Question

The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. Will there be a difference in the cycles if the firm uses cash-based accounting as compared to an accrual-based accounting? Please, explain your answer with an example.

Answer 1

Cash Basis Accounting is when a business records its journal entries only when any transaction is incurred in cash whether its expense or revenue. For eg, on a purchase of goods for Rs. 10,000/-, cash of Rs. 6,000/- is paid, then the entry will be:

Purchase A/c --- Dr 6000

To Cash A/c 6000

and no entry will be recorded for Rs. 4000/-.

But in case of Accrual basis accounting, all the transactions are recorded whether incurred in cash or not.

For Eg. In the above case only, journal entry will be as follows:

Purchase A/c --- Dr 10000

To Cash A/c 6000

To Creditor A/c 4000

A Revenue Cycle starts with providing goods and services to customers, billing it to the customers and ends when the bill is paid in full by the customer or when the cash is collected. So, Revenue Cycle depends on the receipt of payment and therefore can only be related to different types of business industries instead of accounting method as accounting method only records the transactions.

Different examples of revenue cycles can be:

Hairdresser: Prices of hairdressers are known, so when a customer arrives, service is provided and customer pays the bill before leaving the place and the revenue cycle is complete.

Sole proprietor manufacturer: He has manufactured the products, receives orders for its products and then sales order will be generated, order will be picked, invoice will be created for the customers and then after the product is received by the customer and the balance is received, then the revenue cycle will complete.