Chapter 2 notes for Accounting 1

1. Chapter 2
Last update: 8/18/12

2. 2. Compare and contrast the rules
governing
accounting decisions with 85% accuracy
by:
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

4. Free enterprise system:: people are
free to produce the goods and services they
choose

5. Capital: money supplied to
business by investors, banks, or
owners of a business
Entrepreneur: A
person who owns their
own business.

6. Loss:
business
spends
more money
than it earns
Profit: business spends less
money than it earns

8. 1. Service business: provides a
needed service for a fee
Doctors,
Lawyers,
Car Accountant
Services .
Sporting
Industry Realtors

9. 2. Merchandising business: buys finished
products and resells them to individuals or
businesses
Examples:
grocery stores,
sporting goods
stores, gas
stations,
clothing stores

10. 3.Manufacturing business: buys raw
materials and transforms them into finished products
through use of labor and capital

12. 1. Sole proprietorship: single or
one owner who runs a business
Usually, these
types of business
are small & are
found in areas of
service or
merchandising

13. 2. Partnership: business owned by two or more
persons who agree to operate business as co-owners
Usually, these
types of business
are small and
found in areas of
service or
merchandising

14. Any size
business, but
usually medium
to large
Charter: gives a
corporation certain rights
and privileges—rules by
which to operate—has
“inc” trademark

17. Two Types of Accounting
Systems:
1. Manual
accounting
system:
financial information
is recorded by hand

19. Standardized
Rules
CPA:
(Certified Public
Accountant)—Credentials
for an accountant that
shows s/he passed state
test and can operate as a
state recognized accounting

20. Standardized
Rules
GAAP:
(Generally Accepted
Accounting Principles)—all
accountants use same set of
rules to prepare financial
information for a business

21. Standardized
Rules
Financial reports:
Summarized information
prepared by
accountants to show
financial status of
business

22. Standardized
Rules
Three Basic
Rules or
Assumptions
made by
Accountants

23. 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

24. 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

25. 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

26. 1
2

27. Focuses on
reporting
information to
external users

28. 2. Management
accounting
Focuses on
reporting
information to
management
(accounting for
internal use)

29. What’s up
doc?
On to our hands on work