To:. From:. Date:. Subject:. This proposal is about the
Added on - 13 Sep 2019
To:From:Date:Subject:This proposal is about the company named Peyton Approved which is a profitablecompany. It engages in the business of bakery. It uses accrual system of accounting forrecording the financial transactions. Currently Peyton Approved uses only Owners’Equity for financing its bakery business. The purpose of writing this memo is to requestfor a loan for business expansion.Overview of the Company’s Accounting SystemThe accrual basis of accounting provides better picture of the profitability statusof a company for any accounting period. Peyton Approved uses accrual method ofaccounting where all revenues are recognized in Income Statement when they are earned(whether cash has been received or not), and expenses are recognized in IncomeStatement when they are incurred irrespective of actual payment of such expenses. Thefinancials discussed here are based on accounting period of three months which means allledger accounts were closed and profitability as well as financial position of the companywas ascertained by preparing Income Statement and Balance Sheet of the company. Byusing accrual system of accounting it supports responsible practices by relying on theMatching Principle of accounting i.e., matching revenues to expenses at the time whensuch transaction occurs.
Accounting Process and Internal Controls for CashPeyton Approved uses strict accounting processes to overcome the error ofomission, error of commission and error of principle in accounting process and forensuring accuracy of financial statements of the company. The accounting entries whichrecord the day to day transactions are checked twice, firstly by the accountant and then bythe internal control of the company, whereas the accounting entries related to the end ofmonth, adjustment entries, reversing entries and closing entries are checked three to fourtimes. All the Journal entries are carefully posted and the respective closing balances ofLedger accounts are transferred to Trial balance. After preparing the trial balance last stepis to prepare Financial Statements. Peyton Approved also has Internal controls for cashmanagement. These controls prevent mishandling of cash and safeguard against the lossof cash if the segregation of duties are proper. It is difficult for the smaller businesses toput in place such internal controls due to less number of personnel in the business but it isnot impossible.Results of Operations and Strengths and Weaknesses of the CompanyThe net revenue in Income Statement is favorable which means that PeytonApproved is doing the profitable business and covering all of its operating and non-operating costs. The change in capital structure is only requirement for the company tosuccessfully operate in the long run. Peyton Approved is currently financed by owner’sequity. This is not sufficient in the long run for the expansion of the company. It requiresboth debt and equity in its capital structure for financing its operations. One moreadvantage of having debt in capital structure is that the cost of such finance is lower ascompared to that of equity. Profitability ratios show overall efficiency and performance