Comprehensive Guide to the Documentary Cycle

If you are looking for the most important foundations of accounting thought, you must read more about the documentary cycle, which is considered the most important documentation tool and the container that encompasses all accounting operations.

In this article, we will learn about the concept of the documentary cycle, its importance and types, the stages of the documentary cycle, and the importance of reviewing it. We will conclude the article by clarifying the key differences between the documentary and accounting cycles.

Article Content

1. What is the documentary cycle?
2. Why do we need the documentary cycle?
3. Sections of the documentary cycle?
4. Types of documentary cycles
5. Stages of the documentary cycle
6. Review of the documentary cycle
7. What is the difference between the documentary cycle and the accounting cycle?

What is the documentary cycle?

The documentary cycle is the set of procedures that illustrate the movement of documents within the company to track the flow of financial matters. It is also considered the first stage of the accounting cycle, as it represents the channels through which documents move, from preparation to all service or cost centers where there is a mutual impact.

The importance of verifying the validity and accuracy of documents and examining and tracking data lies in the ability to make an accounting entry, then transfer it to the general ledger account, prepare the trial balance, and, after that, prepare the financial statements. All of these steps require accuracy to avoid any defects in the structure of these documents.

Why do we need the documentary cycle?

The documentary cycle is one of the necessities in the accounting process in general, as it achieves many indispensable objectives, such as:

• Determining the function or activity required to be carried out by management.
   
• Knowing the value of assets and liabilities used in carrying out various tasks.
   
• Connecting the departments responsible for implementing shared functions.
   
• Helping management make sound decisions.
   
• Collecting data and providing it to management.
   
• Facilitating access to accounting documents among departments within the company.

Read also:

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Sections of the documentary cycle

The documentary cycle is divided into:

• Cash receipts: the added cash that is collected from operating, investing, and financing activities.
   
• Cash purchases: the company’s purchases that are paid for in cash on the date of purchase.
   
• Cash expenses: include all amounts disbursed to determine capital and identify profits and losses.
   
• Credit sales: sales that are not paid immediately but are scheduled.
   
• Credit purchases: represent the company’s purchases whose value is paid at a later date.
   
• Warehouses: include managing and monitoring inventory movement.
   
• Accounting entries: daily entries such as payroll, annual depreciation, and closing entries.

Types of documentary cycles

With the multiplicity and diversity of documents that fulfill the purpose of the documentary cycle, which is documentation, they generally fall under three types of operations: storage, sales, and purchases.

These three operations represent the main types of the documentary cycle. In addition to sub-types dedicated to a specific activity, such as the documentary cycle for restaurants, and others. This is explained as follows:

The documentary cycle for warehouses

The documentary cycle for warehouses expresses the steps and procedures aimed at ensuring that all data related to the circulation of goods in warehouses is carried out properly, through a set of documents and records that document sales and purchase transactions, including: purchase request, inspection and receipt report, and issuance and receipt voucher. In addition to the inventory process, which is a direct result of the quality of warehouse control.

Not only internally circulated goods, but the responsibility for verifying the documents of imported and exported goods also falls under the documentary cycle for warehouses, as well as the procedures carried out during the specified accounting period. Given the importance of this role, warehouse-related transactions should be recorded periodically, and daily if necessary.

Read also: What is the documentary cycle for warehouses and its types, with a ready-to-download template

The documentary cycle for purchases

The documentary cycle for purchases is considered a tool for listing and documenting all purchase transactions carried out by the company. Accordingly, it performs its tasks following the warehouse documentary cycle, which in turn determines whether the company needs to purchase.

The accountant is responsible for ensuring the integrity of all documents in the purchase cycle, including the quotation, purchase order, purchase invoice, and cash disbursement voucher.

Purchases are divided into two types based on the nature of the request: standard purchases and non-standard purchases. This is explained as follows:
 

• Standard purchases: a list of specified items purchased periodically, determined by the warehouse keeper, who is responsible for tracking quantities and reporting near depletion of these items, to be replenished through the purchase process.
   
• Non-standard purchases: items for which the need to purchase arises without prior planning, as they are non-standard. In this case, a new documentary cycle begins immediately to meet the company’s shortage needs, and the value of the purchases is added to other expenses.

The documentary cycle for sales

With regard to the sales process, there is a documentary cycle for sales. These documents include quotations submitted to customers and discussions of their needs and requirements to obtain the company's product. For documentation purposes, the documents are copied so that the customer keeps one copy and the company keeps another.

The accountant is responsible for preparing and issuing documents related to the sales cycle, including the supply order, sales invoice, goods issuance voucher, cash receipt voucher, and item cards, specifying the details of the goods sold, their quantity, and their total price.

Download now a Word cash receipt voucher template for free editing from Daftra

The documentary cycle for restaurants

The documentary cycle for restaurants does not have a structure different from the types of documentary cycles, as it directly relies on the documentary cycle for purchases and the documentary cycle for warehouses.

The tasks of the warehouse documentary cycle begin simultaneously with identifying the available and required stock of food, beverages, and products offered to customers. Based on what is identified, the documentary cycle for purchases begins performing its tasks by providing shortages for items that are available or unavailable in stock.

The necessity of preparing the documentary cycle accurately lies in the sensitivity of the service provided, namely food, some of which is storable and some non-storable, and therefore expiration dates have a special nature and treatment. Hence, every procedure should be carried out with complete accuracy at its stage and for its type of documentation.

Likewise, the documentary cycle for sales relies on the documentary cycle for purchases in calculating the costs of purchasing products to determine the price of meals and products and the final selling price.

Read also:

Everything you want to know about procurement management

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Stages of the documentary cycle

The stages of the documentary cycle begin with a purchase request submitted by the warehouse manager, who, in turn, determines the availability of products, as well as the items and quantities required for purchase. The purchase request is followed by the purchase order, which in turn requires obtaining quotations and selecting the best to complete the purchase process.

After selecting the best quotation, a goods receipt voucher is created to receive goods from the supplier’s warehouse; a purchase invoice is issued; and an additional voucher is created to add the goods to the company’s warehouses after they are shipped from the supplier’s warehouse. After that, the goods are issued from the company’s warehouses to its branches, locations, and points of sale.

These stages can be summarized as follows:

• Receiving a purchase request from the warehouse manager
• Sending requests for quotations to suppliers
• Receiving quotations from suppliers and comparing them
• Issuing a purchase order to the supplier/suppliers
• Receipt voucher
• Invoice
• Addition voucher

Review of the documentary cycle

Since auditing and account review are among the tasks most closely associated with the accountant, a comprehensive review of the documentary cycle is conducted to ensure the accuracy of its outputs and the correctness of its data. It should be noted that reviewing the documentary cycle of a particular activity requires the accountant to have good knowledge of the nature of that activity.

The review is carried out on the documentary cycle in all its details, starting with its initial stages, including determining the need based on inventory, purchase orders, quotations, and the extent of success in selecting the best available quotations. It is also necessary to review invoices, quantities, and the data provided in each document separately.

The more accurate the review of the documentary cycle details, the more balanced, accurate, and easier to trace and review the entries of the final trial balance of the accounting cycle will be.

What is the difference between the documentary cycle and the accounting cycle?

As previously indicated, the documentary cycle is considered the first stage of the accounting cycle, which means that the relationship of part to whole governs the two. In light of this, the difference between them is clarified as follows:

• The accounting cycle consists of all accounting operations that are built sequentially upon one another and are completed by the accountant, starting with recording journal entries, preparing the general ledger, adjusting entries, and the trial balance, and ending with preparing the financial statements, closing entries, and the post-closing trial balance.
   
• The documentary cycle is the primary source for recording financial transactions and can be considered the container that holds financial data. All the accounting cycle processes previously explained are documented and recorded through the documentary cycle. Thus, it represents a part of the accounting cycle.