Profit And Loss As Index Of Company Success - Assignment Example

The business had total expenditure of $20,756 which includes non-cash expenses of $175 for depreciation on equipment. Although depreciation does not involve the movement of funds it represents a charge for the use of the asset. This charge should not be deducted for income tax purposes. However, the charge is reflective of the use of the asset in the company. The charge was calculated for two months based on a 5-year straight-line method of depreciation. It is expected that the useful life of equipment which includes a computer, fax machine and a copy straight-line longer than 5 years.

The Internal Revenue Service (2012) indicates that businesses must prorate depreciation deduction based on the months in use. The items of equipment were in use for 2 months and so the charge in the accounts is based on this fact. Other expenses of note include bad debt expense which includes write-offs as well as provisions made for debts that may not be collected. The two bills representing a total of approximately $11,000 and due from Delta Company is not collectible since the company is bankrupt.

A total of 25% of the debt of $8000 (that is $2,000) due from Baker Company for consultancy fees and $763.86 for reimbursable are also not considered to be recoverable based on previous experience with the client. Additionally, $432.78 for costs may not be recovered from Charlie Company. These amounts have been included as a provision for doubtful debts and included in Bad debt expense. The total amount of bad and doubtful debts expensed represents 40 per cent of income. The company made a net profit of $15,686 which represents 41 per cent of total income.

Depreciation of $175 will be added back to the net profit figure. Income tax has not been accounted for since the proprietor’s will include this profit when filing his personal income tax returns. This will be filed on the appropriate form for business proprietors.