Importance Of Accounting, Recording Financial Transactions, And Advantages And Disadvantages Of A Company

Importance of Accounting to the Owners And Operations Manager

1.Importance Of Accounting to the Owners And Operations Manager.

2.Describe How the Operations Manager Should Record Financial Transactions.

3.Discuss about the Advantages And Disadvantages Of a Company.

The primary function of accounting in business is to assist both internal and external stakeholders to take sound business decisions by presenting them consistent financial information. The present report revolves around a Melbourne based company named Advanced Food Services which is faced with the problem of ineffective accounting method due to which it is losing considerable amounts of stock and money. The answers provide recommendations about how the owners (Smythe and Alba) and the Operations Manager (Jimmy) can bring the business back on track

1.In simple words, Accounting is defined as the practice of recording, summarizing, evaluating and reporting financial transactions of a company. Accounting is considered to be the most critical functions of any organization. In fact, it is usually known as the Language of Business (Porter and Norton, 2008). It is important for the owners and Operations Manager of Advanced Food Services to understand that adopting proper accounting methods will provide them quantitative information of economic nature which in turn will help immensely in decision making. Currently, no proper records are maintained by anyone in the Melbourne based company. However, if Jimmy or the two owners start keeping accounting records, then the outcomes of their operations and financial position will be in front of them in a systematic manner. Both the owners and Jimmy will be able to take due care of their cash requirement and working capital with the help of a sound accounting system (Bragg, 2011).

Effective business accounting guarantees timely recording of liabilities that need to be paid within the specified timeframe. All businesses require exchanging money with their consumers and investors. If the business owners neglect maintaining records of expenses, then they are likely to find themselves trapped in financial problems sooner or later. An accounting system will help them maintain proper cash outflow and inflow for determining the cash in hand. As the owners and Jimmy do not track their expenditure, inventory and sales, it is becoming impossible to get a clear impression of whether the company is earning a profit or not (Ernst & Young LLP, 2017). However, if they use GAAP, they can easily track their transactions and prepare their financial statements. GAAP will help them in achieving consistency in their appearance of financial details. These accounting principles require that the company uses the same standards from one accounting year to the other, which encourages usability and consistency of the statements. For instance, moving from the FIFO inventory accounting technique to the LIFO without prior notice can confuse users and the owners too (Narayanswamy, 2014). Likewise, consistent bad debt accounting and revenue recognition techniques impact internal decision making. As business involves regular operation and requires maintaining records of all these transactions, statements prepared in accordance with GAAP are not just for a particular period of time but also maintained on a daily basis. GAAP also increases the comparability of financial reports by standardizing accounting methods. The owners and Jimmy can compare their financial records belonging to distinct periods against the statements of similar companies of the same sector (Lev and Gu, 2016).

Describing Recording Financial Transactions

Clearly, Smythe and Alba (the owners) and Jimmy (Operations Manager) are not following either proper accounting methods or GAAP standards. Merely keeping a box of receipts and payments are going to turn the month end accounting into a cumbersome process and increases the probability of omission and duplication. Formal record keeping is imperative for the smooth functioning of Advanced Food Services.

2.Financial statements are recorded by operation manager through double entry system. The double entry system of bookkeeping and accounting refers to a method in which each transaction consists of two or more than two accounts by giving equal effect to debit and credit side. The profit or loss is calculated with the help of double entry book keeping the system in an accurate manner by preparing the profit and loss account for a given period of time. The system of double entry book keeping will also assist in disclosing the information of business’s financial position with the help of balance sheet (Bragg, 2011).

Operation manager is required to make use of mainly five types of accounts in the accounting records which are: – liabilities, assets, equity, expense, and revenue.

Operation manager can compute profits with the use of income statement. Profit and loss account is another name for the income statement (Narayanswamy, 2014). The formula for income statement is:

Revenues – Expenses = Net Income

For survival, all businesses are required to make profits, to pay off expenditures, interests on debts and taxes. After paying off all operational, the amount left is net income. It is significant to maintain income statement as it helps in calculating profits and shows the financial profitability of business during a specific period of time. P&L account is used universally by accountants and managers. An example of some crucial transactions for business is enumerated as below:

Cash transactions

It includes cash recipes and cash disbursement. At the end of the month, operation manager must settle the bank account regarding any omission or outstanding transactions such as, if the company signs a cheque, it must be immediately recorded in the accounting records, though it might be not cleared by the bank at the end of the month it is still outstanding (Bock, 2010).

Accounts receivable

This amount is the due amount of customers which the company has to receive from them. The information of these accounts is recorded in sub ledger, and it must be settled to the accounts receivables listing for the assurance of balance amount (Gupta, 2012).

Advantages And Disadvantages Of a Company

Accounts payable

These transactions generally show money payable by the company to the suppliers. It is inclusive of amounts due to employees or to taxes which are payrolls or HST. It is significant to settle these accounts and make sure that what to record regarding the existing continuing obligations (Aylen, 2012).

Sales transaction

It records the income generated by a business by selling its services and products. This will include cash as well as credit transactions by considering relevant accounts.

3.In Australia, the most usual types of company are:

• Public companies (normally formed for raising or borrowing public money by listing its shares to be traded on the stock exchange)
• Proprietary limited companies (which are not entitled to raising money from the public through issue of shares) (Sinha, 2016)

Given the owner’s interest in expanding the business by turning it into a company, the most feasible option is to form a proprietary limited company. The advantages of doing so are listed below:

Limited Liability – The most apparent advantage of forming a limited company is that it brings financial security with it. The shareholders of the company are not accountable for any debt which is accrued by the company beyond the extent of their own investments. This will give a feeling of security for the investors (Bock, 2010).

Separate Entity – Because of its very nature, a proprietary limited company is seen as a different legal entity and has a separate existence from its owners. This has many benefits, including the fact that the organization has perpetual existence and the death of any member will not cease its existence. This ensures the security for other members and employees and is also a benefit which other forms of businesses are not entitled to (Burton, 2012).

Taxation and tax-related advantages – The Limited Liability company will only be taxed on its profits and is not subject to any greater tax rates levied on partnerships or sole traders. There are many ways in which the limited company can be used for the benefit of the members and their interests. By forming and operating a limited company, the members are entitled to pay themselves the minimum wage levels. This enables them to reap benefits of personal allowance. There is also the benefit of paying yourself in dividends rather than in the form of pay packets (Aylen, 2012).

Ownership and Control – In the case of Proprietary Limited Companies, the Directors are also the main shareholders of the company. Hence, the control and ownership of the business stay with them. Decisions could be taken easily and quickly with little mess, enabling more efficient business management (Lev and Gu, 2016).

It is advisable that Smythe and Alba expand their business by turning it into a Proprietary Limited Company because of the above mentioned advantages. However, they should consider the following disadvantages before taking the plunge:

Cost – A limited company is costly to set up.

Complex accounts – The rules governing bookkeeping and accounting of a company are more restrictive and complex as compared to a sole trader.

Restricted capital raising – There is a restriction on capital raising through the issue of shares.

Hence, though Smythe and Alba can expand their business by forming a company, they will have to be careful about their accounting methods (Sinha, 2016).

Conclusion

It is evident that the problems being faced by Advanced Food Services can be mitigated by following appropriate accounting methods and complying with GAAP. Moreover, as the advantages of forming a company outweigh its disadvantages, they should consider turning their business into a company

References

Aylen, J., 2012. Starting and Running a Small Business For Canadians For Dummies All-in-One. John Wiley & Sons.

Bock, M., 2010. The Advantages and Disadvantages of Relationship Management. GRIN Verlag.

Bragg, S., 2011. The New CFO Financial Leadership Manual. John Wiley & Sons.

Burton, K., 2012. Business Skills All-in-One for Dummies. John Wiley & Sons.

Ernst & Young LLP., 2017. International GAAP 2017: Generally Accepted Accounting Practice under International Financial Reporting Standards. John Wiley & Sons.

Gupta, P., 2012. Principles of Business Financial Accounting. AuthorHouse.

Lev, B. & Gu, F., 2016. The End of Accounting and the Path Forward for Investors and Managers. John Wiley & Sons.

Narayanswamy, R., 2014. FINANCIAL ACCOUNTING: A Managerial Perspective. PHI Learning.

Porter, G. &Norton, C., 2008. Financial Accounting: The Impact on Decision Makers. Cengage Learning.

Sinha, D., 2016. Advantages and Disadvantages of a Company Form of Business – Explained. [Online]. Available through: <https://www.yourarticlelibrary.com/company/advantages-and-disadvantages-of-a-company-form-of-business-explained/40801/>. [Accessed on 18^th August 2017]