Importance of Accounting Cycle For Trading Company

If you are a businessman and a business that is dependent in trade-related business, then you must understand the trading company accounting cycle. This is very important because knowing the cycles that occur will minimize the occurrence of fraud. The following is a complete explanation of the simple trading company accounting cycle.

What Is a Trading Company?

In general, trading companies are companies whose main activities are buying, storing and reselling merchandise without adding value to it. What is meant by added value is to process or change the shape or nature of the goods, in such a way that they have a high sale value.

Trading companies can be distinguished from other types by looking at the special characteristics inherent in a trading company. The characteristics of a trading company are as follows:

  • The main income comes from selling merchandise.
  • The main costs come from the cost of goods sold and other business costs.
  • In his account there is a merchandise inventory account.
  • As an intermediary between producers and consumers.
  • Between the goods purchased and goods sold are the same or there is no change.
  • The main objective is to make a profit by selling the trade at a higher price compared to the purchase price.

From the characteristics of the trading company it can be concluded that the main activity of the trading company is buying and selling.

Also read:  7 Important Points Regarding the Recording of Trade Company Purchases and Sales Journals

Trading Company Accounting Cycle

The trading company accounting cycle is the process of making a trading company financial statement for a certain period. In general, the trading company accounting cycle always starts from the transaction to the preparation of the company’s financial statements followed by a balance that is closed with a closing journal to a reversing journal.

1. Record Transactions in General Journals

Recording all transactions in a public journal is the first step in the accounting cycle and is used to record all business transactions and events in the accounting system. When business events occur throughout the accounting period, journal entries are recorded in general journals to show how the events change in the accounting equation. For example, when a company spends cash to buy a new vehicle, the cash account is reduced or credited and the vehicle account is increased or debited.

2. Take notes in the subsidiary ledger

After a journal entry is made in a public journal, then this entry must be posted and transferred to the general ledger account. This is the second step in the trading company accounting cycle. The purpose of journalizing is to record changes in the accounting equation caused by business events. General ledger accounts categorize these changes or debits and credits into certain accounts, so that management can have useful information for budgeting and performance purposes.

3. Make an Unadjusted Balance Sheet

The unadjusted trial balance is a list of all business accounts that will appear on the financial statements before year-end adjusting journal entries are made. That is why the balance sheet is called not adjusted. This is the third step in the accounting cycle. After all journal entries are posted to the general ledger account, an unadjusted trial balance can be prepared. Posting an account to an unadjusted trial balance is quite simple. Basically, each account balance is transferred from the general ledger account to the trial balance. All accounts with debit balances are listed in the left column and all accounts with credit balances are listed in the right column. Because management uses this general ledger account, journal entries are posted to the general ledger account on a regular basis. Most companies have a computerized accounting system that updates ledger accounts as soon as journal entries are entered into accounting software. Manual accounting systems are usually installed weekly or monthly. As with journalizing, entries are made throughout each accounting period.

4. Journal of Adjustment

An adjustment journal is a journal entry that is made at the end of a period to correct an account before the financial statements are prepared. This is the fourth step in the accounting cycle. Adjustment entries are most often used according to the matching principle to match income and expenses in the period they occur. There are three types of adjusting journal entries as follows:

  • Advance payment
  • Accruals
  • Non-cash expenses

Each of the entries above adjusts income or expenses to match the current period usage. This concept is based on the principle of time period which states that accounting records and activities can be divided into separate time periods.

5. Balance Sheet Adjusted

The trial balance after adjustment is a list of all company accounts that will appear on the financial statements after the year-end adjustment journal is made. Preparing a trial balance after adjusting is the fifth step in the trading company accounting cycle and is the last step before financial statements can be produced. There are two main ways to prepare adjusted trial balances. Both of these methods are useful depending on the company website and the chart of accounts used. You can post your account to your balance after adjustment using the same method used to create an unadjusted trial balance. Account balances are taken from ledger accounts and are on an unadjusted trial balance. Basically, You only repeat this process again unless the ledger account includes year-end adjustment entries. You can also take an unadjusted trial balance and simply add adjustments to the account that has been changed. In many ways this is faster for small companies because there are very few accounts that need to be changed. Note that only active accounts will appear on the financial statements that must be included in the trial balance. If the account has a zero balance, there is no need to put it on the balance sheet. Note that only active accounts will appear on the financial statements that must be included in the trial balance. If the account has a zero balance, there is no need to put it on the balance sheet. Note that only active accounts will appear on the financial statements that must be included in the trial balance. If the account has a zero balance, there is no need to put it on the balance sheet.

6. Making Financial Statements

Prepare general financial statements; including the balance sheet, income statement , retained earnings statement, and cash flow statement, are the most important things in the accounting cycle because they are the purpose of financial accounting. In other words, the concept of financial reporting and the accounting cycle process is focused on providing information that is useful for external users in the form of financial statements. These statements are the end products of the accounting system in any company. Basically, preparing these statements is about what is financial accounting.

7. Make an Accounting Worksheet

Accounting worksheets are a tool used to help accountants complete the accounting cycle and prepare year-end reports such as unadjusted trial balances, adjusting entries, post-adjustments, and financial statements. An accounting worksheet is basically a worksheet that tracks every step of the accounting cycle. This document usually has five sets of columns that begin with a trial balance account that has not been adjusted and ends with financial statements. In other words, an accounting worksheet is basically a worksheet that shows all the main steps in the accounting cycle side by side. Each step includes the debit and credit with the total calculated at the bottom. Just like the trial balance, the worksheet also has a title that consists of the company name,

8. Make a Closing Journal

Closing journals are entries made at the end of an accounting period to delete all temporary accounts and transfer their balances to a permanent account. In other words, temporary accounts are closed or reset at the end of the year. This is usually called closing a book. A temporary account is an income statement account used to track accounting activities during the accounting period. For example, an income account records the amount of income earned during an accounting period, not during the company’s lifetime. Permanent accounts are balance sheet accounts that track activity that lasts longer than the accounting period. For example, a vehicle account is a fixed assets account that is recorded on the balance. The vehicle will provide benefits to the company in the coming years, so it is considered a permanent account.

9. Make a summary of income

An income summary account is a temporary account used to store income statement, income and expense account balances, during the closing entry step of the accounting cycle. In other words, the income summary account is only a substitute for the account balance at the end of the accounting period when closing entries are being made.

10. Balance Sheet After Closing the Book

A trial balance after closing a book is a list of all accounts and their balances after the closing entry has been journalized and posted to the ledger. In other words, the trial balance after closing is a list of accounts or permanent accounts that still have a balance after the closing entry is made. The list of accounts is identical to the account presented on the balance sheet. This makes sense because all income statement accounts have been closed and no longer have a current balance. The purpose of preparing a post-closing trial balance is to verify that all temporary accounts have been properly closed and that the total debits and credits in the accounting system are the same as after the closing entry was made.

11. Make a Reverse Journal

A reversing journal is a journal entry made at the beginning of an accounting period to reverse or cancel an adjusting entry made at the end of the previous accounting period. This is the last step in the accounting cycle. The reversing journal is done because the accrual of the previous year and the prepayment will be repaid or used during the new year and no longer needs to be recorded as a liability and an asset. This journal is optional depending on whether or not there are adjusting journal entries that need to be reversed.

The entire accounting cycle above is an accounting process that can be used for trading companies. Each process will continue to be repeated to produce financial statements that you can use as consideration for business decision making.

To facilitate trading companies in making financial reports, accounting software is  now  available for trading companies in Indonesia. The use of which is quite easy and can be used anywhere makes  accounting software  much in demand by entrepreneurs. No need to bother going back and forth excel,  no need to bother learning how to make accounting, the  software already provides various accounting features for your company.

by Abdullah Sam
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