The accounting process consists of several different cycles. Each cycle reflects a certain type of business activity. Accountants define each transaction by activity and follow the same process to record and report related information. The five accounting cycles are revenue, expenditure, conversion, financing and fixed asset. The combined cycles repeat each accounting period
The revenue cycle has two major transaction groups: sales and cash receipts. Sales include all revenue earned from goods and services purchased by consumers. Also included are sales discounts, returns or allowances. Cash receipts represent the actual cash received by a company. Under accrual accounting — the most popular method used to record transactions — sales and cash receipts are separate transactions.
Expenditures represent the value given up to acquire goods or services necessary to run a business. Transaction groups include inventory purchases, credit purchases, payroll and cash disbursements. Any time a company expends cash, it falls under this accounting cycle. Expenditures are either a cost or an expense. A cost will typically bring value to a company — such as an asset — while an expense is a one-time use of capital.
The conversion cycle accounts for the production of goods and services by a company. Cost accounting is often a subunit of this cycle. Accountants will allocate production costs to all goods and services. The conversion cycle takes information from the expenditure cycle and uses it to accurately expense all produced items. This cycle can run in a continuous process rather than individual accounting periods.
Companies may need external financing to fund business operations. The financing cycle will record and report information relating to stock, debt, bond and dividend transactions. The acquisition of external financing and payments made to investors or lenders will fall under this cycle. Transactions may be less frequent here if companies do not use external funds for their operations.
Capital investments represent the purchase of major assets used in operations. The purchase and depreciation of fixed assets are common transactions in this cycle. Selling off old or outdated assets also falls under this cycle. The fixed-asset cycle may have close ties to the financing cycle. Many companies use external financing to purchase fixed assets. A fixed transaction can therefore have a related transaction in the financing cycle.