THE WORLD OF BUSINESS AND ACCOUNTING

THE ENVIRONMENT OF BUSINESS Free Enterprise System  People are free to produce the goods and/or services they wish Business must do two things to survive:  Operate at a profit  Attract and keep an individual willing to take the risk to run it

ENTREPRENEURSHIP: IS IT IN YOU? Pros Be your own boss Control your work schedule Benefit from your hard work Select people you work with. Cons Work long hours Must be motivated and energetic each day Face the possibility of losing money Entrepreneurs transform ideas for products or services into real-world business but entrepreneurship is not for everyone.

TYPES OF BUSINESS OPERATIONS Service Business – provides a needed service for a fee. Merchandising Business – buys finished products and resells them to customers. Manufacturing Business – buys raw materials and transforms them into finished products, then sells the finished products to customers.

FORMS OF BUSINESS ORGANIZATION To start a business, a potential owner must have a sufficient amount of money (capital) and must choose an appropriate form of business organization. Each form of organization has advantages and disadvantages.

SOLE PROPRIETORSHIP Advantages Easy to set up All profits go to owner Owner has total control Few regulations to follow Disadvantages Limited expertise Hard to raise money Owner has all the risks Hard to attract talented employees A business owned by one person.

PARTNERSHIP Advantages Easy to start Easy to start Skills and talents are pooled Skills and talents are pooled More money available More money availableDisadvantages Conflicts between partners Conflicts between partners Profits must be shared Profits must be shared Owners share all risks Owners share all risks A business owned by two or more persons.

CORPORATION Advantages Easier to raise money Easy to expand Easy to transfer ownership Losses limited to investment Disadvantages Costs more to start up Complex to organize More regulations Higher taxes A business owned by stockholders and recognized by law to have a life of its own.

ACCOUNTING: THE LANGUAGE OF BUSINESS

WHAT IS ACCOUNTING? Planning, recording, analyzing, and interpreting financial information.

ACCOUNTING SYSTEM A planned process to collect, document, and report on financial transaction affecting the business. May be manual or computerized

WHAT ARE GAAP? What would happen if everyone used a different set of rules when driving? Accountants use the same rules to prepare their financial documents and reports. Known as Generally Accepted Accounting Principles or GAAP

HOW ACCOUNTING SYSTEMS WORK InputsProcessingOutputs Source Documents  Checks  Invoices  Sales Slips  Receipts Tasks  Analyzing  Classifying  Recording Financial and Management Accounting Reports  Financial Condition  Results of operations  Investments by and distributions to owners

WHO USES FINANCIAL INFORMATION? Two groups that use accounting reports: II ndividual outside the business who have an interest in the business II ndividual inside the business

ACCOUNTING CONCEPTS Accounting concepts provide a foundation for accounting systems.  Business Entity  Business financial information is kept separate from owner’s personal information.  Unit of Measurement  Business transactions are stated in numbers that have common values  Realization of Revenue  Revenue is recorded at the time goods or services are sold

TECHKNOW CONSULTING Service business Proprietorship

THE ACCOUNTING EQUATION Assets = Liabilities + Owner’s Equity Assets – Anything of value that is owned by a business Examples: Equipment, Vehicles, Buildings, Tools, Computers Equity – Financial rights to the assets of a business 1.Liabilities – an amount owed by a business (debts) 2.Owner’s Equity – the owner’s claims to the assets of a business 4 types of accounts affect owner’s equity: Capital – owner’s investment Drawing – owner’s withdrawl of assets for personal use Revenue – increase in OE from the sales of goods or services Expenses – decrease in OE from normal operation of a business 5. In accounting there are two kinds of equity: liabilities and owner’s equity. Liabilities can be considered equity because the bank or other creditor can legally take assets if the owner does not pay back a debt.

CHAPTER 1 SECTION 2 The Accounting Equation Assets = Liabilities + Owner’s Equity Transaction: Any activity that changes the accounting equation Account: A single item in the accounting equation Account Title: Name given to an account Account balance: The amount in an account Analyzing transactions (Every transaction must answer these questions) 1.What accounts are affected? (Always at least 2) 2.What is the classification of those accounts? (assets, liabilities, owner’s equity) 3.Is the account increased or decreased?

CHAPTER 1 SECTION 2 CONT. August 3. Received cash from owner as an investment, $5,000 1.What accounts? CashKim Park, Capital 2. Classification?AssetOwner’s Equity 3.Increase/Decrease? + + August 3. Paid cash for supplies, $275 1.What accounts? CashSupplies 2. Classification?AssetAsset 3.Increase/Decrease? - + August 7. Bought supplies on account from Supply Depot, $500 1.What accounts? SuppliesAccounts Payable – Supply Depot 2. Classification?AssetLiability 3.Increase/Decrease? + +