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Chapter 17
Managing BusinessFinances
Section 17.2
Accounting
Read to Learn
Explain the purpose of accounting.
Describe how property rights are measured.
Define the three components of the accounting equation.
Describe the three main financial statements used by businesses.
The Main Idea
Accounting provides financial information about an organization. It also helps guide business decisions regarding operations and finances. Balance sheets, income statements, and statements of cash flows show the financial position of a business.
Key Concepts
Accounting for Business
Property Ownership and Control
Financial Statements
Key Terms
accounting
generally accepted accounting principles (GAAP)
the systematic process of recording and reporting the financial position of a person or an organization
the set of accounting rules used by accountants to prepare reports
Key Term
property
assets
anything of value that is owned or controlled
property and other items of value owned by a business
Key Term
currentassets
accountsreceivable
assets that are either used up or converted to cash during the normal cycle of the business
the total amount of money owed to a business
Key Term
fixedassets
equity
items of value that will be held for more than one year
the present value of an asset less all claims against it
Key Term
liabilities
accountspayable
creditors’ claims to the assets of a business
the short-term liabilities that a business owes to creditors
Key Term
owner’sequity
accountingequation
an owner’s claim to the assets of the business
a rule that states that assets must always equal the sum of liabilities and owner’s equity
Key Term
financialstatements
incomestatement
documents that summarize the changes resulting from business transactions that occur during an accounting period
a report of the revenue, expenses, and net income or net loss of an accounting period
Key Term
balancesheet
cashflows
a report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period
the money that is available to a business at any given time
Key Term
statement ofcash flows
a financial report that shows incoming and outgoing money during an accounting period
Accounting for Business
Many companies hire accounting firms to manage or audit their financial records.
accountingthe systematic process of recording and reporting the financial position of a person or an organization
Accounting for Business
An accountant maintains and reviews business records.
An audit is a review of accounting records and procedures.
Accounting Software
There are software categories for all levels of accounting, from home use to high-end corporate use.
Accounting for Business
Accounting is often called the “language of business.”
Everyone involved in a business should understand the basics of accounting.
Questionable Accounting
Some companies have gotten into legal trouble for committing accounting fraud. Fraud is the crime of intentionally deceiving others for financial gain or some other benefit.
Rules for Accountants
Each company sets up an accounting system according to its specific needs, but all businesses follow generally accepted accounting principles (GAAP).
generally accepted accounting principles (GAAP)the set of accounting rules used by accountants to prepare reports
Property Ownership and Control
The right to own property is basic to a free enterprise system.
propertyanything of value that is owned or controlled
Accounting provides financial information about property and rights to it.
Property Ownership and Control
In accounting, property and financial claims are measured in dollar amounts.
Dollar amounts measure the cost of property and the property rights, or financial claims to the property.
Financial Claims in Accounting
Land and equipment are examples of assets.
assetsproperty and other items of value owned by a business
Financial Claims in Accounting
Current assets include cash, supplies, merchandise, and accounts receivable.
current assetsassets that are either used up or converted to cash during the normal cycle of the business
accounts receivablethe total amount of money owed to a business
Financial Claims in Accounting
Equipment and buildings are examples of fixed assets.
fixed assetsitems of value that will be held for more than one year
Financial Claims in Accounting
The accounting term for the financial claims to all assets is equity.
equitythe present value of an asset less all claims against it
Financial Claims in Accounting
When a person or business buys property and agrees to pay for it later, they are buying on credit.
The business or person selling the property is called the creditor.
Financial Claims in Accounting
Liabilities are measured by the amount of money a business owes its creditors.
liabilitiescreditors’ claims to the assets of a business
Financial Claims in Accounting
Owner’s equity is also referred to as the owner’s capital.
owner’s equityan owner’s claim to the assets of a business
The Accounting Equation
The accounting equation ensures that all accounting records will be correct.
accounting equationa rule that states that assets must always equal the sum of liabilities and owner’s equity
Graphic Organizer
Assets Liabilities Owner’s Equity= +
The Accounting Equation
Example
Company Assets:$100,000
Liabilities:$40,000
Owner’s Equity:$60,000= +
The owner’s rights to the assets that the owner possesses.
Financial Statements
The accounting system is designed to generate financial statements.
financial statementsdocuments that summarize the changes resulting from business transactions that occur during an accounting period
Financial Statements
Financial statements provide information that business owners use to make financial decisions.
Financial Statements
Stockholders, employees, banks, and investment companies use financial statements to learn about the financial conditions of a business.
Corporations must release their financial statements to the public.
Income Statements
The income statement is sometimes called a profit and loss statement.
income statementa report of the revenue, expenses, and net income or net loss over an accounting period
Income Statements
Total revenue is greater than total expenses
Total revenue is less than total expenses
Net income
Net loss
$
$
Balance Sheet
A balance sheet is like a photograph of a business’s finances at a specific moment.
balance sheeta report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period
Balance Sheet
The balance sheet applies the accounting equation.
When added up, the two sides of the equation are equal, or in balance.
Statement of Cash Flows
Cash flows are not indicated in the income statement or the balance sheet.
cash flowsthe money that is available to a business at any given time
Statement of Cash Flows
The statement of cash flows helps managers ensure that the business does not run out of money.
statement of cash flowsa financial report that shows incoming and outgoing money during an accounting period
Statement of Cash Flows
Lenders and investors expect business loan applicants to be able to show a consistently positive cash flow.
Computerized Accounting
Most companies use computer programs to simplify their accounting procedures because they are efficient at organizing and analyzing data.
Graphic Organizer
In a spreadsheet,
rows are identified by
numbers.
Graphic Organizer
In a spreadsheet, columns are identified by
letters.
Graphic Organizer
Cells are the small boxes
in a spreadsheet.
Graphic Organizer
As you create a spreadsheet, you enter numbers, labels, and formulas into cells.
Figure 17.1 Income Statement Using Peachtree Software
Figure 17.2 Balance Sheet Using QuickBooks® Software
1. How does accounting help a business?
Accounting keeps track of money and shows how a business is doing.
2. Discuss property ownership and control. How are they related to the accounting equation?
The person who owns property has a financial claim to it. The accounting equation indicates the amounts of financial claims to property.
3. What are the three main financial statements used in business?
balance sheet, income statement, and statement of cash flows
Chapter 17
Managing BusinessFinances
Section 17.2
Accounting
End of
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