Manufacturing companies are a type of company that operates in the field of selling various types of raw materials or raw materials. These raw materials are adjusted according to market needs and demand, either for resale, processing into semi-finished goods or finished goods. On this occasion, we will discuss the accounting cycle of manufacturing companies.
There are many manufacturing companies in Indonesia, and it must be acknowledged that their role is very important. Especially the rapid development of technology requires manufacturing companies to compete with each other to be the best.
So, to become the best company, of course the company’s financial and accounting cycles must be transparent. The following is a complete discussion of the manufacturing company accounting cycle.
Manufacturing Company Accounting Cycle
After drawing the manufacturing company’s accounting cycle, the next step is to discuss this one by one. Starting from the journal to the reversing journal.
1. Manufacturing Company Transaction Documents
Manufacturing companies have cycles that are quite complicated and different from the accounting cycles of companies in other fields. The financial recording process in manufacturing companies has various specific requirements. An important aspect of recording financial transactions for manufacturing companies is using the accrual method.
One of the stages in a manufacturing company’s accounting cycle is the receipt of transaction documents. This initial cycle is the stage where the collection of evidence of financial transactions is given to accounting so that it can later be processed as a data source for recording transactions.
Various forms of transaction documents that can be provided to accounting parties include notes, Purchase Orders (PO), Purchase Requisition (PR), and so on.
Because transaction documents involving the income and expenditure of company funds are needed for accounting purposes, you should maintain the transaction data as best as possible so that it is not lost and causes ambiguity.
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Purpose of Recording Financial Transactions
Just like other companies, manufacturing companies record financial transactions as a basic step in order to manage the company’s finances as well as possible. Avoid several mistakes that could hinder development and worsen the company’s condition.
Of course, what is recorded is proof of official transactions and can be accounted for. Later, the process of recording financial transactions can show the rate of company economic activity based on the funds disbursed. The following are various purposes for recording financial transactions that you need to know:
- As a source of information related to company funds
- As a source of information regarding changes in profits in company funds
- As a source of information for making financial reports
- As a source of information used to project the company’s potential
Considering how important and numerous functions financial reports are for a company, every proof of transaction of inflows and outflows of company funds must not be left in disarray.
Must be arranged neatly, according to post and transaction time. Stored in a safe place so it is not easily lost.
Various Types of Evidence of Financial Transactions
We have already discussed the importance of the process of maintaining evidence of financial transactions that will be used to prepare financial activity reports for the manufacturing process. The question is, what are the various types of evidence of financial transactions?
The following are various types of evidence of manufacturing company financial transactions that you need to know:
1. Internal Evidence
“Internal” is a word that is synonymous with the inside of a party. Internal evidence in financial transactions is evidence created by internal company parties for parties interested in carrying out transactions.
This internal evidence does have a less official impression, but has quite high authority.
For example :
- Evidence of cash going in and out : this evidence shows the flow of funds coming in and out of the company. For example, cash goes into the company’s treasury, money goes out to pay employee salaries, and so on.
- Memo : this evidence is proof of recording which seems informal and is usually provided by internal company parties (in high positions) to accounting.
2. External Evidence
In contrast to internal evidence, external evidence is transaction evidence provided by parties external to the company regarding transactions that have been carried out. External evidence is usually provided by partners, other companies, and so on. Some types of external evidence that are often encountered are as follows:
- Receipt : a type of proof of transaction provided by another party in the payment process for payment of goods or services that fall within the scope of work within the company concerned. Usually this type of document is filled in by two types of signatures, namely the paying party and the paid party.
- Invoice/ invoice : type of proof of transaction for purchases of goods or services made on credit. This transaction document is usually made in two copies, one in the form of an original document and the other a copied version . The original version of the invoice is given to the party who pays, while the copy version is kept by the party who receives the payment.
- Note: the most common proof of transaction given by the seller to the buyer for the payment made. Be it payment for products or services.
- Credit note – debit note: a type of transaction proof that shows a reduction in the amount of money in the company account for the payment process for something (credit note). Meanwhile, a debit note is proof of a transaction given to an external party due to a return or return of goods whose condition does not match the order.
- Check: external evidence in the form of an order from the account owner to the bank to pay the amount of money stated in the check to the party named on the check.
And there is still some more external evidence that can be collected as a data source for recording company financial transactions. So far, have you begun to understand the manufacturing company accounting cycle?
2. Manufacturing Company Journaling
General accounting journals are used to record transactions that have been carried out by a company with the ultimate goal of achieving balanced figures ( balance ). The basic purpose of making a journal is to group transactions according to the information contained in the accounts in the journal.
The general benefit of a journal is knowing clearly the calculations on all evidence of transactions that have been carried out by the company during a certain period. Apart from that, journals can also help find the equivalent nominal amount ( balance ) in the debit and credit sections.
Lastly, the benefit of making a journal is that it also provides codes for the accounts listed in the journal.
You need to know that journals are divided into two types. Namely general journals and special journals. Basically, these two journals have the same function. However, there are several differences in terms of the recording structure.
Later, general journals and special journals are needed to prepare financial reports as well as general ledger books.
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3. General Ledger
After the journal has been created, the next step is posting it to the ledger. The general ledger is one of the instruments used in the accounting cycle of manufacturing companies.
To understand more about ledgers, please read the following explanation.
3. 1 Definition of General Ledger
A general ledger is a document in the form of a book that is used to transfer recorded accounts from a general journal. A ledger can be interpreted as a “data summary container”. Its existence is very necessary when making accounting reports.
By reading ledger data, accountants can more easily trace errors that occur in transaction records collected by the company. Later, the ledger will also be useful for auditing external parties.
This audit process can help maintain the quality of the company’s performance so that it does not always violate the set budget.
The various accounts contained in the ledger are as follows:
- Real account / real account
- Nominal account / nominal account
The explanation is as follows:
- Real accounts are a type of ledger account used in statements of financial position (Assets, Capital, Liabilities)
- Nominal accounts are a type of account in the R/L (profit and loss) report, including Income and Expenses
3. 2 Functions of the Ledger
The general ledger has the function of:
- A means of summarizing transaction data
- A means of sorting financial data
- A means of knowing whether there is a difference in the amount of an account
- A means of monitoring the history of an account
- A means of classifying transactions that previously came from the journal
- Means of preparing Financial Reports
3.3 Purpose of Ledger
Meanwhile, the purpose of the Ledger is as follows:
- Record manufacturing company financial transactions as well and effectively as possible
- Perform addition/subtraction and adjust to transaction history
- Provides information based on account history
- Validate the number of accounts
- Providing accountable financial report information based on certain transaction periods
4. Trial Balance
A trial balance is a type of financial report that is deliberately created to check whether there are differences in the balance on the debit or credit side. Indeed, the form of the trial balance is not as complicated or complete as other financial reports. So the data is easier to understand.
Even though the form is simple and not too complex, the trial balance is accurate enough to be used as a calculator for the balance between the debit and credit sides of the financial statements.
There are three types of trial balance, namely the unadjusted trial balance, the after-adjusted trial balance, and the closing trial balance.
The balance before adjustments is a type of balance sheet created to look for errors when posting debits and credits to the ledger. This balance list is done to find transaction errors in the ledger.
5. Adjusting Journal
An adjusting journal is a type of journal used to record changes in the balance in an account as a result of a company’s transactions. This journal is used to determine the account balance in the general ledger at the end of each transaction period.
Adjusting journals are also used to calculate income and expenses on company transaction accounts. In general, this type of journal entry is carried out after the trial balance has been completed by accounting.
Adjusting entries regulate the balance for all types of accounts so that they are more appropriate at the end of the period. So, there is no gap between one account and another account.
6. Trial Balance After Adjustments
This type of balance sheet is a type of balance sheet after evaluation of the adjusting journal. Because a manufacturing company’s trial balance uses an accrual basis, adjustments must be made to reduce differences in balances, the resulting balance in the trial balance after adjustments can be more valid.
7. Make Financial Reports
There are quite a lot of steps in preparing financial reports. Namely with the following steps:
- Prepare a trial balance obtained from the general ledger
- Make adjustments to the adjusting journal
- Compile a worksheet or what is usually called a balance sheet
- Prepare profit and loss reports, as well as reports on changes in capital (other types of reports if needed)
- Adjust the accounts and close the accounts
- Prepare a trial balance after closing
These various methods must be carried out in stages in order to be able to prepare detailed financial reports. Later the final results of the financial report can show how healthy the company’s financial condition is.
Manufacturing company accountants should also make financial reports as credible as possible. The process of creating financial reports can basically be done with special accounting software for more accurate results. However, the recording process can be done manually.
So, all the steps in making financial reports above must be detailed to be able to produce credible reports. Later there is another aspect that should not be forgotten, namely the existence of CALK or Notes to Financial Reports.
This note is in the form of a memo or financial report note containing additional information that has its own position in the report being prepared. CALK consists of information related to organizational structure, policies in accordance with PSAK or other statements that can make readers understand the company’s real situation better.
8. Trial Balance After Adjustments
After the adjusting journal is made, it can be entered into the trial balance to get the balance value between debit and credit. This process is the trial balance after adjustments, this is an important process in preparing the company’s financial reports.
9. Closing Journal
Closing journals are a type of journal prepared at the end of an accounting period. This journal is used to send balances from temporary accounts to permanent accounts.
In the creation process, a closing step is carried out so that it reaches a balance of 0 (zero) and is not carried over to the next recording period.
The balance in the final account will later be carried over to the permanent account and serves as an indicator of the company’s previous financial status. When preparing the closing journal, there is a summary of income which will later be useful for recording financial reports for the coming period.
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10. Reverse Journal
The reversing journal is a type of financial report whose existence is quite optional, because it can actually be used and if it is not used it will not affect the company’s financial transaction reports.
As the name suggests, the reversing journal functions to reverse the adjusting journal which could give rise to another balance sheet account. The consequence if there is no reversing journal is the emergence of reverse entries or double accounts.
The various functions of the reversing journal are as follows:
- Simplify the process of creating financial reports for the new transaction period
- Simplify the preparation of journals for the coming transaction period
- Minimize errors in calculating account balances that could occur, for example avoiding duplicate data due to AJP adjustments (Adjusting Journal Entries)
There are several types of accounts that require a reversing journal, including the following:
- Expenses (both payable/prepaid)
- Income that will still be received
- Use of equipment (if recorded as an expense)