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

Explain the important role accounting plays in business. 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. Section 20.1 Financial Record Keeping

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

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

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

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. Section 20.1 Financial Record Keeping

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

Accounting Assumptions You may choose either a calendar year or a fiscal year for your business’s 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

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 Section 20.1 Financial Record Keeping

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

The Accounting Equation Total assets minus total liabilities, which includes accounts payable, equals the owner’s equity. liabilities the debts of a business accounts payable the amount a business owes to creditors owner’s equity the worth of a business Section 20.1 Financial Record Keeping

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

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 Section 20.1 Financial Record Keeping

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

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

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

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

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

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

Identify ongoing accounting activities. 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

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

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

Types of Financial Statements Types of financial statements include: income statement balance sheet statement of cash flows Section 20.2 Preparing Financial Statements

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

Balance Sheet The main purpose of a balance sheet is to present your business’s 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 owner’s equity accounts at the end of an accounting period Section 20.2 Preparing Financial Statements

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

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

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 Section 20.2 Preparing Financial Statements 30

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 Section 20.2 Preparing Financial Statements 31