In this chapter, you will learn why accounting is important to the business community. You will learn the different types of businesses and how daily transactions are posted and how they affect the financial statements. These reading will also demonstrate how to prepare the income statement, balance sheet, and statement of stockholders equity. Pay close attention to steps involved in the accounting cycle from beginning to end.
You should read and take notes on Sections 2.1 through 2.12 of Chapter 2 on pages 30 through 53.
In Section 2.1, you are provided with chapter-specific learning objectives.
In Section 2.2, you will get another look at a potential employment opportunity for someone interested in the business discipline of accounting.
In Section 2.3, there is some discussion of the concept identified as "the entity concept." Please ensure you understand the meaning of this concept. Additionally, this section explains the differences between a single (sole) proprietorship, a partnership, and a corporation.
Section 2.4 explains that a business entity can be distinguished by the type of activity it performs - i.e., service company, merchandising company, or manufacturing company - as opposed to being identified by the type of business ownership.
Section 2.5 discusses the four financial statements and provides illustrations to support the discussion. There is also a discussion on revenues and expenses, as they impact net income or net loss. Pay particular attention to this discussion and be sure the listed equation is in your notes.
Section 2.6 discusses the framework of the entire accounting process, which may also be identified as the accounting equation. The fundamental accounting equation is the basic equation that accountants use to record business transactions. The equation states "assets = liabilities + owners' equity.” There are a number of elements within the accounting equation, and this section of the course will provide you with the direct and alternative identifications of these elements so you can begin to speak the language of accounting.
While you will hear these three elements of the accounting equation discussed and illustrated in multiple ways throughout this course, here is an introduction: Assets are things that expect to have future value to the company. For example, if the company buys a new car, this car has future value to the company. Liabilities are promises to pay. Some companies may not have all of the money to pay cash for the car, so they will typically finance, or obtain credit for, and borrow the difference between the down payment and the final price of the car. If approved, the company now promises to pay back the bank or business entity who gave the company money. Owners' Equity is the owners' claims on assets. This basically means that, as an owner of the company, you have a claim on the asset that is now identified as the new car the company owns.
Section 2.7 introduces you to a number of concepts on business transactions. This is the beginning analysis of how business transactions impact the accounting equation. Later, you will have an opportunity to complete an assessment that will further assist you with understanding how basic business transactions impact the accounting equation.
Section 2.8 seeks to illustrate how some business transactions will impact the balance sheet. It is recommended that you write out the examples in this section of the course, identified on pages 41 through 44. As you are reading through the content, follow along with these examples. Feel free to take any additional notes on the examples you copy.
Section 2.9 illustrates how some business transactions will impact the income statement and/or balance sheet. It is recommended that you write out within your notes the examples in this section of the course, identified on pages 46 through 48. As you read through the content, following along with these examples. Feel free to take any additional notes on the copied examples.
Section 2.10 is a summary of balance sheets and income statement transactions.
Section 2.11 explains what happens when a stockholder receives a dividend (a return on their investment in a company).
Section 2.12 explains the significance of creditors and stockholders as the basic sources of a company's equity. The equity ratio is introduced and examples are provided to support your understanding of this information.