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 the systematic process of recording and reporting the financial position of a person or an organization accounting generally accepted accounting principles (GAAP) the set of accounting rules used by accountants to prepare reports

Key Term anything of value that is owned or controlled property property and other items of value owned by a business assets

Key Term assets that are either used up or converted to cash during the normal cycle of the business current assets accounts receivable the total amount of money owed to a business

Key Term fixed assets items of value that will be held for more than one year the present value of an asset less all claims against it equity

Key Term creditors’ claims to the assets of a business liabilities accounts payable the short-term liabilities that a business owes to creditors

Key Term owner’s equity 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 accounting equation

Key Term documents that summarize the changes resulting from business transactions that occur during an accounting period financial statements a report of the revenue, expenses, and net income or net loss of an accounting period income statement

Key Term a report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period balance sheet cash flows the money that is available to a business at any given time

Key Term a financial report that shows incoming and outgoing money during an accounting period statement of cash flows

Accounting for Business Many companies hire accounting firms to manage or audit their financial records. accounting the 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. property anything 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. assets property and other items of value owned by a business

Financial Claims in Accounting Current assets include cash, supplies, merchandise, and accounts receivable. current assets assets that are either used up or converted to cash during the normal cycle of the business accounts receivable the total amount of money owed to a business

Financial Claims in Accounting Equipment and buildings are examples of fixed assets. fixed assets items 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. equity the 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. liabilities creditors’ 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 equity an owner’s claim to the assets of a business

The Accounting Equation The accounting equation ensures that all accounting records will be correct. accounting equation a rule that states that assets must always equal the sum of liabilities and owner’s equity

The Accounting Equation Graphic Organizer The Accounting Equation Assets Liabilities Owner’s Equity = + Example Company Assets: $100,000 Liabilities: $40,000 Owner’s Equity: $60,000 = + The owner’s rights to the assets that the owner possesses.

The accounting system is designed to generate financial statements. documents 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.

The income statement is sometimes called a profit and loss statement. Income Statements The income statement is sometimes called a profit and loss statement. income statement a report of the revenue, expenses, and net income or net loss over an accounting period

Income Statements Net income Net loss 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 sheet a 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 flows the 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 flows a 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.

In a spreadsheet, rows are identified by numbers. Graphic Organizer In a spreadsheet, rows are identified by numbers.

In a spreadsheet, columns are identified by letters. Graphic Organizer In a spreadsheet, columns are identified by letters.

Cells are the small boxes in a spreadsheet. 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.

Income Statement Using Peachtree Software Figure 17.1 Income Statement Using Peachtree Software

Balance Sheet Using QuickBooks® Software Figure 17.2 Balance Sheet Using QuickBooks® Software

How does accounting help a business? Accounting keeps track of money and shows how a business is doing.

Discuss property ownership and control 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.

What are the three main financial statements used in business? balance sheet, income statement, and statement of cash flows

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