Chapter 20

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

3. 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

4. 20.1 All businesses must record and report all financial activities using established concepts and procedures. Section 20.1 Financial Record Keeping

5. 20.1 financial reports accounting period calendar year fiscal year assets current assets accounts receivable fixed assets liabilities accounts payable owner’s equity chart of accounts debits credits cash basis accrual basis journal journalizing general journal posting Section 20.1 Financial Record Keeping

6. 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

7. Accounting for Business All U.S. businesses, large and small, use the GAAP system for their financial records. GAAPgenerally 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

8. Accounting for Business Financial reports indicate to banks, buyers, government agencies, and consumers how well your business is doing. financial reportsstatements or documents that summarize the results of a business operation and provide a picture of its financial position Section 20.1 Financial Record Keeping

9. 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

10. Accounting Assumptions Financial reports must always cover an accounting period. accounting perioda block of time, such as a month, a quarter, or a year, covered by an accounting report Section 20.1 Financial Record Keeping

11. Accounting Assumptions You may choose either a calendar year or a fiscal year for your business’s accounting period. calendar yearthe accounting period of time from January 1 to December 31 fiscal yearthe accounting period of time that begins and ends in months other than the calendar year Section 20.1 Financial Record Keeping

12. The Accounting Equation The accounting equation, the basis for keeping financial records, is as follows: assetsanything of value that a business owns, such as cash, equipment, or a building assets = liabilities + owner’s equity Section 20.1 Financial Record Keeping

13. The Accounting Equation Assets are further broken down to include current assets, such as accountsreceivable, and fixed assets. current assetscash or any other items that can be converted to cash quickly and used by a business within a year accounts receivablethe amount customers owe a business fixed assetsany 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

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

15. 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

16. 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 accountsthe list of accounts a business uses in its operation Section 20.1 Financial Record Keeping

17. 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. debitsadditions 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 creditsadditions 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

18. Cash or Accrual Basis Income and payments are recorded by using a cash basis or accrual basis system. cash basisan accounting system in which income is recorded when it is received, and expenses are recorded when they are paid accrual basisan 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

19. Journalizing Business Transactions It is important for a business to keep a journalto record business transactions as they occur. journala financial diary of a business journalizingthe 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

20. Journalizing Business Transactions The general journal is the type of journal most commonly used by businesses. general journalan all-purpose journal that is used to record all types of business transaction Section 20.1 Financial Record Keeping

21. Posting to the General Ledger By posting to the general ledger, you can find the balance of each account. postingthe process of transferring amounts from the general journal to accounts in the general ledger Section 20.1 Financial Record Keeping

22. 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

23. 20.1 • 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

24. 20.1 • 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

25. 20.1 • 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

26. 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

27. 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

28. 20.2 income statement balance sheet cash flow statement of cash flows Section 20.2 Preparing Financial Statements

29. 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

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

31. 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

32. 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

33. 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

34. 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

35. Ongoing Accounting Activities Weekly Accounting Activities Posting to the general ledger Keeping track of payments Keeping payroll records Keeping tax records Filing records Section 20.2 Preparing Financial Statements 35

36. Ongoing Accounting Activities Monthly Accounting Activities Preparing financial statements Paying payroll tax deposits Reconciling the bank statement Balancing the checkbook Replenishing the petty cash fund Section 20.2 Preparing Financial Statements 36

37. 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

38. 20.2 • 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

39. 20.2 • 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

40. 20.2 • 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

41. E-CommerceAdvertising 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

42. 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

43. 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

44. End of