accounting help for me

Running head: NAYBROSTRAND COMPANY 1

NAYBROSTRAND COMPANY 3

Naybrostrand Company

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Financial accounting is an important discipline in management of financial resources of an organization not to mention that it is a statutory requirement for organizations because it forms basis for determining statutory deductions such as taxes (Pinson, 2001). Various financial statements go into management of financial resources of an organization. Income statement is one such financial statement, which is useful in calculation of the profitability of an organization. It entails having the revenues for a given accounting period matched against the cost of goods sold in the same period to arrive at the gross profit realized in that period. The gross profit is then matched against the operating expenses for a given period to arrive at the profit before tax after, which tax is deducted to arrive at net income (Pinson, 2001).

It important to realize that, for matching principle to be followed strictly, some adjustments have to be done to the various accounts to ensure that they match with the period they are meant to represent. Failure to do the adjustment will defeat the very purpose of matching principle and accrual accounting. In the case of Naybrostrand, the first income statement was prepared without adjustment for sales, which were not purchased and therefore the net income had been overstated. Below is a new income statement where the adjustments for the sales had been done on the cost of goods sold (deduction of $42,500) this has led to higher gross profit and net income as well (Dupuis & Canada, 2004).

Naybrostrand income statement for the year ended

31st dec, 2012

Amount ($) amount ($)

Revenues 586,000

Cost of goods sold 264,500

Gross profit 321,500

Operating expenses

Depreciation expense 24,350

Insurance 1,400

Marketing 4,500

Rent 28,000

Salaries 78,500

Utilities 6,700

Total expenses 143,450

Profit before tax 178,050

Property taxes 16900

Net income/profit 161150

From the very outset, it is unrealistic to expect the income (notice that the accounts are in profit) to compare with the original income statement. It was important and material to adjust the accounts for the 42500 sales, which never materialized. This in return brought the cost of goods sold down and subsequently the gross profit and the net profit came up. Therefore, the earnings for the organization went up (Dupuis & Canada, 2004).

The accrual basis of accounting advocates that revenues and expenses be recognized in the accounting period when they are earned irrespective of whether cash is received or not. On the other hand, cash basis accounting advocates that revenues and expenses be recognized when cash is received or paid. The matching principle entails having the expenses and revenues being put in the same period they occurred rather than having them in different accounting periods of the organization (Australia & Scott, 1995). The matching principle is an accounting concept whereby the expenses relating to an organization activity in a given accounting period is recognized within the same period the revenues from the same activity are realized.

Therefore, the revenues for a given period are reported alongside the expenses, which were incurred to realize them organization (Australia & Scott, 1995). This practice forms the basis of accrual accounting and it is important because it helps the organization avoid misstatement of a period earnings. For instance, reporting all the revenues and expenses for a given period. If organization reports revenues for an accounting period and fails to report all the expenses associated with the revenue, this would lead to overstatement of revenues. The move could lead the organization paying more taxes and other statutory requirements than it should, which in turn would be hurting the organization in long run. Therefore, the matching principle ensures that the profits or losses given in any accounting period are correct and hence represent true and fair view of the financial situation of an organization (Australia & Scott, 1995).

Matching principle forms the basis of accrual accounting, which is important in ensuring that revenues are matched with their rightful expenses occurring in a given accounting period. Failure to this improper reporting and presentation of organizational financial performance leads to organization paying more than it should on statutory payments. Adjustments to the various accounts are therefore necessary for purposes of reflecting amounts associated with a particular accounting period (Dupuis & Canada, 2004).

References

Australia., & Scott, L. J. (1995). Accrual accounting - a cultural change Canberra: Australian Govt Pub. Service

Dupuis, J., & Canada. (2004). Full accrual accounting, Ottawa: Parliamentary Research Branch

Pinson, L. (2001). Keeping the books: Basic recordkeeping and accounting for the successful small business, Chicago: Dearborn