The World of Business and Accounting

1. Chapter 2 $ The World of Business and Accounting $ Making Accounting Relevant Owning and operating a business takes special skills and traits. $ What skills do you think are important for the person who owns and operates a business? $

2. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Why It’s Important In order to participate in the world of business, you’ll want to understand how businesses are formed, organized, and operated. $ $ $

3. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ The Environment of Business In a free enterprise system people are free to produce the goods and services they choose. $ • Nike • IBM • local video rental store • clothing boutiques • local grocers • Tower Records $ $

4. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ The Need for Profit The amount of money earned over and above the amount spent to keep the business operating is called profit. Businesses that spend more money than they earn operate at a loss. $ $ The Need for a Risk-Taker Entrepreneurs transform ideas for products or services into real-world businesses. $

5. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Entrepreneurship: Who Me? Have you ever considered owning a business? $ • Cons • You probably need to work long hours. • You lose the security of steady wages and medical benefits an employer provides. • You market your own services or products. • You pay for your own operating expenses. • You must be motivated and energetic each day. • You face the possibility of losing money. • Pros • You are your own boss • You create opportunities for earning money. • You create and control your work schedule. • You choose the people you serve. • You select the people who work with you. • You benefit from the rewards of your own hard work. • You choose your own work hours. $ $

6. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ • Types of Business Operations • Service Businesses – provides a needed service for a fee. • Merchandising Businesses – buys finished products and resells them to individuals or other businesses. • Manufacturing Businesses – buys raw materials, such as wood or iron, and transforms them into finished products through the use of labor and capital. It then sells the finished products to individual or other businesses. $ $ $

7. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Forms of Business Organizations • Sole proprietorship – a business owned by one person. • Partnership – a business owned by two or more persons, called partners, who agree to operate the business as co-owners. • Corporation – a business organizations that is recognized by law to have a life of its own. Must get legal permission from the state to operate. This is called a charter and it gives he business certain rights and privileges. $ $ $

8. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Sole Proprietorship A business owned by one person. $ Disadvantages: • Limited expertise • Hard to raise money • Owner has all the risks • Hard to attract talented employees Advantages: • Easy to set up • All profits go to owner • Owner has total control • Few regulations to follow $ $

9. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Partnership A business owned by two or more persons, who agree to operate the business as co-owners. $ Advantages: • Easy to start • Skills and talents are pooled • More money available Disadvantages: • Conflicts between partners • Profits must be shared • Owners share all risks $ $

10. Section 1 Exploring the World of Business(cont'd.) Chapter 2 $ Corporation A business organization that is recognized by law to have a life of its own. $ Disadvantages: • Costs more to start up • Complex to organize • More regulations • Higher taxes Advantages: • Easier to raise money • Easy to expand • Easy to transfer ownership • Losses limited to investment $ $

11. Chapter 2 $ Accounting: The Language of Business $ • Have you ever wondered how popular bands, like U2, determine which venues they’ll play, how much ticket prices should be, and how profitable CD sales have been? • All of these issues are tackled by the band’s financial team: ACCOUNTANTS, CLERKS and FINANCIAL ADVISORS! $ $

12. Chapter 2 $ Accounting System--is designed to collect, document, and report on financial transactions affecting the business. $ $ • Manual Accounting System – processed by hand • Computerized Accounting System – processed by a computer $

13. Chapter 2 $ How the Accounting System Works Outputs Financial and Management Accounting Reports $ Inputs Source Documents Processing Tasks • Checks • Invoices • Sales Slips • Receipts $ • Analyzing • Classifying • Recording • Financial condition • Results of operations • Investments by and distributions to owners $

14. Chapter 2 $ Accounting: The Language of Business $ • All accountants use the same set of rules, called “generally accepted accounting principles” or GAAP for short. • Accounting principles provide a way to communicate financial information in a form understood by those interested in the operation and financial condition of a business. • Because this is so fundamental, accounting is often referred to as the “language of business”. • Financial Reports are summarized information about the financial state of the business. $ $

15. Chapter 2 $ The Purpose of Accounting $ • The purpose of accounting is to provide financial information about a business or a not-for-profit organization. • Individuals need financial information in order to make good decisions $ $

16. Chapter 2 Chapter 2 $ Using Accounting Reports for Making Business Decisions In general, there are two groups that use accounting reports: $ $ • individuals outside the business who have an interest in the business • individuals inside the business $

17. Chapter 2 Chapter 2 $ Financial Accounting -- focuses on reporting information to external users. These reports are prepared using GAAP. $ Who Uses Financial Accounting Reports? $ • potential investors • individuals and institutions, such as banks, that loan money to a business • local, state, and federal governments • workers, consumers, union leaders, and competitors $

18. Chapter 2 Chapter 2 $ • Management Accounting • Management accounting focuses on reporting information to internal management. • These types of reports are prepared for managers making the day-to-day operating decisions like purchasing, hiring and firing. • Managers need accounting information so that they can decide what to do and how to do it! $ $ $

19. Chapter 2 Chapter 2 $ Accounting Assumptions $ • Business Entity – business exists independently of it’s owners personal holdings. • Accounting Period – for reporting purposes, the life of the business is divided into specific periods of time! (Can be months, quarters, or years, for example). • Going Concern – it’s assumed that the business has the ability to survive and operate indefinitely. $ $