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Chap 2 class notes


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Chapter 2 notes for Accounting 1

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Chap 2 class notes

  1. 1. Chapter 2Last update: 8/18/12
  2. 2. 2. Compare and contrast the rules governing accounting decisions with 85% accuracyby: a) Defining the role of profit, risking-taking & entrepreneur in U.S. economy b) Identifying the differences among sole proprietorship, partnership & corporate forms of business c) Applying the three basic accounting assumption to specific situations
  3. 3. Free enterprise system:: people are free to produce the goods and services they choose
  4. 4. Capital: money supplied to business by investors, banks, or owners of a business Entrepreneur: A person who owns their own business.
  5. 5. Loss: business spends more money than it earnsProfit: business spends less money than it earns
  6. 6. 1. Service business: provides a needed service for a fee Doctors, Lawyers, Car Accountant Services . Sporting Industry Realtors
  7. 7. 2. Merchandising business: buys finished products and resells them to individuals or businesses Examples: grocery stores, sporting goods stores, gas stations, clothing stores
  8. 8. 3.Manufacturing business: buys raw materials and transforms them into finished products through use of labor and capital
  9. 9. 1. Sole proprietorship: single or one owner who runs a business Usually, thesetypes of business are small & are found in areas of service or merchandising
  10. 10. 2. Partnership: business owned by two or more persons who agree to operate business as co-owners Usually, thesetypes of business are small and found in areas of service or merchandising
  11. 11. Any size business, butusually medium to large Charter: gives a corporation certain rights and privileges—rules by which to operate—has “inc” trademark
  12. 12. Two Types of Accounting Systems:1. Manual accounting system: financial information is recorded by hand
  13. 13. Standardized Rules CPA: (Certified Public Accountant)—Credentials for an accountant that shows s/he passed state test and can operate as astate recognized accounting
  14. 14. Standardized Rules GAAP: (Generally AcceptedAccounting Principles)—allaccountants use same set of rules to prepare financial information for a business
  15. 15. Standardized RulesFinancial reports:Summarized information prepared by accountants to show financial status of business
  16. 16. Standardized RulesThree Basic Rules orAssumptions made byAccountants
  17. 17. Standardized Rules 1. Business Entity Business exists separately from its owner’s personal holdings Financial statements only have information related to business Personal finances can NOT be included into business finances
  18. 18. Standardized Rules 2. Accounting Period• For financial reporting purposes, life and activities of business are divided into specific periods of time• Most common accounting period is one year• Allows businesses to compare earnings from one accounting period to another
  19. 19. Standardized Rules 3. Going Concern:• Accountants assume business has ability to survive and operate for indefinite period of time• Thus, business has “ongoing” life of its own, separate from owner or owners
  20. 20. 1 2
  21. 21. Focuses on reportinginformation toexternal users
  22. 22. 2. Management accounting Focuses on reportinginformation to management(accounting for internal use)
  23. 23. What’s up doc?On to our hands on work