Business and Accounting Basics

• A business provides goods or services to make a profit for its owners.

Types of Businesses

• Service businesses provide services to customers using human knowledge or talent without selling goods.
• Merchandising businesses buy products and sell them to customers.
• Manufacturing businesses produce the products they sell.

Types of Resources Used by Businesses

• Businesses require financial resources to operate, acquired from investors or creditors.
• Natural resources like land, water, or timber are essential for some businesses.
• Human resources encompass intellectual and physical labor.

Accounting Defined

• Accounting is an information system reporting on economic activities and a business's financial condition.
• It helps stakeholders evaluate operations, financial position, and future prospects.
• All departments, including Marketing, HR, Production, and Finance, utilize accounting information.

Types of Accounting

• Financial accounting focuses on external users like investors, creditors, customers, and the government.
• Managerial accounting addresses the information needs of managers within the business.

Not-for-Profit Business Forms

• Nonprofit businesses aim to meet a societal need.
• Governments serve citizens, provide defense, reallocate wealth, and protect the environment.
• Nonprofits provide transparent information on resource use and mission effectiveness.
• Governments inform stakeholders about the use of tax revenues.

Key Organizations and Standards

• The Financial Accounting Standards Board (FASB) establishes accounting standards in the U.S., known as GAAP.
• The International Accounting Standards Board (IASB) promotes global interest.
• International Financial Reporting Standards (IFRS) are permissible by the SEC for multinational companies trading on U.S. exchanges.

Financial Statements Required by GAAP

Income Statement

• Income Statement summarizes revenues and expenses over a period, resulting in either net profit or net loss.
• Revenue is the economic benefit from providing goods and services.
• Expense is the economic sacrifice made to generate revenue.
• Income Statement is also called Statement of Earnings, Profit and Loss, or Statement of Operations.

Statement of Stockholders' Equity

• The Statement of Stockholders' Equity shows changes in common stock and retained earnings over a period.
• Common Stock represents specific commitments made to investors.
• Retained Earnings are earnings retained in the business since its start.

Balance Sheet

• The Balance Sheet shows a company's financial position at a specific point in time, detailing assets, liabilities, and equity.
• Assets are what the company owns.
• Liabilities are what the company owes.
• Equity is the owners' investment.

Statement of Cash Flows

• The Statement of Cash Flows shows changes in cash during a period through financing, investing, and operating activities.
• Financing activities involve cash from investors or borrowing and outflows for repayment or dividends.
• Investing activities involve buying or selling long-term assets.
• Operating activities include cash from revenue and for paying expenses.

The Accounting Equation

• The Accounting Equation consists of assets, liabilities, and stockholders’ equity.
• Assets are resources used by a business to earn money.
• Liabilities are amounts a company owes to creditors.
• Stockholders’ Equity represents owners' claims to the company’s assets.
• Assets come from liabilities, stockholders' equity (common stock), and retained earnings.
• Revenues increase Retained Earnings, and expenses and dividends decrease it.