Billy Bob’s Fine French Food Emporium

Jessica Washington

October 9, 2013

ACC 203- 09

Memo

Billy Bob’s Fine French Food Emporium

        Billy Bob, I have known you for quite some time now and I must say that over the years, it’s been a pleasure. I first met you at our alma mater, Hampton University, in Principles of Accounting I, taught by Dr. Lebow. If I recall correctly, I believe you majored in mortuary science. Somehow or another with that concentration you were successful with starting your own food establishment called Billy bob’s Fine French Food Emporium. As a matter of fact I often dine at your fine restaurant and enjoy the eclectic cuisine offered. While dining at the bistro one night, you brought it to my attention that you wanted to expand your restaurant in the near future with the help of a loan from a bank. Unfortunately, the bank told you that they need financial statements from you, which you do not have, in order for that to happen. You also revealed that you were using the cash left over after paying the restaurant’s bills for personal reasons. In this memo I plan to explain to you why bankers want financial statements before loaning you money, the importance of maintaining financial records to prepare financial statements, the difference between accrual and the cash basis of accounting for preparing financial statements, and why you are violating the Entity Concept of Accounting.

A financial statement is an accounting summary that provides insight into a firm’s economic solidness at a given time or its profit levels over a period. Financial statements are important for banks because it helps gauge a business’ or firm’s performance in the short and long term. Without financial statements, the bank will have no way of knowing how successful your restaurant is. Offering the bank samples of the delicious food you offer at your restaurant just isn’t enough to prove your success. If a bank can see that your restaurant is doing well through financial statements, then they will be more than happy to issue a loan. However, if the bank sees that the restaurant isn’t doing so well, it can choose to deny you and your restaurant for a loan.

Billy Bob, your request for a loan will be more respected if you go by the accrual basis of accounting rather than the cash basis of accounting. The accrual basis of accounting recognizes revenue when it is earned and matches expenses with the related revenue. The cash basis of accounting only recognizes revenue when cash is received and recognize expenses when cash is paid. By only keeping track of how much money is currently in your pocket, you cannot effectively plan how much money falls towards assets, liabilities, revenues, owner’s equity, and expenses. The accrual basis of accounting is more true to the overall successfulness of your restaurant: Billy Bob’s Fine French Food Emporium. To better explain, here’s an example. A chef can cater an event one month where the cost to him was $200. The chef and the customer then agree that the customer can pay you $400 next month. When looking at that month through the cash basis of accounting, it appears that you just lost $200. When looking at that month through the accrual basis of accounting, you recognize the revenue for the service that you actually did, you notice that you performed services that made $200 that month assuming that the customer is good for their money. Instead of putting that $400 in cash, you record that as the customer owing you $400 which is accounts receivable which is an asset.