Accounting and Financial Reporting: Back To Table of Contents

Accounting and Financial Reporting
Back to Table of Contents
Chapter 20
20.1
Financial Record Keeping

Preparing Financial Statements
20.2
20.1
Explain the important role accounting plays in business. Explain the accounting systems for a small business. Describe the importance of daily sales and cash receipts reports.
Section 20.1 Financial Record Keeping
20.1
All businesses must record and report all financial activities using established concepts and procedures.
20.1
financial reports accounting period calendar year fiscal year assets current assets accounts receivable fixed assets liabilities accounts payable
owners equity chart of accounts debits credits cash basis accrual basis journal journalizing general journal posting
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Accounting for Business

One of the most important operations in the day-today activities of your business is maintaining accurate up-to-date financial records.
Accounting records and reports help you run your business efficiently and profitably by keeping track of money earned and spent.

All U.S. businesses, large and small, use the GAAP system for their financial records.
GAAP generally accepted accounting principles established to allow all businesses to use the same system of recording and reporting financial information

Financial reports indicate to banks, buyers, government agencies, and consumers how well your business is doing.
financial reports statements or documents that summarize the results of a business operation and provide a picture of its financial position
Accounting Assumptions
When creating the accounting books for your business, you will make two assumptions: 1. Your business will operate as a separate entity. 2. Your financial reports will always cover a specific time period.
Financial reports must always cover an accounting period.
accounting period a block of time, such as a month, a quarter, or a year, covered by an accounting report
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You may choose either a calendar year or a fiscal year for your businesss accounting period.
calendar year the accounting period of time from January 1 to December 31
fiscal year the accounting period of time that begins and ends in months other than the calendar year
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The Accounting Equation

The accounting equation, the basis for keeping financial records, is as follows:
assets = liabilities + owners equity
assets anything of value that a business owns, such as cash, equipment, or a building
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Assets are further broken down to include current assets, such as accounts receivable, and fixed assets.
current assets cash or any other items that can be converted to cash quickly and used by a business within a year accounts receivable the amount customers owe a business
fixed assets any items that will be held by a business for more than one year, such as equipment, trucks, or buildings
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Total assets minus total liabilities, which includes accounts payable, equals the owners equity.
liabilities the debts of a business accounts payable the amount a business owes to creditors
owners equity the worth of a business
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The Accounting System

Each business must create its own set of accounts.
Each business will have different accounts, but all will use the same concepts and procedures for recording, summarizing, and report the financial information.
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Creating Accounts
When you create the books of your business, you create a chart of accounts for each of the three categories in the accounting equation: assets, liabilities, and owners equity.
chart of accounts the list of accounts a business uses in its operation
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Double-Entry Accounting
Most businesses use a double-entry accounting system in which each business transaction affects two or more accounts.
These changes are identified by entering debits or credits.
debits additions to the left side of an account that increase the balance of all assets and expense accounts and decrease the balance of all liability and revenue accounts
credits additions to the right side of an account that decrease the balance for all assets and expense accounts and increase the balance for all liability and revenue accounts
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Cash or Accrual Basis

Income and payments are recorded by using a cash basis or accrual basis system.
cash basis an accounting system in which income is recorded when it is received, and expenses are recorded when they are paid accrual basis an accounting system in which income is recorded when it is earned, and expenses are recorded when they are paid
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Journalizing Business Transactions

It is important for a business to keep a journal to record business transactions as they occur.
Journalizing helps a business owner keep up-todate on his or her financial transactions.
journal a financial diary of a business
journalizing the process of recording business transactions, usually on a daily basis as they occur
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Journalizing Business Transactions

The general journal is the type of journal most commonly used by businesses.
general journal an allpurpose journal that is used to record all types of business transaction
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Posting to the General Ledger

By posting to the general ledger, you can find the balance of each account.
posting the process of transferring amounts from the general journal to accounts in the general ledger
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Using Sales and Cash Receipts Report

Businesses that have regular daily sales should prepare these daily reports:
Cash receipts Cash on hand Sales
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20.1
1. Explain the important role accounting plays in business.
Good financial management is essential to sound business management. Accounting provides the vital financial information owners need to make sound business decisions.
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20.1
2. Explain the accounting systems for a small business.

A small business creates accounts, most likely uses double-entry accounting, decides whether to operate under a cash or accrual basis, records business transactions in a journal, and posts to the general ledger.
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20.1
3. Describe the importance of daily sales and cash receipts reports.
These reports allow a business owner to examine total daily sales and to verify the total cash received.
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20.2
Describe the items of information included on each financial statement. Identify ongoing accounting activities. Explain how technology helps business owners with all the accounting features.
Section 20.2 Preparing Financial Statements
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20.2
The ability to identify financial statements for a business, to understand what is reported by each, and to realize the importance of having accurate, up-to-date information is key to the financial health of your business.
27
20.2
income statement balance sheet
cash flow statement of cash flows
28
Types of Financial Statements

To operate a business profitably, you will need up-to-date financial information. Financial statements provide this important information.
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Types of Financial Statements

Types of financial statements include:
income statement balance sheet statement of cash flows
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Income Statement
At the end of your accounting period, your income statement will tell you how much money your business made in sales and where the money went.
income statement a report of the revenue, expenses, and net income or loss for the accounting period
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Balance Sheet
The main purpose of a balance sheet is to present your businesss financial position on a specific date and what you own, owe, and are worth.
balance sheet a report of the final balances of all asset, liability, and owners equity accounts at the end of an accounting period
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Statement of Cash Flows

When your business has a negative cash flow, you will often experience a lack of available cash.
You may not be able to pay your bills or purchase more merchandise for resale.
cash flow the amount of cash available to a business at any given time
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Statement of Cash Flows

Your statement of cash flows gives you a picture of how the cash position of your business changed during a period of time.
statement of cash flow a report of how much cash a business took in and where the cash went
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Ongoing Accounting Activities

Posting to the general ledger Keeping track of payments Keeping payroll records
Weekly Accounting Activities

Keeping tax records
Filing records
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Ongoing Accounting Activities

Preparing financial statements Paying payroll tax deposits Reconciling the bank statement
Monthly Accounting Activities

Balancing the checkbook Replenishing the petty cash fund
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Using Technology
Recording, summarizing and reporting financial information can be a time-consuming activity. Computers offer small business owners the ability to automate all the accounting functions.
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20.2
1. Describe the items of information included on each financial statement.

The income statement reports revenue, expenses, and net income or loss. The balance sheet reports final balances of all asset, liability, and owners equity accounts period. The statement of cash flows reports how much cash a business took in and where the cash went.
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20.2
2. Identify ongoing accounting activities.
Weekly accounting activities include posting to the general ledger, keeping track of payments, keeping payroll records, keeping tax records, and filing records. Monthly activities include preparing financial statements, paying payroll tax deposits, reconciling the bank statement, balancing the checkbook, and balancing and replenishing the petty cash fund.
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20.2
3. Explain how technology helps business owners with all the accounting features.
Technology allows business owners to automate all accounting functions, giving owners the capability to generate reports quickly and accurately.
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E-Commerce Advertising Options

Developing and implementing a Web site is not enougha company must advertise to get consumers to visit it. A number of advertising options are available, including banner swapping, reciprocal linking, viral marketing, and affiliate programs.
41
Tech Terms
affiliate program an online marketing agreement in which member Web sites drive targeted traffic to an e-commerce merchant in return for a commission on the sales generated at the merchants site banner swapping a form of exchanging online advertising in which sites post banner ads for each other
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Tech Terms
reciprocal linking an agreement between two parties to place hyperlinks on their own Web sites leading to each others Web site viral marketing a marketing technique that uses customers to promote a product
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