Trading Company Accounting Cycle – Establishing a trading company is often an option for business people to expand their business to a larger scale. Of the many knowledge that must be learned before starting a company, accounting is very important to understand. Interested in learning about the accounting cycle of a merchandising company? Read the following article to the end.
In general, the accounting cycle of a trading company can be done by making financial reports for a certain period. This calculation starts from recording transactions, preparing financial reports, to closing the balance in the reversing journal. That way, it will be much easier for you to find out between the company’s profits and losses.
Let’s take a closer look at the discussion below.
What Is a Trading Company?
A trading company is a company whose main business is buying goods from suppliers and then selling them back to consumers. This product without the process of changing the shape of the goods. For example, supermarkets and grocery stores to meet daily needs.
The accounting procedures of a merchandising company are in fact no different from those of a service company. This profit and loss calculation is calculated by reducing costs in order to get the overall income from sales for a certain period.
To be able to learn various techniques and ways to record trading company financial transactions to become financial reports that can later be used as a basis for making decisions, Sinaumed’s can read the book Introduction to Accounting 2 Trading Companies .
These costs include the start of the cost of goods sold and also costs during operations in that period. This overall income includes all business activities which are related to sales and administration activities throughout the company.
Example of a Trading Company Book
One of the books that can be used as a companion in studying the accounting cycle of trading companies is Introduction to Accounting 2 Trading Companies .
This book contains information about techniques and easy ways to record financial transactions at trading companies. The method is also presented more easily, especially in recording during report preparation.
The financial statements will be used as a basis for consideration in making decisions. Not only discussing the preparation techniques, this book also contains how to make control devices or commonly referred to as ledgers and journals in each department.
Apart from these accounting books, sinaumedia still has recommendations for other financial accounting books
Trading Company Accounting Cycle
The accounting cycle of a trading company is the process of making the company’s financial statements within a certain period of time. Generally, calculations will start from collecting transaction data to preparing company financial reports to continue closing balances
1. Record transactions in the General Journal
Recording all transactions in the general journal is the first stage of the trading company accounting cycle. This is done to compile all business activities and events in the enterprise system. The goal is that all data is successfully entered with an equation and is easier to process.
Discussion regarding the accounting cycle of trading companies which is one of the absolute requirements for corporate accounting learning outcomes can also be found in a book by Sigit Hermawan, et al entitled Accounting for Service, Trade and Manufacturing Companies .
Business events that occur during one accounting period, the entry of data will be recorded in the general journal. It is useful to convert it to the accounting equation form. For example, when a company buys a new vehicle it reduces the cash account.
2. Recording in the Helper’s Ledger
Completed data is entered into the general journal, then this entry needs to be posted and transferred to the general ledger account. The goal is to record all changes during a related period.
The general ledger account will categorize these changes, debits and credits in a particular account. The goal is that management has information as a budgeting goal.
Complete discussions regarding financial management in the short, medium and long term can also be found in the book Financial Management for Companies which is divided into ten interesting discussions.
3. Make Unadjusted Trial Balance
The meaning of an unadjusted trial balance is all business accounts that appear in the financial statements before adjusting entries are made. Hence, making it referred to as an unadjusted trial balance. This is the third step of the merchandising company accounting cycle.
If all journal entries have been recorded in the general ledger, then you can create an unadjusted trial balance. Posting accounts in the unadjusted trial balance is easy and simple.
Generally, all accounts that have debit balances are listed in the left-hand column and accounts that have credit balances in the right-hand column. Today, almost all companies use a computerized accounting system that makes work easier.
4. Adjusting Journal
Meanwhile, an adjusting journal is a journal entry designed and prepared at the end of the period. The goal is to correct the account before making financial statements. This adjusting entry is the step most often used to apply the matching principle to the total income and expenses of a company during a certain period.
So, both the company’s income and expenses can be balanced. There are three types of expenses in a certain period, so they must be included in the adjusting journal entries. Starting from early payments, accruals and non-cash expenses.
All three must adjust between income and expenditure, so that it is in accordance with previous usage.
4.1 Accounts Requiring Adjustment
There are some accounts that require adjustment only at the end of the period. So not everything needs to be adjusted. The first is the equipment account, requiring this step due to usage. Then the expense account is paid in advance.
Prepaid accounts must go through adjustment stages because the time is due. Next there is a fixed asset account because it has experienced depreciation. Meanwhile, the income account also needs to be adjusted because there is income that has not been taken into account.
Expense accounts also require adjustments because there are still expenses that have not been calculated or payments that have not been processed. Furthermore, revenue accounts are received at the beginning, as time goes by or hand it over to the customer.
4.2 Example of Writing an Adjustment Journal
There are several examples of writing adjusting journals below which can be used as references when writing them. Writing adjusting journals depends on the type of each account, here’s a full review:
1. Supplies Account
The supplies account shows that the temporary balance is IDR 500,000. Meanwhile, the data for the end of the period actually shows that there is still Rp. 200,000 left over. The analysis shows that the amount of consumables is calculated in the load debit column, which is IDR 300,000. Furthermore, it is recorded in the equipment expense account in the amount of IDR 300,000 in the debit column. Then it needs to be reduced by the amount of the account in the amount of IDR 300,000 and so on it is recorded in the credit column in the adjusting journal.
2. Insurance Account
Prepaid insurance account shows that the temporary balance amounted to IDR 360,000. Meanwhile, the data at the end of the period shows that if the amount of insurance is due, it is Rp. 120,000 in a period of 4 months. The analysis carried out shows that the insurance paid in advance will be written down as assets. Meanwhile, the adjusting journal is the total amount of the expense, which is IDR 120,0000 in the debit column. Furthermore, in the insurance account of IDR 120,000 in the credit section.
3. Equipment Account Equipment account
shows a balance of IDR 3,000,000. While at the end of this period there is a depreciation of 10% so it needs to be recalculated so that it becomes real data after being depreciated. The analysis carried out shows that the depreciation of 10% needs to be multiplied by IDR 3,000,000 so that it becomes IDR 300,000. The writing will be entered into the equipment depreciation expense in the debit column. Meanwhile IDR 300,000 is written in the accumulation account at the end of the column.
4. Revenue Account
The services revenue account shows that the amount is IDR 1,800,000. Final data for this period shows a total of IDR 200,000 of services to customers that have not yet been completed. The analysis shows that the service revenue account has not yet become revenue of IDR 200,000. This is because the work for customers has not been done. So it is necessary to reduce the service revenue account by IDR 200,000 to be recorded in the debit column. Next, record in the account column the income received in advance in the amount of IDR 200,000 in the credit section.
5. Trial Balance Has Been Adjusted
Previously, the trial balance itself was a list of account closing balances from the General Ledger on a certain date and was the first step before entering into the preparation of financial statements. While the NSSD or adjusted trial balance has several differences.
- What is meant by an Adjusted Trial Balance
An adjusted trial balance is a list of all accounts and balances in the general ledger after adjusting entries have been made in the previous accounting period or have been posted. Generally, its creation also has several purposes, as is the case with the review in the next point. The difference between an adjusted trial balance and a trial balance in general is in the amount of the balance. Especially when accounting adjustments are completed.
- What is the Purpose of an Adjusted Trial Balance
The preparation of this trial balance has several important purposes. First, which is the first step in preparing financial reports. This tool is an internal document or working paper which will later be used by accountants when preparing various matters, especially reporting. An adjusted trial balance ensures that all debit entries and credit entries have similar or balanced values. This step was taken to suit the double entry accounting concept . That is, any discrepancies or imbalances must be traced before the financial statements are finalized.
6. Make Financial Reports
Financial reports are important, especially for actors in the field of big business, especially companies. Nevertheless, the preparation of financial reports also needs to be made as much as possible by small-scale business entities. The reason is, this one device must be made in each accounting period.
Financial statements can be likened to the heart of the company. So every entrepreneur needs it in the hope of being able to find out the actual financial condition. Another goal is to assess performance in the current year so that it can help make the best possible decision.
Several accounting applications can now be used to prepare financial reports more easily and practically. More specifically, financial statements are considered as a summary of a record of all financial transactions for a certain financial year or period. Learn how to make a good financial report through the Trading Company Accounting book below.
6.1 How to Make Financial Reports Easily
Preparing these general financial reports starts with preparing some information at once. Starting from the balance sheet, income statement, cash flow statement, retained earnings report. All of these become important components in the accounting cycle, because they are used as the goal of financial reports.
In other words, the existence of financial reports and the accounting cycle process will focus on providing useful and useful information. Especially for external users in the form of reports. This statement is the final product of the accounting system in any company.
Generally, how to make financial reports must pay attention to several important things and should not be done haphazardly. Especially if all the data is neatly arranged and accurate.
6.2 Creating an Accounting Worksheet
The accounting worksheet is a tool that will later be used to make it easier for accountants to complete the accounting cycle and prepare year-end reports. Some examples are the unadjusted trial balance, adjusting journals, financial statements and others.
This accounting spreadsheet becomes the sheet that will track each step of the cycle. This document generally has five columns, starting with the unadjusted trial balance account and ending with the financial statement section.
In general, accounting worksheets show each step in the cycle side by side. Each of these stages will include debit and credit data. The title consists of the company name, report title and the time period of the document.
7. Make a Closing Journal
Closing journals are entries prepared at the end of an accounting period to delete all temporary accounts and transfer balances to permanent accounts. It’s like, a temporary account needs to be closed and rearranged at the end of the year or it can be called closing the books.
This temporary account is an income statement account which functions to track accounting activities during a certain period. For example, a revenue account will record the amount of income earned in one cycle so that it is not based on the period of use by the company.
While the permanent account is a balance sheet account that will track activities which can last longer when compared to the accounting period. For example, a vehicle account is recorded on a balance. This was done because it provides benefits to the company even in the coming year.
7.1 Creating an Income Summary
The summary account is a temporary account which will later be used to store profit and loss account balances as well as income and expense accounts during the closing entry stage. This step is carried out in one accounting cycle.
In other words, the income summary account is only considered a substitute for the account balance. This is also done at the end of the accounting period especially during the closing entry stage being carried out.
8. Trial balance after closing the books
The trial balance after closing the book contains a list of all accounts and also the balance of the company after the closing entry stages for further posting in the general ledger. In simple terms, this data will record all permanent accounts that still have balances.
This existing balance is indeed shown to exist even after the closing entry. This list of accounts is identical to the accounts presented in the balance sheet. This certainly makes sense, because all reporting accounts, especially profit and loss, have indeed been closed and no longer have any remaining running value.
The purpose of preparing a post-closing trial balance is to verify that all temporary accounts have been properly closed. While the total credits and debits in the accounting system already have a balanced value after making closing entries.
9. Make a Reversing Journal
Reversing journal entries are journal entries prepared at the beginning of an accounting period to cancel and reverse adjusting entries. Previously it had been made at the end of the annual cycle so this step would be the final stage.
This reversing entry is made because the beginning of the previous year and payments at the end will be completed immediately or used during the new year. Then it is no longer recorded as an asset and also a liability.
Reversing journals are also optional so you only need to compile them when you really need them. The need for financial reports certainly does not always require a reversal of journal entries so they must be adjusted.
The entire merchandising company accounting cycle above is a process that can be applied to this business entity. Each stage certainly requires repetition in order to produce financial reports based on various considerations and decisions in running the business going forward.