Setting up a trading company is often an option for business people to expand their business to a larger scale. Of the many things that must be learned before starting a company, accounting is very important to understand. Interested in studying the accounting cycle of trading companies? Read the following article until the end.
In general, a trading company’s accounting cycle can be carried out by preparing 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 know the company’s profit and loss.
Let’s look at the more complete discussion below.
What is a Trading Company?
Trading companies are companies whose main business is buying goods from suppliers and then reselling them to consumers. This product does not involve any process of changing the form of the item. For example, supermarkets and grocery stores to meet daily needs.
In fact, trading company accounting procedures are no different from service companies. This profit and loss calculation is calculated by reducing costs in order to get the total income from sales during a certain period.
These costs include 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.
Trading Company Accounting Cycle
The accounting cycle for a trading company is the process of creating the company’s financial reports over a certain period of time. Generally, calculations will start from collecting transaction data to preparing company financial reports to continue closing balances.
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1. Record transactions in the General Journal
Recording all transactions in a general journal is the first stage of a trading company’s accounting cycle. This is done to organize all business activities and events in the company system. The goal is that all data can be successfully entered into an equation and made easier to process.
A discussion regarding the trading company accounting cycle, which is one of the absolute requirements for achieving corporate accounting learning, can also be found in the book by Sigit Hermawan, et al entitled Accounting for Service, Trading and Manufacturing Companies .
Business events that occur during one accounting period, the data entry will be recorded in a general journal. It is useful to convert it to accounting equation form. For example, when a company buys a new vehicle it causes the cash account to decrease.
2. Make notes in the Subsidiary Ledger
The data that has been completed is entered into the general journal, then this entry needs to be posted and transferred to the general ledger account. The aim is to record all changes during the relevant period.
The general ledger account will categorize these changes, debits and credits to a particular account. The goal is for management to have information for budgeting purposes.
3. Create an Unadjusted Trial Balance
The meaning of an unadjusted trial balance is the entire business account that appears on the financial statements before the adjusting journal is made. Therefore, it is called an unadjusted trial balance. This is the third step of the trading company accounting cycle.
If all journal entries have been recorded in the general ledger, then you can create an unadjusted trial balance. Posting accounts to the unadjusted trial balance is easy and simple.
Generally, all accounts that have debit balances are written in the left column and accounts that consist of credit balances in the right column. Nowadays, almost all companies use computerized accounting systems which make work easier.
4. Adjusting Journal
Meanwhile, an adjusting journal is a journal entry that is designed and prepared at the end of the period. The aim is to correct the account before making a financial report. This adjustment entry is the most frequently used step to apply the matching principle to the amount of a company’s income and expenses 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 entry. Starting from initial payments, accruals and non-cash expenses.
All three must adjust income and expenses, so that they are in accordance with previous usage.
4.1 Accounts Requiring Adjustments
There are some accounts that require adjustments only at the end of the period. So not everything needs to be adjusted. The first is the equipment account, requiring this stage due to usage. Next, the expense account is paid in advance.
Prepaid accounts must go through an adjustment stage because the time is due. Next there is a fixed assets account because it experiences 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 have not been processed. Furthermore, revenue accounts are received in advance, due to the passage of time or handed over to customers.
4.2 Example of Writing Adjusting Journals
There are several examples of writing adjusting journals below that can be used as references when writing them. Writing adjusting journals depends on each account type, here is a complete review:
1. Supplies Account
The supplies account shows that the temporary balance is IDR 500,000. Meanwhile, data at the end of the period actually shows that there is still IDR 200,000 remaining. The analysis shows that the amount used up is calculated in the debit expense column, namely IDR 300,000. Next, 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 worth IDR 300,000 and so recorded in the credit column in the adjusting journal.
2. Insurance Account
The prepaid insurance account shows that the temporary balance is IDR 360,000. Meanwhile, data at the end of the period shows that the amount of insurance that has matured is IDR 120,000 in a period of 4 months. The analysis carried out shows that the insurance paid in advance will be written down as an asset. Meanwhile, for the adjusting journal, the total amount of expenses is IDR 120,0000 in the debit column. Next, the insurance account is IDR 120,000 in the credit section.
3. Equipment Account
The equipment account shows a balance of IDR 3,000,000. Meanwhile, at the end of this period, it experienced depreciation of 10%, so it needs to be calculated again so that it becomes real data after depreciation. The analysis carried out shows that the 10% depreciation needs to be multiplied by Rp. 3,000,000 to become Rp. 300,000. The writing will be included in 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 service revenue account shows that the amount is IDR 1,800,000. The final data for this period shows a total of IDR 200,000 of services to customers that have not been completed. Analysis shows that the service income account has not yet become income of IDR 200,000. This is because the work for customers has not been done. So there needs to be a reduction in the service income account of IDR 200,000 and then recorded in the debit column. Next, record in the account column the unearned income 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 closing account balances from the General Ledger on a certain date and was the first step before entering into the preparation of financial reports. Meanwhile, 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 preparation also has several purposes, as is the case in 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?
Preparing a trial balance has several important purposes. First, it 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 things, especially reporting. An adjusted trial balance ensures that all debit entries and credit entries have similar or balanced values. This step was taken to comply with the double entry accounting concept . That is, any differences or imbalances must be explored before the financial statements are completed.
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6. Make Financial Reports
Financial reports are important, especially for players in the large business sector, especially companies. However, the preparation of financial reports also needs to be prepared as much as possible by small-scale business entities. The reason is, this device must be created in every accounting period.
Financial reports can be thought of as the heart of a company. So every entrepreneur needs it in the hope of being able to find out their true financial condition. Another goal is to assess performance in the current year so that it can help make the best possible decisions.
Several accounting applications can now be used to prepare financial reports more easily and practically. More clearly, financial reports are considered as a summary of the recording of all financial transactions during a financial year or certain period.
6.1 How to Make Financial Reports Easily
Preparing this general financial report starts by preparing several pieces of information at once. Starting from the balance sheet, profit and loss report, cash flow report, retained earnings report. All of these are important components in the accounting cycle, because they serve as the purpose 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 prepare financial reports must pay attention to several important things and should not be done haphazardly. Especially if all the data has been arranged neatly and accurately.
6.2 Create an Accounting Worksheet
Accounting worksheets are 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 unadjusted trial balances, adjusting journals, financial reports and others.
This accounting worksheet is a sheet that will track each step of the cycle. Generally this document has five columns, starting from the unadjusted trial balance account and ending with the financial statements section.
In general, an accounting worksheet shows each step in the cycle side by side. Each stage will include debit and credit data. The title consists of the company name, report title and 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 the balance to permanent accounts. It’s like, a temporary account needs to be closed and reset at the end of the year or what 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, an income account will record the amount of income earned in one cycle so it is not based on the period of use by the company.
Meanwhile, a permanent account is a balance sheet account that will track activities that can last longer than the accounting period. For example, a vehicle account is recorded at the balance. This is done because it provides benefits to the company even in the coming year.
7.1 Creating an Income Summary
A summary account is a temporary account that will later be used to store the balance of the income statement account 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 while the closing entry stage is being implemented.
8. Trial Balance After Book Closing
The trial balance after closing the book contains a list of all accounts and also the company’s balance after the closing entry stage and then posted in the ledger. In simple terms, this data will record all permanent accounts that still have a balance.
This existing balance is proven to still 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 report accounts, especially profit and loss, have been closed and no longer have any remaining value.
The purpose of preparing a post-closing trial balance is to verify that all temporary accounts have been closed correctly. Meanwhile, the total credits and debits in the accounting system already have a balanced value after making the closing entry.
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9. Make a Reversal Journal
Reversing journals are journal entries prepared at the beginning of an accounting period to cancel and reverse adjusting journal entries. Previously it had been done at the end of the annual cycle so this step was the final stage.
This reversing entry is carried out at the beginning of the previous year and the payment at the end will immediately be completed or used during the new year. Then it is no longer recorded as an asset or liability.
A turning journal is also optional so you only need to organize it when you really need it. The need for financial reports certainly does not always require reversal of journal entries so they must be adjusted.
The entire trading 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 in the future.