Business Explain: Accounting

The language of business

Accounting provides information that is useful in making decisions by all participants in the market for resource goods and services, both profit-oriented and nonprofit oriented.

What type of income or profit does an investor expect to receive in exchange for providing financial resources? What time of income does a creditor expect from providing financial resources to an organization or business?

Investors expect a distribution of the business's profits as a return on their financial investment (capital allocation).

Creditors lend financial resources to businesses and receive interest as a return or profit on the loan.

Describe a non-for-profit or nonprofit enterprise. What is the motivation for this type of entity?

Not-for-profit or nonprofit entities provide goods or services to consumers for humanitarian or special reasons rather than to earn a profit for owners. For example, certain not-for-profit entities allocate resources to provide for research of diseases or social/environmental welfare; others allocate resources to promote the arts and provide education.

Distinguish between elements of financial statements and accounts.

Items reported on the financial statements are organized into classes or categories called elements. The ten elements of financial statements are:
1. Assets
2. Liabilities
3. Equity (Stockholders' Equity)
4. Investments by Owners (Contributed Capital)
5. Revenue
6. Expenses
7. Distributions (Dividends)
8. Net Income
9. Gains
10. Losses

Accounts are specific items or subclassifications of the elements. Examples of accounts include cash, land and common stock.

What role do assets play in business profitability?

Assets, the economic resources of a business, are used to produce earnings.

To whom do the assets of a business belong?

The assets of a business belong to that business entity and there may be claims on the assets. Claims on the assets belong to resource providers.