stakeholders includes outside firms that lend money to a business and credit-reporting agencies that supply information to these lenders. Banks want to know about the financial affairs and financial condition of a firm before lending money, for example. The accounting system needs to produce the financial information that a bank requires to consider a loan request.
What information do lenders want? Lenders want to know that a business is profitable and enjoys a positive cash flow. Profits and positive cash flows allow a business to repay debt easily. A bank or other lender also wants to see assets that could be liquidated, in a worst-case scenario, to pay a loan — and other debts that may represent a claim on the firm’s assets.
Vendors also typically require financial information from a firm. A vendor often lends money to a firm by extending trade credit. What’s noteworthy about this fact is that vendors sometimes require special accounting. One category of vendors that a company such as John Wiley & Sons, Inc., deals with is its authors. To pay an author the royalty that they’re entitled to, Wiley puts in a fair amount of work to calculate royalty-per-unit amounts and then reports and remits these amounts to each author.
Other firms sometimes have similar financial reporting requirements for vendors. Franchisees (such as the person who owns and operates the local McDonald’s) pay a franchise fee based on revenue. Retailers may perform special accounting and reporting to enjoy rebates and incentives from the manufacturers of the products that they sell.
Government agencies
Predictable stakeholders that require financial information from a business also include the federal and state government agencies that have jurisdiction over the firm. Every business in the United States needs to report on its revenue, expenses, and profits so that it can correctly calculate income tax due to the federal government (and often, the state government too) and then pay that tax.
Firms with employees must also report to the federal and state governments on wages paid to those employees and pay payroll taxes based on metrics, such as number of employees, wages paid to employees, and unemployment benefits claimed by past employees.
Providing this sort of financial information to government agencies represents a key duty of a firm’s accounting system.
Business form generation
In addition to the financial reporting described in the preceding paragraphs, accounting systems typically perform a key task for businesses: producing business forms. An accounting system almost always produces the checks needed to pay vendors, for example. In addition, an accounting system prepares the invoices and payroll checks. More sophisticated accounting systems, such as those used by large firms, prepare many other business forms, including purchase orders, monthly customer statements, credit memos to customers, and sales receipts.
Reviewing the Common Financial Statements
With the background information just provided, I’m ready to talk about some of the common financial statements or accounting reports that an accounting system like QuickBooks produces. If you understand which reports you want your accounting system to produce, you should find it much easier to collect the raw data necessary to prepare these reports.
In the following sections, I describe the three principal financial statements: the income statement, the balance sheet, and the statement of cash flows. I also briefly describe a fourth, catch-all category: accounting reports.
Don’t worry — I go through this material slowly. You need to understand what financial statements your accounting systems are supposed to provide and what data these financial statements supply.
The income statement
Perhaps the most important financial statement that an accounting system produces is the income statement, also known as a profit and loss statement. An income statement summarizes a firm’s revenue and expenses for a particular period. Revenue represents amounts that a business earns by providing goods and services to its customers. Expenses represent amounts that a firm spends providing those goods and services. If a business can provide goods or services to customers for revenue that exceeds its expenses, the firm earns a profit. If expenses exceed revenue, obviously, the firm suffers a loss.
To show you how all this works — and it’s really pretty simple — take a look at Tables 1-1 and 1-2. Table 1-1 summarizes the sales that an imaginary business enjoys. Table 1-2 summarizes the expenses that the same business incurs for the same period. These two tables provide all the information necessary to construct an income statement.
TABLE 1-1 A Sales Journal
| Joe | $1,000 |
| Bob | 500 |
| Frank | 1,000 |
| Abdul | 2,000 |
| Yoshio | 2,750 |
| Marie | 2,250 |
| Jeremy | 1,000 |
| Chang | 2,500 |
| Total sales | $13,000 |
TABLE 1-2 An Expenses Journal
| Purchases of hot dogs and buns | $3,000 |
| Rent | 1,000 |
| Wages | 4,000 |
| Supplies | 1,000 |
| Total expenses | $9,000 |
Using the information from Tables 1-1 and 1-2, you can construct the simple income statement shown in Table 1-3. Understanding the details of an income statement is key to understanding of how accounting works and what accounting tries to do. Therefore, I want to go into some detail in discussing this income statement.
TABLE 1-3 Simple Income Statement
| Sales revenue |
|
