Introduction
Denimike Company Limited is an upcoming organization that aims at manufacturing fibreboard products in Arlington, U.S.A. The Company was founded in 2018 as a small business with 2 founders, Denis and Michael. Ever since it was founded the company continues to grow and aims at becoming a major supplier of fibreboard products in Arlington. The company has 5 employees who are involved in different operations of the business. This business analysis aims at evaluating the various aspects of the company that includes; the types of product the company offers, the accounting methods used by the company, and the business transactions expected by the company. The company will be a major fabricator of wood panel products with well-formulated and organized operations in Arlington.
Types of Business Products
The Denimike Company Limited aims at using modern technologies and processing methods to enhance the quality of its fibreboard products, which include; innovating wood preparation, modern sanding technologies, pressing technology, and resin technologies. The innovative technologies will shorten the overall production processes while increasing the quality of the final products. Consequently, the raw materials will be refined using the refinement of shavings and chips obtained from plywood and sawmills. The cleaning process will remove any impurity before being assorted into small and big flakes. Meanwhile, the flakes will be assorted into woods chips piles and sawdust.
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Types of Accounting Methods
The company intends to use cash accounting as a method of reporting its revenues. The cash accounting method will report its revenues and expenses as they are received and paid since Denimike is a small upcoming company and does not have a huge revenue stream yet. After considerable growth to a tune of $5 million, the company will switch its accounting method to the accrual method. Additionally, since the company is still growing, it is wise to use the cash accounting method because it would need to seek bank financing. Consequently, using the accrual accounting method to look for bank financing would not be favourable because the company would incur many expenses with little revenue making it look like a poor company (Small Business BC, 2019). Therefore, obtaining bank financing would be impossible.
Types of Transactions
There are many types of transactions that will be incurred by the business when running its operations such as purchase of goods and raw materials, hiring of employees and services, sales, depositing and withdrawing of cash in the bank, purchase of assets, as well as payment of salaries and wages (Sankar, 2019). First, the purchase of goods and raw materials can be made using a credit or in cash whereby credit purchases will be made after some time and cash purchases will be made immediately. The accounts that are expected to be impacted include cash accounts and purchase accounts, credit accounts, creditors' accounts, as well as Cash/Bank accounts. Second, some transactions involve hiring or receiving services. This business will need several support services such as repair and maintenance services, leasing and renting of equipment and machinery, and many more. According to Research Park (n.d), the accounts that will be impacted by these transactions would include Cash/Bank accounts, respective expenses accounts such as repairs and renting services, and vendors’ accounts that offer services on credit.
Third, some transactions will be related to sales, which include sales of goods on credit and sales of goods on a cash basis. The accounts that will be impacted by these types of transactions would comprise of sales accounts, accounts receivables, and cash/bank account. Fourth, some transactions will consist of cash withdrawal and deposit from and in the bank respectively. These transactions will impact cash/bank accounts. Fifth, some of the business transactions will involve the payment of salaries and wages of the employees of the company, which would impact the salary payable and cash/bank accounts. Lastly, the purchase of fixed assets such as plant machinery, building, land, and others, are some of the transactions that the business will have to carry out. The accounts that will be impacted by these transactions consist of fixed assets accounts, cash/bank accounts, and loan accounts.
Impacts of Business Transactions
The business transactions discussed above have several impacts on the business books of accounts (Sankar, 2019):
Purchase of goods and raw materials: The purchase of goods and raw materials would debit the purchase account while the accounts payable would be credited. However, if the cash account is credited, there will be no changes in assets because the purchase of goods and raw materials forms part of the current assets in a balance sheet, which is the same with a cash account. On the other hand, in case of purchases through credit, there will be debiting of purchase accounts and the equivalent amount credited to the accounts payable on the liabilities side of the balance sheet. The purchase of raw materials and goods will further impact the income statement on the cost of the goods that are sold. Thus, when the cash is eventually paid, it will lead to cash outflow.
Receiving or hiring of services: Hiring of services will debit the expense accounts, which will impact the income statement because expenses are deducted from revenue when calculating Net Income. Additionally, the vendor’s account will affect the accounts payable in the Balance Sheet because it will increase when services are received on credit, and anytime they are paid, they will lead to an outflow of cash and reduction of the accounts payable balance too, which will nullify the effect on the balance sheet.
Sales: Selling of products will impact revenue in Income statements, which may lead to an increase in profits. On the other hand, Cash received from sales will lead to cash inflows but not showing any change in Balance Sheet because the accounts receivable will get lowered and cash/bank will increase.
Depositing and withdrawing funds: Cash that is received through the accounts receivables will be deposited in the bank account. Whenever the cash at hand is low, it will be withdrawn from the bank. This withdrawal does not impact the balance sheet since both banks and cash are entered on the assets side.
Payment of salaries and wages: Staff workers and labourers are paid salaries and wages respectively for their rendered services. These wages and salaries will impact the Income Statement since the salaries and wages are part of production cost, and should be deducted from revenue. Therefore, when salaries and wages are being paid they will lower the cash/bank balance thereby impacting the balance sheet.
Purchase of fixed assets: Purchasing fixed assets such as land, buildings, and machinery impact the assets side of the balance sheet. However, when they are purchased on credit, an equal amount of money would be entered on the liabilities' side which would balance the balance sheet.
Type of the Company
The Denimike Company is a sole proprietor business since it is a small upcoming organization with unlimited liabilities and limited working space. Additionally, the company has 5 employees who are involved in different operations of the business. The number of employees is still small which only favours sole proprietorship.
References
Research Park. (n.d). Starting a business in Illinois . Retrieved on 4 December 2019, from http://www.researchpark.illinois.edu/sites/default/files/media/Starting%20a%20Business%20in%20Illinois.pdf
Sankar, R. (2019). Measuring the Business Performance: Sole Proprietors in Puducherry. SCMS Journal of Indian Management , 16 (2), 118-134.
Small Business BC. (2019). Business Planning and Financial Forecasting: A Start-up Guide. Western Economic Diversification Canada and the Ministry of Small Business and Economic Development . Retrieved on 4 December 2019, from http://public-files.prbb.org/intervals/docs/16760815-Business-Planning.pdf.
