Chap 2 class notes

The World of Business &ACCOUNTING

Chapter 2Last update: 8/18/12

Essential Outcomes2. Compare and contrast the rules

governing accounting decisions with 85% accuracy by:

a) Defining the role of profit, risking-taking & entrepreneur in U.S. economy

b) Identifying the differences among sole proprietorship, partnership & corporate forms of business

c) Applying the three basic accounting assumption to specific situations

d) Defining the accounting terms for this chapter

The Free Enterprise Businesses

Free enterprise system:: people are free to produce the goods and services they choose

Capital: money supplied to business by investors, banks, or owners of a business

Entrepreneur: A person who owns their own business.

Profit: the amount of money earned over & above the amount spent to keep the business operating

Loss: business

spends more money than it

earns

Profit: business spends less money than it earns

Three major Kinds of Free

Enterprise Businesses

1. Service business: provides a needed service for a fee

Doctors, Lawyers, Accounta

nt.

RealtorsSporting Industry

Car Services

2.Merchandising business: buys finished products and resells them to individuals or businesses

Examples: grocery stores,

sporting goods stores, gas stations,

clothing stores

3.Manufacturing business: buys raw materials and transforms them into finished products through use of labor and capital

Three major types of Free

Enterprise Businesses

1. Sole proprietorship: single or one owner who runs a business

Usually, these types of

business are small & are

found in areas of service or

merchandising

2. Partnership: business owned by two or more persons who agree to operate business as co-owners

Usually, these types of

business are small and

found in areas of service or

merchandising

3. Corporation: business organization that is recognized by law to have a life of its own

Any size business, but

usually medium to

large

Charter: gives a corporation certain rights and privileges—rules by which to operate—has

“inc” trademark

Accounting & the World of

Free Enterprise

Accounting system: designed to collect, document,

and report on financial transactions affecting the

business

2. Computerized accounting

system: financial

information is entered into a computerized

system

1. Manual accounting system: financial information is recorded by hand

Two Types of Accounting Systems:

Accounting Rules to Live By

CPA:

(Certified Public Accountant)—Credentials

for an accountant that shows s/he passed state test and

can operate as a state recognized accounting

business

Standardized Rules

Standardized Rules

GAAP:

(Generally Accepted Accounting Principles)—

all accountants use same set of rules to prepare financial information for a business

Standardized Rules

Standardized Rules

Financial reports:

Summarized information prepared by

accountants to show financial status of

business

Standardized Rules

Standardized Rules

Three Basic Rules or

Assumptions made by

Accountants

Standardized Rules

Standardized Rules

1. Business Entity Business exists separately

from its owner’s personal holdings

Financial statements only have information related to business

Personal finances can NOT be included into business finances

Standardized Rules

Standardized Rules

2. Accounting Period

• For financial reporting purposes, life and activities of business are divided into specific periods of time

• Most common accounting period is one year

• Allows businesses to compare earnings from one accounting period to another

Standardized Rules

Standardized Rules

3. Going Concern:

• Accountants assume business has ability to survive and operate for indefinite period of time• Thus, business has “ongoing” life of its own, separate from owner or owners

Standardized Rules

Standardized Rules

Two Major areas of

Accounting

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1. Financial accounting

Focuses on reporting

information to external

users

2. Management accounting

Focuses on reporting

information to management

(accounting for internal use)

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On to our hands on work

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