Party Like Yolo Pty engages in the business of rendering services of arranging the parties for birthdays and other occasions and the company also sales the material used in the party celebrations. The books of accounts of the company for the period from June 2016 to August 2016 have been prepared. The analysis of the financial statements reveals that the company incurred losses in the month of July and August 2016. In the month of July 2016, the loss was amounting to $1,455.33 which further increased to $6,034.89 in the month of August 2016. The services revenues of the company dropped in the month of August to $10,734 from $13,230 in the previous month. Further, the depreciation expense was observed to be rising up side in the month of August as compared to July.
The depreciation expense increased from $833.33 to $1,638.89 in the month of August 2016. The primary reason for this rise in the depreciation expense has been identified as the purchase of new equipment of worth $24,000. However, the equipment was purchased in the month of July but it was put to use only in the month of August, therefore, the depreciation expense was charged from the month of August 2016. Apart from this, there was observed a sudden hike in the cash balance. The company was running in the month of July with the total cash balance of $52,408 while it increased to $81,687 in the month of August. The rise in the balance of cash in the month of August was due to the realization coming from the customers. Further, there was common stock issued for a sum of $65,000 in the month of August which also contributed to the increase in cash balance.
Moreover, the company also took out a short term loan for an amount of $35,000. In addition to this, it was observed that the company is incurring losses and despite that it has distributed dividend to the shareholders. In the month of August, the company paid out a sum of $4,500 to the shareholders as dividend which appears unjustified as the company is not earning profits. The balance of accounts receivables also become part of key observations due to its negative balance in the month of August. It was observed that the balance in the accounts receivables ledger went to -$12,903 at the end of August month. It is rarely seen that the balance of accounts receivable goes negative. This implies that the company has received advances from the customers for which services are yet to be rendered.
Due to the losses being incurred and payment of dividend, the balance in the retained earnings account went negative. The retained earnings account was showing a balance of $87 at the end of July 2016. At the end of the month of August, the balance reached to -$10,447.22 which was mainly due to the losses of August month and dividend paid out.