1. The World of Business and Accounting
Chapter 2

2. Section 1

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

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

5. 3 Types of Business Operations

6. 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

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

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

9. 3 Types of Business Organizations

10. 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

11. 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

12. 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

13. Section 2

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

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

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

17. 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

18. 3 Accounting Assumptions

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

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

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