Major Accounting Issues - Essay Example

Table of Contents Introduction ……………………………………………………………………………..………...2 Matching concept and Going Concern concept …………………...……………………………...2 Business Plan .…………………………………………………………………………..………...4 Executive Summary.…………………………………………………………………………..…..4 Company Summary………………………………………………………………………..……...4 Marketing………………………………………………………………………..………………...5 Catering Operations………………………………………………………………………..……...5 Financial Plan………………………………………………………………………..…………….5 Conclusion………………………………………………………………………..…….................5 Reference List………………………………………………………………………..……............6 Introduction Accounting has been practiced by businesses for a thousand of years. According to Snyder (2008), “it is the art of recording, summarizing, reporting and analyzing financial transactions.” It plays an important role in every business today. Matching concept and Going Concern concept Basic accounting principles are the general rule which govern in the field of accounting. The generally accepted accounting principles (or “GAAP”) are making up by four basic assumptions (Orwel, 2009). The four basic assumptions include: going concern, consistency, prudence and matching “accruals.” Going concern is one of the underlying assumptions in accounting that comes from the accountant that the business entity will continue its operation in the foreseeable future (Williamson, 2001). This serves as an implication in carrying out business objectives and commitments used for the valuation of assets and liabilities (Averkamp, n.d.a). The business has no intention to liquidate that is why necessary assessment on the business ability to continue is a going concern. If uncertainties occur, reasons should be disclosed as well as the business financial statements. The principle of historical cost is supported by going concern concept in valuing its assets and liabilities. It says that what must be entered in the accounting records are the original cost of the assets/liabilities and not the current market value. Matching or “accruals” concept states that the expenses must be “matched” with the revenue earned for a given accounting period (Victor, n.d.). Regardless whether the transactions cash is received or paid, business cost incurred should be reported as estimated. Every business transaction should be recognized when it happens and not when the outcome has been received or given. Expenses incurred same as true for revenues should be reported in that same period whether the expenses/revenues have been paid in cash or in later years. By the use of this concept, the true income of a business for each accounting period can be easily computed. Entities are expected to make a financial statement each year which can be found in company reports such as the income statement (P&L account) and the balance sheet. 1. For the year ended July 31, 2010, there is a total payment of $6,600 (4,200+2,400); 12 months business rate due for 2009 is to be deducted in the P&L account. The payment made by Yule by the end of the year was for 18.8 months (6,600/350), the 6.8 months has to be deducted in order for the P&L account to show only 12 months rate for the year end. The value of the 6.8 months payment deducted would appear in the balance sheet under current asset as prepayment (matching concept). Adjustment of entries will follow when the prepaid rate is being used up and the cost will be move to the rate expenses on P&L account. This business rate is considered to be a revenue expense in P&L account for it gives a benefit for one accounting year only. 2. If the credit occurs for 60 days, it will be an expense that shall be reported on July 31 P&L account. When the payment is made by August, it is an August receipt, not August revenue. Under the accrual basis of accounting, the revenue for the 60 days credit will only be recognized when they are earned by August (Averkamp, n.d.b). Since it is a credit, the account receivable in the balance sheet will also be affected at the time the payment is realized. The total amount owed by the customer will appear in the July 31 balance sheet as current asset known as debtors. Although extending credit raises customer loyalty and establishes business relationship, it is a bit risky (Needham, n.d.). It is a big deterrent for small businesses because customers might become delinquent in their payment. 3. Damages refer to fewer amount of cash received than the total amount of cash paid (Wagner, 1990). The original purchase price (10,000) of the product has to be reported in the P&L account as well as the losses. Whether the incident was a non-recurring event that made the items an extraordinary, GAAP required an explanation in the notes to the financial statement. Conservatism principle, will guide accountant to anticipate or disclose losses (Averkamp, n.d.c.). 4. According to Elmaleh (n.d.), “the matching principle dictates that the cost of fixed assets…ought to be spread over the number of periods that they will help generate revenue.” What is being recorded was the original cost of an asset and not the current market value. Simply means, in depreciation (consumption of fixed assets) the entire life of the asset would remain recognized in your balance sheet but if you expensed, it could no longer be documented. In P&L account, depreciation of asset was a debit while in a balance sheet it was cost less provision for depreciation which equals to the fixed asset book value. Business Plan A business needs plan that will prepare the business in looking ahead, allotting resources and be prepared for problems and prospects (Berry, n.d.). Executive Summary Objectives: The catering business of Linda likes to develop a sustainable start-up business. Mission: Its mission is to provide the finest catering that would surpass customer’s expectations. Key to Success: Not just to meet but to go beyond customer’s needs in terms of food quality and excellence of service. Company Summary Start-up: Linda Baker will incur the start-up costs, possible expenses and liabilities: Kitchen equipment (dishes, silverware, linen, etc.), transportation (delivery vehicle) and licensing costs. Liabilities like product insurance, coverage for equipment and vehicle and worker compensation. Company ownership: Linda Baker is a sole proprietor in her catering business. Marketing Market segmentation: The clients will be the middle and upper class. Implementation: The first method is a targeted advertising campaign. As a past senior manager, she has many contact friends that she can use in raising the awareness about her catering. She can also use sample catering business invoice in her prospect customers. Catering Operations Location: Linda can use her house as space for the office and the kitchen for food production. Identity: She shall decide a name that will create an identity also known as “branding.” Financial Plan Linda may use the traditional source in financing small business like going to a lender such as bankers or creditors. A well-written business plan shall be presented to the lender for it will show an accurate picture for the business idea (Walden University, 2010). Commercial banks usually design programs that will help in lending capital to small businesses. She can also refer to the Small Business Administration (SBA) that provides guarantees to lenders to grant loan for new business ventures. Family, friends and other businesses will be her alternative source in funding her catering business. To lessen the amount needed, she can apply for equipment leasing, wherein she can access many types of equipment needed for the business without using cash (All Business, n.d.). Conclusion On the two scenarios, accounting proves that it is the backbone of the business financial world. It is a response when someone struggles on how to record transactions and compile reports. At the end, it gives the financial snapshot in order to make a firm decision for the present and future health of the business. Reference Lists All Business, n.d. Small business financing options. [Online]. pp. 1-2. Available at: http://www.allbusiness.com/finance/895-1.html [Accessed 22 June 2010]. Averkamp, H., n.d.a. Accounting principles. Accounting Coach, [Online] Available at: http://www.accountingcoach.com/online-accounting-course/09Xpg01.html [Accessed 21 June 2010]. Averkamp, H., n.d.b. Accruals basis of accounting. Accounting Coach, [Online] Available at: http://www.accountingcoach.com/terms/A/accrual-basis-of-accounting.html [Accessed 21 June 2010]. Averkamp, H., n.d.c. The conservatism principle. Accounting Coach, [Online] Available at: http://blog.accountingcoach.com/conservatism-principle/ [Accessed 21 June 2010]. Berry, T., n.d. What is business plan? Bplans.com, [Online] Available at: http://articles.bplans.com/writing-a-business-plan/what-is-a-business-plan/33 [Accessed 21 June 2010]. Elmaleh, M.S., n.d. Fixed assets and depreciation. Understanding Accounting, [Online] Available at: http://www.understand-accounting.net/Fixedassetsanddepreciation.html [Accessed 21 June 2010]. Needham, S., n.d. Extending credit to your customers…is it good business? Biz Office, [Online] Available at: http://www.bizoffice.com/library/files/credit_should.html [Accessed 21 June 2010]. Orwel, A., 2009. Basic accounting principles – what are they? EzineArticles.com, [Online] 18 May. Available at: http://ezinearticles.com/?Basic-­Accounting-­Principles-­-­-­What-­Are-­They?&id=2360245 [Accessed 21 June 2010]. Snyder, S., 2008. What is accounting? Office Microsoft, [Online] Available at: http://office.microsoft.com/en-us/support/what-is-accounting-HA010102445.aspx [Accessed 21 June 2010]. Victor, D., n.d. Accounting concepts: Accruals or the matching convention. Helium, [Online] Available at: http://www.helium.com/items/1713540-accruals [Accessed 21 June 2010]. Wagner, M.J., 1990. How do you measure damages? Lost income or lost cash flow? The choice of method can make a big difference in the final amount. The Journal of Accountancy, 169. Walden University, 2010. What are some methods for financing small business? [Online] 22 June. Available at: http://thinkup.waldenu.edu/finance-and-accounting/financial-planning/item/11788-what-are-some-methods-financing-small-business [Accessed 22 June 2010]. Williamson, D., n.d. The going concern principle: when and how to assess the value of a company and/or its assets. Fortune City, [Online] July. Available at: http://business.fortunecity.com/discount/29/goingconc.htm [Accessed 21 June 2010]. Read More