The World of Business & Accounting 11/18/2018 The World of Business & Accounting Chapter 2 Make a list of several local businesses & write their names down… Identify them as either a service, manufacturing, or merchandising business

Exploring the World of Business (2.1) 11/18/2018 Exploring the World of Business (2.1) Free enterprise system What kinds of risk are involved in running a business? Profit Loss The need for profit The need for a risk-taker Role of entrepreneurs Traits of entrepreneurs 1. Possibility of losing money invested in the business, making legally questionable decisions 1a. Amount of money earned over & above the amount spent to keep the business operating. 1b. Businesses that spend more money than they earn 2. To pay for raw materials, labor, equipment, utilities, & rent…the selling price must be high enough to cover all costs. 3. Person who transforms ideas for products or services into real-world business. Owning a business can offer flexible schedules, self-direction, and financial gain…see figure 2.1 (pros & cons of entrepreneurship) 4. motivated, self-starters, risk-taking, organized, marketing knowledge, & accounting skills

Types & Forms of Businesses 11/18/2018 Types & Forms of Businesses Service – provides a needed service for a fee Merchandising – buy finished products & resells them to individuals or other businesses. Manufacturing – buy raw materials, uses labor & machinery to transform them into finished products to individuals or other businesses. Capital- money supplied by investors, banks, or business owners First…what do businesses do and how are they organized? ex. Travel agencies, hair salons, repair shops, real estate offices, and medical centers Car dealers, grocery stores, etc.

Forms of Business Organization 11/18/2018 Forms of Business Organization What new businesses in our area have recognized a need? What needs exist in the community that an entrepreneur could address? Sole proprietorship Adv/disadv Partnership Corporation Charter – legal permission from state to operate Easy to start up, little or no legal paperwork required, you’re the boss, all profits go to owner Owned by two or more people who agree to operate the business as co-owners…adv – easy to set up, pooled skills & talents, more money available…disadv – conflict, shared profits, shared risks Business recognized by law to have a life of its own. Must get permission from the state to operate. Adv – easier to raise money, easy to expand, easy to transfer ownership…disadv – more costs to start, more complex to organize, more regulations, higher taxes

Accounting: The Universal Language of Business (2.2) 11/18/2018 Accounting: The Universal Language of Business (2.2) What would happen if everyone used a different set of rules when driving? The Accounting System Manual accounting system Computerized accounting system GAAP (generally accepted accounting principles) Financial reports 1. GAAP guides people through financial information that is presented in a consistent way from one company to another. 2a. Processed by hand 2b. Recorded by entering it into a computer 3. All accountants follow the same set of rules to prepare financial reports. 4. Summarized information about the financial status of a business.

Figure 2.7 (How the Accounting System Works) 11/18/2018 Figure 2.7 (How the Accounting System Works) Inputs - Processing  Outputs Source Documents Checks Invoices Sales slips Receipts Tasks Analyzing Classifying Recording Financial & Management Accounting Reports Financial condition Investments by and distributions to owners

Using Accounting Reports for Making Business Decisions 11/18/2018 Using Accounting Reports for Making Business Decisions Who uses accounting reports? These reports have a wide audience Two groups Individuals outside the business who have an interest in the business Individuals inside the business People who invest in or loan money to a business or are asked to do so, people who have any kind of interest in the business & people who work for the business.

11/18/2018 Financial Accounting Focuses on reporting information to external users Reports are prepared for individuals not directly involved in the day-to-day operations of the business Investors, banks than loan money to business, all levels of government, consumers, union leaders, & competitors

Management Accounting 11/18/2018 Management Accounting Focuses on reporting information to management Reports are prepared for managers involved in making the day-to-day operating decisions like purchasing, hiring, production, payments, sales, & collections They need information so they can decide what to do, how to do it, when to do it, & whether or not the results match the plans for the future

Accounting Assumptions 11/18/2018 Accounting Assumptions Business entity Exists independently of its owner’s personal holdings Accounting period A period of time covered by an accounting report…can cover one month, a quarter, or a year (most common) Going concern – although many businesses fail within the first five years, accountants assume the business will continue to operate An assumption is something taken for granted as true. 2. This assumption is necessary when accountants assign the cost of buildings and equipment over the estimated period of time they will be used. Comparison of reports from one period to the next also makes the accounting period concept necessary. 3. Unless there is evidence to the contrary, accountants assume that a business has the ability to survive and operate indefinitely.