Basic Bookkeeping Lesson 4 – The Business Activity Cycle

The following business startup activities are necessary for businesses. I will discuss The Business Activity Cycle, then translate it for household use below.

The Business Activity Cycle is lesson 4 in my free bookkeeping course.

The Business Activity Cycle

The following diagram shows the basic business activity cycle. I will be giving a basic overview of the diagram below, but I won’t be going into detail about each step at this time. If you are running a trading business it is important to familiarize yourself with the business activity cycle, accounting entries are made for each day in the order shown below.

The Business Activity Cycle, as per accounting practice | www.AuthenticallyAsh.com

 

 

1. Capital Contribution of owner(s)

I discussed this step in detail in the article Begin Bookkeeping in your Business or Household. The capital contribution of owners is the starting point of a business.  It is where the owner(s) contribute financially to get the business off the ground. This step also covers opening bank accounts for the business.

2. Acquisition of assets

This is the part where the startup assets are purchased for the business. All assets that are acquired by the business should be entered into an asset register.

3. Purchase of trading stock

If a business sells merchandise to the consumer, the business will purchase their trading stock at this step. This is all goods that will be resold, not the merchandise that will be used to serve the customers. For example, a hair dresser may sell shampoo, but will also use shampoo when serving her clients. The shampoo that is sold is the merchandise, also called trading stock.

4. Making arrangements and paying costs

A business usually needs licenses to conduct business. At this step you would purchase the required licenses. You would also contact other businesses for various services needed by your business at this step, e.g. telephone, electricity and internet services. If you intend to have employee’s you would also need to register to have employees. Lastly you would arrange for the equipment to be insured and stationery to be printed.

5. Selling trading stock and/or rendering service

Selling trading stock

A trading business has customers. The trading stock is sold to its customers for cash or in some cases on credit. I don’t advice selling on credit unless you are selling to trusted long-time clients.

When selling goods for cash, you would issue a cash invoice. The cash invoice is completed in duplicate and the original is given to the customer with the goods.

If a business has a cash register, then they usually issue a cash register slip instead of an invoice. The cash register roll will be used to make accounting entries instead of the cash invoice.

Rendering service

A service business offers some form of service for money. No physical merchandise is sold or purchased. Like with a trading business, you can either issue a cash invoice or use a cash register. The total of all the invoices issued on a particular day must be compared with the total of the cash sales and must be equal to the money received.

6. Collection of debtors’ accounts

If your business sells goods on credit, then the next step is the collection of money owed to you.

7. Payment of creditors’ accounts

The final step of the business activity process is to make payments to the creditors’ of the business. The creditors’ are the people whom the business owes money.

Translating the Business Activity Cycle for household bookkeeping.

Since the cycle above is more suited to a trading business, and our household is more of a service business the cycle becomes a little different:

Service Business Activity Cycle | AuthenticallyAsh.com

1. Capital contribution of partners

This is the starting point of the process and includes the initial amount in the household bank account. I described this process in the article Begin Bookkeeping in your Business or Household.

2. Acquisition of assets

The first time you go through this step, you will create your asset register. After the first time you will acquire more assets/investments and update the asset register at this step, or you will sell/dispose of assets and update the asset register accordingly.  It is also wise to save money to buy assets/investments at this step just in case you get a deal of a lifetime later on.

3. Acquisition of consumable stores

Since you don’t require merchandise to trade, you won’t be purchasing trading stock at this step. Instead you will be buying consumable stores such as groceries that your household needs, or anything else that is required to provide the services mentioned in my article Run your household like a business. It is better to have your electricity cut off than to have no food to eat. This said, you shouldn’t waste money at this step. Create a budget and stick within budget. I will discuss budgeting in a later article.

4. Essential arrangements and payment of relevant expenses

Once your basic household necessities are purchased, you can spend money on paying bills like water, electricity, telephone, internet, insurance etc. You will also pay back your creditors at this step.

5. Payment of other expenses

In a household situation, other expenses may be pocket money (or spending money) for the people within your household.  If you want everybody to contribute their income to the household, you need to make sure that they are at least getting some spending money for themselves.  Mark, myself and his mom get 20%, 15% and 15% of the household profits respectively.  The other members of our household manage their own incomes, but they also take full responsibility for specific household bills.  The other 50% we retain within the household account.

6. Withdrawal of money by owner for personal use

At this step, we buy luxuries for our household.  Things that don’t belong to any one person, but rather to the whole household.  An example of this sort of luxury would be satellite television.

7. Cash received for services rendered

The last step (since most people are paid at the end of the month), is when we deposit our monthly household incomes into the household bank account.  Mark and I only keep enough of our salaries to pay for the debit orders that come off our accounts.  The rest of the salary goes into the join account and managed accordingly.

The order of events in a household

Therefore the monthly cash flow cycle for a household will be as follows:

  1. Assets are purchased or money is saved/invested using the profits from the previous month.
  2. Groceries and other needs are purchased.
  3. Creditors and essential bills are paid.
  4. Profits are given to household members as “pocket money”
  5. Luxuries are bought.
  6. Income comes in from household members
  7. Opening balances for the next month are calculated (return to step 1)

You will need a little forward planning in order to make sure you always have enough cash over from the second step in order to pay the bills in the 3rd step.  If you are finding that you don’t have enough money to pay your bills, you should consider looking at what services you can cut in order to live within your income.

Basic Bookkeeping: Household Cash Flow Cycle | AuthenticallyAsh.com

Conclusion

Now you know the basic business activity cycle. When you make entries into the household or business books on a daily basis you should follow the order of transactions in the cycle mentioned above. Tasks:

  1. Create your asset register.  You can download my Asset Register Template or you can make your own.
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