Question

Natalie Koebel spent much of her childhood learning the art of cookie-making from her grandmother. They spent many happy hours mastering every type of cookie imaginable and later devised new recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is investigating possibilities for starting her own business as part of the entrepreneurship program in which she is enrolled.

A long-time friend insists that Natalie has to include cookies in her business plan. After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie-making school. She will start on a part-time basis and offer her services in people’s homes. Now that she has started thinking about it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer group sessions (which will probably be more entertainment than education) and individual lessons. Natalie also decides to include children in her target market. The first difficult decision is coming up with the perfect name for her business. She settles on “Cookie Creations,” and then moves on to more important issues.

Instructions

(a) What form of business organization—proprietorship, partnership, or corporation— do you recommend that Natalie use for her business? Discuss the benefits and weaknesses of each form that Natalie might consider.

(b) Will Natalie need accounting information? If yes, what information will she need and why? How often will she need this information?

(c) Identify specific asset, liability, revenue, and expense accounts that Cookie Creations will likely use to record its business transactions.

(d) Should Natalie open a separate bank account for the business? Why or why not?

(e) Natalie expects she will have to use her car to drive to people’s homes and to pick up supplies, but she also needs to use her car for personal reasons. She recalls from her first-year accounting course something about keeping business and personal assets separate. She wonders what she should do for accounting purposes. What do you recommend?

Answer 1

(a) Since Natalie is starting her venture for the first time, it's wise to keep it small & simple. In terms of business organization, following options are open to her:

Proprietorship - This is the simplest and the best way to start. You're your own boss. The set-up instructions are fairly simple even for a lay man and don't offer much legal complexities. Natalie should begin with proprietorship initially.

Partnership - Partnership is an option only when there're two or more people with similar business interest joining to add value. It appears that Natalie is doing this on her own at this moment and might not need a partnership to begin with.

Corporation - Well, to start, all the major names in the industry initially started from a garage. Any growing business needs to switch over to Corporation once they realize it's true potential. This is more suitable for Natalie only once she's completely established in business and is planning to grow it to a national/international level.

(b) For a proprietorship, Natalie needs very basic accounting information; all sales are revenue, all costs incurred are expenses and the balance left is profit. Any devices/equipments purchased initially like laptop, printer, packaging or baking machine are assets. All transactions need to be accounted for.

(c) Assets can be laptop, printer, baking oven, packaging machine etc.

Liabilities will be the supplier's bills that need to be settled.

Revenue will be from sales generated either by students subscribing to her class or her selling sample cookies prepared with the customers.

Expenses will be the cost incurred like buying raw material for cookies, electricity, internet bills, gas purchased for official work, stationery charges etc.

(d) Yes, it's necessary to open a separate bank account to segregate all your business expenses from personal ones. This makes the transactions more transparent during audit and tax filing. Moreover, it'll be a current account instead of a savings personal account.

(e) As a thumbrule, Natalie can estimate an average amount per mile that she spends and can allocate it towards business for the total miles travelled on business work.