Business Cycles

An accounting cycle begins when accounting personnel create a transaction from  source document and ends with the completion of the financial reports and closing of temporary accounts in preparation for a new cycle.

The five accounting cycles and their main steps are shown below:

1. Revenue cycle

Sales orders

Cash receipts

2. Expenditure Cycle 

(Note: This cycle focuses on two separate resources; inventory and human resources and is often considered two separate cycles; purchasing and payroll/HR.)

Inventory/purchasing

Accounts payable

Payroll

Cash payments

3. Conversion Cycle (Production cycle)

Production

Cost accounting

4. Treasury Cycle

5. Fixed assets

Asset acquisition

Depreciation

Disposal

THE REVENUE CYCLE

The Revenue Cycle is the set of activities in a business which brings about the exchange of goods or services with customers for cash. Most business transactions are conducted on a credit basis. Cash is received after goods are shipped to the customer. The phases process are : the physical phase in which goods or services are transferred to the buyer; and the financial phase in which the cash is received from the buyer. The first phase is handled by te sales order processing subsystem, the latter by the cash receipts subsystem.

THE EXPENDITURE CYCLE

The expenditure cycle is a type of process that helps to define what occurs from the point that a business or consumer decides that the purchase of a given good or service is necessary to the point that the purchase is paid for in full. The number and type of steps included within the cycle will vary, based on the complexity of researching and ultimately obtaining permission to make the purchase. The process may further be complicated based on the policies and procedures that are involved in deciding when and how to tender payment for those purchases.

For many companies, the expenditure cycle begins with the granting of permission to make a particular purchase. Typically, the party wishing to make the purchase must submit what is known as a requisition form to a purchasing agent or department. If the agent reviews the requisition and finds that the requested item is within the pricing guidelines and budgetary restrictions of the company, the next step in the cycle involves the issuance of a purchase order number. At that point, the party who submitted the original request may contact the authorized vendor and place the order, carefully noting that the purchase order number assigned by the purchasing agent is to be included as part of the detail found on the invoice for the order.

CONVERSION CYCLE


A metric that expresses the length of time, in days that is takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted in cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and length of time the company is afforded to pay its bills without incurring penalties.


TREASURY CYCLE


Is the timing and frequency of the various maturities or treasury instruments; transactions include those related to financing the operations of the business (e.g. issuance of capital stock or long-term debt).


FIXED ASSET

Fixed assets, also known as a non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.

Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a firm's consumers/end-users. As an example, a baking firm's current assets would be its inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit (i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc. Each aforementioned non-current asset is not sold directly to consumers.

These are items of value which the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery. These often receive favorable tax treatment (depreciation allowance) over short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets are assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably.

It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location.

The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period.

The use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.

Posted by: Grace Anne Plaza Dalagan