Accounting and financial reporting

Accounting and Financial Reporting financial reports accounting period calendar year fiscal year assets current assets accounts receivable fixed assets liabilities accounts payable 20.1

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Accounting and Financial

Reporting

Back to Table of Contents

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Accounting and Financial Reporting

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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

20.1

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All businesses must record and report all

financial activities using established concepts

and procedures

20.1

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financial reports accounting period calendar year

fiscal year assets

current assets accounts receivable fixed assets

liabilities accounts payable

20.1

owner’s equity chart of accounts debits

credits cash basis accrual basis journal

journalizing general journal posting

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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

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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

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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

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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

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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

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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

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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

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Total assets minus total

liabilities, which includes

accounts payable, equals

the owner’s equity.

liabilities the debts of

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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

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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

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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

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

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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

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Journalizing Business Transactions

It is important for a business

to keep a journal to record

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

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Journalizing Business Transactions

The general journal is the

type of journal most

commonly used by

businesses

general journal an purpose journal that is used to record all types of business transaction

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all-Accounting and Financial Reporting

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

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Using Sales and Cash Receipts Report

Businesses that have regular daily sales should

prepare these daily reports:

Cash receipts

Cash on hand

Sales

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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.

20.1

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2 Explain the accounting systems for a small

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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.

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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

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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

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income statement balance sheet

20.2

cash flow statement of cash flows

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Types of Financial Statements

To operate a business profitably, you will need

up-to-date financial information

Financial statements provide this important

information

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Types of Financial Statements

Types of financial statements include:

income statement

balance sheet

statement of cash flows

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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

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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

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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

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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

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Ongoing Accounting Activities

Weekly Accounting Activities

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Ongoing Accounting Activities

Monthly Accounting Activities

Preparing financial statements

Paying payroll tax deposits

Reconciling the bank statement

Balancing the Replenishing

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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

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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

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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

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3 Explain how technology helps business

owners with all the accounting features

Technology allows business owners to automate all accounting functions, giving owners the

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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

E-Commerce

Advertising Options

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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

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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

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Accounting and Financial

Reporting

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