20-12-2012, 06:55 PM
Accounting: The Language of Business
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Learning Objectives
After studying this chapter, you should be able to:
Explain how accounting information assists in making decisions.
Describe the components of the balance sheet.
Analyze business transactions and relate them to changes in the balance sheet.
Compare features of proprietorships, partnerships, and corporations.
Introduction
Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements
Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies
The Nature of Accounting
The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.
Accounting systems are designed to meet the needs of the decisions makers who use the financial information.
Every business has some sort of accounting system.
These accounting systems may be very complex or very simple, but the real value of any accounting system lies in the information that the system provides.
Accounting as an Aid toDecision Making
Accounting information is useful to anyone who makes decisions that have economic results.
Managers want to know if a new product will be profitable.
Owners want to know which employees are productive.
Investors want to know if a company is a good investment.
Creditors want to know if they should extend credit, how much to extend, and for how long.
Government regulators want to know if financial statements conform to requirements.
The Balance Sheet
Sections of the balance sheet:
Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns)
Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm)
Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners)
Balance Sheet Transactions
The balance sheet is affected by every transaction that an entity encounters.
Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation must always be balanced.