Accounting Cycle
We often hear the company’s accounting cycle in the economic activities. What is company’s accounting cycle?. Accounting cycle is the process of making the company’s financial statements for a certain period of time.
Generally, the accounting cycle starts from the transaction to the preparation of the company’s financial statements. Then followed by the balance closed with closing journals or until the reversing journal.
Trading Company
A trading company is a company which its main business is purchasing goods from a supplier and selling them to consumers without changing the shape of the goods. As an examples are grocery stores and supermarkets. These businesses purchase the daily necessities from suppliers and resell them to consumers.
The Accounting Cycle In Trading Business
The accounting cycle in a trading company is no different from the service company. Either the service company or the trading company should record all transactions in the journal and then periodically recorded in the accounts in ledger. By the end of the period, the accounts balances are calculated and stated in the worksheet as a tool for preparing financial reports. Adjusting journals and closing journals are also carried out within the trading company, as well as the preparation of a post-closing trial balance should be done as the final stage in the accounting cycle.
- Transaction Identification. Starting from a transaction by identifying the transactions in any account. At a trading company, a seller will deliver his products and receive payment from buyer. The transaction here is identified as cash sales transactions.
- Post to Ledger. The next step is to post to the ledger,. It is the process of transferring journaled accounts to each ledger.
- Make a Trial Balance. A trial balance lists the accounts used and their balance values serves to show that the debit and credit sides have balanced.
- Adjusting Journal. Adjusting entries are made when there are errors in journalizing and posting or to ensure the costs and revenues have been recorded in the correct period.
- Trial Balance After Adjustment. The next stage is a combination of trial balance and adjustment journal, commonly called the trial balance after adjustment (adjusted trial balance).
- Preparing Financial Statements. After a trial balance after adjustment is set, the next step is to prepare the financial statements. The financial statements are the end result of the accounting process which serves a summary of financial transactions. The financial statements are presented with the purpose to provide the information regarding to the position of assets, debt, and capital of the company. In general, financial statements include income statement, capital change statement, and balance sheet. At this stage the existing accounts on the trial balance after the adjustment are transferred to the financial statements in accordance with their financial statements. As an example for the balance sheet, the accounts related to the balance sheet are the group accounts of property, debt and capital. The income statement contains income and expense accounts.
- Make a Closing Journal. The next step is to make a closing journal of the accounts in the income statement that is the income and expense accounts.
- Trial Balance After Closing. The following stage is the trial balance after closing. Same as in the trial balance after the previous adjustment by combining the trial balance with closing entries. This will be stated in the profit loss statement with zero balance.
- Reversing Journal.Reversing journal is an optional so it does not have to make it. It only applies for specific transactions. For example, advanced income transactions or prepaid expenses are journalized as costs.
Understanding accounting cycle for trading companies seems complicated. However it is necessary because it is the requirements in preparing financial statements. Understanding the flow of financial statement allows users to recognize the accurate financial position.
