1. $ $ $ $ Section 2 Accounting: The Universal Language of Business
Chapter 2
Section 2 Accounting: 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. $ $

2. $ $ $ $ Why It’s Important Key Terms Chapter 2
Section 2 Accounting: The Universal Language of Business (cont'd.)
Chapter 2 $
Why It’s Important
Understanding accounting systems is the key to understanding business. $
Key Terms
accounting system
manual accounting system
computerized accounting system
GAAP
financial reports
financial accounting
management accounting
business entity
accounting period
going concern $
ACCOUNTING SYSTEM: designed to collect, document and report on financial transactions affecting the business
MANUAL ACCTY SYSTEM: accounting info is processed by hand
COMPUTERIZED ACCTG SYSTEM: financial info is recorded by entering it into a computer
GAAP: Pronounced “gap” generally accepted accounting principles…all accountants use the same set of rules to prepare their info in a form understood by
those interested in the operations and financial condition of a business
FINANCIAL REPORTS: summarized info about the financial status of a business
FINANCIAL ACCOUNTING: focuses on reporting info to external users, financial acctg reports are prepared for individuals not directly involved in the day-
to-day operations of the business. These reports are prepared using GAAP.
MANAGEMENT ACCOUNTING: focuses on reporting info to management, often referred to as acctg for internal users of acctg info. Prepared for managers involved in making the day-to-day operating decisions like purchasing, hiring, production, payments, sales, and collections.
BUSINESS ENTITY: A separate entity, exists independently of its owner’s personal holdings. Acctg records and reports are maintained separately and
contain financial info related only to the business. The business owner’s personal financial activities or other investments aren’t included
in the reports of the business.
ACCOUNTING PERIOD: the life of a business is divided into specific periods of time. The period of time covered by an acctg report is an acctg period. It
can cover one month or three months (quarterly), but the most common period is one year. This assumption is necessary when
accountants assign the cost of buildings and equipment over the estimated period of time they will be used. Comparisons of reports
from one period to the next makes the acctg period concept necessary.
GOING CONCERN: A business is expected to continue as a going concern, unless there is evidence to the contrary, accountants assume that a business has
the ability to survive and operate indefinitely…many businesses fail within the first five years, the accountant assumes the business will
continue to operate unless it is clear that it cannot survive $

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

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

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

6. $ $ $ $ Financial Accounting Who Uses Financial Accounting Reports?
Section 2 Accounting: The Universal Language of Business (cont'd.)
Chapter 2
Chapter 2 $
Financial Accounting
Financial accounting focuses on reporting information to external users. $
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 $

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

8. $ $ $ $ Accounting Assumptions Chapter 2 Chapter 2 business entity
Section 2 Accounting: The Universal Language of Business (cont'd.)
Chapter 2
Chapter 2 $
Accounting Assumptions $
business entity
accounting period
going concern $
KEY POINT: Each business sets up an accounting system according to its specific needs, but all businesses follow GAAP. These generally accepted acctg principles are based on three very important assumptions summarized by:
BUSINESS ENTITY: A separate entity, exists independently of its owner’s personal holdings. Acctg records and reports are maintained separately and
contain financial info related only to the business. The business owner’s personal financial activities or other investments aren’t included
in the reports of the business.
ACCOUNTING PERIOD: the life of a business is divided into specific periods of time. The period of time covered by an acctg report is an acctg period. It
can cover one month or three months (quarterly), but the most common period is one year. This assumption is necessary when
accountants assign the cost of buildings and equipment over the estimated period of time they will be used. Comparisons of reports
from one period to the next makes the acctg period concept necessary.
GOING CONCERN: A business is expected to continue as a going concern, unless there is evidence to the contrary, accountants assume that a business
has the ability to survive and operate indefinitely…many businesses fail within the first five years, the accountant assumes the
business will continue to operate unless it is clear that it cannot survive $

9. $ $ $ $ Check Your Understanding 1. How would you organize the system?
Section 2 Accounting: The Universal Language of Business (cont'd.)
Chapter 2
Chapter 2 $
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? $ $