Basic Financial Transactions Terms and Processes

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Table of Contents

Introduction
Three Fundamental Types of Cash Cycle
The Meaning of Entity-Relationship Diagram
Two Major Points of Revenue Cycle
References

Introduction

One of the principles of the economic system is the interaction of a large number of finite and cyclic monetary processes. This fundamental rule also applies to the financial transaction sector. According to Sullivan (n.d.), “analyzing these activities can help you find ways to improve your collection procedures and increase cash flow” (para. 1). The purpose of this paper is to identify the main monetary functioning principles of three primary financial cycles and the essence of Entity-Relationship Diagram.

Three Fundamental Types of Cash Cycle

Economists in general and accountants, in particular, consider revenue, conversion, and expenditure cash stages as principal. According to Sullivan (n.d.), the revenue cycle includes assay of manufacturing costs, accounts receivable, registration and transfer of cash deposits, and payment of a bill in the end. Hayes (2019) explained conversion activities as a system divided into periods: days of sales of inventory and sales outstanding when a profit occurs, and days payables outstanding associated with planned costs. Nestor-Harper (n.d.) noted that the expenditure stage consists of analysis and order of necessary consumable materials, assessment and execution of papers of the delivered items, its proper disposal and payment. Depending on the business sector and customer requests, required procedures may vary.

The Meaning of Entity-Relationship Diagram

The complication and increase in the number of business models and methods of economic calculation are directly related to the development of computers and high technologies. For example, Rouse (n.d.) described the Entity-Relationship Diagram as a system that analyzes the mutual influence between humans and all surrounding aspects, which later serves as a basis for a database of business events. This model allows accountants to study the small details and make an overall picture of the business climate of the company and therefore understand the primary sources of income and expenses.

Two Major Points of Revenue Cycle

The income cycle can be considered not only as activities but also as a set of systems. It is customary to allocate two models: sales order processing, which is associated with the material business component, and cash receipts of the pecuniary part of the deal. According to Susanto (2019), the first includes “…Receive Order; Check Credit; Pick Goods; Ship Goods; Customer Bill; Update Inventory Records; Update Accounts Receivable; Post to General Ledger” (p. 335). The second system is responsible for the collection and bank accounting of earnings received during the business process.