Chapter 2 AccountingExam Review

The World of Business and Accounting

Mr. SherpinskyCouncil Rock High School

Business, Computers, & Information Technology

Vocabulary to Know!Key Terms

free enterprise system profit loss entrepreneur capital service business merchandising business manufacturing business

Key Terms sole proprietorship partnership corporation charter

The Environment of BusinessThe Environment of Business

In the U.S. we have a free enterprise system; people are free to produce goods and services and spend money as they wish.A business can operate at a profit or a loss. If the revenues are greater than the costs, the money left over is profit. When costs are greater than revenues, the business operates at a loss.

In order to survive, a business must do two things… operate at a profit, and have an individual willing to take the risk to run

it.

Traits of Entrepreneurs

Roles ina Business

Inventors

Investors

EmployeesManagers

Entrepreneurs

entrepreneurA person who

transforms ideas for products or services

into real-world businesses.

The Need for a Risk-TakerAn entrepreneur transforms ideas for products or

services into actual (real-world) businesses.

Types and Forms of BusinessTypes of Business OperationsThere are three types of business operations:

Service businesses provide services for fees. Merchandising businesses buy and sell finished

products. Manufacturing businesses buy materials and make

finished products.

service business

A business that provides a

needed service for a fee.

merchandising business

A business that buys finished products and

resells them to individuals or other

businesses.

manufacturing businessA business that buys raw materials, uses labor and

machinery to transform them into finished products, and

sells the finished products to individuals or other

businesses.

Types and Forms of BusinessTypes and Forms of BusinessIn a free enterprise system, an entrepreneur can

choose the type and form of business to run.

Each type needs capital (money) from investors, banks, or business owners to

begin.

Forms of Business Organization

Sole ProprietorshipSole means “single” and proprietor means “owner.” – Most common in US! A sole proprietor is a single owner, but the operation

may have many managers and employees. There are advantages and disadvantages to being a

sole proprietor.

Forms of Business OrganizationPartnership

When two people or more people enter into an agreement to operate a business as co-owners, a partnership is formed.

There are advantages and disadvantages to a partnership.

Forms of Business OrganizationCorporation

A corporation often starts off as a sole proprietorship or partnership. In order to become a corporation an organization must obtain a charter (legal permission to operate).

There are advantages and disadvantages to a corporation.

Review What You’ve Learned

Key Terms Review free enterprise system

A system in which individuals are free to produce the goods and services they choose.

profitThe amount earned above the amount of expense incurred to keep the business operating.

lossThe result when a business spends more money than it earns.

entrepreneurA person who transforms ideas for products or services into real-world business.

Review What You’ve Learned

Key Terms Review capital

Money supplied by investors, banks, or owners of a business.

service businessA business that provides a needed service for a fee.

merchandising businessA business that buys finished goods and resells them to individuals or other businesses.

manufacturing businessA business that buys raw materials and transforms them into financial products by using labor and machinery.

Review What You’ve Learned

Key Terms Review 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.

corporationA business organization recognized by law to have a life of its own.

charterThe legal permission, granted by a state, that gives a corporation certain rights and privileges and spells out the rules under which the corporation is to operate.

Questions for Review

Main IdeaAccounting: Universal Language of

BusinessThe accounting system produces

information used to make decisions.

Vocabulary to Know!Key Terms

accounting system manual accounting system computerized accounting system GAAP financial reports financial accounting management accounting business entity accounting period going concern

The Accounting Systems

Two types of accounting systems

Manual AccountingSystem

Computerized Accounting System

accounting systemDesigned to collect, document, and report on financial transactions affecting

the business.

manual accounting systemWhen accounting information is

processed by hand.

computerized accounting systemWhen accounting information is processed by recording it into a

computer.

Language of Business

Accountants must follow GAAP rules issued by the Financial Accounting Standards Board (FASB).

GAAP (generally accepted accounting principles)The set of rules that all accountants use to prepare

financial reports.

What is GAAP?

Language of BusinessWhat Are

financial reports?

financial reportsDocuments that present summarized information

about the financial status of a business.

Financial reports contain a summary of the financial status of a business.

Most common time-period for reports is annual.. (Yearly)

Language of BusinessUsing Accounting Reports for Making

Business DecisionsAccounting provides financial information about a business or

organization.

Two groups that useaccounting reports

Individuals outside the business who have an interest in the business

Individuals inside the business

investors, the local, state, and federal

government, and employees, consumers, and

competitors.

managers, owners

Making Business DecisionsThose interested in the financial accounting reports of a business include:

InvestorsLocal, state, and

federal government

Employees, consumers, and

competitors

financial accountingThe type of accounting that focuses on reporting information to external users.

Making Business Decisions

Management accounting reports are prepared for managers involved in:

management accountingThe type of accounting that focuses on reporting information to management; often referred to as

accounting for internal users of accounting information.

Purchasing decisionsHiring decisionsProduction decisionsPaymentsSalesCollections

Accounting Assumptions

Three GAAP Assumptions

Business entity

Accounting period

Going concern

business entityThe accounting assumption that a business exists independently of its owner’s personal holdings.

The accounting records and reports are maintained separately and contain financial information

related only to the business.

Review What You’ve Learned

Key Terms Review accounting system

A system designed to collect, document, and report on business transactions.

manual accounting systemA type of accounting system in which information is processed by hand.

computerized accounting systemA type of accounting system in which information is recorded by entering it into a computer.

Review What You’ve Learned

Key Terms Review GAAP

The set of rules that all accountants use to prepare financial reports.

financial reportsDocuments that present summarized information about the financial status of a business.

financial accountingThe type of accounting that focuses on reporting information to external users.

management accountingThe type of accounting that focuses on reporting information to management; often referred to as accounting for internal users of accounting information.

Review What You’ve Learned

Key Terms Review business entity

The accounting assumption that a business exists independently of its owner’s personal holdings. The accounting records and reports are maintained separately and contain financial information related only to the business.

accounting periodThe period of time covered by an accounting report.

going concernThe accounting assumption that a business is expected to operate indefinitely.

Questions?• EXAM- Next Class