Question 2: At the end of the year a small business owner comes to you with this

Question

Question 2:

At the end of the year a small business owner comes to you with this self prepared income statement.

The goal is to “clean up” this report:

What items would you raise questions about?

Are there any potential bookkeeping errors?

P&L; (Income Statement) ABC Law Firm, POC 2017 01 02 Q3 Q4 Jan Dec Legal Fee Income 32,000 36,000 41,000 29,000 138,000 5,000 40,00030,000 46,000 17,000 133,000 Divorce Cases Immigration Cases 8,000 (6,000 5,000 (12,000 Total Revenues from Clients COGS Client Fees Merchant account fees 5002,000 5002,000 500 500 500 500 500 500 Expenses Payroll 15,000 10,000 15,000 10,000 50,000 Payroll Taxes (Employer's FICA Match)10,000 8,000 10,000 8,000 36,000 2,000 4,000 3,000 2,000 2,000 3,000 10,000 (50) (168) Rent Credit Card Payments Postage 2,000 (240 (28) 150 240 Owner's Draw 28 2,850 50 3,168 Total Expenses 30,000 20,000 30,000 23,000 103,000 Net Profits 10,000 10,000 16,000 (6,000) 30,000

Explanation / Answer

1. Questions to be raised regarding the report persented:

a) Whether the report is made on Accrual or Cash basis.

b) Gross Income part of the report is missing.

c) Rent expenses are not evenly booked in the Income Statement.

d) Credit Card payments are booked under the payment mode head instead of Expense head mode, like entertainment, purchase or travelling.

e) Postage expenses are negatively booked.

f) Owner's Draw being the capital nature item are taken to the Income Statement where only revenue nature items are booked.

2) There do exist some potential bookkeeping errors, namely :

i) Rent is not evenly booked on the accrual basis.

ii) Credit Card payments are not described whether personal or towards business. If related to business, the same should be booked under the various expense heads.

iii) The capital nature transactions like Owner's Draw, are booked under the Income Statement of the business.

3) Mistakes in the formatting of the report are :

A) Gross Profit colume has been left out.

B) Rent is not booked on accural basis.

C) Credit Card payments are not described under the different heads of expenses.

D) The Net Operating Income has been described as Net Profits.

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