Business Accounting Chapter 2

Free Enterprise System

CHOICE: produce what you want & use money as you wish

INNOVATION: new and better products and services

COMPETITION: businesses compete and try to make profit

ENTREPRENEURSHIP: taking risks on new ideas in business and transforming them into real-world applications

Profit and Loss

Profit: money earned above amount spent, needed to continue operating in long term

Loss: more costs than earnings

Three types of businesses:

Service: provides service for fee

Merchandising: resells final goods to consumer

Manufacturing: turns raw material into finished product

Capital: money invested in a business by an owner

Three forms of business organization: Sole Proprietorship Partnership Corporation

Sole Proprietorship has only one owner oldest and most common; easiest to form owner keeps profit

Partnership bound by partnership agreement money to be invested responsibilities division of profits and losses

Corporation needs charter has life of its own owned by shareholders (permission from state) has life of its own owned by shareholders many start as sole proprietorship or partnership

The Role of Accounting record and report accurate, timely, useful, financial information as it relates to the profits and losses of a business   Accounting is the language of business.

Generally Accepted Accounting Principles (GAAP) Basic accounting rules apply to all businesses. Different businesses may use different accounting systems but follow same rules. 

Steps in an accounting system collect and verify source documents analyze business transaction what did we get, what did we give? journalize transaction (post to the ledger) classify (trial balance) prove  

(worksheet) summarize financial reporting adjust close post-closing trial balance

Users of financial information: government unions management creditors   customers owner investors

Financial Accounting: Management Accounting: Types of Accounting Financial Accounting: external users Management Accounting: internal users

Accounting Assumptions

accounting records contain only information related to the business entity business will continue to operate as a going concern

money amounts of fixed buying power are the unit of measure for transactions the time period covered by an accounting report is a fiscal period or accounting period