Types of transaction cycles in accounting
/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.
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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.