A memo to BizCon Consultation Firm

A memo to BizCon Consultation Firm

To: Management of BizCon Consultation Firm

From: Chief Finance Officer

Subject:  Delayed Wage Payments

In the real sense, the company has been facing a financial shortfall. The company promised to pay her employees in the first week of the year, but this has never been made possible. BizCon shall employ two methods of accounting.  The approaches to be used by BizCon will be based on cash and accruals. Cash basis is operated by small businesses as well as personal finances. Majorly, the cash approach is utilized for-profits whenever money is acquired in cash. Besides, it is used for expenses whenever cash gets paid out to various suppliers of the company. Also, cash could be employed for the operations of small financial institutions alongside in support of everyday accounting operations (Staples, 2007).

On the other hand, the accrual basis is referred to revenue generated from the produced goods and services expenses incurred during the production. From the scenario, the equipment suppliers of BizCon prefer being paid in cash basis but not in credit form or rather any payment deliveries.BizCon has been recording cash in support of purchasing commodities, products and services. The proper method of accrual indicates that BizCon is not paying its money whenever the company has customers. Conversely, BizCon defrays using another payment method like credit form whenever there is a need for recording transactions which have been made instantly.

If the company follows the cash-based method of accounting only whenever the physical cash it attained or moved, then we shall be capable of recognizing various entries which will not be in the correct form when it comes to financial positions on how BizCon is operating. However, taking a look at the accrual approach, the cash receipts and payments are never deemed to be in support of recognizing entries. When the liabilities occur or rather when the assets are uncured, then we shall not do not know what shall be present accurately for the financial positions of the business (Staples, 2007).

For instance, if we take payment of salaries as of the above question: the system of cash-based accounting, the wages paid to workers for the one month shall be paid the following year. This shall be recorded in the next year like cash paid in the subsequent year. This will augment the profit of the current year through reducing expenses incurred in that year; however, as outlined in the accrual accounting basis, even though we defray the subsequent liability in the next year.

Therefore, in the above transactions that incorporate sales which we acquired money in the later dates could have to be recorded in the receivable books of accounts in this year like sales which have been made during this year. Besides, the expenses on salaries have to be booked within the current year like payable salaries and expense salaries.

Assessment of the reported favourable net income

BizCon has been offering a credit of six months period to the customers. The company has been paying suppliers through the use of cash methods in case it is purchasing any form of material it requires. The fact of cash shortage will appear. This issue of favourable net income came as a result of using appropriate methods of payments as well as paying the companies’ suppliers promptly with the use of available cash when buying any form of equipment.  The company can have a positive net income, although running out of money. As it is known, the cash-flows and profits are financial measurements that are related in the world of accounting. However, the two are never linked directly to one another. Profit is a quantification of ongoing corporate sustainability as the cash-flow measures the firm’ capacity of defraying its bills whenever they are due.  The cash-flow for sure is the closing cash balance arrived at when all the deductions have been made from the received cash.

On the other hand, profit is the amount which remains upon deducting earned revenue, incurred expenses from the income received. Thus, in accounting, something is expensed whenever an economic value has been used up ultimately. However, an organization might have used far more cash as compared to whatever has been spent in any accounting system (Erchinger & Melcher, 2007). Thus, as BizCon is performing better, profit-making in support of every sale can be extended for six months within the little cash the company is experiencing. In future, when credit id reduced, then there would be appropriate cash at hand for the company.

References

Erchinger, H., & Melcher, W. (2007). Convergence between US GAAP and IFRS: Acceptance of IFRS by the US Securities and Exchange Commission (SEC). Accounting in Europe, 4(2), 123-139.

Staples, C. L. (2007). Generally Accepted Accounting Principles (GAAP). In Encyclopedia of Public Administration and Public Policy (pp. 828-832). Routledge.