The World of Business and Accounting Chapter 2

Section 1

Free enterprise system People are free to produce the goods and services they choose.

Money supplied by investors, banks, or owners of a business. Capital Money supplied by investors, banks, or owners of a business.

3 Types of Business Operations

Provides a service for a fee Hair Salons Repair Shops Lawn Companies Service Business Provides a service for a fee Hair Salons Repair Shops Lawn Companies

Merchandising Business Sells a finished product Department Stores Car Dealers Publix Walgreens

Manufacturing Business Buys raw materials (wood, iron, steel, oil) and transforms them into a finished product Bakery Paper Mill Steel Mill Oil Company

3 Types of Business Organizations

Sole Proprietorship One Owner Disadvantages Limited expertise Easy to set up All profits go to the owner Owner has total control Few regulations to follow Limited expertise Hard to raise money Owner has all the risks Hard to attract talented employees

Partnerships Two or more owners Disadvantages Easy to start Skills and talents are pooled More money available Conflicts between partners Profits must be shared Owners share all risks

Corporations Business organization that is recognized by law to have a life of its own Advantages Disadvantages Easier to raise money Easy to expand Easy to transfer ownership Losses limited to investment Costs more to start up Complex to organize More regulation Higher taxes

Section 2

Accounting System Is designed to collect, document, and report financial transactions affecting the business.

Generally Accepted Accounting Principles (GAAP) A set of rules that all Accountants use to prepare their reports.

Summarized information about the financial status of a business. Financial Reports Summarized information about the financial status of a business.

2 Groups use financial reports 1. External Users Financial Accounting - focuses on reporting information to external users. Ex. Investors, Banks, Government 2. Internal Users Management Accounting - focuses on reporting information to internal users. Ex. Managers, Owners

3 Accounting Assumptions

Exists independently of its owner’s personal holdings. Business Entity Exists independently of its owner’s personal holdings.

A time period covered by an accounting report. Accounting Period A time period covered by an accounting report.

Going Concern The assumption that a business entity will continue to operate for an indefinite time.