Accounting and Financial Reporting Back to Table of Contents.

Accounting and Financial Reporting

Accounting and Financial Reporting

Back to Table of Contents

Accounting and Financial Reporting Accounting and Financial Reporting

2

Chapter 20

Accounting and Accounting and Financial ReportingFinancial Reporting

Financial Record KeepingFinancial Record Keeping

Preparing Financial StatementsPreparing Financial Statements

20.1

20.2


3

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


4

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


20.1


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


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


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:


1. Your business will operate as a separate entity.

2. Your financial reports will always cover a specific time period.


9


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


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


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


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


13


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


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.

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


17

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


18

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 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


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

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


23

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.


20.2


24

Types of Financial Statements

To operate a business profitably, you will need up-to-date financial information.

Financial statements provide this important information.



25

Types of Financial Statements

Types of financial statements include:


income statement

balance sheet

statement of cash flows


26

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



27

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



28

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.


29

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


Ongoing Accounting Activities

Section 20.2 Preparing Financial Statements 30

Weekly Accounting Activities

Posting to the general ledger

Keeping track of payments

Keeping payroll records

Keeping tax records

Filing records

Ongoing Accounting Activities

Section 20.2 Preparing Financial Statements 31

Monthly Accounting Activities

Preparing financial

statements

Paying payroll tax deposits

Reconciling the bank statement

Balancing the checkbook

Replenishing the petty cash

fund

Accounting and Financial Reporting Back to Table of Contents.

Documents

business financial reports

financial statements

financial activities

accounting records

accounting books

accounting systems

financial information

financial position section