Home Sewing Business
Income statement
Introduction
This paper is aimed at presenting a report which will depict the operational performance of a given firm called Lena Sewing Enterprises. The study can also be called profit and loss statement, statement of revenue and expenses, or consolidated statement of earnings as it shows profits generated and the corresponding expenses incurred to generate such benefits over a given period which usually constitutes a year. This report facilitates a critical analysis of future growth prospects, costs, and profitability of the firm. It may assist business analysts in identifying drivers and components of net earnings for a given period, thus supporting forecasting abilities.
Adjustment of entries in income and expenditure is an important function that ensures that the correct revenue appreciation and matching principles are closely adhered to and followed. These accruals can be divided into prepayments which are defined as prepaid expenses and unearned revenues as well as accruals which are referred to as accrued expenses and accrued revenues (Chapter 4: Accrual accounting concepts n.d.).
Income statement using the accrual basis
Lena Sewing Enterprises
Income statement. For the period ending 30th June 2014
Assumption: there is no sale of any asset in this business as Lena is a Start up business with limited asset base. Secondly, Lena business is tax exempt and so all net income is assumed to be after tax. Under accrual basis of accounting, accounts receivables are considered intangible assets which grow as the business increases its issuance of invoices and thus forms a major part of accrual revenues (Accounting basics: Accounting for windows n.d.).
Income statement using cash basis
Lena Sewing Enterprises
Income statement. For the period ending 30th June 2014
Record keeping
Introduction
Record keeping is a very important activity to any business as well as agricultural producers at large. It supports decision-making in risky situations and also forms the backbone for calculating the taxable income of businesses. Therefore, whichever method is selected, cash or accrual, a lot of attention should be attracted to its proper implementation, work and results achieved. However, for corporations with annual revenue exceeding US $ 25 million, this flexibility in the method of preparation is not applicable. It is not recommended to apply one method of bookkeeping until the end of a year to facilitate correct taxable income return filling (Danny, Dean, and Steven n.d.).
Accrual accounting
Under the accrual basis of accounting, revenues are recorded as they are earned while expenses are matched with the related revenues that are generated in the income statement. This method gives an income statement that presents a clear reflection of a company’s profitability for a given period. In the balance sheet, the reported incomes are shown as assets under account receivables and the approximated true profits added to the owner’s equity. However, utilities seem to be approximated and reported as an expense under accounts payables for a certain period. It is important to note that this method is considered more accurate in net income terms due to its ability to match income with expenses that are generated in the process. Also, it is considered more realistic for measuring business performance by many experts.
However, this approach is blamed on its multifaceted principles which may result in the following threats to the business of a company. First, it increases income discrepancy as it is recorded, while the cash backing, on the other hand, is lacking to support such decisions. Third, it results in insufficient funds which negatively influence small businesses that require more purchases of new stocks.
In addition, traders might be lured to extend more credit to other customers thus limiting its cash at hand to help in restocking the business. Fourth, this method requires qualified personnel in its preparation which increases the cost and may lead to confusion if statements mirror the net income devoid of actual cash changes. Finally, it usually results in high tax payments as businesses have to pay full tax returns for incomes not earned. This is because net income changes are calculated before the money is received (Danny, Dean, and Steven n.d.).
Cash accounting
Under the cash basis of accounting, revenues are recorded when they are received and expenses when paid in the income statement. However, in the balance sheet, the revenue will not be considered as an asset with true profits excluded in the retained earnings. The expenses- utilities and bills are recorded when they are settled. Cash accounting is advocated for because of its simplicity, does not require the services of qualified personnel in its preparation, and due to its flexibility in filling of taxation return. This method can benefit from the accrual basis of accounting through the simple iterative adjustment to income and expenses and thus its merit of correctly reflecting the true profit position of the business (Danny, Dean and Steven n.d.).
However, it requires detailed and precise cash disbursement and receipt, a whole balance sheet in addition to accruals for the start of a given period. Secondly, it is considered a bit misleading as a positive figure based on accounts payable can be easily reported even though the firm is running at a loss. Nevertheless, this method is appropriate for Lena’s sewing business as this business is still small and needs to cut extra costs of personnel and tax expenses. We strongly recommend cash basis of accounting.
Silvertail Petroleum Ltd.
Bookkeeping is the process is recording business transactions in a logical style. In this process, the double-entry method is followed with transactions debited to one account and a similar credit entry recorded on another account. However, due to a high number of transactions in the day-to-day business activity, special books like sales journals, a purchases journal, a cash payment journal, a cash receipts journal, and a general ledger are often used. These special books are loved due to their simplistic nature in recording single and commonly occurring transactions within any business.
Sales journal this journal records sales made by businesses on credit terms. Sales recorded in this journal result in a debit to accounts receivables and a credit entry to the sales account. The company should use this journal as it is considered simple due to its recording of only the date and amount of sales to be paid by the customer and therefore reduces duplication of information. In the posting of information, the sales journal is credited with the given amount whiles accounts receivable under individual customer accounts are debited. When transferring postings information to the general ledger, only the total value is transferred.
Purchases journal
It is used in recording credit purchases of goods for resale to customers, business supplies, and other related purchases. Under posting, credit purchases are recorded in this journal, and column figures posted as the total amount in the general ledger account. This business will require purchases ledger as petroleum is an expensive venture which requires large amount of money and thus the business might need goods on credit from its major suppliers. Secondly, most business do not hold enough capital to undertake cash purchases of their inventories, and so the like of silver tail petroleum Ltd. This journal reduces clogging of general ledger with numerous sales usually in the petroleum business. To reduce such bureaucracy, this journal will keep off these purchases and only totals recorded at month end.
Note: general Ledger is a record of all business accounts and balances for a given period especially one month.
Cash receipts journal
This journal records only cash receipts generated from sales, rent, interest and other income sources. A column for cash debits and discounts are included as this book only records transactions involving cash receipts. For balancing purposes, all the cash entries in the cash receipts journal should be summed up and posted to appropriate accounts. Therefore this company will highly require cash receipts journals with all its cheques being recorded in the accounts receivables credit column.
Cash Payments Journal
This journal only records cash payments made by the businesses like cheques, cash and miscellaneous payments. In this book, cash payments are credited to cash account as cash is a current asset which carries a debit balance and a credit column for purchase discounts involve purchase discounts if any transactions.
This journal includes date, cheque number, explanation, accounts payable debit, cash credit, debit purchases and other payments debit columns. It is important in any business as it shows an appropriate value of transactions thus reduces error common in accounting entries. Secondly, this journal is chronological in recording transactions using date and thus reduces errors of omission. Finally, this journal helps in reducing the entries on ledger account as only totals are posted here. In this way, it easens the accounting work and also reduces clogging of entries into the main ledger.
Conclusion
Accounting principles have evolved from a much poorly record keeping to a current internationally recognized system. However, most businesses both local and international are now turning to accrual accounting system as the best way to report their trading activities. However, cash accounting still is preferred mostly by start up businesses like in the Lena sewing machine enterprises. Even though accrual basis is reflecting high net returns in our example above, many financial institutions are reluctant to lend against such accounts if the business is not large enough to provide a good proof. On book keeping, it is important for companies to maintain records of their transactions on a daily basis. For companies that get a lot of orders and in some instances sell or purchases on credit, journals should be used to help reduce excess postings on ledger.
References
Accounting basics: Accounting for windows. n.d. Web.
Chapter 4: Accrual accounting concepts. n.d. Web.
Danny, K, Dean, M and Steven, K n.d., Financial management: Cash vs. accrual accounting. Web.