The Simple Trading Company Accounting Cycle

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

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

Table of Contents

1 What is a Trading Company?

2 The Accounting Cycle of a Trading Company

2.1 1. Recording Transactions in the General Journal

2.2 2. Record in the subsidiary ledger

2.3 3. Creating Unadjusted Trial Balance

2.4 4. Adjusting Journal

2.5 5. Adjusted Trial Balance

2.6 6. Making Financial Statements

2.7 7. Creating Accounting Worksheets

2.8 8. Creating a Closing Journal

2.9 9. Creating Income Summary

2.10 10. Trial Balance After Closing the Book

2.11 11. Creating a Reversing Journal

What is a trading company?

In general, a trading company is a company whose main activity is buying, storing and reselling merchandise without adding value to it. What is meant by added value is in the form of processing or changing the shape or nature of the goods in such a way that they have a high selling value.

A trading company 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 operating expenses.
  • In the accounting, there is a merchandise inventory account.
  • As an intermediary between producers and consumers.
  • Between the goods purchased and the 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 than the purchase price.

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

Also read:  7 Important Points Regarding the Journal of Trading Company Purchases and Sales

Trading Company Accounting Cycle

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

1. Recording Transactions in the General Journal

Recording all transactions in a general 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 during an accounting period, journal entries are recorded in the general journal to show how those 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. Record in the Assistant Ledger

After journal entries are made in the general journal, they should then be posted and transferred to the general ledger accounts. This is the second step in the trading firm’s accounting cycle. The purpose of journalizing is to record changes in the accounting equation that result from business events. General ledger accounts categorize these changes or debits and credits into specific accounts, so that management can have information that is useful for budgeting and performance purposes.

3. Make Unadjusted Trial Balance

The unadjusted trial balance is a list of all the business accounts that will appear in the financial statements before the year-end adjusting journal entries are made. That is why this trial balance is called unadjusted. This is the third step in the accounting cycle. After all journal entries are posted to the ledger accounts, an unadjusted trial balance can be prepared. Posting an account to an unadjusted trial balance is quite simple. Basically, the individual account balances are transferred from the ledger accounts 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. Since management uses these ledger accounts, journal entries are posted to the ledger accounts on a regular basis. Most companies have computerized accounting systems that update ledger accounts as soon as journal entries are entered into the accounting software. The manual accounting system is usually installed weekly or monthly. Just like journaling, entries are made throughout each accounting period.

4. Adjustment Journal

An adjusting 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 in which they occur. There are three types of adjusting journal entries as follows:

  • Advance payment
  • Accrual
  • Non-cash expenses

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

5. Adjusted Trial Balance

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

6. Making Financial Statements

Prepare general financial reports; including the balance sheet, income statement , retained income statement, and cash flow statement, is the most important thing in the accounting cycle because it is the purpose of financial accounting. In other words, the concept of financial reporting and the accounting cycle process is focused on providing useful information to external users in the form of financial reports. These statements are the final product of the accounting system in any company. Basically, preparing these statements is what financial accounting is all about.

7. Creating an Accounting Worksheet

Accounting worksheets are tools used to help accountants complete the accounting cycle and prepare year-end reports such as unadjusted trial balances, adjusting entries, post-adjusted trial balances, and financial reports. An accounting worksheet is basically a worksheet that tracks every step of the accounting cycle. These documents typically have five sets of columns starting with an unadjusted trial balance account and ending with financial statements. In other words, an accounting worksheet is basically a worksheet that shows all the major steps in the accounting cycle side by side. Each step lists its debits and credits with the total calculated at the bottom. Just like the trial balance, the worksheet also has a title consisting of the company name,

8. Make a Closing Journal

A closing journal is an entry 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 commonly known as closing the book. A temporary account is an income statement account that is used to track accounting activities during the accounting period. For example, the revenue account records the amount of revenue earned during the accounting period, not over the life of the company. A permanent account is a balance sheet account that tracks activity that lasts longer than the accounting period. For example, a vehicle account is a fixed asset account that is recorded on the balance. The vehicle will provide benefits for the company in the coming years, so it is considered a permanent account.

9. Create an Income Summary

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

10. Trial Balance After Closing the Book

The post-book closing trial balance is a list of all accounts and their balances after closing entries have been journalized and posted to the ledger. In other words, a trial balance after book closing is a list of accounts or permanent accounts that still have a balance after closing entries are made. This list of accounts is identical to the accounts presented on the balance sheet. This makes sense since all income statement accounts have been closed and no longer have any current balances. The purpose of preparing the 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 entries were made.

11. Creating a Reversing Journal

Reversing entries are journal entries made at the beginning of the accounting period to reverse or cancel the adjusting entries made at the end of the previous accounting period. This is the final step in the accounting cycle. Reversing entries are made because the previous year’s accruals and prepayments will be paid or used during the new year and no longer need to be recorded as liabilities and assets. This journal is optional depending on whether or not there are adjusting journal entries that need to be reversed.

Also Read: 6 Ways to Measure Cash Flow That Determines the Success of Your Business

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

 

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