The accounting system produces information used by businesses to make decisions. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Key Terms free enterprise system profit loss entrepreneur capital Exploring the World of Business Section 2.1 Key Terms free enterprise system profit loss entrepreneur capital service business merchandising business manufacturing business sole proprietorship partnership corporation charter Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 free enterprise system The activities that a person does well. Free Enterprise System profit The amount of money earned over and above the amount spent to keep the business operating. Profit Loss loss When a business spends more money than it earns. Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 Operate at a profit What a business needs to survive An individual willing to take the risk Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 Inventors entrepreneur A person who transforms ideas for products or services into real-world businesses. Investors Entrepreneurs Roles in a Business Managers Employees Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 Self-Starters Organizational Skills Traits of Entrepreneurs Accounting Skills Marketing Knowledge Glencoe Accounting

The Environment of Business Exploring the World of Business Section 2.1 Do you have good writing and speaking skills? Are you creative or mechanical? Entrepreneur – Who, Me? Are you a self-starter? Do you have accounting or marketing skills? Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 Three Types of Business Operations Service Business Merchandising Business Manufacturing Business manufacturing business A 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. merchandising business A business that buys finished products and resells them to individuals or other businesses. service business A business that provides a needed service for a fee. Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 $ All types of businesses need capital to begin. capital Money that investors, banks, or business owners supply for a business to begin. Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 Three Forms of Business Organization Sole Proprietorship Partnership Corporation sole proprietorship A business owned by one person. partnership A business owned by two or more persons. corporation A business recognized by law to have a life of its own. Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 Advantages Disadvantages Easy to end the business Difficult to manage Being your own boss Overwhelming time commitment Pride of ownership Few fringe benefits No special taxes Limited growth Limited life span Glencoe Accounting

Types and Forms of Businesses Unlimited Liability Any debts or damages incurred by the business are your own personal debts. (Even if you have to sell your home, car, etc.) Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 More advantages More disadvantages More financial resources Unlimited liability Shared management Disagreements among partners Longer survival Difficult to terminate Glencoe Accounting

Types and Forms of Businesses Exploring the World of Business Section 2.1 charter Legal permission to operate. A corporation must obtain a charter. More Advantages More Disadvantages Limited liability Paperwork Size Perpetual life Double taxation Ease of drawing talented employees Difficult to terminate Separation of ownership from management Possible conflict with board of directors Glencoe Accounting

Business Partner

How Should You Choose Your Business Partner? Talk to successful and unsuccessful partnerships to see what works and what did not. Interview prospective partner Skills What contacts, special attributes or resources can they contribute? Evaluate kind of decision maker they are – will we get along?

3 Types of Partnerships General Partnership Limited Partnership Master Limited Partnership

3 Types of Partnerships 1. A general partnership is one in which all owners share in operating the business and in assuming liability for the business’s debts. 50 / 50 40 / 60 30 / 30 / 40 25 / 25 / 25 / 25

3 Types of Partnerships 2. Limited Partnership – Is one with one or more general partners and one or more limited partners

General Partner Owner Unlimited Liability Active in managing the firm

Limited Partner owner Invests $ no management no liability responsibility for losses

Limited Liability The responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

3 Types of Partnerships Master Limited Partnership (MLP) – looks like a corporation in that it acts like a corporation but is taxed like a partnership

Partnership Agreement A written agreement that specifies the who, what, when, where, how and why the partnership is formed so that no misunderstandings arise

Franchise The right to use a specific business’s name and sell its products or services in a given territory Franchisor – Company that develops a product Franchisee – A person who buys the right *must have a franchise agreement*

Franchise Advantages Disadvantages Management assistance Larger start-up costs Nationally recognized name Marketing fees Financial advice & assistance Shared profit/royalty Lower failure rate Management regulation Restrictions on selling Competition from nearby franchises

Key Terms accounting system manual accounting system 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 Glencoe Accounting

The Accounting System Manual Accounting System Accounting: The Universal Language of Business Section 2.2 Manual Accounting System Two types of accounting systems Computerized Accounting System accounting system Designed to collect, document, and report on financial transactions affecting the business. manual accounting system When accounting information is processed by hand. computerized accounting system When accounting information is processed by recording it into a computer. Glencoe Accounting

GAAP (generally accepted accounting principles) The Accounting System Accounting: The Universal Language of Business Section 2.2 What Is GAAP? GAAP (generally accepted accounting principles) The set of rules that all accountants use to prepare financial reports. Glencoe Accounting

financial reports? The Accounting System What Are financial reports Accounting: The Universal Language of Business Section 2.2 What Are financial reports? financial reports Documents that present summarized information about the financial status of a business. Glencoe Accounting

Using Accounting Reports for Making Business Decisions Accounting: The Universal Language of Business Section 2.2 Individuals outside the business who have an interest in the business Two groups that use accounting reports Individuals inside the business Glencoe Accounting

Using Accounting Reports for Making Business Decisions Accounting: The Universal Language of Business Section 2.2 Those interested in the financial accounting reports of a business include: Local, state, and federal government Employees, consumers, and competitors Investors financial accounting The type of accounting that focuses on reporting information to external users. Glencoe Accounting

Using Accounting Reports for Making Business Decisions Accounting: The Universal Language of Business Section 2.2 Purchasing decisions Hiring decisions Production decisions Payments Sales Collections Management accounting reports are prepared for managers involved in: management accounting The type of accounting that focuses on reporting information to management; often referred to as accounting for internal users of accounting information. Glencoe Accounting

Accounting Assumptions Accounting: The Universal Language of Business Section 2.2 GAAP Assumptions 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. Business entity Accounting period Going concern Glencoe Accounting

Accounting Assumptions Accounting: The Universal Language of Business Section 2.2 GAAP Assumptions accounting period The period of time covered by an accounting report. Business entity Accounting period going concern The accounting assumption that a business is expected to operate indefinitely. Going concern Glencoe Accounting

Step 1 Step 2 Step 3 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? 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) Glencoe Accounting

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. 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. The business has the promise of only one owner to use to try to secure money from investors or lenders. The owner bears all of the risk of loss, or unlimited liability. The owner could lose personal equity if the business fails. The most talented potential employees would tend to prefer the job security of working in larger firms. Glencoe Accounting

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