accounting ch 2

Copyright © by McGraw-Hill Education. All rights reserved. Accounting

The accounting system produces information used by businesses to make decisions.


Describe profit, risk-taking, and entrepreneurs.

Describe service, merchandising, and manufacturing businesses.

Compare the sole proprietorship, partnership, and corporate forms of businesses.

List the advantages and disadvantages of each form of business organization.

Describe the purpose of accounting.

Explain financial and management accounting.

Describe the three basic accounting assumptions.


Key Terms

free enterprise system

profit

loss

entrepreneur

capital

service business

Exploring the Worldof Business

Section 2.1

merchandising business

manufacturing business

sole proprietorship

partnership

corporation

charter



The Environment of Business

Free Enterprise System

Profit Loss

free enterprise systemThe activities that a person

does well.

profitThe amount of money earned

over and above the amount spent to keep the business operating.

lossWhen a business spends more

money than it earns.

Section 2.1




Section 2.1

What a business needs to survive

Operate at a profit

An individual willing to take the risk




Section 2.1

Roles ina Business

Inventors

Investors

EmployeesManagers

Entrepreneurs

entrepreneurA person who

transforms ideas for products or services

into real-world businesses.




Section 2.1




Section 2.1

Traits of Entrepreneurs

Self-Starters OrganizationalSkills

MarketingKnowledge

AccountingSkills




Section 2.1

Entrepreneur –Who, Me?

Are you creative or mechanical?

Are you a self-starter?

Do you have good writing and speaking skills?

Do you have accounting or marketing skills?



Types and Forms of Businesses

Section 2.1

Three Types of Business Operations

ServiceBusiness

MerchandisingBusiness

ManufacturingBusiness

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.




Section 2.1

$All types of businesses need capital to begin.

capitalMoney that investors, banks, or business owners supply for a

business to begin.


sole proprietorshipA business owned by one person.

partnershipA business owned by two or more persons.

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



Section 2.1

Three Types of Business Organization

SoleProprietorship

Partnership Corporation




Section 2.1




A corporation must obtain a charter.

charterLegal permission to operate.

Section 2.1


Accounting: The Universal Language of Business

Section 2.2

Key Terms

accounting system

manual accounting system

computerized accounting system

GAAP

financial reports

financial accounting

management accounting

business entity

accounting period

going concern



Section 2.2

The Accounting System

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.



Section 2.2


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

financial reports.

What Is

GAAP?




Section 2.2

What Are

financial reports?

financial reportsDocuments that present summarized information

about the financial status of a business.


Using Accounting Reports for Making Business Decisions


Section 2.2

Two groups that useaccounting reports

Individuals outside the business who have an interest in the business

Individuals inside the business




Section 2.2

Those 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.




Section 2.2

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


Section 2.2

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.


Accounting Assumptions


Section 2.2

GAAP Assumptions

Business entity

Accounting period

Going concern

accounting periodThe period of time covered by

an accounting report.

going concernThe accounting assumption that a business is expected to operate

indefinitely.


Question 1

DePalm Pizza had the following cash transactions yesterday.Receipts (money in): Checks: $650.00, Cash $500.00Expenditures (money out): Gas and oil for delivery vehicle $75.98, supplies $477.50, salaries $380.00, and miscellaneous expenditures $123.76.

Did DePalm have a “profit” or “loss” for the day?

Step 1 Calculate the total receipts. $650.00 + $500.00 = $1,150

Step 2 Calculate the total expenditures. $75.98 + $477.50 + $380.00 + $123.76 = $1,057.24

Step 3 Calculate the net profit (loss). $1,150.00 - $1,057.24 = $92.76 profit (Receipts exceed expenditures)


Question 2

Sole proprietorship is the most popular form of business ownership, yet very few large businesses are sole proprietorships. Give at least two reasons to explain this.

1. Sole proprietorships have the expertise of only the owner to call on. For example, the owner may be a great accountant but only a fair salesperson.

2. The business has the promise of only one owner to use to try to secure money from investors or lenders.

3. The owner bears all of the risk of loss, or unlimited liability. The owner could lose personal equity if the business fails.

4. The most talented potential employees would tend to prefer the job security of working in larger firms.

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