Accounting and its Use in Business Decisions

Read and take notes on Sections 2.1 through 2.12 of Chapter 2 on pages 30-53.

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.

  • 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". Be sure you understand the meaning of this concept, and 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 – that is, 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.
  • Section 2.6 discusses 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. 
  • Section 2.7 introduces a number of concepts of business transactions and how they affect the accounting equation.
  • Section 2.8 illustrates how some business transactions affect the balance sheet. Write out the examples in this section on pages 41-44. As you read, follow along with these examples and take notes. 
  • Section 2.9 illustrates how some business transactions affect the income statement and/or balance sheet. Write the examples on pages 46-48, follow along with them, and take notes.
  • 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. 

Click AccountingPrinciples.pdf link to view the file.