What is the transaction cycle in a business?

A transaction cycle in a business is a series of activities or events that occur during the processing of a business transaction. It typically involves a sequence of steps that starts with the occurrence of a business event and ends with the completion of the related financial transaction.

An understanding of the transaction cycle helps the bookkeeper to identify the sources of documents, the flow of documents, and the point at which they must be recorded in the system. For example, in a decentralized environment, the sales order might be issued by the sales team, and the bookkeeper may not need to record this but the moment the goods is ready to ship, the bookkeeper must have the information to invoice the customer before the goods leave the warehouse.

Transaction cycles are essential for managing the financial operations of a business and include several types of transactions such as:

        1 - Sales cycle: This cycle starts when a customer places an order for goods or services and ends when the customer pays for the order.

        2 - Purchasing cycle: This cycle starts when the business needs to purchase goods or services and ends when the payment is made to the supplier.

        3 - Manufacturing cycle: This cycle starts when the raw materials are issued to the production department and ends when the finished goods are transferred to the warehouse.

        4 - Payroll cycle: This cycle starts when employees work and ends when they are paid for their work.

        5 - Cash cycle: This cycle starts when cash is received and ends when it is deposited in the bank or used to pay expenses.

        6 - Inventory cycle: This cycle starts when inventory is purchased or produced and ends when it is sold to customers or becomes obsolete.

Each transaction cycle involves a series of steps that include recording and processing transactions, reconciling accounts, and producing financial statements. The effectiveness of transaction cycles is crucial to ensure the accuracy and integrity of financial information, as well as to support sound decision-making by management.