Coffee Break Café: A Sole Proprietorship That Serves Coffee

Advantages of Using a Sole Proprietorship as a Form of Business

The new business that has been formed is a café. The main product of café is Coffee. The name of the café is Coffee Break Café. This business is operated by the single owner who works for the self-profit. This type of business association is known with the name of the sole proprietorship. It is a different element for the book keeping reason. An independent company begins as a sole proprietor. In this sort of business, the proprietor itself needs to hold up under the duties regarding everyday operations. The coffee café comes under the retail outlets.

Coffee Break Café comes under the small size of the business. The size of the business is identified with the capital invested by the owner. So the amount invested by the owner in this business is $1,000, 000.00. The number of employees employed in the business can also help in determining the size of the business. Talking about the café, the employed employees are less as compared to the big business.

Business related to the coffee café comes under the food and beverage industry. This is a very vast industry that consists of many products. Food and beverage is a noteworthy industry area for the Australian economy, as far as the two its money related commitment and work. Nourishment and refreshment handling are Australia’s biggest assembling industry. The industry is uniquely driven by requesting buyers looking for assorted variety, quality, and esteem. The ethnic and social assorted variety of Australia has reflected in the nourishment extend accessible (Martinez, 2013).

While starting any business owner select the form of business. The form of business includes sole proprietorship, partnership, a limited liability company or a corporation. The selection of a form of business over here is a sole proprietorship (Singh, Chaudhary, and Arora, 2014). A sole proprietorship is the most inexpensive structure of the business. This form of business can come into the existence with less tax and legal formalities.

• This is one of the businesses which are going to control and manage by the one person. Hence, the owner will get the freedom to run the business according to their wish (Baik, Lee, and Lee, 2015).
• The profit of a business is going to be kept by the single owner. There will be no distribution of the profit.
• The decisions in the business can be taken without any influence of the third party. There will be privacy in the business.
• Winding up of the business can easily take place if the owner wants. After winding up the business the owner of the company can keep the entire amount with them (Gitman, Juchau, and Flanagan, 2015).
• It will be easy to change the legal structure of the business, in case of any circumstances.

The above given are some of the advantages to the business that maintains a sole proprietorship as a legal form of business. This is the reason behind the selection of the sole proprietorship as a legal form of business.

Sources of finance are the most explorable region, particularly for the new business. It is maybe the hardest piece of the considerable number of efforts. There are different sources of finance; that can be decided on the premise of day and age, possession and control, and generation of an era of a fund. In the new business selection of the sources of finance needs in-depth analysis of sources. It needs the understanding related to the financing sources. The most common sources of finance used by the new form business include equity, debenture and a bank loan. 

Sources of Finance for a New Business

Equity Financing: – A business can finance with the use of equity as a source of finance. Equity is cash paid in the business by the investors. For raising funds owner of the company need to raise investment by issuing shared in the business (Agrawal, Catalini, and Goldfarb, 2014).

Debentures: – The second most important source of funding includes raising fund through debentures. A new business can raise funds through issue of debentures in which the company needs to pay a fixed amount interest (NAGARIA, 2016). The amount of interest can be paid by the business at precise intervals that may be six months or year.

Loan from a bank: – The new startup can raise finance by taking a loan from the bank. A bank credit is a measure of cash obtained for a set period of a concurred reimbursement plan (Rostamkalaei, and Freel, 2016). The reimbursement sum will rely upon the size and term of the credit and the rate of intrigue.

According to the capital requirement, the owner can arrange capital from following sources. The owner can raise amount from equity, a loan from bank and debentures. 

The income statement and balance sheet show the accounting value of all of the company’s assets and liabilities. The report shows the analysis of all activities at the time of the accounting period that affects cash, impacted primarily by financing, investing and operations (Minnis, and Sutherland, 2017).

 The role of the accounting in a business is to help external and internal stakeholders to make good decisions by providing them financial information (Alammar, and Kohn, 2016). Accounting helps the café in communicating information to the investors, owners, and managers that help in evaluating a company’s business performance.

The accounting process is a chain of activities that starts with transactions and finishes with the closure of books (DRURY, 2013).

Step-1 Analysis of business transactions: – In a café, the accountant can identify a transaction or events. In this transaction, an owner can not include the personal transactions. This step involves the business transaction of the café related to the buying supplies from a vendor, payment of labor cost, salary etc.

Step-2 Make journal entries: – According to the transactions, the business needs to record the relevant journal entries in the ‘Book of original entry.’ These transactions are recorded in the journal using a double-entry system. These entries befall in at least two accounts, one is credited and other is debited.

Income Statement and Balance Sheet of Coffee Break Café

Step-3 Post to ledger accounts: – Now the café accountant will transfer the journal entries in the appropriate ledger accounts. It contains the collection of accounts and financial statement. Ledger accounts are also known as ‘Book of Final Entry’.

Step-4 Prepare trial balance: – The café account will now prepare a trial balance. The trial balance consists of the general ledger account balances. This balance is created to check the accuracy of the equality of debit and credit balance.

Step-5 Making adjusting entries: – The accountant will adjust entries to capture the deferred and accrued amounts. This might include the amount of income and expenses which were not documented in the books.

Step-6 Adjusted trial balance: – The café accountant needs to adjust the trial balance on the basis of subtraction and addition of the entries. This is beneficial to understand the equality of credit and debits.

Step-7 Prepare financial statements: – The café account will prepare the financial statements that include the income statements, cash flow statement, and balance sheet.

Step-8 Close accounts: – Closure of the temporary accounts including revenue, expenses, losses, and gain in the business will take place in this step.

Step-9 Post-closing Trial balance: – This is the last step which includes the final trial balance that is based on the closing journal entries.

In the Coffee Break Café business financial accounting reflect the activities of the company related to the financial terms. Financial statement throws light on the revenue, assets, liabilities, equity and expenses of the business (Edwards, 2013). This report is established by the café to provide the information to the outside parties.  Seeing this information the investors may attract towards the business and they can make an investment in the business.

Managerial accounting is also prepared by the café with the aim of helping the managers of the company. The company can utilize this accounting in making decisions related to the business (Weygandt, Kimmel, and Kieso, 2015). The managers of the café can find the errors in the business activity and according they can take the decision.

In the organization, managers play a vital role in working with the business. The analysis comprises of the calculation of the various ratios. The manager of the company can understand the financial position of the company (Petty, et.al. 2015). It helps in taking decision-related to the investment. The manager of the café can check the operational effectiveness and efficiency of the business. the financial statement analysis includes different techniques such as cash flow, ratio analysis, profit, and loss account. 

Major Assumptions for Financial Projections

Profit and loss account can be used by the manager to understand the amount of profit and loss of the company. Profitability of the business can be checked by the manager through profitability ratios.

Liquidity of the business can be checked by the manager with the help of current assets ratio and quick assets ratio. The debt to equity ratio establishes who owns more of the company either stakeholders or creditors.

An efficiency ratio helps the manager to check the efficiency of the business and how inventory turns into the revenue of the company.

The financial statement analysis helps the manager of the café to take the correct decision for the company. These decisions help the company to grow in the market. The manager can use the financial statement analysis to compare same size company.

Coffee Break Café is a newly formed company while managing the consideration the company should retain most of the profit in the company and distribute the rest of the profit. The distribution of profit can take place in the ratio of 70:30. Out of this, the company should retain the 70 of the profit. There is a reason behind keeping the large amount as a retaining earning. In the newly form business, the requirement of the capital can be fulfilled through retained earnings. To manage the business operations company require more amount of funds. Retained earnings can be utilized by the company whenever they want to increase the sales of the business or they are looking to expand the business. Retained earnings give strengthen to the financial position of a business and this is the reason it gives financial stability to the business (Lazonick, 2014). Retained earnings play a vital role in increasing the capital that leads to increase in the market value of the shares.  

References

Agrawal, A., Catalini, C. and Goldfarb, A., 2014. Some simple economics of crowdfunding. Innovation Policy and the Economy, 14(1), pp.63-97.

Alammar, A. and Kohn, D., 2016. Proper Accounting is Vital for Sustainable Business Growth.

Baik, Y.S., Lee, S.H. and Lee, C., 2015. Entrepreneurial firms’ choice of ownership forms. International Entrepreneurship and Management Journal, 11(3), pp.453-471.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Lazonick, W., 2014. Profits without prosperity. Harvard Business Review, 92(9), pp.46-55.

Martinez, M.G. ed., 2013. Open innovation in the food and beverage industry. Elsevier.

Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.

NAGARIA, M.S., 2016. Finance: A vehicle for enhancing Performance in Indian Micro, Small and Medium Enterprises (MSMEs). Journal of Finance, 2395, p.7492.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Rostamkalaei, A. and Freel, M., 2016. The cost of growth: small firms and the pricing of bank loans. Small Business Economics, 46(2), pp.255-272.

Singh, S., Chaudhary, S. and Arora, M., 2014. Intellectual property rights in sole proprietorship form of business. International Journal of Advanced Research in Management and Social Sciences. ISSN, pp.2278-6236.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

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