Accounting in Brave Brands Marketing - Case Study Example

Introduction The role of accounting is critical in business. The importance of accounting in business can be understood from the fact that it is often defined as the language of business. This makes it critical for almost all the people in the organization to have a certain level of accounting information. In line with this fact, this paper is aimed at developing a review of the basic accounting for the employees of Brave Brands Marketing, which is a well-renowned marketing organization. Role of Accounting Simply stating, accounting is defined as the art of managing information through a complete process. The accounting process includes the collection, arrangement, analysis, summary development and reporting of the financial transactions conducted in an organization. It is critical to organize the data collected systematically for the purpose of decision making. It is important to understand the difference between accounting and bookkeeping, where the former is a complete process whereas latter one is a single component of the accounting process based on recording the information. Like every process, accounting is also based on the input, process and output process which is depicted below: (Agtarap-San Juan, 112) The above process is completed for every accounting or reporting period which is usually a period of one year. The information developed from accounting is used by internal as well as external users. The internal users include the people within the organization and are part of the management. For example, accounting information is used for the price determination, costing, sales forecast and budgeting, etc. On the other hand, the external set of people who uses the financial information includes stakeholders such as investors, analyst, creditors, debtors, regulatory authorities, and government, etc. Financial accounting and managerial accounting both play an important role in business management. The different roles played by two are as follows (Weygandt, Kimmel, and Kieso, 5): MANAGERIAL ACCOUNTING FINANCIAL ACCOUNTING User of information Internal member of the organization such as managers, etc. External stakeholder such as regulators, government, investors, etc. Role of information Planning and monitoring of the financial operations of the organization Reporting of performance for the verification by external players. Format of report Business devises its flexible set of the rules depending upon its requirement It is mandatory to follow the Generally Accepted Accounting Principles Reporting Period Usually by end of decided reporting period; however, can be prepared with flexibility It is mandated by law to prepare financial statements on declared period and regular periodicals Financial Statement Businesses produce various reports for the analysis of the information. However, most important are income statement and the balance sheet, which are prepared by all organizations. Income Statement An income statement which is also known as statement of comprehensive income is developed to review the net financial results that a business has arrived at the end of the reporting period providing information of operating for that particular period. Following are the core element that is derived from the income statement (Mowen, Don and Dan, 40): PARTICULAR INFORMATION Sales Net sales Less: Cost of Goods Sold Includes direct material, labor and overhead involved in the production Gross profit Saving from revenue after deducting the cost of goods sold Less: Operating Expenses All general and administrative expenses are deducted from gross profit Net Operating Profit Profit with the firm after meeting operating expenses Less: interest Expense and tax Net income Net income that a firm is left with after meeting all expenses for a particular accounting period Balance Sheet: At the end of the accounting period, companies prepare a balance sheet that is the statement of the values of company’s asset, liabilities and the capital held by the business. The balance sheet contains following element (Heitger, Mowen, and Hansen, 309): Asset Side Liabilities and Equities Side Current Asset: Value of asset less than a year Fixed Assets: Assets of life more than a year Current Liabilities: Payables on business with life of less than a year Long term Liabilities: Debt or other payables with the period of more than a year Equities: Capital: Total investment in business Add: Profit Loss: Profit/ loss for the year is net of from capital Less: Drawing: withdrawing from the business Net Equities According to the accounting equation, assets side is required to be equal to the sum of liabilities and equities side. Cash Basis and Accrual Basis of Accounting In accounting, different systems are used for the reporting and recognition of activity conducted by business. In the cash basis accounting system, the transaction is only recorded once it is realized in terms of receiving or paying cash. This method often fails to account the complete activity of the business in particular point in time. On the other hand, the accrual based system is one in which the transactions of revenue and expenses are recorded as they are conducted (earned or incurred). This method brings into account all the activities of the business (Rich, et al.110). For example, the company has paid rent of AED 24,000 in advance in the month of September in 2014 and company prepares its reporting in the month of December. With this case, under the cash based system, the company would record rent expense of AED 24,000 in all as the amount has flown out of the company’s cash account. On the other hand, in the accrual based system as one December, the company would recognize rent expense of AED 8000 for four months i.e. from September to December and would mention remaining AED 16000 under prepaid rent as an asset. Hence, the total impact on current in the balance sheet under cash basis would be reduction of cash by AED 24000 while under the accrual basis it would be only AED 8000. Hence, companies do not use cash based system as it does not reflect the real picture of the business. Payables The amount which the CEO of Brave Brands Marketing has described in the financial statements under the term of a present obligation that rose from an event that has happened in the past event and the settlement will incur an outflow of the economic resources of an organization implies the term liability in the discipline of accounting. Clarke (4) defines liability as an obligation that is an obligation on the business and is required to be paid in the future. This obligation may range payable to suppliers, creditors, and other operating facilities suppliers, etc. The obligation amount is reported in the balance sheet on the liabilities side and is classified into categories of current and long term liabilities. Current Liabilities includes payable amount that is to be paid within the period of 12 months. The other categories of payable are accounted under the head of the non-current liabilities the payment of which is extended beyond 12 months. Usually, such payables include long term loans from banks, issued bonds, and debenture, etc (Clarke, 4). Cost Analysis Companies incur different costs in order to conduct business operations. These costs are defined as the costs that are directly related to the production of goods or services produced by the firm, while on the other hand; other costs are accounted into factory overhead. These costs support the business operation of production of goods or services; however, are not directly associated with the labor and material (Cooke, 214). Cost incurred by Brave Brands Marketing is segregated in the table below as factory overhead, material, goods in process and direct labor as follows: Factory Overhead Advertising Expense $ 85,000 Amortization Expense- Factory Patents $ 16,000 Bad Debts expense $ 28,000 Depreciation Expense for office equipment, factory building, and factory equipment $ 37,000+133,000+78,000 Factory insurance Expired (factory insurance expense) $ 62,000 Factory Supervision $ 74,000 Factory Supplies used $ 21,000 Factory Utilities $ 115,000 Income Taxes $ 54,400 Indirect Labor $ 26,000 Interest Expense $ 25,000 Miscellaneous Expense $ 55,000 Property Tax on factory equipment $ 14,000 Repair Expense $ 31,000 Salaries Expense $ 150,000 Material Material is the material that is used for the production of goods and services in an organization. It is important to understand the difference between direct material and indirect material where former include component which remain the part of the final product while other material which is indirect and contributes in the production but are not part of the final product are accounted in the factory overhead. Raw material purchases Inventory Dec 31, 2010 $ 60,000 Add: purchases $ 313,000 Net Material Available $ 373,000 Less: Ending Inventory $ 78,000 Net Material Used $ 295,000 Goods in Process Goods in process include that inventory that have entered the production process, but are not finished on the date of reporting (Chitale, Chitale, and Gupta, 133). The goods-in-process for Brave Brands Marketing is as follows: Goods in Process Inventory Dec 31, 2010 $ 8,000 Net Material Used $ 295,000 Net Goods in process available $ 303,000 Less: Ending Inventory Goods in Process $ 9,000 Net Goods in Process $ 294,000 Direct Labor Like direct material, direct labor includes compensation for the person who is directly involved in the production of goods and services. Direct labor for Brave Brands Marketing amounts to $ 250,000 (Kinney and Raiborn, 35). Conclusion The above report provides ample review of the basic element of the accounting in a comprehensive manner. This will enable the employees of Brave Brands Marketing in understanding the basic financials of the organization. WORK CITED Agtarap-San Juan, Donatila. Fundamentals of Accounting: Basic Accounting Principles Simplified for Accounting Students. AuthorHouse, 2007. Chitale, A. K., A. K. Chitale, and R. C. Gupta. Materials Management: Text And Cases. PHI Learning Pvt. Ltd., 2014. Clarke, Edward A. Accounting: An Introduction to Principles and Practice. Cengage Learning, 2011 Cooke. Finance For Nonfinancial Managers, 2/E. Tata McGraw- Hill Edition, 2004. Heitger, Dan, Maryanne Mowen, and Don Hansen. Fundamental Cornerstones of Managerial Accounting. Cengage Learning, 2007. Kinney, Michael, and Cecily Raiborn. Cost accounting: Foundations and evolutions. Cengage Learning, 2012. Mowen, Maryanne, Don Hansen, and Dan Heitger. Cornerstones Of Managerial Accounting. Cengage Learning, 2011. Rich, Jay, et al. Cornerstones of Financial and Managerial Accounting, Current Trends Update. Cengage Learning, 2009. Weygandt, Jerry J., Paul D. Kimmel, and Donald E. Kieso. Managerial accounting: Tools for business decision making. John Wiley & Sons, 2009. Read More