The World of Business and Accounting Making Accounting Relevant Owning and operating a business takes special skills and traits. Making Accounting Relevant Owning and operating a business takes special skills and traits. What skills do you think are important for the person who owns and operates a business?

Section 1Exploring the World of Business What You’ll Learn  Profit and risk-taking.  The free enterprise system.  Starting and running your own business.  Three types of business operations.  Three forms of business organization. What You’ll Learn  Profit and risk-taking.  The free enterprise system.  Starting and running your own business.  Three types of business operations.  Three forms of business organization.

Why It’s Important In order to participate in the world of business, you’ll want to understand how businesses are formed, organized, and operated. Why It’s Important In order to participate in the world of business, you’ll want to understand how businesses are formed, organized, and operated. Section 1 Exploring the World of Business (cont'd.)

Key Terms  free enterprise system  profit  loss  entrepreneur  capital  service business  merchandising business  manufacturing business  sole proprietorship  partnership  corporation  charter Key Terms  free enterprise system  profit  loss  entrepreneur  capital  service business  merchandising business  manufacturing business  sole proprietorship  partnership  corporation  charter

The Environment of Business In a free enterprise system people are free to produce the goods and services they choose. The Environment of Business In a free enterprise system people are free to produce the goods and services they choose.  Nike  IBM  local video rental store  clothing boutiques  local grocers  Tower Records  Nike  IBM  local video rental store  clothing boutiques  local grocers  Tower Records Section 1 Exploring the World of Business (cont'd.)

The Need for Profit The amount of money earned over and above the amount spent to keep the business operating is called profit. Businesses that spend more money than they earn operate at a loss. The Need for Profit The amount of money earned over and above the amount spent to keep the business operating is called profit. Businesses that spend more money than they earn operate at a loss. The Need for a Risk-Taker Entrepreneurs transform ideas for products or services into real-world businesses. The Need for a Risk-Taker Entrepreneurs transform ideas for products or services into real-world businesses. Section 1 Exploring the World of Business (cont'd.)

Entrepreneurship: Who Me? Have you ever considered owning a business? Entrepreneurship: Who Me? Have you ever considered owning a business? Pros  You are your own boss  You create opportunities for earning money.  You create and control your work schedule.  You choose the people you serve.  You select the people who work with you.  You benefit from the rewards of your own hard work.  You choose your own work hours. Pros  You are your own boss  You create opportunities for earning money.  You create and control your work schedule.  You choose the people you serve.  You select the people who work with you.  You benefit from the rewards of your own hard work.  You choose your own work hours. Cons  You probably need to work long hours.  You lose the security of steady wages and medical benefits an employer provides.  You market your own services or products.  You pay for your own operating expenses.  You must be motivated and energetic each day.  You face the possibility of losing money. Cons  You probably need to work long hours.  You lose the security of steady wages and medical benefits an employer provides.  You market your own services or products.  You pay for your own operating expenses.  You must be motivated and energetic each day.  You face the possibility of losing money. Section 1 Exploring the World of Business (cont'd.)

Types of Business Operations  Service Businesses  Merchandising Businesses  Manufacturing Businesses Types of Business Operations  Service Businesses  Merchandising Businesses  Manufacturing Businesses Section 1 Exploring the World of Business (cont'd.)

Forms of Business Organizations  Sole proprietorship  Partnership  Corporation  Sole proprietorship  Partnership  Corporation Section 1 Exploring the World of Business (cont'd.)

Sole Proprietorship A business owned by one person. Advantages:  Easy to set up  All profits go to owner  Owner has total control  Few regulations to follow Advantages:  Easy to set up  All profits go to owner  Owner has total control  Few regulations to follow Disadvantages:  Limited expertise  Hard to raise money  Owner has all the risks  Hard to attract talented employees Disadvantages:  Limited expertise  Hard to raise money  Owner has all the risks  Hard to attract talented employees Section 1 Exploring the World of Business (cont'd.)

Partnership A business owned by two or more persons, who agree to operate the business as co-owners. Advantages:  Easy to start  Skills and talents are pooled  More money available Advantages:  Easy to start  Skills and talents are pooled  More money available Disadvantages:  Conflicts between partners  Profits must be shared  Owners share all risks Disadvantages:  Conflicts between partners  Profits must be shared  Owners share all risks Section 1 Exploring the World of Business (cont'd.)

Corporation A business organization that is recognized by law to have a life of its own. Advantages:  Easier to raise money  Easy to expand  Easy to transfer ownership  Losses limited to investment Advantages:  Easier to raise money  Easy to expand  Easy to transfer ownership  Losses limited to investment Disadvantages:  Costs more to start up  Complex to organize  More regulations  Higher taxes Disadvantages:  Costs more to start up  Complex to organize  More regulations  Higher taxes Section 1 Exploring the World of Business (cont'd.)

Check Your Understanding Would you say that the advantages of being an entrepreneur outweigh the disadvantages or vice versa? Why? Section 1 Exploring the World of Business (cont'd.)

You work as a sales clerk at the Gap. The fall merchandise has come in, and the store manager has asked you to price the crewneck sweaters at 25% over cost. A sweater costs 15 wholesale. What is the retail price? With a 6 percent sales tax, what is the cost of the sweater to the customer? If the Gap sold 100 sweaters at that price, what would the profit be? Section 1 Exploring the World of Business (cont'd.)

Section 2Accounting: The Universal Language of Business What You’ll Learn  How the accounting system works.  Who uses financial accounting reports.  Who uses management accounting reports.  How accounting is used to help make business decisions.  What assumptions provide the foundation for accounting systems. What You’ll Learn  How the accounting system works.  Who uses financial accounting reports.  Who uses management accounting reports.  How accounting is used to help make business decisions.  What assumptions provide the foundation for accounting systems.

Why It’s Important Understanding accounting systems is the key to understanding business. Why It’s Important Understanding accounting systems is the key to understanding business. Section 2 Accounting: The Universal Language of Business (cont'd.) Key Terms  accounting system  manual accounting system  computerized accounting system  GAAP  financial reports Key Terms  accounting system  manual accounting system  computerized accounting system  GAAP  financial reports  financial accounting  management accounting  business entity  accounting period  going concern  financial accounting  management accounting  business entity  accounting period  going concern

The Accounting System Designed to collect, document, and report on financial transactions affecting the business. The Accounting System Designed to collect, document, and report on financial transactions affecting the business. Section 2 Accounting: The Universal Language of Business (cont'd.)  manual accounting system  computerized accounting system  generally accepted accounting principles (GAAP)  financial reports  manual accounting system  computerized accounting system  generally accepted accounting principles (GAAP)  financial reports

How the Accounting System Works Section 2 Accounting: The Universal Language of Business (cont'd.) Inputs Source Documents Inputs Source Documents Processing Tasks Processing Tasks Outputs Financial and Management Accounting Reports Outputs Financial and Management Accounting Reports  Financial condition  Results of operations  Investments by and distributions to owners  Financial condition  Results of operations  Investments by and distributions to owners  Analyzing  Classifying  Recording  Analyzing  Classifying  Recording  Checks  Invoices  Sales Slips  Receipts  Checks  Invoices  Sales Slips  Receipts

Using Accounting Reports for Making Business Decisions There are two groups that use accounting reports: Using Accounting Reports for Making Business Decisions There are two groups that use accounting reports: Section 2 Accounting: The Universal Language of Business (cont'd.)  individuals outside the business who have an interest in the business  individuals inside the business  individuals outside the business who have an interest in the business  individuals inside the business

Financial Accounting Financial accounting focuses on reporting information to external users. Financial Accounting Financial accounting focuses on reporting information to external users. Section 2 Accounting: The Universal Language of Business (cont'd.) Who Uses Financial Accounting Reports?  potential investors  individuals and institutions, such as banks, that loan money to a business  local, state, and federal governments  workers, consumers, union leaders, and competitors  potential investors  individuals and institutions, such as banks, that loan money to a business  local, state, and federal governments  workers, consumers, union leaders, and competitors

Management Accounting Management accounting focuses on reporting information to management. Management Accounting Management accounting focuses on reporting information to management. Section 2 Accounting: The Universal Language of Business (cont'd.)  Managers

Accounting Assumptions Section 2 Accounting: The Universal Language of Business (cont'd.)  business entity – the business records are held independently of personal financial activities  accounting period – most common is one year  going concern – assumes the business has the ability to survive and operate indefinitely  business entity – the business records are held independently of personal financial activities  accounting period – most common is one year  going concern – assumes the business has the ability to survive and operate indefinitely

Check Your Understanding Consider creating an “accounting system” for your personal finances. Check Your Understanding Consider creating an “accounting system” for your personal finances. 1. How would you organize the system? 2. What inputs would there be? 3. How might you record your activities? 4. How might you report on those activities? 1. How would you organize the system? 2. What inputs would there be? 3. How might you record your activities? 4. How might you report on those activities? Section 2 Accounting: The Universal Language of Business (cont'd.)