20
Accounting and
Financial Reporting
Section
20.1
Financial Record Keeping
Section
20.2
Preparing Financial Statements
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
The Main Idea
All businesses must record and report all financial activities using
established concepts and procedures.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
Content Vocabulary
GAAP
financial reports
accounting period
calendar year
fiscal year
assets
current assets
accounts receivable
fixed assets
liabilities
accounts payable
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
owner’s equity
chart of accounts
debits
credits
cash basis
accrual basis
journal
journalizing
general journal
posting
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
Accounting for Business
All U.S. businesses, large
and small, use the GAAP
system for their financial
records.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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:
1.
2.
Your business will operate as a separate entity.
Your financial reports will always cover a specific time period.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
Accounting Assumptions
Financial reports must
always cover an
accounting period.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
calendar
fiscal
yearyear
from
the accounting period of time that
Januaryand
1 toends
December
31 other
begins
in months
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 = liabilities + owner’s equity
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
assets
anything of value that a business
owns, such as cash, equipment,
or a building
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
current
accounts
fixed
assets
assets
receivable
any amount
cash
the
items
or any
that
customers
other
will items
be held
owe
that
byacan
a
be converted
business
for more
to cash
than
quickly
one year,
and
used as
such
by equipment,
a business within
trucks,aor
year
buildings
SECTION
20.1
Financial Record
Keeping
The Accounting Equation
Total assets minus total
liabilities, which includes
accounts payable, equals
the owner’s equity.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
liabilitiesequity
owner’s
accounts
payable
the worth
debts of aa business
amount
business owes to
creditors
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
debits
credits
additions to the right
left side
sideofofananaccount
account
that decrease
increase the
thebalance
balanceofforallallassets
assets
and expense accounts and increase
decreasethe
the balance
balance
for all
of liability
all liability
andand
revenue
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
cash basis
accrual
basis
an accounting system in which
income is recorded when it is
received,and
earned,
andexpenses
expensesare
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.
Journalizing helps a
business owner keep up-todate on his or her financial
transactions.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
journal
journalizing
a
financial
of a business
the
processdiary
of recording
business
transactions, usually on a daily
basis as they occur
SECTION
20.1
Financial Record
Keeping
Journalizing Business Transactions
The general journal is the
type of journal most
commonly used by
businesses.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.1
Financial Record
Keeping
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
Content Vocabulary
income statement
balance sheet
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
cash flow
statement of cash flows
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
Types of Financial Statements
Types of financial statements include:
•
•
•
income statement
balance sheet
statement of cash flows
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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:
what the business owns,
owes, and is worth.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
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.
You may not be able to pay
your bills or purchase more
merchandise for resale.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
cash flow
the amount of cash available to a
business at any given time
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
statement of cash flows
a report of how much cash a
business took in and where the
cash went
Ongoing Accounting Activities
Posting to the
general ledger
Keeping track
of payments
Keeping payroll
records
Weekly Accounting Activities
Keeping tax
records
Filing records
34
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
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
SECTION
20.2
Preparing Financial
Statements
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.
Chapter 20 Accounting and Financial Reporting
Glencoe Entrepreneurship: Building a Business
20
Accounting and
Financial Reporting
End of
Chapter 20
Section
Section
20.1
20.2
Accounting and
Financial Record Keeping
Financial
Preparing Financial Reporting
Statements
Glencoe Entrepreneurship: Building a Business