Question

1. The business credit card is being used for business and personal expenses; list the business and then the personal expenses from the statement. Address the accounting and ethical reasons for this separation of expenses.

2. Dave takes advantage of cash discounts from vendors whenever possible. Address the business reason for this decision. Then, address the ethical ramifications if Dave would take the discount when paying outside the discount period.

Answer 1

Answer 1 : Accounting and Ethical reasons for Separation of Expenses.

a) Tax implications - The IRS allows business owners to claim deductions for business-related expenses such as travel and supplies, but you must have the proper documentation to support it. If your business is audited, the IRS will look closely at each expense to verify that it is indeed related to the regular operation of the business. When there is no clear paper trail in terms of what the expenses were for, or how you paid for them, it becomes more difficult to validate the deduction.

b) Liability Separation - A separation is also important when considering your liability for debts. If your business is structured as a corporation or limited liability company, keeping the two separate works to your advantage, if a creditor takes action against you for an unpaid debt. When there is no clear distinction between business and personal finances, creditors are in a better position to claim your personal assets to satisfy a debt.

c) Business Credit - You may be able to get a business credit card based on your personal credit history alone, but you will need a separate business credit profile to secure larger business loans or establish vendor lines of credit.

Note: I cannot list business and personal expenses from the statement as the said statement has not been provided

Answer 2 : The ethical ramifications if Dave would take the discount when paying outside the discount period.

a) Lack of trust - Since Dave takes the discount outside the discount period then it creates a sense of dishonesty from the part of Dave as the vendor had agreed for a lower payment only if such payment was made within a specified period.

b) Future unavailability of Discounts - On default of discount terms earlier, vendors will be vary of providing such discounts in the future and will demand full payment due.

c) Increased Expenditure - There will be more expenditure to be incurred as discounts will not be provided and will also lead to a strain on the working capital of the entity.