1. THE WORLD OF BUSINESS AND ACCOUNTING Chapter 2

2. The Environment of Business  Free Enterprise System – An economy where people are free to produce the goods and services they choose  Profit – Money earned above and beyond money spent to keep the business operating  Loss – Businesses that spend more than they earn experience this Revenue - Expenses_____ Net Income (Loss)

3. The Environment of Business  Entrepreneur – A person who transforms ideas for products or services into a business  Aka – enterpriser, businessperson  Pros and Cons

4. Types and Forms of Businesses  Capital – Money that investors, banks, or business owners provide a company  Service Business – Provides a needed service for a fee  Ex: Lawn mowing service, hair salon, doctor’s office, etc.  Merchandising Business – Buys finished products and resells them to individuals or other businesses.  Ex: Target, Meijer, etc.

5. Types and Forms of Businesses  Manufacturing Business – Buys raw materials, uses labor and machinery to transform them into finished products and then sells those finished products.  Ford, GM, Snap On Tools, Levi Strauss, etc.

6. Types and Forms of Businesses  Sole Proprietorship – Business owned by one person  Ex: Cal’s Hot Dog Stand  Partnership – Business owned by two or more persons (partners) who run the business as co- owners  Ex: Law Firm - Dewey, Cheatham and Howe

7. Types and Forms of Businesses  Corporation – A business recognized by law to have a life of its own.  Ex: Microsoft, PepsiCo, etc.  Shareholders  Doesn’t have to be huge  Charter – Legal permission from the state to operate as a corporation

8. The Accounting System  Accounting System – Designed to collect, document and report on financial transactions affecting the business  Manual Accounting System  Computerized Accounting System  GAAP – Generally Accepted Accounting Principles  Financial Reports – Summarized information about the financial status of a business.

9. Using Accounting Reports  Who uses Accounting Reports?  Financial Accounting – Focuses on reporting information for external users  Management Accounting – Focuses on reporting information for internal users

10. Accounting Assumptions  Business Entity – A business exists independently of its owner’s personal holdings  Accounting Period – A period of time covered by an accounting report  Monthly, Quarterly, Annually  Consistent  Going Concern – The business is expected to continue  aka – Continuity Assumption