Accounting and Its Use in Business Decisions

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. This chapter also demonstrates how to prepare the income statement, balance sheet, and statement of stockholders' equity. Pay close attention to the steps involved in the accounting cycle from beginning to end. This chapter will introduce you to the framework of the entire accounting process, which may also be called 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". This section gives the direct and alternative identifications of these elements to help you speak the language of accounting. 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.

Learning objectives

  • Identify and describe the three basic forms of business organizations. 
  • Distinguish among the three types of activities performed by business organizations. 
  • Describe the content and purposes of the income statement, statement of retained earnings, balance sheet, and statement of cash flows. 
  • State the basic accounting equation and describe its relationship to the balance sheet. 
  • Using the underlying assumptions or concepts, analyze business transactions and determine their effects on items in the financial statements. 
  • Prepare an income statement, a statement of retained earnings, and a balance sheet. 
  • Analyze and use the financial results - the equity ratio

Source: Textbook Equity,
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