Question

You are the new accountant for ABC, Co. ABC, Co. is a plumbing supply and installation company.

Your boss is the President, Mr. Bigg.

As the accountant, it is your job to explain to Mr. Bigg the following accounting terms.

1. What is a chart of accounts?

2. What are adjusting journal entries?

3. What is an income statement?

Based on your course work of accounting and information systems course (ACC 4310) at your University, what would you recommend to Mr. Bigg to improve his business in regards to the following situations?

1. Accounts Receivables are billed and due at 30 days from invoice, however, most customers tend to pay up to 45 days. The company needs to improve cash flows.

2. Several customers have bounced checks and this causes issues, especially the $25.00 fee charged from the bank?

3. The company needs capital for expansion, to purchase materials, and new equipment. Why would you suggest to Mr. Bigg.

Answer 1

SOLUTION :

PART - A

1. Chart of Accounts is a detailed and comprehensive list produced within the entity. It lists down all the ledger accounts that are part of the accounting system. Each of these ledger accounts will be classified in to any of the major heads viz. asset/expense/income/liability/equity/contra revenue/contra expense and will have a unique code.

2. Adjusting journal entries are those journal entries that are usually passed at the year end. Mostly these entries are for non cash items and are used for finalisation of accounts. Some examples are : Depreciation, Provision for Income Tax etc.

3. Income Statement is that part of financial statements that will reflect the operational result of the entity. It starts with the revenue and ends with net operating income/loss. It contains all the revenue items and expense items.

PART - B

1. Following are few steps by which a timely collection from receivables can be ensured :

• Collect a good portion of the invoice at the point of sale itself.
• Send timely reminders in polite manner.
• Apart from normal trade discount, announce rewards for prompt payment for 'n' number of times.
• Follow the right procedures of invoicing and follow up.

2. The below steps can be useful in case of customers whose checks keep bouncing :

• Advice the clients to have proper budgeting.
• Urge upon them to open Over Draft accounts.
• Accept cashier's check only.
• Announce recovery of bank charges from clients plus interest.

3. Financing Decisions :

Sources from which capital can be raised, are plenty and a wise selection has to be made by following a detailed consideration of the purpose and the projected revenue. Given below are few alternatives that will best serve the different purposes :

• Expansion - Fresh capital, Long Term Loans, Public Depsits
• Purchase of materials - Cash Credit, Over Draft, Factoring, Bank Guarentee
• New Equipment - Operating Lease, Finance Lease, Hire Purchase, Equipment Mortgage Loan