20 Accounting and Financial Reporting Section 20 1

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 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 year fiscal year the accounting period of time from the accounting period of time that January 1 to December 31 begins and ends in months other 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 receivable any items that will be held by a cash or any other items that can the amount customers owe a be converted to cash quickly and business for more than one year, used by a business within a year such as equipment, trucks, or 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 owner’s liabilities accountsequity payable the worth of a business the debts of a business the amount a 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 side of an account additions to the left side of an account that increase the balance of all assets that decrease the balance for all assets and expense accounts and decrease the and expense accounts and increase the balance of all liability and revenue balance for all liability and 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 expenses are earned, and expenses 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 journalizing a financial diary of a business the process 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 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 20. 1 20. 2 Accounting and Financial Record Keeping Financial Preparing Financial Reporting Statements Glencoe Entrepreneurship: Building a Business