2. Section Objectives
Explain the important role accounting plays in business.
Explain the accounting system for a small business.
Describe the importance of daily sales and cash receipts reports.

3. The Main Idea
All businesses must record and report all financial activities using established concepts and procedures.

4. Content Vocabulary GAAP financial reports accounting period
calendar year
fiscal year
assets
current assets
accounts receivable
fixed assets
liabilities
accounts payable
owner’s equity
chart of accounts
debits
credits
cash basis
accrual basis
journal
journalizing
general journal
posting

5. 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.

6. 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

7. 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

8. Accounting Assumptions
When creating the accounting books for your business, you will make two assumptions:
Your business will operate as a separate entity.
Your financial reports will always cover a specific time period.

9. 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

10. Accounting Assumptions
You may choose either a calendar year or a fiscal year for your business’s accounting period.
fiscal year
the accounting period of time that begins and ends in months other than the calendar year
calendar year
the accounting period of time from January 1 to December 31

11. 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 + owner’s equity

12. The Accounting Equation
Assets are further broken down to include current assets, such as accounts receivable, and fixed assets.
fixed assets
any items that will be held by a business for more than one year, such as equipment, trucks, or buildings
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

13. The Accounting Equation
Total assets minus total liabilities, which includes accounts payable, equals the owner’s equity.
owner’s equity
the worth of a business
accounts payable
the amount a business owes to creditors
liabilities
the debts of a business

14. 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.

15. 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 owner’s equity.
chart of accounts
the list of accounts a business uses in its operation

16. 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.
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
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

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

18. 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-to-date on his or her financial transactions.
journalizing
the process of recording business transactions, usually on a daily basis as they occur
journal
a financial diary of a business

19. 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

20. 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

21. Using Sales and Cash Receipts Report
Businesses that have regular daily sales should prepare these daily reports:
Cash receipts
Cash on hand
Sales

22. After You Read
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.

23. After You Read 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.

24. After You Read
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.

25. Section Objectives
Describe the items of information included on each financial statement.
Identify ongoing accounting activities.
Explain how technology helps business owners with all the accounting functions.

26. The Main Idea
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. Content Vocabulary 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.

29. Types of Financial Statements
Types of financial statements include:
income statement
balance sheet
statement of cash flows

30. 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

31. Balance Sheet
The main purpose of a balance sheet is to present your business’s financial position on a specific date: what the business owns, owes, and is worth.
balance sheet
a report of the final balances of all asset, liability, and owner’s equity accounts at the end of an accounting period

32. 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

33. 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 flows
a report of how much cash a business took in and where the cash went

34. Weekly Accounting Activities
Ongoing Accounting Activities
Posting to the general ledger
Keeping track of payments
Keeping payroll records
Weekly Accounting Activities
Keeping tax records
Filing records 34

35. Monthly Accounting Activities
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 35

36. Using Technology
Recording, summarizing and reporting financial information can be a time-consuming activity.
Computers offer small business owners the ability to automate the accounting functions.

37. After You Read
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 owner’s equity accounts period. The statement of cash flows reports how much cash a business took in and where the cash went.

38. After You Read 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.

39. After You Read
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.

40. End of
Chapter 20
Accounting and Financial Reporting