The World of Business and Accounting

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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?

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Chapter 2

Section 1 Exploring the World of Business

• What Youll Learn
• Profit and risk-taking.
• The free enterprise system.
• Starting and running your own business.
• Three types of business operations.
• Three forms of business organization.

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Section 1 Exploring the World of Business (cont.)
Chapter 2

Why Its Important In order to participate in
the world of business, youll want to understand
how businesses are formed, organized, and
operated.



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Section 1 Exploring the World of Business (cont.)
Chapter 2

• Key Terms
• free enterprise system
• profit
• loss
• entrepreneur
• capital
• service business
• merchandising business
• manufacturing business
• sole proprietorship
• partnership
• corporation
• charter

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Section 1 Exploring the World of Business (cont.)
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

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Section 1 Exploring the World of Business (cont.)
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.

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Section 1 Exploring the World of Business (cont.)
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.

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Section 1 Exploring the World of Business (cont.)
Chapter 2

• Types of Business Operations
• Service Businesses
• Merchandising Businesses
• Manufacturing Businesses

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Section 1 Exploring the World of Business (cont.)
Chapter 2

Forms of Business Organizations

• Sole proprietorship
• Partnership
• Corporation

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Section 1 Exploring the World of Business (cont.)
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
• Owner has total control
• Few regulations to follow

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Section 1 Exploring the World of Business (cont.)
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

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Section 1 Exploring the World of Business (cont.)
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

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Section 1 Exploring the World of Business (cont.)
Chapter 2

Check Your Understanding

Would you say that the advantages of being an
entrepreneur outweigh the disadvantages or vice
versa? Why?


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Chapter 2
Section 2 Accounting The Universal Language of
Business

• What Youll Learn
• How the accounting system works.
• Who uses financial accounting reports.
• Who uses management accounting reports.
• How accounting is used to help make business
  decisions.
• What assumptions provide the foundation for
  accounting systems.

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2

Why Its Important Understanding accounting
systems is the key to understanding business.

• Key Terms
• accounting system
• manual accounting system
• computerized accounting system
• GAAP
• financial reports

• financial reports
• financial accounting
• management accounting
• business entity
• accounting period
• going concern

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2

The Accounting System Designed to collect,
document, and report on financial transactions
affecting the business.

• manual accounting system
• computerized accounting system
• generally accepted accounting principles (GAAP)
• financial reports

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2

How the Accounting System Works
Outputs Financial and Management Accounting
Reports

Inputs Source Documents

• Processing
• Tasks

• Checks
• Invoices
• Sales Slips
• Receipts

• Financial Condition
• Results of operations
• Investments by and distributions to owners

• Analyzing
• Classifying
• Recording

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2
Chapter 2

Using Accounting Reports for Making Business
Decisions There are two groups that use
accounting reports

• individuals outside the business who have an
  interest in the business
• individuals inside the business

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2
Chapter 2

Financial Accounting Financial accounting
focuses on reporting information to external
users.

Who Uses Financial Accounting Reports?

• potential investors
• banks that loan money to a business
• local, state, and federal governments
• workers, consumers, union leaders, and competitors

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2
Chapter 2

Management Accounting Management accounting
focuses on reporting information to management.

• Managers

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2
Chapter 2

Accounting Assumptions

• business entity
• accounting period
• going concern

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Section 2 Accounting The Universal Language of
Business (cont.)
Chapter 2
Chapter 2

Check Your Understanding Consider creating an
accounting system for your personal finances.

1. How would you organize the system? 2. What
inputs would there be? 3. How might you record
your activities? 4. How might you report on those
activities?