Unit 1
Introduction to Accounting
Chapter 1
You and the World of Accounting
Chapter 2
The World of Business and Accounting
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Chapter 2
The World of Business and Accounting
What You’ll Learn
 Describe profit, risk-taking, and entrepreneurs.
 Describe service, merchandising, and
manufacturing businesses.
 Compare the sole proprietorship, partnership, and
corporate forms of business.
 List the advantages and disadvantages of each
form of business organization.
 Describe the purpose of accounting.
 Explain financial and management accounting.
 Describe three basic accounting assumptions.
 Define the accounting terms introduced in this
chapter.
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Chapter 2, Section 1
Exploring the World of Business
What Do You Think?
Why is the U.S. economy sometimes called a
market economy?
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SECTION 2.1
Exploring the World of Business
Main Idea
The United States has a free enterprise system with
various kinds of businesses.
You Will Learn
 about the environment of business.
 the three types of business operations.
 the three forms of business organization.
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Exploring the World of Business
SECTION 2.1
Key Terms
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free enterprise system
profit
loss
entrepreneur
capital
service business
merchandising business
manufacturing business
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Exploring the World of Business
SECTION 2.1
Key Terms
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sole proprietorship
partnership
corporation
charter
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SECTION 2.1
Exploring the World of Business
The Environment of Business
When you hear the word business, what do you
think of?
In the U.S. we have a free enterprise system; people
are free to produce goods and services and spend
money as they wish.
A business can operate at a profit or a loss. If the
revenues are greater than the costs, the money left over
is profit. When costs are greater than revenues, the
business operates at a loss.
In order to survive, a business must
 operate at a profit, and
 have an individual willing to take the risk to run it.
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SECTION 2.1
Exploring the World of Business
The Need for a Risk-Taker
In a business, inventors generate ideas, employees provide
labor, and managers supervise. An entrepreneur
transforms ideas into actual businesses.
What does it take to run a business?
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SECTION 2.1
Exploring the World of Business
Role of Entrepreneurs
There are pros and cons to being an entrepreneur.
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SECTION 2.1
Exploring the World of Business
Traits of Entrepreneurs
Most entrepreneurs:
 are self-starters.
 have organizational skills.
 have marketing knowledge.
 have accounting skills.
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SECTION 2.1
Exploring the World of Business
Entrepreneur – Who, Me?
Have you thought about owning a business? If so, you
should ask yourself these questions:
 Do you have good writing and speaking skills?
 Are you creative or mechanical?
 Are you a self-starter?
 Do you have accounting or marketing skills?
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SECTION 2.1
Exploring the World of Business
Types and Forms of Business
In a free enterprise system, an entrepreneur can choose
the type and form of business to run.
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SECTION 2.1
Exploring the World of Business
Types of Business Operations
There are three types of business operations:
 Service businesses provide services for fees.
 Merchandising businesses buy and sell finished
products.
 Manufacturing businesses buy materials and
make finished products.
Each type needs capital (money) from investors, banks, or
business owners to begin.
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SECTION 2.1
Exploring the World of Business
Forms of Business Organization
Most U.S. businesses are organized in one of three ways:
 sole proprietorship
 partnership
 corporation
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SECTION 2.1
Exploring the World of Business
Sole Proprietorship
Sole means “single” and proprietor means “owner.” A sole
proprietor is a single owner, but the operation may have
many managers and employees.
There are advantages and disadvantages to being a sole
proprietor.
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SECTION 2.1
Exploring the World of Business
Partnership
When two people enter into an agreement to operate a
business as co-owners, a partnership is formed.
There are advantages and disadvantages to a partnership.
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SECTION 2.1
Exploring the World of Business
Corporation
A corporation often starts off as a sole proprietorship or
partnership. In order to become a corporation an
organization must obtain a charter (legal permission to
operate).
There are advantages and disadvantages to a corporation.
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SECTION 2.1
Exploring the World of Business
Key Terms Review
 free enterprise system
A system in which individuals are free to produce
the goods and services they choose.
 profit
The amount earned above the amount of
expense incurred to keep the business operating.
 loss
The result when a business spends more money
than it earns.
 entrepreneur
A person who transforms ideas for products or
services into real-world business.
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SECTION 2.1
Exploring the World of Business
Key Terms Review
 capital
Money supplied by investors, banks, or owners of
a business.
 service business
A business that provides a needed service for a
fee.
 merchandising business
A business that buys finished goods and resells
them to individuals or other businesses.
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SECTION 2.1
Exploring the World of Business
Key Terms Review
 manufacturing business
A business that buys raw materials and
transforms them into financial products by using
labor and machinery.
 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.
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SECTION 2.1
Exploring the World of Business
Key Terms Review
 corporation
A business organization recognized by law to
have a life of its own.
 charter
The legal permission, granted by a state, that
gives a corporation certain rights and privileges
and spells out the rules under which the
corporation is to operate.
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Chapter 2, Section 2
Accounting: The Universal
Language of Business
What Do You Think?
What kinds of financial decisions do you make? What
information do you use to make decisions?
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SECTION 2.2
Accounting: The Universal
Language of Business
Main Idea
The accounting system produces information used to
make decisions.
You Will Learn
 how the accounting system works.
 how decision makers use accounting reports.
 three important accounting assumptions.
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Accounting: The Universal
Language of Business
SECTION 2.2
Key Terms
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accounting system
manual accounting system
computerized accounting system
GAAP
financial reports
financial accounting
management accounting
business entity
accounting period
going concern
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SECTION 2.2
Accounting: The Universal
Language of Business
The Accounting System
The accounting system is designed to collect,
document, and report on financial transactions.
There are two types of accounting systems:
 manual accounting system
 computerized accounting system
Accountants must follow GAAP rules issued by the
Financial Accounting Standards Board (FASB).
Financial reports contain a summary of the financial
status of a business.
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SECTION 2.2
Accounting: The Universal
Language of Business
Using Accounting Reports for Making
Business Decisions
Accounting provides financial information about a
business or organization. There are two groups that use
accounting reports:
 individuals outside the business who have an
interest in the business
 individuals inside the business
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SECTION 2.2
Accounting: The Universal
Language of Business
Financial Accounting
In financial accounting, reports are prepared for
individuals outside the business.
Those interested in the financial accounting reports of a
business include
 investors,
 the local, state, and federal government, and
 employees, consumers, and competitors.
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SECTION 2.2
Accounting: The Universal
Language of Business
Management Accounting
In management accounting, reports are prepared for
managers inside the business.
Financial accounting reports help a manager decide:
 what to do,
 how to do it,
 when to do it, and
 whether or not the results match the plans for the
future.
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SECTION 2.2
Accounting: The Universal
Language of Business
Accounting Assumptions
As mentioned before, all businesses follow GAAP, which
includes three assumptions:
 A business is a business entity, separate from
its owner’s personal holdings.
 There is a set accounting period.
 A business is expected to continue as a going
concern, able to survive and operate indefinitely.
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SECTION 2.2
Accounting: The Universal
Language of Business
Key Terms Review
 accounting system
A system designed to collect, document, and
report on business transactions.
 manual accounting system
A type of accounting system in which information
is processed by hand.
 computerized accounting system
A type of accounting system in which information
is recorded by entering it into a computer.
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SECTION 2.2
Accounting: The Universal
Language of Business
Key Terms Review
 GAAP
The set of rules that all accountants use to
prepare financial reports.
 financial reports
Documents that present summarized information
about the financial status of a business.
 financial accounting
The type of accounting that focuses on reporting
information to external users.
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SECTION 2.2
Accounting: The Universal
Language of Business
Key Terms Review
 management accounting
The type of accounting that focuses on reporting
information to management; often referred to as
accounting for internal users of accounting
information.
 business entity
The accounting assumption that a business exists
independently of its owner’s personal holdings.
The accounting records and reports are
maintained separately and contain financial
information related only to the business.
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SECTION 2.2
Accounting: The Universal
Language of Business
Key Terms Review
 accounting period
The period of time covered by an accounting
report.
 going concern
The accounting assumption that a business is
expected to operate indefinitely.
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CHAPTER 2
Chapter 2 Review
Question 1
DePalm Pizza had the following cash transactions
yesterday.
Receipts (money in): Checks: $650.00, Cash $500.00
Expenditures (money out): Gas and oil for delivery
vehicle $75.98, supplies $477.50, salaries $380.00, and
miscellaneous expenditures $123.76.
Did DePalm have a “profit” or “loss” for the day?
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CHAPTER 2
Chapter 2 Review
Question 1
Did DePalm have a “profit” or “loss” for the day?
Answer 1
Step 1: Calculate the total receipts.
$650.00 + $500.00 = $1,150
Step 2: Calculate the total expenditures.
$75.98 + $477.50 + $380.00 + $123.76 = $1,057.24
Step 3: Calculate the net profit (loss).
$1,150.00 - $1,057.24 = $92.76 profit
(Receipts exceed expenditures)
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CHAPTER 2
Chapter 2 Review
Question 2
Sole proprietorship is the most popular form of business
ownership, yet very few large businesses are sole
proprietorships. Give at least two reasons to explain this.
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CHAPTER 2
Chapter 2 Review
Answer 2
1. Sole proprietorships have the expertise of only the
owner to call on. For example, the owner may be a
great accountant but only a fair salesperson.
2. The business has the promise of only one owner to
use to try to secure money from investors or
lenders.
3. The owner bears all of the risk of loss, or unlimited
liability. The owner could lose personal equity if the
business fails.
4. The most talented potential employees would tend
to prefer the job security of working in larger firms.
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Resources
Glencoe Accounting Online Learning Center
English Glossary
Spanish Glossary
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