He Accounting Cycle Of A Trading Company Accounting Essay

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Trading companies have a major asset which most of the service businesses do not have, that asset is well known as Inventory, the businesses are working with different kinds of assets which are selling to customers, and this is the only purpose in this business. Unlikely other assets which are retained and obtained by a business, the trading business have to depend on its survival on the constant sale of this asset. Based on this, a trading businesses need to be able to account for the asset and individual lines of merchandise which to be succeed.

The trading businesses sell goods as its primary source of revenue. A clothing store, supermarket, butcher, chemist, sport shop, milk bar are all trading businesses as they earn most of their revenue based on the sale of goods. In principle accounting, the goods sold by a business are mainly referring to Inventory.

The accounting needs in trading businesses are different from those of the service businesses because of the existences of inventory, which also called as trading stock. Stock inventory including all goods purchased by the trading businesses in order to resale, which are usually happens at a higher price than the cost of the purchased item price.

The activities of the trading businesses create a need to record both of buying and selling of goods. The meaning of trading inventory are excludes some items which may sold occasionally by a business. Non-current asset such as machineries, vehicles and equipment may be sold for a profit at the end of their functional life, however, when such assets are purchased, they are mainly purchased with the purposed of not for reselling the items to generate any profit. An business owner basically buy non- current assets with the purpose of owning them for several accounting periods for the intention of making profits.

The trading businesses depend on purchase and selling inventory, the owner of the business will need to know the great deal more about the stocks handled by the business. For example, the owner have to know the cost of goods sold, the cycle of turnover of the items, and which items are the most profitable , these are all very important pieces of information in the trading business.

In the trading businesses, the cost of goods sold is normally the largest expenses of the business, meanwhile, the business owner will need to control this expense to maximize the margin, and also the owner need to know the amount of stock loss due to damage or theft, and the percentage to raise the sale price of the stocks sold. The total of stock on hand needs to be adequate to meet the daily demands of customers. However, the more money to spend of stock purchase, the less money is available to pay to start new profitable projects or other bills. Therefore, the business owners have to actively in discord between keeping sufficient stock on hand to have the enough money available to undertake new projects or paying bills. However, if the prices are set too low the business may generate plenty of sales, but those sales will not provide sufficient profit to the expenses and the business will not be able to earn a profit. It's crucial that the owner is able to determine a suitable price that will provide for a profit and allow the business to expand.

The importance of the data collected and the number of transactions involving stock means that the accounting system need to be set up record sale and purchase of stock effectively and efficiency. Most of the small businesses use computers for recording the sale and purchases of inventory a lot easier.

The accounting cycle plays the very important role in make an appropriate entries and managing the trading company's finances in each time of purchase made or the revenue is earned. Every time a client or customer makes a payment, the accounting department have to track every single payment to ensure the particular account linked to the client or customer is fully paid.

An Accounting cycle is a step-by-step process of classification, recording and summarization of economic transactions of a trading business. It creates useful financial information in the form of financial statements including income statement, balance sheet, cash flow statement and statement of changes in equity. Accounting Cycle starts from the recording of every single transactions and ends on the preparation of financial statements and closing entries.

Following are the major steps involved in the trading company accounting cycle.

Journal Entries - Analyzing and recording Transactions

The journal entries is to analyzing and recording transactions ,it's the first step in the accounting cycle and begins at the start of an accounting period continues until the whole period. Transaction analysis is a process which concludes whether a specific trading company event has an economic impact on the assets, liabilities or equity of the business. After analyzing the transactions, accountants will classify and record the events which having economic impact by journal entries according to debit and credit rules of a T-Account respectively.

Example of Debit and Credit rules in the T-Account:-

Assets and Expenses 

An increase is recorded as debit (left side) 

A decrease is recorded as credit (right side) 

Liabilities, Equities and Revenues 

A decrease is recorded as debit (left side) 

An increase is recorded as credit (right side)

Following are some examples of translations and Journal Entries:-

Goods purchased on credit from Samantha RM 6,000

Purchase account debit RM 6,000

Samantha account credit RM 6,000

Rent paid for shop to landlord RM 2,000

Rent Account Debit RM 2,000

Cash Account Credit RM 2,000

Commission received in cash RM 1,600

Cash Account Debit RM 1,600

Commission Account Credit RM 1,600

Posting Journal Entries to Ledger Accounts

Posting the journal entries to the ledger accounts is the second step of accounting cycle.

After the journal entries recorded in the first step provide information on which accounts are to be debited and which are to be credited, the debit and credit values of journal entries will be transferred to ledger accounts accordingly. Each department receives a paper copy of the portion of the Ledger account containing the accounts assigned to their department code.

Some example of Ledger accounts as below,

Preparing Unadjusted Trial Balance

An unadjusted trial balance is the one which is created before any adjustments are made in the ledger accounts and it will be print out at the end of each month to initiate the process of creating financial statements.

Example:

Following is the unadjusted trial balance prepared for Company A.

Preparing adjusting entries and the end of the Period.

Adjusting entries are journal entries made at the end of the accounting period to allocate

revenue and expenses to the period in which they actually are applicable. Adjusting

entries are required because normal journal entries are based on actual transactions, and

the date on which these transactions occur may not be the date required to fulfill the

matching principle of accrual accounting.

The two major types of adjusting entries are:

Accruals: for revenues and expenses that are matched to dates before the

transaction has been recorded.

Deferrals: for revenues and expenses that are matched to dates after the

transaction has been recorded.

Accruals

Accrued items are those for which the firm has been realizing revenue or expense without

yet observing an actual transaction that would result in a journal entry. For example,

consider the case of salaried employees who are paid on the first of the month for the

salary they earned over the previous month. Each day of the month, the firm accrues an

additional liability in the form of salaries to be paid on the first day of the next month, but

the transaction does not actually occur until the paychecks are issued on the first of the

month. In order to report the expense in the period in which it was incurred, an adjusting

entry is made at the end of the month.

Deferrals

Deferred items are those for which the firm has recorded the transaction as a journal

entry, but has not yet realized the revenue or expense associated with that journal entry.

In other words, the recognition of deferred items is postponed until a later accounting

period.

5.Preparing adjusted trial balance

The Adjusted Trial Balance is a trial balance which is prepared after taking into account all the adjusting entries that have been journalized and transferred. The Adjusted Trial Balance

will also show the balance of all the accounts irrespective of whether they were involved in the adjustment. The accounts involved in the adjustment will show the updated or adjusted balance. The purpose of preparing the Adjusted Trial Balance is to show the effect of all financial events that had occurred in the accounting period. The Adjusted Trial Balance is to verify that the total debit and total credit are equal for all the accounts in the ledger after the adjustments.

6.Preparing financial Statements

Financial statements are one of the mainstays of the accountant in business, prepared according to relevant regulations, accounting standards and other guidelines, depending on the type of organization. However, with stakeholders increasingly including not only other finance professionals, experienced investors and business analysts but also the general public, it is crucial that statements can be understood by all users. Additionally, information used to prepare final documents must be verifiable as whole and accurate.

There's more to compiling financial statements and accounts than simply arriving at the final figures. Other relevant activities might include:

preparing supporting schedules and notes, and statements of affairs

checking that documents and files of transactions recorded in the books have been posted accurately

analyzing historical data to show year-on-year or month-to-month changes in various financial positions

selecting key information and drafting relevant interpretations for cover statements for bank reports.

7.Closing temporary accounts via closing entries

At the end of the accounting period, the balances in temporary accounts are transferred to

an income summary account and a retained earnings account, thereby resetting the balance of the temporary accounts to zero to begin the next accounting period. First, the revenue accounts are closed by transferring their balances to the income summary account. Next, the expense accounts are closed by transferring their balances to the income summary account. Finally, the dividends account is closed to retained earnings. Once posted to the ledger, these journal entries serve the purpose of setting the temporary revenue, expense, and dividend accounts back to zero in preparation for the start of the next accounting period.

8.Preparing post-closing trial balance

The post-closing trial balance is the last step in the accounting cycle. It is prepared after all of that period's business transactions have been posted to the General Ledger via journal entries. The post-closing trial balance can only be prepared after the closing entries have been posted to the General Ledger. The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account. After the closing entries are posted, these temporary accounts will have a zero balance. The permanent balance sheet accounts will appear on the post-closing trial balance with their balances. When the post-closing trial balance is run, the zero balance temporary accounts will not appear. However, all the other accounts having non-negative balances are listed, including the retained earnings account. As with the trial balance, the purpose of the post-closing trial balance is to ensure that debits equal credits. 

Q2, Assume that you are an owner of a Rafflesia Sdn. Bhd, Below are TWELVE(12) information during the first month of operation for the year 2011 for you to use in recoding the following:

1st Jan Mr. Lee, owner of Rafflesia Sdn. Bhd., Invested RM200,000 cash and premises amounting to RM350000.

2nd Jan Mr Lee purchases machineries of RM 20,000 on credit from ABC Machines Sdn. Bhd.

4th Jan Paid insurance in advance for the February month of the year RM 1500.

5th Jan Paid to advertising agent in advance for the next 6 months for a total of RM 700.

7th Jan Purchased of raw materials RM 15000 in cash from Soon S/B.

10th Jan Cash Sales RM 11000, money received in cash.

13th Jan Return on purchases of defective raw materials RM1250 bought from Soon S/B.

15th Jan Paid salary RM4500 by Cash.

20th Jan Accruals expenses of Electricity and water bill RM 450 for the month of January 2011 payable in February 2011.

24th Jan made a sale on account of RM 6000 to May S/B, payable in 30 days.

27th Jan returned on sales made on account of RM 500 from May S/B.

30th Jan Cash withdrawal RM750 for own personal use.

a. Create one transaction for each account, and prepare the necessary Journal Entries.

Journal Entries

No.

Date

Account

DR (RM)

CR(RM)

1

1/1/2011

DR Premises

200000

 

 

 

CR Mr Lee's Capital

 

200000

 

 

Mr. Lee, owner of Rafflesia Sdn. Bhd., Invested RM200,000 cash and premises amounting to RM350000.

 

 

2

2/1/2011

DR Machinery

20000

 

 

 

CR ABC Mechines Sdn. Bhd

 

20000

 

 

Mr Lee purchases machineries of RM 20,000 on credit from ABC Machines Sdn. Bhd.

 

 

3

4/1/2011

DR Prepaid Insurance

1500

 

 

 

CR Cash

 

1500

 

 

Paid insurance in advance for the February month of the year RM 1500.

 

 

4

5/1/2011

DR Prepaid Advertising agent

700

 

 

 

CR Cash

 

700

 

 

Paid to advertising agent in advance for the next 6 months for a total of RM 700.

 

 

5

7/1/2011

DR Purchase

15000

 

 

 

CR Cash

 

15000

 

 

Purchased of raw materials RM 15000 in cash from Soon S/B.

 

 

6

10/1/2011

DR Cash

11000

 

 

 

CR Sales

 

11000

 

 

Cash Sales RM 11000, money received in cash.

 

 

7

13/01/11

DR Purchase Returns - Soon A/B

1250

 

 

 

CR Raw Material

 

1250

 

 

Jan Return on purchases of defective raw materials RM1250 bought from Soon S/B.

 

 

8

15/01/11

DR Salaries Expense

4500

 

 

 

CR Cash

 

4500

 

 

Paid salary RM4500 by Cash

 

 

9

20/01/11

DR Electricity and Water Expenses

450

 

 

 

CR Accounts Payable - Electricity and Water

 

450

 

 

Accruals expenses of Electricity and water bill RM 450 for the month of January 2011 payable in February 2011.

 

 

10

24/01/11

DR May S/B

6000

 

 

 

CR Sales

 

6000

 

 

Made a sale on account of RM 6000 to May S/B, payable in 30 days.

 

 

11

27/01/11

DR Sales Returns

500

 

 

 

CR May S/B

 

500

 

 

Returned on sales made on account of RM 500 from May S/B.

 

 

12

30/01/11

DR Drawings

750

 

 

 

CR Cash

 

750

 

 

Cash withdrawal RM750 for own personal use.

 

 

 

 

Total

261650

261650

b.) Post to the General Ledger the above Journal entries

General Ledger

 

Cash

 

1st Jan Mr Lee Capital

200000

4th Jan Prepaid Insurance

1500

10th Jan Sales

11000

5th Jan Prepaid Advertising

700

 

7th Jan Purchase

15000

 

15th Jan Salaries Expense

4500

 

30th Jan Drawings

750

 

B b/c

188550

211000

211000

B b/d

188550

 

 

Mr. Lee Capital

 

B b/c

200000

1st Jan Cash

200000

200000

200000

 

B b/d

200000

 

Machinery

 

2nd ABC Machines Sdn. Bhd

20000

B b/c

20000

20000

20000

B b/d

20000

 

Purchase

 

 

7th Jan Cash

15000

B b/c

15000

15000

15000

B b/d

15000

 

ABC Machines Sdn. Bhd

 

B b/c

20000

2nd Jan Machinery

20000

20000

20000

 

B b/d

20000

 

 

Prepaid Insurance

 

4th Jan Cash

1500

B b/c

1500

1500

1500

B b/d

1500

 

Prepaid Advertising

 

5th Jan Cash

700

B b/c

700

700

700

B b/d

700

 

Purchase Returns - Soon S/B

 

13th Jan Raw Material

1250

B b/c

1250

1250

1250

B b/d

1250

 

Raw Material

 

B b/c

1250

13th Jan Purchase Returns - Soon S/B

1250

1250

1250

 

B b/d

1250

 

Salaries Expense

 

15th Jan Cash

4500

B b/c

4500

4500

4500

B b/d

4500

 

Electricity and Water Expenses

 

20th Jan Accounts Payable

450

B b/c

450

450

450

B b/d

450

 

Accounts Payable

 

B b/c

450

20th Electricity and Water Expenses

450

450

450

 

B b/d

450

 

May S/B

 

 

24 Jan Sales

6000

27th Jan Sales Returns

500

 

B b/c

5500

6000

6000

B b/d

5500

 

Sales Returns

 

27th Jan May S/B

500

B b/c

500

500

500

B b/d

500

 

 

Drawings

 

 

30th Jan Cash

750

B b/c

750

750

750

B b/d

750

 

Sales

 

B b/c

17000

10th Jan Cash

11000

 

24th Jan May S/B

6000

17000

17000

 

B b/d

17000

 

C.) After getting the balances of (b), Create the Trial Balance.

Rafflesia Sdn. Bhd

T- Balance

31st Jan 2011

Account Title

Debit (RM)

Credit (RM)

Cash

188550

 

Mr. Lee Capital

 

200000

Purchase

15000

 

Machinery

20000

 

ABC Machines Sdn. Bhd

 

20000

Prepaid Insurance

1500

 

Prepaid Advertising

700

 

Purchase Returns - Soon S/B

1250

 

Raw Material

 

1250

Salaries Expense

4500

 

Electricity and Water Expenses

450

 

Accounts Payable

 

450

May S/B

5500

 

Sales Returns

500

 

Drawings

750

 

Sales

 

17000

Total

238700

238700

d. Finally, prepare the two (2) major financial Statements

d.1 Income Statement

Rafflesia Sdn. Bhd

Income Statement

31st Jan 2011

Sales Revenue

 

 

Sales

17000

 

Less: Sales Return

-500

 

Purchase Returns

-1250

 

Total of Sales Revenue

 

15250

 

 

 

Operating Expenses

 

 

Salaries Expense

4500

 

Electricity and Water Expenses

450

 

Total of Operating Expenses

 

4950

 

 

 

Net Income

 

10300

d.2. Balance Sheet

Rafflesia Sdn. Bhd

Balance Sheet

31st Jan 2011

ASSETS

LIABILITIES & OWNERS EQUITY

Cash

188550

Accounts Payable

20450

Machinery

20000

Owners' Equity - Mr. Lee Capital

200000

Prepaid Insurance

1500

Retained Earnings - Net Income

10300

Prepaid Advertising

700

Less: Drawings

-750

Raw Material

1250

 

 

Accounts Receivable - May S/B

5500

 

 

TOTAL

217500

TOTAL

230000

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