Question

In: Accounting

Your friend, Dana, is starting her own photography business. She knows that you are studying accounting,...

Your friend, Dana, is starting her own photography business. She knows that you are studying accounting, so she has turned to you for help in setting up her accounting records. What method of accounting would you suggest Dana use? What questions would you ask her to help determine your suggestion? What other suggestions would you make to Dana as she gets started with her new business?

Solutions

Expert Solution

  • To begin with any sort of business, it is utmost important to choose a method of accounting suitable for the business. Primarily there are two methods, viz. Cash method and accrual method.
  • Under cash method, transactions are recorded as and when the cash is received or paid. In accrual method, amounts are recorded as and when they are due without waiting for the cash exchange.
  • Eg. If for a photoshoot, the cameraman books a resort in the month of May for which the payment will be due in August, so under cash method this transaction will be recorded in August when the amount will be paid to the resort. Whereas, in accrual method the transaction will be recorded in the month of booking i.e may when the payment is due even though cash is paid at a later date in August.
  • For a newly commencing business of Dana, accrual method may find complications of timing of recording transactions, hence I will recommend cash method to Dana in order to start the business with ease.
  • Before, giving an opinion on accounting method to be implemented, following things will be assured from Dana-
  1. Track of invoices and payments
  2. Mode of payments
  3. Accounting software used to record transactions
  4. Nature of expenses incurred
  5. Average collection period
  6. Average payment period
  7. Single entry or double entry type of book keeping system. Etc.
  • While starting the photography business, I would like to inform Dana about the maintaining of book keeping system, filing and retention of documents, recording of assets and liabilities, accounting for incomes and expenses, cash flow and other reporting requirements, Hiring accounting and finance employees etc.

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