Business Accounting a) Cash ment usually shows the cash receipts and expenses for a particular period of time. For instance, Caro has just begun a business to sell postcards and in this business, she will need to make purchases and other expenses as well as make sales and receive revenue. These are recorded in a cash statement as shown below. Carol Accounting Cash Statement For the Month of September, 2013 1 September, 2013 Savings £ 2,000 Redundancy pay 3,000 Bank loan 2,000 Balance at bank 7,000 Paid for van in cheque (3,000) 2nd September, 2013 Paid 3 months rental (2,100) Bought 2,000 postcards for resale @ 10 pence (200) 4th September Sold 1,500 postcards @50 pence 750 Bought 3,000 postcards @10 pence and paid in cheque (300) 5th September Sold 2,500 postcards @50 pence 1,250 6th September Bought 6,000 postcards@10 pence and paid by cheque (600) Sold 2,800 postcards @ 50 pence 1,400 Insurance premium for van, paid in cheque 360 7th September Sold 500 postcards @ 50 pence 250 Paid for diesel for the van (30) 30th September Bought 8,000 postcards @10 pence and paid by cheque (800) Sold 7,500 postcards @50 pence 3,750 Paid wages (750) Total 6,980 b) income statement is a statement of a business showing the revenues and experiences in a particular period of time and the total income from that particular business at the end of that particular business period.
Revenues Sales 7,760 Total revenues 7,760 Total cost of sales 1,900 Gross profit 5,860 Expenses Van purchase 3,000 Paid rent 2,100 Fuel 30 Wages 750 Total expenses 5,880 Net income -20 Caro Businesses Balance sheet For the month of September Current Asset Cash pay 3,000 Savings 2,000 Total current assets 5,000 Long-term Assets Van 3,000 Total Assets 8,000 Current Liabilities Loan 2,000 Long term Liability - Total Liability 2,000 Capital & Shareholders Equity 6,000 Total Liabilities and Shareholder’s Equity 8,000 A statement of the financial position of a business is normally represented by a balance sheet. This normally shows the actual financial position of the company as far as the assets and liabilities of the business are concerned.
It therefore enables the business to know whether the firm has enough current assets to be able to settle its current assets. This shows the liquidity position of the business of whether it can be profitable or not. In this particular business, the business is a small one therefore the owner does not have or need a lot of assets to start the business. The business for instance only has van as the only fixed asset to start with. it does not have any long term liability a part from the current liability which is a loan of 2,000 pounds.
The firm is therefore busted by the shareholder’s equity which is larger showing that the shareholder is gaining from the business. c) A letter to Carol From: Name of the Sender The Accountant, Carol Businesses, To: Carol Carol Businesses Po box RE: A LETTTER TO IMPROVE YOUR BUSINESS Dear Carol, This is specifically concerning your business of selling postcards. I hereby write to you this letter to first inform you that your business is not doing quite well and secondly, on how you can improve it.
The business actually is struggling to meet its expenses where we find out that the expenses in the month add up to 5,880 pounds. This is so high if you consider the fact that the business is a small one and can only afford a gross profit of 5,860 pounds. One way to improve the business is to ensure that you invest in more stock so that you can increase your sales. This will definitely increase your gross profit and also your net income. I also need to inform you that the van you bought is treated differently from the wages you pay for several reasons.
One, the van becomes an asset once you have acquired it. This is because you use it in the business in order to facilitate transportation. In this case, in the income statement, the van will not appear anywhere since we do not record assets in the income statements (Jay, 1969). However, we recorded the wages of your assistant in the income statement as a expense since it represents a sum of money that you used in order to meet your liability for the services from your assistant.
It therefore directly affects your net income by reducing it, unlike the van that do not directly affect your net income. In the balance sheet, however, the van will be recorded as an asset being that it is one of these things that the firm uses to facilitate the business. Looking at it keenly, you will find that wages do not appear in the balance sheet since wages are expenses and expenses do not appear in the balance sheet since they are neither assets not liabilities.
They only become liabilities to in the business if they are overdue. It therefore means that the financial position in the balance sheet is not in any way affected by the wages. However, the van increases the total assets since it contributes directly as a fixed asset. This makes the firm be in a better position to repay any debts it has such as the bank loan whenever the loan is defaulted. This is because the business can sell off its assets in times of bankruptcy so that they can pay off those expenses that they owe to other businesses.
We can therefore gladly say that the wages decrease the net income of the business and put the business in a bad position financially, while the van improves the position of the firm financially since it is a property of the firm and the owner can do anything she pleases with it. Yours Sincerely Name of Sender Signature Reference Jay, T. (1969). Understanding Financial Statements. USA: Marion Street Press.