The World of Business
and Accounting
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 1 Exploring the World of Business (cont'd.)
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.)
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
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 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?
Pros
 You are your own boss
 You create opportunities for
earning money.
Cons
 You probably need to work
long hours.
 You create and control your
work schedule.
 You lose the security of
steady wages and medical
benefits an employer
provides.
 You choose the people you
serve.
 You market your own
services or products.
 You select the people who
work with you.
 You pay for your own
operating expenses.
 You benefit from the rewards
of your own hard work.
 You must be motivated and
energetic each day.
 You choose your own work
hours.
 You face the possibility of
losing money.
Section 1 Exploring the World of Business (cont'd.)
Types of Business Operations

Service Businesses – provides a needed service for
a fee.

Merchandising Businesses – buys finished
products and resells them to individuals or other
businesses.

Manufacturing Businesses – buys raw materials,
such as wood or iron, and transforms them into
finished products through the use of labor and
capital. It then sells the finished products to
individual or other businesses.
Section 1 Exploring the World of Business (cont'd.)
Forms of Business Organizations

Sole proprietorship – a business owned by one
person.

Partnership – a business owned by two or more
persons, called partners, who agree to operate the
business as co-owners.

Corporation – a business organizations that is
recognized by law to have a life of its own. Must get
legal permission from the state to operate. This is
called a charter and it gives he business certain
rights and privileges.
Section 1 Exploring the World of Business (cont'd.)
Sole Proprietorship
A business owned by one person.
Advantages:
Disadvantages:
 Easy to set up
 Limited expertise
 All profits go to owner  Hard to raise money
 Owner has total control  Owner has all the risks
 Few regulations to
follow
 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:
Disadvantages:
 Easy to start
 Conflicts
between partners
 Skills and talents
are pooled
 More money
available
 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:
Disadvantages:
 Easier to raise money  Costs more to start
up
 Easy to expand
 Complex to
 Easy to transfer
organize
ownership
 More regulations
 Losses limited to
 Higher taxes
investment
Accounting: The Language of
Business
• Have you ever wondered how
popular bands, like U2, determine
which venues they’ll play, how
much ticket prices should be, and
how profitable CD sales have been?
– All of these issues are tackled by
the band’s financial team:
ACCOUNTANTS, CLERKS and
FINANCIAL ADVISORS!
Accounting System -- is designed
to collect, document, and report on
financial transactions affecting the
business.
 Manual Accounting System –
processed by hand
 Computerized Accounting System –
processed by a computer
How the Accounting System
Works
Inputs
Source
Documents
Processing
Outputs
Tasks
Financial and
Management
Accounting
Reports
 Checks
 Analyzing
 Invoices
 Classifying
 Sales
Slips
 Recording
 Receipts
 Financial
condition
 Results of
operations
 Investments
by and
distributions
to owners
Accounting: The Language of
Business
• All accountants use the same set of rules,
called “generally accepted accounting
principles” or GAAP for short.
• Accounting principles provide a way to
communicate financial information in a
form understood by those interested in
the operation and financial condition of a
business.
• Because this is so fundamental,
accounting is often referred to as the
“language of business”.
• Financial Reports are summarized
information about the financial state of the
business.
The Purpose of Accounting
• The purpose of accounting is to
provide financial information
about a business or a not-forprofit organization.
• Individuals need financial
information in order to make
good decisions
Using Accounting Reports for
Making Business Decisions
In general, there are two groups that
use accounting reports:
 individuals outside the
business who have an
interest in the business
 individuals inside the
business
Financial Accounting -- focuses on
reporting information to external users.
These reports are prepared using GAAP.
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
Management Accounting
Management accounting focuses on
reporting information to internal
management.
• These types of reports are prepared
for managers making the day-to-day
operating decisions like purchasing,
hiring and firing.
• Managers need accounting
information so that they can decide
what to do and how to do it!
Accounting Assumptions
 Business Entity – business exists
independently of it’s owners personal
holdings.
 Accounting Period – for reporting
purposes, the life of the business is
divided into specific periods of time! (Can
be months, quarters, or years, for
example).
 Going Concern – it’s assumed that the
business has the ability to survive and
operate indefinitely.