Jim & Judy Choi's Bed & Breakfast
As Jim & Judy Choi's banker, no, they should not be congratulated on their "profit." Since they have not done anything related to their actual business activities and have not actually made any money from their business, there is no profit to address. Profit comes from making money in a business, not from saving money that would otherwise be used to prepare for that business. Many people do not understand the difference, however, and that gets them into trouble when they attempt to create balance sheets and keep their accounting books in order for their company. The Choi's, for example, have managed not to spend every dime they were loaned and that they previously had in the bank, but that is not the same thing as making a profit once their business has been opened. They can only make a profit once they have opened for business and their income after all expenses is a positive number.
If they are not able to bring in sufficient income, or they find that they are losing money, there will be no profit to celebrate. Companies that want to make a profit should get good advice from their bankers and accountants about how to accurately measure profit and loss (International, 2007). The amount of cash a person or business has does not measure profit, and making sure it is measured accurately is very important when it comes to accounting (International, 2007). When a company decides that it needs to determine profit, a balance sheet is very important, as well. The money that comes into the company matters, but so does the money that is going out of the company. Many people mistakenly think that they are doing well because they have a lot of money coming in from their business, but that must be measured against how much money they are paying out for expenses (Elliot & Elliot, 2004; International, 2007).
The data that the Choi's currently have can be...
They will need to show their initial investment of $100,000, as well as the loan of $100,000. It is important to show the amount of the payment on the loan, too. The Choi's did not get the opportunity to borrow that money for free, and they have a principle and interest payment they must make on it each month. That is an expense that needs to be displayed on the balance sheet. Any expenses that are recurring should go into the completion of the balance sheet (Elliot & Elliot, 2004). The money that was spent on the colonial house and the renovations, as well as any other money that was spent on other items, should all be listed. Then the $38,000 that is left over will be shown as the cash on hand. When the cash available and all the expenses are added together, they should equal what was originally borrowed and put into the business. That is how the financial information is balanced, and is largely the purpose of a company having a balance sheet.
Some very small companies, such as sole proprietorships that provide services and not goods for profit, do not concern themselves with balance sheets (Elliot & Elliot, 2004). The company is not large enough and complicated enough at that point to need accounting statements. For the Choi's, however, balance sheets and other types of financial statements are a requirement. A bed and breakfast resort would provide both goods and services, and all of that has to be accounted for in some way. Since the Choi's are new business owners, they would be best served by having an accountant handle their financial statements. That way they are sure to follow the correct procedures and regulations in order to keep their business running and avoid any financial problems with the IRS and other governing bodies that may request information contained in financial statements such as their balance sheet.
The Board of…
