Accounting and
Financial
Reporting
Back to Table of Contents
Chapter 20
Accounting and Financial Reporting
Accounting and
Financial Reporting
20.1
Financial Record Keeping
20.2
Preparing Financial Statements
2
Accounting and Financial Reporting
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
3
Accounting and Financial Reporting
20.1
All businesses must record and report all
financial activities using established concepts
and procedures.
Section 20.1 Financial Record Keeping
4
Accounting and Financial Reporting
20.1
financial reports
accounting period
calendar year
fiscal year
assets
current assets
accounts receivable
fixed assets
liabilities
accounts payable
Section 20.1 Financial Record Keeping
owner’s equity
chart of accounts
debits
credits
cash basis
accrual basis
journal
journalizing
general journal
posting
5
Accounting and Financial Reporting
Accounting for Business
One of the most important operations in the day-today 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
6
Accounting and Financial Reporting
Accounting for Business
All U.S. businesses, large
and small, use the GAAP
system for their financial
records.
Section 20.1 Financial Record Keeping
GAAP generally
accepted accounting
principles established to
allow all businesses to
use the same system of
recording and reporting
financial information
7
Accounting and Financial Reporting
Accounting for Business
Financial reports indicate
to banks, buyers,
government agencies, and
consumers how well your
business is doing.
Section 20.1 Financial Record Keeping
financial reports
statements or
documents that
summarize the results of
a business operation
and provide a picture of
its financial position
8
Accounting and Financial Reporting
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
9
Accounting and Financial Reporting
Accounting Assumptions
Financial reports must
always cover an
accounting period.
Section 20.1 Financial Record Keeping
accounting period a
block of time, such as a
month, a quarter, or a
year, covered by an
accounting report
10
Accounting and Financial Reporting
Accounting Assumptions
You may choose either a
calendar year or a fiscal
year for your business’s
accounting period.
Section 20.1 Financial Record Keeping
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
Accounting and Financial Reporting
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
12
Accounting and Financial Reporting
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
13
Accounting and Financial Reporting
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
14
Accounting and Financial Reporting
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
15
Accounting and Financial Reporting
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.
Section 20.1 Financial Record Keeping
chart of accounts the
list of accounts a
business uses in its
operation
16
Accounting and Financial Reporting
Double-Entry Accounting
Most businesses use a
double-entry accounting
system in which each
business transaction affects
two or more 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
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
Section 20.1 Financial Record Keeping
17
Accounting and Financial Reporting
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
18
Accounting and Financial Reporting
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.
Section 20.1 Financial Record Keeping
journal a financial diary
of a business
journalizing the
process of recording
business transactions,
usually on a daily basis as
they occur
19
Accounting and Financial Reporting
Journalizing Business
Transactions
The general journal is the
type of journal most
commonly used by
businesses.
Section 20.1 Financial Record Keeping
general journal an allpurpose journal that is
used to record all types of
business transaction
20
Accounting and Financial Reporting
Posting to the General
Ledger
By posting to the general
ledger, you can find the
balance of each account.
Section 20.1 Financial Record Keeping
posting the process of
transferring amounts from
the general journal to
accounts in the general
ledger
21
Accounting and Financial Reporting
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
22
Accounting and Financial Reporting
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
23
Accounting and Financial Reporting
20.1
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.
Section 20.1 Financial Record Keeping
24
Accounting and Financial Reporting
20.1
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.
Section 20.1 Financial Record Keeping
25
Accounting and Financial Reporting
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
26
Accounting and Financial Reporting
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
27
Accounting and Financial Reporting
20.2
income statement
balance sheet
Section 20.2 Preparing Financial Statements
cash flow
statement of cash flows
28
Accounting and Financial Reporting
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
29
Accounting and Financial Reporting
Types of Financial
Statements
Types of financial statements include:
income statement
balance sheet
statement of cash flows
Section 20.2 Preparing Financial Statements
30
Accounting and Financial Reporting
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.
Section 20.2 Preparing Financial Statements
income statement a
report of the revenue,
expenses, and net
income or loss for the
accounting period
31
Accounting and Financial Reporting
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.
Section 20.2 Preparing Financial Statements
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
Accounting and Financial Reporting
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
33
Accounting and Financial Reporting
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.
Section 20.2 Preparing Financial Statements
statement of cash flow
a report of how much
cash a business took in
and where the cash
went
34
Ongoing Accounting Activities
Posting to the
general ledger
Keeping track
of payments
Keeping payroll
records
Weekly Accounting Activities
Keeping tax
records
Section 20.2 Preparing Financial Statements
Filing records
35
Ongoing Accounting Activities
Preparing
financial
statements
Paying payroll
tax deposits
Reconciling the
bank statement
Monthly Accounting Activities
Balancing the
checkbook
Section 20.2 Preparing Financial Statements
Replenishing
the petty cash
fund
36
Accounting and Financial Reporting
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
37
Accounting and Financial Reporting
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 owner’s 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
38
Accounting and Financial Reporting
20.2
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.
Section 20.2 Preparing Financial Statements
39
Accounting and Financial Reporting
20.2
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.
Section 20.2 Preparing Financial Statements
40
Accounting and Financial Reporting
E-Commerce
Advertising Options
Developing and implementing a Web site is not enough—a
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
41
Accounting and Financial Reporting
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 merchant’s site
banner swapping
a form of exchanging online advertising in which sites post banner ads
for each other
Section 20.2 Preparing Financial Statements
42
Accounting and Financial Reporting
Tech Terms
reciprocal linking
an agreement between two parties to place hyperlinks on their own
Web sites leading to each other’s Web site
viral marketing
a marketing technique that uses customers to promote a product
Section 20.2 Preparing Financial Statements
43
End of
Accounting and
Financial
Reporting
Back to Table of Contents