ACT102 Introduction to Accounting

ACT102
S1 2018
ASSIGNMENT
Introduction to Accounting
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Contents
1- You are required to form a business and to write a brief introduction about it.....................3
2- In deciding on the legal form for your business, discuss the reasons for your choice..........4
3- Discuss the different financing options to set up your business and the reasons for your
choice.........................................................................................................................................5
4- Briefly define the role of accounting as it relates to your business.......................................6
5- Develop a chart of accounts for your business......................................................................7
6- Will there be a need to use special journals and/or subsidiary ledgers in your business.
Discuss.......................................................................................................................................8
7- As it relates to your business, when is it suitable to do the adjustment of the accounts and
the closing and why....................................................................................................................9
8- Discuss the considerations that the management of your business would take into account
in deciding on whether to distribute profits or to retain them in the business.........................10
References................................................................................................................................11
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1- You are required to form a business and to write a brief
introduction about it
In today’s scenario it is observed that the demand for coffee has seen a tremendous increase.
The number of coffee lovers have increase to great extend which attached to open a coffee
house with the name “The Caffeine Café”. The aim behind this business plan is to serve best
quality product and services to local level customers by providing them a warm and friendly
atmosphere. The philosophy behind this business plan is product, service and atmosphere
(Kadan, 2012).
The legal form of ownership is going to be a partnership so that the investment amount is a
combination of capital invested by each. The combined capital will give us an advantage of
opening a moderate sizes shop. The raw material required for the serving the coffee is
purchased from a manufacturer so that it is made available at a low price. This industry is on
the verge of growth. The future of the industry is alive till the time there is demand and
supply of coffee (Crague, 2012). The major issue that could be faced with this industry is lack
of supply, price rise and any natural calamity. As we are aware of these problems, advance
provisions to face the same will be made.
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2- In deciding on the legal form for your business, discuss the reasons
for your choice.
As discussed earlier that the legal form of ownership of The Caffeine Café is partnership. The
reason behind considering this legal form is sharing of risk and profits. The cost associated
with the initial investment for opening a coffee shop was distributed between the partners and
non-got burdened with the same. It could be said that in taking any decision, two minds
working is always better than one. One of the major benefit of working in partnership is that
there are limited external regulations. The main regulatory document is the partnership deed
that is made by the partners (Morris, Webb & Franklin, 2011). In case there will be need of
funds, money lending would be always prioritised to partnership rather than sole working.
There is an opportunity of saving tax individually by splitting the income into the ratio as
decided at the time of preparing the partnership deed. Also the major reason for choosing the
option of partnership was sharing of loss (Sedov, 2017). In case the business plan does not
work out to be the as expected, and there are losses incurred, then such losses could be
distributed among the partners. The working related to the management of internal and
external affairs could be easily distributed in accordance to the interest of the partners. This
will help in get the work done on time and will finally result in building trust among the
customers (Peng, 2011).
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3- Discuss the different financing options to set up your business and
the reasons for your choice
According to a research it was found that 94% of start-up businesses fail during the initial
stage of the year. The cause of such failure is lack of funds. If there is not set source from
where the funds could be raised at the initial stage, it becomes difficult for the business pan to
stay stable. The funds made available are considered as fuel for the working of the business.
At the time of setting the coffee house, The Caffeine Café the following sources of funds
where available where:
Crowd Funding: Crowd funding was one of the source through which we came across for the
first time. In crowd funding the entrepreneur will introduce the business plan on the crown
funding platform and will provide information such as the objective, legal form and an
estimate of the funds that are required (Anon, 2016.). Through crowd funding more than one
person could lend money. This source was eliminated as the main criteria for raising funds
from multiple person was the popularity of the business model.
Angel Investment: Such investors are individuals who have surplus money with them and are
looking for the best business proposal to invest. In exchange to the money invested by them
they have right to inspect the management of the business and give suggestions and
recommendations (Minich-Pourshadi, 2010).
Loan from micro finance companies and NBFCs: The financial companies which are ready to
provide loan at simple and low interest rates is one the best option available to raise funds.
Such companies do not have stringent policies and are flexible in their working styles. This
was one of the option that was opted to raise funds for The Caffeine Café.
Personal Investment: Investment made from owns pocket is the best way to find cash. When
the money involved in the business is from the own pockets the seriousness to grow the
money is double the rate. There is no issues such as refund of the money, interest rate and o
documentation. This was another option undertook to start The Caffeine Café.
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4- Briefly define the role of accounting as it relates to your business
Accounting plays a very important role in any business irrespective of the size and industry
the business is associated to. Cash flows, income and expenditure accounts are required for
the business to keep a control on the working. Track on the flow of the cash is important to be
kept as a minimal level of cash is required to be maintained at the business. The accounting
information that will be recorded in the books of accounts of The Caffeine Café would be
related to the financials.
The accounting information will be used by the partners of the café and as the funds raised
are through financial institution, hence, they shall demand a copy of the accounting
information for their records.
The accounting process that will be followed by the partners will be- Setting up of simple
accounting system, preparing chart of accounts, opening a bank account, separating personal
and business expenses, record keeping of receipts and invoices, creation of payment and
receipt of payment system, record the entries related ad develop a forecast (Doinea, 2011).
The financial accounting maintained by the partners will be inform of preparation of financial
statements. Entries made in the financial statement will be trough the data collected from the
transaction made.
The management accounting process will keep a record of the cost that is incurred in the set
of the business. Such cost incurred will be available for comparison with the revenues earned
by the way of management accounting. The estimated profits could be found through this.
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5- Develop a chart of accounts for your business.
(Rylee, 2017)
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6- Will there be a need to use special journals and/or subsidiary
ledgers in your business. Discuss
It is observed that the posting of the journal entries in the respective ledger accounts is a time
consuming process. There are times when the entries of similar entries are to be made.
Repetitive entry of similar entries in a waste of time. In order to speed-up such process,
special entries are used to record the repetitive entries having the effect on the same set of
accounts (Ramagopal, 2009).
Considering the business of The Caffeine Café where majority of the transitions are cash
receipt and cash disbursement based, there will be a need of using special entries for saving
time. It is obvious that the business will have similar nature of transactions, hence use of
special entries would be a benefit for the accounting procedure. With the use of special
entries, the transactions would be documented in one line of the ledger (Skærbæk &
Tryggestad, 2010). After that there will be no requirement of posting individual entries
separately, the total of each column will be posted at the end.
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7- As it relates to your business, when is it suitable to do the
adjustment of the accounts and the closing and why.
Adjustment Entries are mostly done at the end of the year for any business. Such entries are
done to record any unrecognised or un-entered income or expense. Whenever there is a
transaction starting in one period and ending in the other period, there is a need to make an
entry in the books of accounts. In case such entry is omitted, the same needs to be adjusted in
the current period.
In the case of The Caffeine Café the adjustment entries are not applicable as it will be the first
year for the business to make any transitions. Hence, there will be no transition that would
have been started in the previous year and ended in the current year. Therefore there is no
need to make adjustment entries (De Franco, Wong, & Zhou, 2011).
Closing Entries is also done at the end of the year. The journal entries made in the books of
accounts are closed at the end. The process of moving the data from the temporary account to
the permanent account is closing of journal entries. The temporary account in such case is the
income statement and the permanent account is the balanced sheet (Imam & Kouwenaar,
2008).
In case of The Caffeine Café, the closing of the entries will be done at the end of the
accounting period. This would be done to bring the balance of the temporary accounts to zero
which includes the revenue and expenses account.
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8- Discuss the considerations that the management of your business
would take into account in deciding on whether to distribute profits or
to retain them in the business.
In order to understand the progressive earnings of any business, the analysis of profits would
be appropriate. The earning done by any business after making the relevant deductions is the
profit earned by it. The earning of profits depends on the form of business. One the profits are
earned, there are two options before the partners. The profits could either be distributed
among the partners or retained in the development of the business. Such retention of profits
are done to maintain the cash flow in the business for the next year or could be used as capital
investment (McKelvie & Wiklund, 2010).
In case of The Caffeine Café, it will be suitable for the partners to keep the profits in the
business. As the business have undergone only one year, the amount of profit earned are also
eligible. Distribution of the same would not solve the personal purposes of the partners, rather
the retention will help them in the development of the business or repayment of the loan took
(Whitfield & Duffy, 2013). Even if the profits are distributed, there will be no difference in
the taxation of the amount. Hence it is suggested to the partners to retain the profits in the
business.
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References
Anon, 2016. Long-Term services and supports financing options: Which options do people
support? The Gerontologist, 56(Suppl3), p.233.
Crague, Gilles et al., 2012. Liability put to the test by new forms of business organization.
(Report). Sociologie du travail, 54(1), p.1.
De Franco, Gus, Wong, M.H. Franco & Zhou, Yibin, 2011. Accounting adjustments and the
valuation of financial statement note information in 10-K filings.(Report). Accounting
Review, 86(5), pp.1577–1604.
Doinea, O. et al., 2011. The Role of Accounting Information in decision-making strategies
and processes. Economics, Management and Financial Markets, 6(2), pp.188–193.
Imam, P. & Kouwenaar, A., 2008. Rapid current account adjustments : are microstates
different?
Kadan et al., 2012. Analysts' industry expertise. Journal of Accounting and Economics, 54(2-
3), pp.95–120.
McKelvie, Alexander & Wiklund, Johan, 2010. Advancing firm growth research: a focus on
growth mode instead of growth rate. Entrepreneurship: Theory and Practice, 34(2), pp.261–
288.
Minich-Pourshadi, K., 2010. Financing Options. Health Leaders, 13(6), pp.42–43.
Morris, Michael H., Webb, Justin W. & Franklin, Rebecca J., 2011. Understanding the
manifestation of entrepreneurial orientation in the non-profit context. Entrepreneurship:
Theory and Practice, 35(5), pp.947–971.
Peng, T.-J.A., 2011. Resource fit in inter-firm partnership: intellectual capital perspective.
Journal of Intellectual Capital, 12(1), pp.20–42.
Ramagopal, C., 2009. Accounting for managers starting from basics an exclusive &
comprehensive book covering revised UGC syllabus, New Delhi: New Age International.
Rylee, C.D., 2017. So, you need a new chart of accounts. Planning for Higher Education,
45(3), pp.60–67.
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Sedov I.A, 2017. Legal forms of the commercial organizations. Interaktivnaâ Nauka, (1),
pp.208–211.
Skærbæk & Tryggestad, 2010. The role of accounting devices in performing corporate
strategy. Accounting, Organizations and Society, 35(1), pp.108–124.
Whitfield & Duffy, 2013. Extended revenue forecasting within a service industry.
International Journal of Production Economics, 141(2), pp.505–518.
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