Acct 1 Chapter 2

Patchogue-Medford High School

Accounting I – Chapter 2 Notes

Mr. Butzke



Chapter 2 – The World of Business and Accounting              Page 29


Objective: Students will be able to demonstrate their knowledge of profits, risk taking, and entrepreneurship. They will also describe the characteristics of service, merchandising, and manufacturing businesses. The students will show the differences between sole proprietorship, partnership, and corporations as well as the differences between financial and managerial accounting.


Section 1 – Exploring the World of Business


Free Enterprise System – People are free to produce the goods and services they choose and charge what they want for them.


Entrepreneurship – Transforms ideas for product or services into a real world business. High risk that lies with the owner (person who holds the idea).


Profit – Money (revenue) earned that is greater then the money spent (expenses) to operate the business.

Loss – The opposite of the profit (expenses are greater then revenue)


List Pros and Cons (see page 32)


Problem 2-1 Assess your entrepreneurship potential, text page 35, work book pg 16.


In order to start a business you need capital. Money supplied by investors, banks, or owners.


There are three types of businesses: (page 33)


Service – Provides a service, for a fee.  (travel, insurance, accounting, legal, taxi)


Merchandise – Buys a finished product and then resells it to individuals or businesses. (Macys, Walmart, Kmart, BestBuy, Home Depot)


Manufacturing – Buys raw materials and transforms them into a finished product through the use of capital and labor.  (Automobile, furniture, lumber)






There are three types of business organizations: (page 40)


Sole Proprietorship – (pg 34) – One owner, exists as long as that person is around. This is tougher to raise capital, the easiest to form, the most popular type, with unlimited liability.


Partnership – (pg 34) – A written agreement between two or more people to share all business aspects. Shared risk.


Corporation – (pg 34) – Recognized by law as having a life of its own. The legal permission to form is called a Charter. This tells the rules under which the business may operate. The liability is limited to the assets of the corporation. Shareholders are the owners.


(List the advantages and disadvantages of all.)



Section 2 – The Universal Language of Business – Accounting


Every business both needs and must have an accounting system. Accounting systems are designed to collect, document and report on financial transactions affecting the business. There are manual and automated systems.

All accountants follow the rules of GAAP (Generally Accepted Accounting Principles)


Financial systems are processed by:


  1. Inputs (source documents: checks, receipts, invoices)


  1. Processing (tasks: analyzing, classifying, recording)


  1. Outputs (reports: financial statements)


Two types of Accounting

         Financial Accounting – Focuses on reporting information to external users

         Management Accounting – Focuses on reporting to internal users


All businesses set up accounting systems based on three assumptions:

  1. It is a business entity – exists independently of its owners personal assets
  2. It has an accounting period – it reports in a specific time period.
  3. It is a going concern – the business is expected to continue functioning


Terms Page 41

Questions Page 42




Prob.  2-4             Types of businesses                TB pg 43        WB pg 17

Prob.  2-5             Accounting Assumptions          TB pg 43        WB pg 17

Prob.  2-6             Business operations                 TB pg 44        WB pg 17

Prob.  2-7             Forms of a business                TB pg 44        WB pg 18

Prob.  2-8             Adv. Disadv. Of Entrep.          TB pg 44        WB pg 18