Accounting and Financial Reporting

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Chapter 20
Accounting and Financial Reporting
Financial Record Keeping
20.1
Preparing Financial Statements
20.2
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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
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20.1

• All businesses must record and report all
  financial activities using established concepts
  and procedures.

Section 20.1 Financial Record Keeping
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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 ca
sh basis accrual basis journal journalizing genera
l journal posting
Section 20.1 Financial Record Keeping
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Accounting for Business

• One of the most important operations in the
  day-to-day 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.

Section 20.1 Financial Record Keeping
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Accounting for Business

• 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
Section 20.1 Financial Record Keeping
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Accounting for Business

• 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
Section 20.1 Financial Record Keeping
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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.

Section 20.1 Financial Record Keeping
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Accounting Assumptions

• 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
Section 20.1 Financial Record Keeping
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Accounting Assumptions

• 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
Section 20.1 Financial Record Keeping
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The Accounting Equation

• The accounting equation, the basis for keeping
  financial records, is as follows

assets anything of value that a business owns,
such as cash, equipment, or a building
assets liabilities owners equity
Section 20.1 Financial Record Keeping
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The Accounting Equation

• 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
Section 20.1 Financial Record Keeping
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The Accounting Equation

• 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
Section 20.1 Financial Record Keeping
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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.

Section 20.1 Financial Record Keeping
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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
Section 20.1 Financial Record Keeping
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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
Section 20.1 Financial Record Keeping
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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
Section 20.1 Financial Record Keeping
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Journalizing Business Transactions

• It is important for a business to keep a journal
  to record business transactions as they occur.

journal a financial diary of a business
journalizing the process of recording business
transactions, usually on a daily basis as they
occur
Journalizing helps a business owner keep
up-to-date on his or her financial transactions.
Section 20.1 Financial Record Keeping
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Journalizing Business Transactions

• The general journal is the type of journal most
  commonly used by businesses.

general journal an all-purpose journal that is
used to record all types of business transaction
Section 20.1 Financial Record Keeping
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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
Section 20.1 Financial Record Keeping
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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

Section 20.1 Financial Record Keeping
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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.
Section 20.1 Financial Record Keeping
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20.1

1. 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.
Section 20.1 Financial Record Keeping
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20.1

1. 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.
Section 20.1 Financial Record Keeping
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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.

Section 20.2 Preparing Financial Statements
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20.2

• income statement
• balance sheet

cash flow statement of cash flows
Section 20.2 Preparing Financial Statements
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Types of Financial Statements

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

Section 20.2 Preparing Financial Statements
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Types of Financial Statements

• Types of financial statements include

• income statement
• balance sheet
• statement of cash flows

Section 20.2 Preparing Financial Statements
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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
Section 20.2 Preparing Financial Statements
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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
Section 20.2 Preparing Financial Statements
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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.

cash flow the amount of cash available to a
business at any given time
You may not be able to pay your bills or purchase
more merchandise for resale.
Section 20.2 Preparing Financial Statements
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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
Section 20.2 Preparing Financial Statements
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Weekly Accounting Activities
Ongoing Accounting Activities
Posting to the general ledger
Keeping track of payments
Keeping payroll records
Keeping tax records
Filing records
Section 20.2 Preparing Financial Statements
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Monthly Accounting Activities
Ongoing Accounting Activities
Preparing financial statements
Paying payroll tax deposits
Reconciling the bank statement
Balancing the checkbook
Replenishing the petty cash fund
Section 20.2 Preparing Financial Statements
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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.

Section 20.2 Preparing Financial Statements
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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.
Section 20.2 Preparing Financial Statements
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20.2

1. 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.
Section 20.2 Preparing Financial Statements
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20.2

1. 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.
Section 20.2 Preparing Financial Statements
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E-CommerceAdvertising 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.

Section 20.2 Preparing Financial Statements
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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
Section 20.2 Preparing Financial Statements
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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
Section 20.2 Preparing Financial Statements
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