1. 0 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 1 Introduction to Accounting Chapter 1You and the World of Accounting Chapter 2The World of Business and Accounting

2. 1 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 The World of Business and Accounting What You’ll Learn  Describe profit, risk-taking, and entrepreneurs.  Describe service, merchandising, and manufacturing businesses.  Compare the sole proprietorship, partnership, and corporate forms of business.  List the advantages and disadvantages of each form of business organization.  Describe the purpose of accounting.  Explain financial and management accounting.  Describe three basic accounting assumptions.  Define the accounting terms introduced in this chapter.

3. 2 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2, Section 1 Exploring the World of Business What Do You Think? Why is the U.S. economy sometimes called a market economy?

4. 3 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea The United States has a free enterprise system with various kinds of businesses. You Will Learn  about the environment of business.  the three types of business operations.  the three forms of business organization. Exploring the World of Business SECTION 2.1

5. 4 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  free enterprise system  profit  loss  entrepreneur  capital  service business  merchandising business  manufacturing business Exploring the World of Business SECTION 2.1

6. 5 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  sole proprietorship  partnership  corporation  charter Exploring the World of Business SECTION 2.1

7. 6 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Environment of Business When you hear the word business, what do you think of? In the U.S. we have a free enterprise system; people are free to produce goods and services and spend money as they wish.free enterprise system 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.profitloss In order to survive, a business must  operate at a profit, and  have an individual willing to take the risk to run it. Exploring the World of Business SECTION 2.1

8. 7 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Need for a Risk-Taker In a business, inventors generate ideas, employees provide labor, and managers supervise. An entrepreneur transforms ideas into actual businesses.entrepreneur What does it take to run a business? Exploring the World of Business SECTION 2.1

9. 8 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Role of Entrepreneurs There are pros and cons to being an entrepreneur. Exploring the World of Business SECTION 2.1

10. 9 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Traits of Entrepreneurs Most entrepreneurs:  are self-starters.  have organizational skills.  have marketing knowledge.  have accounting skills. Exploring the World of Business SECTION 2.1

11. 10 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneur – Who, Me? Have you thought about owning a business? If so, you should ask yourself these questions:  Do you have good writing and speaking skills?  Are you creative or mechanical?  Are you a self-starter?  Do you have accounting or marketing skills? Exploring the World of Business SECTION 2.1

12. 11 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Types and Forms of Business In a free enterprise system, an entrepreneur can choose the type and form of business to run. Exploring the World of Business SECTION 2.1

13. 12 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Types of Business Operations There are three types of business operations:  Service businesses provide services for fees. Service businesses  Merchandising businesses buy and sell finished products. Merchandising businesses  Manufacturing businesses buy materials and make finished products. Manufacturing businesses Each type needs capital (money) from investors, banks, or business owners to begin.capital Exploring the World of Business SECTION 2.1

14. 13 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Forms of Business Organization Most U.S. businesses are organized in one of three ways:  sole proprietorship sole proprietorship  partnership partnership  corporation corporation Exploring the World of Business SECTION 2.1

15. 14 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Sole Proprietorship Sole means “single” and proprietor means “owner.” 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. Exploring the World of Business SECTION 2.1

16. 15 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Partnership When two people enter into an agreement to operate a business as co-owners, a partnership is formed. There are advantages and disadvantages to a partnership. Exploring the World of Business SECTION 2.1

17. 16 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Corporation 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).charter There are advantages and disadvantages to a corporation. Exploring the World of Business SECTION 2.1

18. 17 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  free enterprise system A system in which individuals are free to produce the goods and services they choose.  profit The amount earned above the amount of expense incurred to keep the business operating.  loss The result when a business spends more money than it earns.  entrepreneur A person who transforms ideas for products or services into real-world business. Exploring the World of Business SECTION 2.1

19. 18 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  capital Money supplied by investors, banks, or owners of a business.  service business A business that provides a needed service for a fee.  merchandising business A business that buys finished goods and resells them to individuals or other businesses. Exploring the World of Business SECTION 2.1

20. 19 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  manufacturing business A business that buys raw materials and transforms them into financial products by using labor and machinery.  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. Exploring the World of Business SECTION 2.1

21. 20 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  corporation A business organization recognized by law to have a life of its own.  charter The 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. Exploring the World of Business SECTION 2.1

22. 21 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2, Section 2 Accounting: The Universal Language of Business What Do You Think? What kinds of financial decisions do you make? What information do you use to make decisions?

23. 22 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea The accounting system produces information used to make decisions. You Will Learn  how the accounting system works.  how decision makers use accounting reports.  three important accounting assumptions. Accounting: The Universal Language of Business SECTION 2.2

24. 23 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  accounting system  manual accounting system  computerized accounting system  GAAP  financial reports  financial accounting  management accounting  business entity  accounting period  going concern Accounting: The Universal Language of Business SECTION 2.2

25. 24 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Accounting System The accounting system is designed to collect, document, and report on financial transactions.accounting system There are two types of accounting systems:  manual accounting system manual accounting system  computerized accounting system computerized accounting system Accountants must follow GAAP rules issued by the Financial Accounting Standards Board (FASB).GAAP Financial reports Financial reports contain a summary of the financial status of a business. Accounting: The Universal Language of Business SECTION 2.2

26. 25 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Using Accounting Reports for Making Business Decisions Accounting provides financial information about a business or organization. There are two groups that use accounting reports:  individuals outside the business who have an interest in the business  individuals inside the business Accounting: The Universal Language of Business SECTION 2.2

27. 26 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Financial Accounting In financial accounting, reports are prepared for individuals outside the business.financial accounting Those interested in the financial accounting reports of a business include  investors,  the local, state, and federal government, and  employees, consumers, and competitors. Accounting: The Universal Language of Business SECTION 2.2

28. 27 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Management Accounting In management accounting, reports are prepared for managers inside the business.management accounting Financial accounting reports help a manager decide:  what to do,  how to do it,  when to do it, and  whether or not the results match the plans for the future. Accounting: The Universal Language of Business SECTION 2.2

29. 28 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Accounting Assumptions As mentioned before, all businesses follow GAAP, which includes three assumptions:  A business is a business entity, separate from its owner’s personal holdings.business entity  There is a set accounting period.accounting period  A business is expected to continue as a going concern, able to survive and operate indefinitely.going concern Accounting: The Universal Language of Business SECTION 2.2

30. 29 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  accounting system A system designed to collect, document, and report on business transactions.  manual accounting system A type of accounting system in which information is processed by hand.  computerized accounting system A type of accounting system in which information is recorded by entering it into a computer. Accounting: The Universal Language of Business SECTION 2.2

31. 30 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  GAAP The set of rules that all accountants use to prepare financial reports.  financial reports Documents that present summarized information about the financial status of a business.  financial accounting The type of accounting that focuses on reporting information to external users. Accounting: The Universal Language of Business SECTION 2.2

32. 31 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  management accounting The type of accounting that focuses on reporting information to management; often referred to as accounting for internal users of accounting information.  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: The Universal Language of Business SECTION 2.2

33. 32 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  accounting period The period of time covered by an accounting report.  going concern The accounting assumption that a business is expected to operate indefinitely. Accounting: The Universal Language of Business SECTION 2.2

34. 33 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 DePalm Pizza had the following cash transactions yesterday. Receipts (money in): Checks: $650.00, Cash $500.00 Expenditures (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? Chapter 2 Review CHAPTER 2

35. 34 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 Did DePalm have a “profit” or “loss” for the day? Answer 1 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) Chapter 2 Review CHAPTER 2

36. 35 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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. Chapter 2 Review CHAPTER 2

37. 36 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 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. Chapter 2 Review CHAPTER 2

38. 37 Glencoe Accounting Unit 1 Chapter 2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary