Page 401 - Business Principles and Management

Unit 5

15.1 Types of Financial Records

Goals Terms
• Describe why businesses need to • financial records • accounts payable
maintain financial records. • data-processing record
• Identify and discuss the purpose of center • asset
several types of business financial • accounts receivable • depreciation
records. record • fixed assets

Financial Records

All businesses—large and small—must keep records. The main reason businesses
keep records is to determine whether they have made a profit or a loss. If a busi-
ness is not making a profit, it faces a lot of operating pressures. If financial prob-
lems cannot be solved, the business may cease to exist. Financial records (also
called accounting records) are organized summaries of a business’s financial
information and activities.
A very small business can determine how profitable it is by simply using a busi-
ness checking account to record income deposited and by writing checks for all
payments. The total receipts (deposits) less the total of all checks written tell the
business owner if the business is making money. However, that does not really pro-
vide adequate information to fully understand the financial condition of the busi-
ness. Businesses need far more complete and detailed records than a checkbook
to satisfy their information needs. All companies must determine what records to
keep, how to prepare and maintain them, and who should be responsible for the
records. Once a records system has been developed, managers can then use the
information to understand the business’s finances and complete financial planning.

RECORD-KEEPING SYSTEMS

Businesses handle financial records in various ways. A small-business owner
can keep the records personally or employ a full-time or part-time bookkeeper
or accountant. Larger businesses establish an accounting department or use an
accounting service organization. The record-keeping system a business adopts
determines, in part, the way it will handle its records.
Systems for keeping financial records may be simple or complex, and they
may require almost no financial knowledge to use or may be highly technical.
Today almost all business records systems are computerized. Regardless of the
type of record system a company selects, the system must be accurate, keep
information safe and secure, and provide timely and accurate information.

SMALL-SCALE RECORD SYSTEMS Manual record systems in which all information was
entered and analyzed by hand were used by businesses for thousands of years.
If you have taken an accounting class, you have probably had experience with
a manual records system. Few businesses other than some that are very small
rely on manual systems today. Easy-to-use and affordable accounting software

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