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.
A career as an entrepreneur
When today's college students are polled about their long-term career choice, a surprisingly large
number respond that they wish to someday own and manage their own business. In fact, the aspiration
to start a business, to be an entrepreneur, is nearly universal. It is widely acknowledged that a degree in
accounting offers many advantages to a would-be entrepreneur. In fact, if you ask owners of small
businesses which skill they wish they had more expertise in, they will very frequently reply "accounting". No matter what the business may be, the owner and/or manager must be able to
understand the accounting and financial consequences of business decisions.
Most successful entrepreneurs have learned that it takes a lot more than a great marketing idea or
product innovation to make a successful business. There are many steps involved before an idea
becomes a successful and rewarding business. Entrepreneurs must be able to raise capital, either from
banks or investors. Once a business has been launched, the entrepreneur must be a manager - a
manager of people, inventory, facilities, customer relationships, and relationships with the very banks
and investors that provided the capital. Business owners quickly learn that in order to survive they
need to be well-rounded, savvy individuals who can successfully manage these diverse relationships.
An accounting education is ideal for providing this versatile background.
In addition to providing a good foundation for entrepreneurship in any business, an accounting
degree offers other ways of building your own business. For example, a large percentage of public
accountants work as sole proprietors - building and managing their own professional practice. This can be a very rewarding career, working closely with individuals and small businesses. One advantage of
this career is that you can establish your practice in virtually any location ranging from large cities to
rural settings. Finally, many accountants who have gained specialized expertise and experience in a
particular field start their own practice as consultants. Expertise such as this, which may be in a field
outside of traditional accounting practice, can generate billing rates well in the excess of USD 100 an
hour.
The introduction to this text provided a background for your study of accounting. Now you are
ready to learn about the forms of business organizations and the types of business activities they
perform. This chapter presents the financial statements used by businesses. These financial statements
show the results of decisions made by management. Investors, creditors, and managers use these
statements in evaluating management's past decisions and as a basis for making future decisions.
In this chapter, you also study the accounting process (or accounting cycle) that accountants use to
prepare those financial statements. This accounting process uses financial data such as the records of
sales made to customers and purchases made from suppliers. In a systematic manner, accountants
analyze, record, classify, summarize, and finally report these data in the financial statements of
businesses. As you study this chapter, you will begin to understand the unique, systematic nature of
accounting - the language of business.