Have you ever heard of the term settlement? In general, settlement is a payment method that functions to lock the number of transactions that enter a business account. Settlement is a critical strategic component of business cost accounting. Cost accounting is a part of accounting science.
Cost accounting aims to provide planning and control of company costs. Therefore, the settlement payment process must be carried out properly so that the company does not suffer losses with the help of ERP software. This article will elaborate on the meaning of settlement, cost accounting, and the recording of settlement in the accounting journal.
Table Of Content
- What is Settlement in Cost Accounting?
- Recording of Settlement in the Cost Accounting Journal
- Conclusion
What is Settlement in Cost Accounting?
Maybe most people still don’t know what settlement is. Because its use is still rare in the payment system for buying and selling activities in general. Settlement is a payment system for incoming transactions in the form of demand deposits. However, we can convert income in journal entries.
Thus, settlement is the final step of a transaction, carried out by the seller for the buyer’s payments. Thus, we must complete this settlement properly, where the seller will receive payment for the goods given to the consumer.
You should note that settlement payments do not apply to debts or receivables; in most cases, this payment must be made before the goods are shipped to the consumer. In this case, if you already know what settlement is, then the cost accounting journal entry for this journal is also the same. Of course, you must be able to control expenditures effectively to fulfill all company objectives. Accounting science is the practice of recording, reporting, and detecting costs involved with corporate operations.
Cost Accounting Function
Financial reporting activities related to cost accounting will assist management in knowing and taking appropriate cost of goods sold policies. As a result, cost accounting assists firms in calculating the cost of items and in planning and controlling costs. Here’s the full explanation:
Determine the basic price
Cost accounting is used to establish the basic price of goods and services traded by businesses and individuals. Determining the cost of things is critical since mismatched prices can lead to losses for businesses. For this reason, the price given should not be too high so that consumers can enjoy the product. On the other hand, you don’t want to undercut the company’s profits by too much.
Thus, cost accounting is critical in determining which company costs are burdensome for a product process and optimizing it. It is possible to obtain the cost of goods by tracking and summarizing all cost components directly related to production.
Also read: COGS (Cost of Goods Sold) – A Component in Business You Have to Know
Planning and controlling costs
A company’s ability to price a product initially is becoming increasingly important in business. Business managers must estimate prices based on cost data and take into account various cost-related factors. Cost accounting is very useful during this planning stage because it shows whether there are deviations or errors in the actual cost planning. If an error occurs, the company’s management must correct it and keep costs under control during the following year’s production period.
Recording of Settlement in the Cost Accounting Journal
Cost accounting will record settlement after the company receives payment or cash and the product or service and the company deliver it or the customer receive it. Cash receipts can affect not only the sales process but also the cost of goods sold and finished product inventory in cost accounting.
The following is an example of recording settlements:
As illustrated above, when a company records a settlement in cost accounting, that is how to do it by adding cash and also a sales account. Thus, the cost of goods sold will increase in the debit position, allowing a reduction in product inventory in the credit position, because the company has sold the product to consumers.
If the consumer owes a debt to the company but they pay them in the following month, the next settlement provisions will apply. The recording of these conditions is as follows:
This condition indicates that settlement occurs in April when a business receives payment from a consumer for its rights, even though the delivery of goods and products is in january.
The possibility that often occurs, especially for manufacturing companies, is the waste material from the processing of a product, which you usually know as waste material. When a company doesn’t use a piece of material to make a product again, it’s waste. This is because the company can’t use the material again. Increase the productivity and profitability of your manufacturing business with COGS (Cost of Goods Sold) – A Component in Business You Have to Know, the most complete manufacturing system in Indonesia.
In cost accounting, the remaining materials will be put into two categories: the remaining materials that are not sold and also the waste of raw materials that are sold.
The rest of the materials that are not sold
When the resulting material as a result of processing orders, they charge the costs of destroying the materials separately or combine with the costs of making the relevant orders.
You can use the following journal entries to record disposal costs for leftover materials:
Work in Process – Material Cost__________xx
Cash__________________________________________________xx
Conversely, if material wastage occurs as a result of manufacturing a particular order or occurs naturally, the cost is included in factory overhead costs. You can use the following journal to record these costs:
Actual Factory Overhead Cost__________xx
Cash__________________________________________________xx
Remaining Sold Materials
When a company consider their remaining raw materials as the total cost of reducing the total during the production process of certain orders or simply sell it, the journal entries are as follows:
When reduction in total costs during the production process of certain orders or when they sell raw materials record the remaining raw materials, the journal entries are as follows:
Cash__________________________________________________xx
Work in Process – Material Cost____________________xx
Also read: Amortization: Definition, Method, and Examples in Accounting
Conclusion
That is a complete discussion of settlements related to cost accounting. However, businesses must require accurate and neat recording of expenses according to the above journal. Why is that? Because with cost accounting you can use it as a controller and also the right cost planning. You also have to determine the amount of turnover you receive through this settlement record, right? As a result, by acquiring this knowledge, you can avoid losses.
One way to achieve this is to have neat and accurate bookkeeping in real-time, that is, you can try using Accounting Software from HashMicro. Automate cash flow management, financial statement generation, bank reconciliation, adjusting journals, invoicing, and more in just seconds. Enhance your business now with a free demo system from Hashmicro.
