Unit 1 Introduction to Accounting - Mrs. Ingram's Class ...mrsingramsclassblog.weebly.com/uploads/2/2/7/0/22703680/...Compare the sole proprietorship, partnership, and corporate forms

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

Unit 1 Introduction to Accounting

Chapter 1 You and the World of Accounting

Chapter 2 The World of Business and Accounting


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.


Chapter 2, Section 1 Exploring the World of Business

What Do You Think? Why is the U.S. economy sometimes called a market economy?


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


Key Terms §  free enterprise system §  profit §  loss §  entrepreneur §  capital §  service business §  merchandising business §  manufacturing business



Key Terms §  sole proprietorship §  partnership §  corporation §  charter



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. 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. In order to survive, a business must

§  operate at a profit, and §  have an individual willing to take the risk to run it.



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.



Role of Entrepreneurs There are pros and cons to being an entrepreneur.



Traits of Entrepreneurs Most entrepreneurs:

§  are self-starters. §  have organizational skills. §  have marketing knowledge. §  have accounting skills.



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?



Types and Forms of Business In a free enterprise system, an entrepreneur can choose the type and form of business to run.



Types of Business Operations There are three types of business operations:

§  Service businesses provide services for fees. §  Merchandising businesses buy and sell finished

products. §  Manufacturing businesses buy materials and

make finished products. Each type needs capital (money) from investors, banks, or business owners to begin.



Forms of Business Organization Most U.S. businesses are organized in one of three ways:

§  sole proprietorship §  partnership §  corporation



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.



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.



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). There are advantages and disadvantages to a corporation.



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.



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.



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.



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.



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?


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


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 The accounting system is designed to collect, document, and report on financial transactions. There are two types of accounting systems:

§  manual accounting system §  computerized accounting system

Accountants must follow GAAP rules issued by the Financial Accounting Standards Board (FASB). Financial reports contain a summary of the financial status of a business.


SECTION 2.2


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


SECTION 2.2


Financial Accounting In financial accounting, reports are prepared for individuals outside the business. Those interested in the financial accounting reports of a business include

§  investors, §  the local, state, and federal government, and §  employees, consumers, and competitors.


SECTION 2.2


Management Accounting In management accounting, reports are prepared for managers inside the business. 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.


SECTION 2.2


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.

§  There is a set accounting period. §  A business is expected to continue as a

going concern, able to survive and operate indefinitely.


SECTION 2.2


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.


SECTION 2.2


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.


SECTION 2.2


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.


SECTION 2.2


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.


SECTION 2.2


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


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)



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.



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.



Resources

Glencoe Accounting Online Learning Center English Glossary Spanish Glossary