Prepare Standard Financial statements and Books of Accounts

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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.

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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