer orders2- Deliver goods to the customers 3- Request payment for the goods4- Receive the payment

conclusion

Thus we can consider business activities as cycle of accounting transactions. In fact the study of transaction cycles is a convenient way to understand how most accounting systems work.

Transaction Cycles A set of accounting transaction that occurs in a

Normal sequence for example a sales transaction is followed by shipping transaction, a billing transaction, and a cash receipts transaction. Therefore, there are four transaction cycles which are the following:

TRANSACTION CYCLE

Financial Cycle Expenditure Cycle Revenue Cycle Conversion Cycle

Financial Cycle

It is that type of transaction cycle which records those transactions which are concern with the acquisition of capital from owners and creditors.

The financial cycle is also concerned with the use of capital to acquire productive assets and the reporting to them how it is used.

Third is reporting to the source of capital (Financial Statements).

The financial cycle can be explained by the following figures

Financial Reporting

System

Source of CapitalProperty System

Journal Entry System

Expenditure Cycle That type of transaction cycle which records

those transactions which are concern with the acquiring of materials and overheads for the process of conversion is called expenditures cycle.

The expenditures cycle consist the following four economic events (transactions).

Request for items Received items Accounts payable/recording an obligation to pay for them.

Pay for them

The expenditure cycle can be explained by the following diagram

Continu…

In given figure it is clear that most of the organizations have their purchasing, receiving, vouching and cash disbursement departments.

The purchasing department contacts with the vendors for the acquisitions of input materials and other items while receiving departments receive the items form the vendors as ordered by the purchasing departments. The vouching system department keeps the written evidence of all the transitions during the expenditures cycle and finally making payment.

Revenue Cycle

That type of transaction cycle which records those transactions which are concerned with the generation of revenue from the sales of output after conversion.

The revenue cycle records the following four economic events (transactions).

Receiving an order from customers Delivering the goods Request for payment Receive the payment

The revenue cycle can be explained by the following figure:

Conversion Cycle That type of transaction cycle which records

those transactions which occurs during the conversion of input to output is called conversion cycle.

A single economic event transaction is recorded by the conversion cycle which is the consumption of material labor and overhead to produce the output.

Manufacturing companies uses raw materials and apply labors and overheads to produce output.

The Conversion Cycle In Manufacturing Company

Expenditure Cycle

Receiving System

Revenue Cycle

Shipping System

Inventory System

Payroll System

Inventory

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