Chapter 17
Managing Business
Finances
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
the systematic process of recording
accounting and reporting the financial position
of a person or an organization
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
property
controlled
assets
property and other items of value owned
by a business
Key Term
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
Key Term
fixed
assets
items of value that will be held for more
than one year
equity
the present value of an asset less all
claims against it
Key Term
creditors’ claims to the assets of a
liabilities
business
accounts the short-term liabilities that a business
payable 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
accounting
always equal the sum of liabilities and
equation
owner’s equity
Key Term
documents that summarize the
financial
changes resulting from business
statements transactions that occur during an
accounting period
income
statement
a report of the revenue, expenses,
and net income or net loss of an
accounting period
Key Term
a report of the balances in all assets,
balance
liabilities, and owner’s equity accounts at
sheet
the end of an accounting period
cash
flows
the money that is available to a business
at any given time
Key Term
statement of
cash 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.
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.
Accounting provides
financial information
about property and
rights to it.
property
anything of value that is
owned or controlled
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
Graphic Organizer
The Accounting Equation
=
Assets
Liabilities
+
Owner’s Equity
+
Owner’s Equity:
$60,000
Example
Company Assets:
$100,000
=
Liabilities:
$40,000
The owner’s rights to the assets that the owner possesses.
Financial Statements
The accounting
system is designed to
generate financial
statements.
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.
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
Total revenue is greater
than total expenses
Net income
$
Total revenue is less
than total expenses
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.
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
End of
Chapter 17
Managing Business
Finances
Section 17.2
Accounting