Unit I Case Study: Accounting Principles Cecilia Williamson ✓ Solved

```html

What form of business organization do you recommend that Natalie use for her business? Discuss the benefits and weaknesses and explain the reasons for your choice. Will Natalie need accounting information? What will she need and why? How often will she need this information? Identify specific asset, liability, and owner’s equity accounts that Cookie Creations will likely use to record its business transaction. Should Natalie open a separate bank account for the business?

Recommendation on Business Organization

For Natalie’s cookie business, the recommended form of business organization is a sole proprietorship. This type of structure is particularly beneficial for new entrepreneurs like Natalie who are just starting their journey in the business world. As a sole proprietor, Natalie would have complete control over her business, which allows for simplified decision-making. Furthermore, personal liability does exist, but in the beginning stages, the risk is minimal compared to potential rewards.

The benefits of a sole proprietorship include ease of setup, minimal regulatory requirements, and the direct receipt of profits, which is crucial for a college student supporting her education. Moreover, it allows Natalie to keep her business operations simple and inexpensive while testing her cookie idea in the market.

However, there are weaknesses associated with this structure, primarily the personal liability risk. Natalie would be responsible for any debts incurred by her business, which could jeopardize her personal assets. Additionally, raising capital can be challenging because she may not have the necessary credit or collateral to qualify for significant loans.

Need for Accounting Information

Yes, Natalie will need accounting information to manage her business effectively. Understanding her finances is critical for determining profitability, tracking expenses, and preparing for taxes. To maintain her financial health, Natalie should consider setting up a separate bank account solely for her business. This separation will help her manage her personal and business finances independently, making tax preparation much easier and more organized. It is best practice to monitor her business finances such as income and expenditures on a weekly basis, whether she chooses to use accounting software or consult with an accounting firm.

Required Accounting Information

To monitor her business effectively, Natalie needs information on various financial aspects, including profit margins, operational expenses, inventory costs, and cash flow. This data will help her make informed decisions regarding pricing, cost adjustments, and potential expansions or shifts in her business model. A simple accounting software package could serve her needs well, allowing her to log daily transactions and generate periodic reports to help gauge her performance.

Assets, Liabilities, and Owner’s Equity Accounts

Natalie’s Cookie Creations will likely utilize several types of accounts to record business transactions. The primary assets may include:

• Cooking supplies (e.g., ingredients, packaging)
• Cooking equipment (e.g., ovens, mixers)
• Instructional materials (e.g., recipes, guides)
• Inventory of finished products (cookies, baked goods)

Liabilities for her business could include:

• Utility bills (electricity, water)
• Ingredient costs (when purchased on credit)
• Professional fees (if consulting an accountant)

The owner’s equity, although minimal at first, will reflect Natalie’s investment into the business. This aspect will grow alongside profits as her business develops, allowing her to reinvest earnings into expanding her operations.

Importance of a Separate Bank Account

Definitely, Natalie should open a separate bank account for her business. Maintaining separate accounts is essential not only for better financial organization but also for gaining a clearer understanding of her business's financial health. It will simplify tracking revenues and expenses, which is particularly significant during tax season or any potential audits.

Furthermore, if she plans to expand her business in the future—perhaps transitioning from a sole proprietorship to a partnership or even a corporation—having organized and transparent financial records will be advantageous. Investors and lenders will require a clear financial history to assess the viability and growth potential of Natalie’s Cookie Creations.

In cases of audits by the IRS or during due diligence for loans, having a clear separation between personal and business finances will protect her from potential liabilities while ensuring compliance with regulatory obligations.

Conclusion

In conclusion, starting as a sole proprietorship is a practical recommendation for Natalie’s cookie business due to its straightforward structure and lower associated costs. While it does come with challenges, particularly around personal liability and raising capital, the benefits it offers during the initial stages of her venture are substantial. The need for proper accounting practices and the importance of maintaining separate business finances will lay a strong foundation for her future business success. By understanding her assets, liabilities, and overall equity, Natalie can effectively monitor her growth and be well-prepared for any financial opportunities or challenges ahead.

References

• Weygandt, J.J., Kimmel, P.D., Kieso, D.E. (2017). Accounting Principles. Wiley.
• Kasahun, A. K. (2020). The Impact of Working Capital Management on Firms' Profitability-Case of Selected Sole Proprietorship Manufacturing Firms in Adam City. IOSR Journal of Economics and Finance (IOSR-JEF), 11(1), 45-55.
• Horngren, C.T., Sundem, G.L., & Elliott, J.A. (2013). Introduction to Financial Accounting. Pearson.
• Libby, T., Libby, P.A., & Short, D.G. (2011). Financial Accounting. McGraw-Hill.
• Needles, B.E., Powers, M., & Crosson, S.V. (2018). Financial Accounting. Cengage Learning.
• Stickney, C.P., Brown, P. & Wook, F. (2009). Financial Accounting: A Global Perspective. Cengage Learning.
• Garrison, R.H., Noreen, E.W., & Brewer, P.C. (2018). Managerial Accounting. McGraw-Hill.
• Shilling, M. E. (2017). How to Start a Sole Proprietorship. Business News Daily.
• American Institute of Certified Public Accountants (2019). Understanding Your Business Structure.
• IRS (2020). Sole Proprietorships. Internal Revenue Service. Retrieved from IRS Website.

```