4.8

• Businesses are required by law to keep records of their financial

  transactions for at least 5 years for tax purposes (including all

  documents relating to income and expenses).
• When established, a business will engage in a variety of financial transactions, all

  of which can be recorded on paper and electronically (e.g. Cash register dockets,

  credit card, EFTPOS vouchers, purchase invoices).
• A cash book usually consists of 2 sections:

  ▪ The cash receipts recorded on the left

  ▪ The cash payments recorded on the right
• A business earns income by selling a good or service to its customers.

  ▪ To measure how successful a business is at trading, a financial report

  is called an income statement is created.

  ▪ The income statement shows:

  ▪ The amount of income or revenue earned

  ▪ The costs or expenses incurred in earning that revenue

  ▪ Whether a profit or a loss has been incurred in the period under

  review.
• A balance sheet provides a picture of what a business owns (assets) and owes

  (liabilities) and the owner’s equity on a particular date.

  ▪ It represents the net worth (equity) of the business – It shows the financial

  stability of the business.
• Record-keeping strategies are used to help the business monitor, manage and

  report financial performance.
• Maintaining accurate records is a legal obligation of the business and serves as an

  invaluable tool for decision making.
• Record-keeping strategies include using source documents (written documents that

  provide evidence of a financial transaction), maintaining a cash book (a summary

  of all the business’s cash receipts and cash payments), producing an income

  statement (used primarily to help the business to calculate how much profit it has

  made over a period of time), and producing a balance sheet (a summary of a

  business’s assets and liabilities at a point in time).