Accounting Transactions of Tax Solutions Inc - Assignment Example

FINANCE Overview of the Business The of the business is Tax Solutions Inc. and is a private limited company incorporated and domiciled in USA under the Company’s Act. It offers tax related solutions as well as managerial consultancy services. Tax issues have for a very long bedevilled many business entities, affecting their operational efficiency and/or even total closure. The Federal government has been asking the business community to adhere and comply with all set rules and regulations in the administration of taxes. Tax Solutions Inc. offers revolutionary and professional solutions to these problems that have existed in the business arena. Tax Solutions Inc. is targeting to offer solutions so as to help businesses reduce tax exposures, capitalize on available tax incentives and hence increase their cash flows for growth. It targets small and medium sized enterprises (SMEs) in the USA to grow and create value with them. Among the tax incentives that Tax Solutions Inc. guide businesses on are industry specific and include Domestic Production Activities Deduction for manufacturers through its tax specialists in manufacturing industries irrespective of the nature of manufacturing. In addition, Tax Solutions Inc. team of experts will help them assess how a given tax credit fits with your overall tax strategy and timing. Accounting Transactions that Tax Solutions Inc. Involved itself within December 20X4 1/12/20X4 – The owners of Tax Solutions Inc. registered their company with $1,500,000. 1/12/20X4 – The Company paid license fee of $10,000. 1/12/20X4 - Tax Solutions Inc. purchased equipment for $180,000 cash. 2/12/20X4 - The Company purchased a building for $900,000 cash to be developed as part of the companys expansion policy. 2/12/20X4 – Paid Insurance policies for one year worth $30,000 4/12/20X4 - The Tax Solutions Inc. completed a consulting project for a customer in exchange for $536,000 cash. 6/12/20X4 - Purchased equipment by paying $81,000 cash and signing a note payable for $231,000 6/12/20X4 - Completed consulting services for $76,000. Tax Solutions Inc. will collect the amount within 30 days. 7/12/20X4 - The Company purchased office supplies worth $40,000 on an account. 10/12/20X4 - Completed consulting services worth $99,000 and this amount will be collected later in future. 12/12/20X4 - Tax Solutions Inc. collected $35,000 from one of the clients as part payment for the amounts owed to the company. 15/12/20X4 - The Company paid $29,000 cash on its accounts payable. 17/12/20X4 - Paid $6,000 cash for maintenance of equipment 20/12/20X4 - The Company paid $46,000 cash for an advertisement in the local newspaper for the month of December. 23/12/20X4 - Tax Solutions Inc. offered consultation services and was paid $600,000 in cash. 24/12/20X4 - Tax Solutions Inc. offered consultation services worth $50,000, but the client paid $80,000 in cash. 25/12/20X4 – The Company paid a subscription fee of $25,000 to a profession body in which it is a member. 27/12/20X4 - Tax Solutions Inc. made advance payment for January 20X5 supplies worth $35,000. 31/12/20X4 - Paid its employees $306,000 as salaries. 31/12/20X4 - An inventory count of supplies was done and showed that supplies worth $26,000 had been used by the end of the month. . 31/12/20X4 - Depreciation expense for the equipment was $7,200. 31/12/20X4 - The useful life of the building is 15 years, after which its value will be zero. 31/12/20X4 - There are 7 employees working at Tax Solutions Inc., and they received their salaries at the weekend. The work week has 5 days and starts on Sunday and ends on Thursday. Weekly salary is $170,000, and it is paid every Thursday. December 31 fell on a Tuesday. 31/12/20X4 - The Company received amount worth $156,000 for consulting services to be provided in January 20X5. Journal Entries Date Account Reference Amount ($) Debit Credit 1/12/20X4 Cash   1,500,000     Capital     1,500,000   Being a record of the initial amount contributed by the owners to start the business                 1/12/20X4 Trading license   10,000     Cash     10,000   Being a record of license fee paid to the local authority for a grant of permission to run the business                 1/12/20X4 Equipment   180,000     Cash     180,000 Being a record of purchase of equipment for cash     2/12/20X4 Building   900,000     Cash     900,000 Being a record of purchase of a building in cash               2/12/20X4 Insurance   30,000     Cash     30,000   Being payment for the insurance policies for the business and workers               4/12/20X4 Cash   536,000     Revenue     536,000 Being a receipt of income for a consulting services               6/12/20X4 Equipment   312,000     Cash     81,000   Notes payable     231,000 Being a record of purchase of building partly on credit and and partly on cash             6/12/20X4 Accounts receivables   76,000     Revenue     76,000 Being a record of revenue earned but not collected               7/12/20X4 Supplies 40,000     Accounts payable     40,000 Being a record of purchase of office supplies on credit               10/12/20X4 Accounts receivable   99,000     Revenue     99,000 Being a record of income earned but not collected               12/12/20X4 Cash   35,000     Accounts receivable     35,000 Being a record of cash receipt from clients for consultancy services rendered earlier               15/12/20X4 Accounts payable   29,000     Cash     29,000 Being a record of cash paid to the outstanding accounts payable               17/12/201X4 Maintenance   6,000     Cash     6,000 Being a record of cash payment for equipment maintenance               20/12/20X4 Advertisement   46,000     Cash     46,000 Being a record of cash paid for promotion purposes               23/12/20X4 Cash   600,000     Revenue     600,000   Being a receipt of income for a consulting services   24/12/20X4 Cash   80,000     Revenue     50,000   Unearned revenue     30,000   Being a record of cash received for services offered and a prepayment by the client                 25/12/20X4 Subscription fee   25,000     Cash     25,000   Being a payment for the subscription fee to a CPA organization                 27/12/20X4 Prepayments   35,000     Cash     35,000   Being a record of money paid in advance for supplies in the next month                 31/12/20X4 Salary   306,000     Cash     306,000 Being a record of salary paid in cash               31/12/20X4 Supplies expense   26,000     Supplies inventory     26,000 Being a record of supplies consumed during the month               31/12/20X4 Equipment depreciation   8,200     Accumulated depreciation     8,200 Being a record of depreciation of the equipment for the month               31/12/20X4 Building depreciation   5,000     Accumulated depreciation     5,000 Being a record of buildings depreciation for the month               31/12/20X4 Salary expense   102,000     Salary payable     102,000 Being a record of salary expense for the last three days of the month               31/12/20X4 Cash   156,000     Unearned revenue     156,000 Being a record of the revenue earned which had been received in advance   Ledger Accounts Cash account Cash Acct. No. 101   Date Explanation Reference   Amount Balance       Debit Credit   1/12/20X4 Capital   1,500,000   1,500,000 1/12/20X4 License fee     10,000 1,490,000 1/12/20X4 Equipment     180,000 1,310,000 2/12/20X4 Building     900,000 410,000 2/12/20X4 Insurance     30,000 380,000 2/12/20X4 Revenue   536,000   916,000 6/12/20X4 Equipment     81,000 835,000 12/12/20X4 Accounts receivable   35,000   870,000 15/12/20X4 Accounts payable     29,000 841,000 17/12/20X4 Maintenance     6000 835,000 20/12/20X4 Advertisement     46,000 789,000 23/12/20X4 Revenue   600,000   1,389,000 24/12/20X4 Revenue   50,000   1,439,000 24/12/20X4 Unearned revenue   30,000   1,469,000 25/12/20X4 Subscription fee     25,000 1,444,000 27/12/20X4 Prepayment     35,000 1,409,000 31/12/20X4 Salary     306,000 1,103,000 31/12/20X4 Unearned revenue   156,000   1,259,000             Capital account   Capital   Acct. No. 102   Date Explanation Reference   Amount Balance       Debit Credit   1/12/20X4 Cash     1,500,000 1,500,000                         Accounts receivable   Accounts receivable   Acct. No. 103   Date Explanation Reference   Amount Balance       Debit Credit   6/12/20X4 Revenue   76,000   76,000 10/12/20X4 Revenue   99,000   175,000 12/12/20X4 Cash     35,000 140,000             Supplies account   Supplies   Acct. No. 104   Date Explanation Reference   Amount Balance       Debit Credit   7/12/20X4 Accounts payable   40,000   40,000 31/12/20X4 Supplies expense     26,000 14,000             Insurance account   Insurance   Acct. No. 105   Date Explanation Reference   Amount Balance       Debit Credit   2/12/20X4 Cash   30,000   30,000                         Equipment account   Equipment   Acct. No. 106   Date Explanation Reference   Amount Balance       Debit Credit   1/12/20X4 Cash   180,000   180,000 6/12/20X4 Cash   81,000   261,000   Notes payable   231,000   492,000 Building account   Building   Acct. No. 107   Date Explanation Reference   Amount Balance       Debit Credit   2/12/20X4 Cash   900,000   900,000                         Accumulated depreciation – equipment account Accumulated depreciation - equipment Acct. No. 108   Date Explanation Reference   Amount Balance       Debit Credit             0 31/12/20X4 Depreciation 1   8,200 8,200                         Accumulated depreciation – building account Accumulated depreciation - building Acct. No. 109   Date Explanation Reference   Amount Balance       Debit Credit             0 31/12/20X4 Depreciation 1   5,000 5,000 Depreciation account- equipment Depreciation expense - equipment Acct No. 110   Date Explanation Reference   Amount Balance       Debit Credit   31/12/20X4 Accumulated depreciation   8,200   8,200                         Depreciation account – building Depreciation expense -building   Acct. No. 111   Date Explanation Reference   Amount Balance       Debit Credit   31/12/20X4 Accumulated depreciation   5,000   5,000                         Account payable account   Accounts Payable   Acct. No. 112   Date Explanation Reference   Amount Balance       Debit Credit   7/12/20X4 Supplies     40,000 40,000 15/12/20X4 Cash     29,000 11,000             Notes payable account   Notes Payable   Acct. No. 113   Date Explanation Reference   Amount Balance       Debit Credit   6/12/20X4 equipment     231,000 231,000             Unearned revenue account   Unearned revenue   Acct. No. 114   Date Explanation Reference   Amount Balance       Debit Credit   24/12/20X4 Cash     30,000 30,000 31/12/20X4 cash     156,000 186,000             Salary payable account   Salary payable   Acct. No. 115   Date Explanation Reference   Amount Balance       Debit Credit               31/12/20X4 Salary expense     102,000 102,000             Maintenance expense account   Maintenance Expense Acct. No. 116   Date Explanation Reference   Amount Balance       Debit Credit   2013/10/01         0 17/12/20X4 Cash 1 6,000   6,000                         Advertising expense account   Advertising Expense Acct. No. 117   Date Explanation Reference   Amount Balance       Debit Credit             0 20/12/20X4 Cash 1 46,000   46,000             Salaries expense account   Salaries Expense   Acct. No. 118   Date Explanation Reference   Amount Balance       Debit Credit             0 31/12/20X4 Cash 1 306,000   306,000 31/12/20X4 Salaries Payable 1 102,000   408,000 Supplies expense account   Supplies Expense   Acct. No. 119   Date Explanation Reference   Amount Balance       Debit Credit             0 31/12/20X4 Supplies Expense 1 26,000   26,000         0               License fee expense account License fee expense   Acct. No. 120   Date Explanation Reference   Amount Balance       Debit Credit   1/12/20X4 Cash   10000   10000                         Subscription expense account Subscription fee expense   Acct. No. 121   Date Explanation Reference   Amount Balance       Debit Credit   1/12/20X4 Cash   25,000   25000                         Prepayment account Prepayment     Acct. No. 122   Date Explanation Reference   Amount Balance       Debit Credit   27/12/20X4 Cash   35,000   35000                         Revenue account   Revenue account   Acct. No. 123   Date Explanation Reference   Amount Balance       Debit Credit               4/12/20X4 Cash 1   536,000 536,000 6/12/20X4 Accounts receivable 1   76,000 612,000 10/12/20X4 Accounts receivable     99,000 711,000 23/12/20X4 Cash     600,000 1,311,000 24/12/20X4 Cash     50,000 1,361,000                         Trial balance Tax Solutions Inc. Trial balance as at 31st December 20X4 Debit Credit $ $ Capital 1,500,000 Cash 1,259,000 Accounts receivable 140,000 Supplies 14,000 Prepayment 35,000 Insurance 30,000 Depreciation 13,200 Maintenance expense 6,000 Advertisement expense 46,000 Salary expense 408,000 Supplies expense 26,000 License fee 10,000 Subscription fee 25,000 Equipment 492,000 Building 900,000 Accumulated depreciation - equipment 8,200 Accumulated depreciation - building 5,000 Account payable 11,000 Notes payable 231,000 Salary payable 102,000 Unearned revenue 186,000 Revenue 1,361,000 3,404,200   3,404,200 Trial Balance This is a list of all closing balances of ledger accounts pertaining to a particular period. It is in this list that ledger balances are grouped either into debit balances and credit balances.1 In this regard, assets and expenses are debited while capital, revenues and liabilities are credited. At the end of the day, the debit and credit entries must be equal, and financial statements are then prepared using these balances. Its purpose First, since its preparation id based on the principle of double entry, it is used to check the arithmetic accuracy because the debit and credit entries must be equal2. Second, it is used, to summarize, financial transactions that have taken place over a certain period. Third, it is used to trace accounting errors back to the journals and ledgers. Fourth, it is used by accountants as a working paper and the initial step towards the financial statements preparation. Limitations Despite the uses described above, trial balance suffers from serious issues. It only serves to confirm that the debit and credit balance totals match. Even though these balances agree, there could be some errors that the trial balance cannot detect. These errors include the error of commission, the error of omission, reversal of entries, the error of principle and compensating error (Kaplan Financial Limited, 2012). The purpose of Statement of financial position and income statement This is a financial statement that shows incomes earned and expenses incurred by an entity in the course of its operations. It provides a snapshot of an entity’s profitability in a given period. Therefore, it has one section that presents revenues and incomes and the other reflecting expenses for the same period. When revenues are more than expenses, then the entity will have made a profit, but, if expenses exceed revenues, then it will have made losses.3 On the other hand, the statement of financial position was formally called a balance sheet, and this financial statement is used to show the net worth of an entity.4 Its elements include assets, owners equity and liabilities. Generally, the statement of financial position and income statement are two of the four financial statements that entities are required to prepare and present. The prepared financial statements and reports are presented to the various users of financial information about the reporting entity with an objective of assisting them in the economic decision-making process. Each one of these financial information users has varied needs from the presented reports. Shareholders are interested in its long-term and short term survival. They, therefore, use financial information to perform some analyses such as profitability analysis to establish its viability, and dividend analysis to establish their investments returns.5 Creditors interest on the other hand in the reporting entitys financial statements is to establish its ability to honour its short-term obligations and loan decisions. Cash flow statement The cash flow statement is one of the major financial statements that companies are required to prepare. It indicates the effects of an entity’s investing, financing and operating activities on its cash balance. It provides relevant information about an entity’s cash receipts as well as cash payments during a given accounting period6. As such, a more complete indication of sources and uses of cash resources by an entity are indicated. Entities preparing cash flow statements can either use an indirect method or direct method. Cash Flows from Operating Activities According to7, cash flows from operating activities are those primarily derived from the entity’s principal revenue-producing activities. These cash flows arise from the transactions as well as other events considered while determining net profit or loss. In other words, these cash flows measure the cash amount generated or used by an entity in producing and selling services and goods. Cash flows captured under this section include: cash receipt as a result of rendering services or sale of goods; cash receipts from commissions, royalties, fees and other revenues; cash payments to suppliers; and tax payments or refunds inter alia. In addition, it is in this section that changes in working capital items are done. Cash Flows from Investing Activities Cash flows from investing activities deals with cash flows relating to capital expenditure, inter-corporate acquisitions and investments. This section also captures cash realized from non-current assets disposal. These cash flows are paramount as they are used to indicate expenditures level in resources for the purposes of future incomes, as well as cash flows generation.8 They include; cash paid for the property, plant and equipment acquisition, intangibles and costs relating to self-constructed non-current assets; cash received from plant and equipment acquisition and intangibles disposal9. Cash paid or received on acquisition or disposal of shares and debt instruments respectively. Cash flows from financing activities. These are cash flows that show the movement involving proceeds from shares issued, debentures and borrowings.10 It also captures dividend payment and interest in respect of borrowings as well as an outflow of cash from shares repurchase.11 Income Statement Tax Solutions Inc. Income Statement For the period ended 31st December 20X4 $ $ Service Revenue 1,361,000 Less expenses Maintenance Expense 6,000 Advertising Expense 46,000 Salaries Expense 408,000 Insurance Expense 30,000 Supplies Expense 26,000 License fee 10,000 Subscription fee 25,000 Depreciation expenses 13,200 Total expenses 564,200 Net earnings 796,800 Statement of financial position Tax Solutions Inc. Balance Sheet As at December 31 20X4 $ $ Assets Current Assets Cash 1,259,000 Accounts Receivable 140,000 Supplies 14,000 Prepayment 35,000 Total Current Assets 1,448,000 Non-current assets Equipment 492,000 Less: Accumulated Depreciation 8,200 483,800 Building 900,000 Less: Accumulated Depreciation 5,000 895,000 Total Property, Plant and Equipment 1,378,800 Total Assets 2,826,800 Liabilities Current Liabilities Accounts Payable 11,000 Notes Payable 231,000 Unearned Revenue 186,000 Salaries Payable 102,000 Total Liabilities 530,000 Equities Owners Capital 2,296,800 Total Liabilities and Equities 2,826,800 Statement of changes of owners’ equity Tax Solutions Inc. Statement of changes in Equity For the period ended 31st December 20X4 $ $ Owners equity Total As at 1st December 20X4 1,500,000 1,500,000 Profit/(loss) For The Month 796,800.00 796,800 At 31st December 20X4 2,296,800 2,296,800 Statement of cash flows Tax Solutions Inc. Cash flow statement For the period ended 31st December 20X4 Cash flows from operating activities Cash receipts from clients 1,407,000 Cash paid to employees (306,000) Cash paid for insurance (30,000) Cash paid for subscription (25,000) Cash paid for license (10,000) Cash paid for advertisement (46,000) Prepayment (35,000) Cash paid for Supplies (29,000) Cash paid for maintenance (6,000) Net cash flows from operating activities 920,000 Cash flows from investment activities Purchase of building (900,000) Purchase of equipment (492,000) Net cash used in investment activities (1,392,000) Cash flows from financing activities Capital contributed 1,500,000 Borrowings 231,000 Net cash flows from Financing activities 1,731,000 Net increase in cash for the month   1,259,000 References List Accounting-Simplified. Statement of Cash Flows. 2013. http://accounting-simplified.com/financial/statements/cash-flow-statement.html (accessed April 21, 2015). Bhattacharyya, Asish K. Financial Accounting For Business Managers 3Rd Ed. . New Delhi: PHI Learning Pvt. Ltd, 2006. Kaplan Financial Limited. The Trial Balance and Errors in the Financial Reporting System . 2012. http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/The%20Trial%20Balance%20and%20Errors%20in%20the%20Financial%20Reporting%20System.aspx (accessed April 20, 2015). Mohana, Rao Peddina. Financial Statement Analysis and Reporting. New Delhi: PHI Learning Pvt. Ltd., 2008. Reeves, Laurie. The Purpose of a Balance Sheet & Income Statement. 2015. http://smallbusiness.chron.com/purpose-balance-sheet-income-statement-61847.html (accessed April 21, 2015). Siddiqui, S. A., and A. S. Siddiqui. Comprehensive Financial Accounting XI. Darya Ganj, Delhi: Laxmi Publications, 2006. Way, Jay. What Is the Importance of a Companys Financial Statements? 2015. http://smallbusiness.chron.com/importance-companys-financial-statements-21332.html (accessed April 30, 2015). Read More