Chapter 2 Accounting Exam Review The World of Business and Accounting

1. Chapter 2 AccountingExam ReviewThe World of Business and Accounting Mr. Sherpinsky Council Rock High School Business, Computers, & Information Technology

2. Vocabulary to Know! Key Terms • free enterprise system • profit • loss • entrepreneur • capital • service business • merchandising business • manufacturing business Key Terms • sole proprietorship • partnership • corporation • charter

3. The Environment of Business The Environment of Business 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 do two things… • operate at a profit, and • have an individual willing to take the risk to run it.

4. Traits of Entrepreneurs The Need for a Risk-Taker An entrepreneur transforms ideas for products or services into actual (real-world) businesses. Inventors entrepreneur A person who transforms ideas for products or services into real-world businesses. Investors Entrepreneurs Roles ina Business Managers Employees

5. Types and Forms of Business Types of Business Operations There are three types of business operations: • Service businessesprovide services for fees. • Merchandising businessesbuy and sell finished products. • Manufacturing businessesbuy materials and make finished products. 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.

6. Types and Forms of Business Types and Forms of Business In a free enterprise system, an entrepreneur can choose the type and form of business to run. Each type needs capital(money) from investors, banks, or business owners to begin.

7. Forms of Business Organization Sole Proprietorship Sole means “single” and proprietor means “owner.” – Most common in US! • 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.

8. Forms of Business Organization Partnership • When two people or more people enter into an agreement to operate a business as co-owners, a partnership is formed. • There are advantages and disadvantages to a partnership.

9. Forms of Business Organization 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.

10. Review What You’ve Learned 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.

11. Review What You’ve Learned 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. • manufacturing business A business that buys raw materials and transforms them into financial products by using labor and machinery.

12. Review What You’ve Learned Key Terms Review • 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. • 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.

13. Questions for Review Main Idea Accounting: Universal Language of Business The accounting system produces information used to make decisions.

14. Vocabulary to Know! Key Terms • accounting system • manual accounting system • computerized accounting system • GAAP • financial reports • financial accounting • management accounting • business entity • accounting period • going concern

15. The Accounting Systems Manual AccountingSystem 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.

16. Language of Business Accountants must follow GAAP rules issued by the Financial Accounting Standards Board (FASB). What is GAAP? GAAP (generally accepted accounting principles) The set of rules that all accountants use to prepare financial reports.

17. Language of Business What Are financial reports? financial reports Documents that present summarized information about the financial status of a business. Financial reportscontain a summary of the financial status of a business. Most common time-period for reports is annual.. (Yearly)

18. Language of Business Using Accounting Reports for Making Business Decisions Accounting provides financial information about a business or organization. Individuals outside the business who have an interest in the business • investors, • the local, state, and federal government, and • employees, consumers, and competitors. Two groups that useaccounting reports Individuals inside the business • managers, • owners

19. Making Business Decisions 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.

20. Making Business Decisions • 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.

21. Accounting Assumptions Three 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

22. Review What You’ve Learned 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.

23. Review What You’ve Learned 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. • management accounting The type of accounting that focuses on reporting information to management; often referred to as accounting for internal users of accounting information.

24. Review What You’ve Learned Key Terms Review • 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 period The period of time covered by an accounting report. • going concern The accounting assumption that a business is expected to operate indefinitely.

25. Questions? • EXAM- Next Class