I will add a screenshot of the question my classmates are answering.
According to Charles’s income statement (single-step format) if he continued to be self-employed for another two years he could meet that goal of a net income of 40,000 per year and it would only continue to increase after four years if business continues grow. If I was to advise him I would wait another two years to so if business continues to expand and he sees growth. The purpose of this type of income statement is to evaluate how profitable a business may be according to Porter and Norton (2016).
The bookkeeper recorded the transaction accordingly. If a client is depositing cash then that would be considered service revenue because the client is paying for a type of service. The client may have deposited the cash before the fiscal year has ended but I believe the receipt would need to be annotated next year at the end since the service will be provided next year. As the controller I would need to modify the books because it is my responsibility to report accurate info.
I would advise Charles to give his business an opportunity to grow. His business is already showing profitability in its second year with an increase of 78% in profit margins and 260% increase in revenue. In addition, his depreciation expense for his vehicle will drop after the third year and gain $15,000 in net income on his fourth year. If he can continue to grow his business by 38.5% on the third year, he will increase his revenue to about $100,000 and his only increasing cost is his secretarial services of about $3,000 for every $25,000 in revenue resulting of approximately $12,000 on the third year. Through this extrapolation his net income on the third year would increase to about $54,500. His business has the potential to double the $40,000 salary from working at a firm in just a few years. Essentially Charles is exchanging risk of running his own business for the potential of higher returns.
No, the bookkeeper did not properly account for the client’s deposit because the $10,000 was recorded as a revenue rather than a liability because the work is not complete and is scheduled for the following year.
I would need to correct the entry to reflect the $10,000 accurately as liability. As the controller of the firm, I have the responsibility for all accounting operations of the business (accountingtools.com, 2019).