Maintaining well written books of
accounts is behavioral pattern of successful enterprises.
Unfortunately many
owners of businesses and organizations do not fully understand what it means to
have PROPER records and well written books of accounts. leaders of
organisations are constantly faced with tough decision on planning and
development of strategies. They all would admit that decision making is much
easier with well processed information of the daily activities at hand.
The income Tax law section 152,
requires every firm, company or organization to keep proper records and books
of accounts. It levies a penalty for not complying amounting to twice the tax
payable in that year. See our Tax accounting proposal.
Wrong classification of transactions can lead to higher tax liability when
expenses are disallowed in an objection to estimated Tax assessment.
But besides that, it is vitally
important to note that the effectiveness of management decision on how an organization should be driven to achieve
its set goals, is strongly rooted on the quality of accounting information that
it captures and the kind of reports it generates.
Someone once told me, that it was
a waste of money to pay someone to write for them books of accounts. His
reasoning was, that if an entity strictly kept its records of expenses and incomes,
then it should be able to post (receipts, invoices and vouchers etc..) them in
books of accounts and generate an income and expense statement report
thereafter to reveal to him his profit position.
Now, without guidance of a
professional business accountant to help process this raw data into useful
information, then such an entity is most likely to end up with a profit and
lose statement report that looks like the one below.
Income
Statement as at 31st Dec 20xx
|
|
Income:
|
|
Sales
|
21,584,890
|
Expenditure:
|
|
Rent
|
240,000
|
Salary
|
400,088
|
medical
|
1,340,000
|
Transport
|
13,000,000
|
casual
labor
|
269,000
|
Advertisement
|
340,000
|
Printing and Photocopy
|
900,800
|
Announcements
|
64,000
|
Audits
|
73,000
|
Accountancy
|
889,000
|
consultancy
|
50,000
|
Total
Expense
|
17,565,888
|
Profit/loss
|
4,019,002
|
The problem with this kind of report is that it hides a lot of valuable Information about how the loss or profit was arrived at. And as such, decisions on how to maintain or grow this observed profit would be based on limited information hence can not be relied upon to cause positive change.
For effective decision making, an
entity needs to have a profit and loss statement that looks like the one below.
Income Statement as at
31st Dec 20xx
|
||
Income:
|
||
Category 1
|
20,000,000
|
|
Category 2
|
1,350,000
|
|
Category 3
|
234,890
|
|
Total
|
21,584,890
|
|
EXPENDITURE
|
||
Administrative cost
|
||
Rent
|
13,000,000
|
|
Transport
|
234,000
|
|
Medical
|
560,000
|
|
Total
|
13,794,000
|
|
Marketing cost
|
||
Transport
|
400,000
|
|
Allowance
|
370,000
|
|
Photocopying
|
890,000
|
|
Total
|
1,660,000
|
|
Operational cost
|
||
Transport
|
654,000
|
|
Casual labor
|
1,000,000
|
|
Medical
|
206,000
|
|
Total
|
1,860,000
|
|
TOTAL EXPENDITURE
|
17,314,000
|
|
PROFIR/LOSS
|
4,270,890
|
|
This can then be presented in
summary format as below.
Income
Statement as at 31st Dec 20xx
|
|
Income:
|
|
Category
1
|
20,000,000
|
Category
2
|
1,350,000
|
Category
3
|
234,890
|
21,584,890
|
|
Expenditure:
|
|
Administrative
cost
|
13,794,000
|
Marketing
cost
|
1,660,000
|
Operational
cost
|
1,860,000
|
Total
expense
|
17,314,000
|
Profit/
loss
|
4,270,890
|
You can clearly see that this report brings out a lot of quality information for managers and decision makers of an organization to make impactful decisions with turn a round results to drive the firm, company or organization to supersede its set goals and objective with minimum effort.
Analysis of the entity’s
performance can be done by comparing different categories of expenditures
against incomes received say for instance; your marketing expenditure can be analyzed
to explain the incomes. With the same information, also analyze operational
expenditure to establish a trend and plan how to cut costs.
This report format
can help an organization make income projections and the expected expenditures
with fair accuracy during budgeting.
A decision to Reinvestment
profits or bring in more money can be made with identifiable priority areas of
expenditures that would yield maximum return on investment (RoI).
This therefore requires that
transactions be captured in the source documents with enough details and
narratives to ensure accurate definition and correct posting in the category
created.
HOW TO DEVELOP AN INFORMATIVE INCOME
STATEMENT FORMAT;
By following these simple steps
one can establish an effective record capturing and processing system.
1. Obtaining a comprehensive understanding of your
entity;
A comprehensive understanding of
what the organization is doing, the industry it is in, the business sectors in
terms of its services or products, business model, what are its fixed cost, who
are the major and minor clients its servicing or targeting
This will reveal to you the
income and expense categories to which sub headings will be assigned.
i)
The incomes can be categorized as
Sales category 1,category
2,micellenious.. etc while
ii) The Expense can be categorized as;
Administrative expense, operational expense, Marketing expense, sales
and distribution expense etc…
2.
Design A chart of Account:
A chart of accounts (COA) is a created list of the accounts used by a business entity to define each class of items for which money
or the equivalent is spent or received. It is used to organize the finances of
the entity and to segregate expenditures, revenue, assets and liabilities in
order to give interested parties a better understanding of the financial health
of the entity.
The list can be numerical, alphabetic, or
alpha-numeric. The structure and headings of accounts should assist in consistent
posting of transactions. Each nominal ledger account is unique to allow its ledger to be located. The list is typically arranged
in the order of the customary appearance of accounts in the financial
statements, balance sheet accounts followed by profit and loss accounts.
3.
Designing the structure and Nature of Book
entries to be kept:
The nature of records that an entity will
capture for compliancy and management purpose, will determine the kind of books
to be put in place.
A smaller organization will require fewer and
general purpose book entries that will capture more than one form of records
therefore reducing the number of books to keep.
These books will set the bench mark on which
configuration of a soft ware will be done should the entity so wish to automate.
The kind of software application to be bought will be guided by these books of
account.
4. Designing of source documents and procedure
of use;
The source documents(receipts,
voucher, invoices, LPO etc…) should be designed with procedures that will
enable as much detail of desired information and narratives from a single
transaction or activity. With good narratives captured, inaccuracies due to
wrong definition, classification and posting of transactions can be corrected
through a review of transactions posted.
If
your organisation or business needs to have its accounting information
formatted as described earlier, feel free to contact us
We
serve all sizes of organisations from one man company to large corporation. The
principle is the same and there for cuts across.
If
you’re interested, Sign up for this service that we are offering to you.
Call
or write to us; For inquiries write to jwauditors@gmail.com,
for serious business write to jwandpartners@gmail.com
or call The Director Business Advisory Mr Omony Patrick on 0772 564808, The
firm’s Managing Partner Mr Ochola John 0704 024835 office line: 0414 256408
