2. 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.

3. 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.

4. Key Concepts
Accounting for Business
Property Ownership and Control
Financial Statements

5. 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

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

7. 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

8. 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

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

10. 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

11. 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

12. 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

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

14. 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

15. Accounting for Business
An accountant maintains and reviews business records.
An audit is a review of accounting records and procedures.

16. Accounting Software
There are software categories for all levels of accounting, from home use to high-end corporate use.

17. Accounting for Business
Accounting is often called the “language of business.”
Everyone involved in a business should understand the basics of accounting.

18. 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.

19. 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

20. 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.

21. 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.

22. Financial Claims in Accounting
Land and equipment are examples of assets.
assets
property and other items of value owned by a business

23. 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

24. 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

25. 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

26. 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.

27. 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

28. 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

29. 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

30. 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.

31. The accounting system is designed to generate financial statements.
documents that summarize the changes resulting from business transactions that occur during an accounting period

32. Financial Statements
Financial statements provide information that business owners use to make financial decisions.

33. 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.

34. 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

35. Income Statements Net income Net loss
Total revenue is greater than total expenses
Total revenue is less than total expenses
Net income
Net loss $

36. 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

37. Balance Sheet
The balance sheet applies the accounting equation.
When added up, the two sides of the equation are equal, or in balance.

38. 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

39. 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

40. Statement of Cash Flows
Lenders and investors expect business loan applicants to be able to show a consistently positive cash flow.

41. Computerized Accounting
Most companies use computer programs to simplify their accounting procedures because they are efficient at organizing and analyzing data.

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

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

44. Cells are the small boxes in a spreadsheet.
Graphic Organizer
Cells are the small boxes in a spreadsheet.

45. Graphic Organizer
As you create a spreadsheet, you enter numbers, labels, and formulas into cells.

46. Income Statement Using Peachtree Software
Figure 17.1
Income Statement Using Peachtree Software

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

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

49. 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.

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

51. End of