The World of Business and Accounting

Chapter 2

Section 1

Free enterprise system

People are free to produce the goods and services they

choose.

Capital

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

3 Types of Business

Operations

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 ProprietorshipOne Owner

Advantages Disadvantages

• 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

PartnershipsTwo or more owners

Advantages Disadvantages

• Easy to start

• Skills and talents are pooled

• More money available

• Conflicts between partners

• Profits must be shared

• Owners share all risks

CorporationsBusiness 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.

Financial Reports

Summarized information about the financial status of a business.

2 Groups use financial reports

1. External UsersFinancial Accounting - focuses on reporting information to external users.

Ex. Investors, Banks, Government

2. Internal UsersManagement Accounting - focuses on reporting information to internal users.

Ex. Managers, Owners

3 Accounting Assumptions

Business Entity

Exists independently of its owner’s personal holdings.

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.