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CHAPTER 1
INTRODUCTION TO
BUSINESS AND
ACCOUNTING
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Chapter Overview
 Why is it necessary to have an understanding
of business before trying to learn about
accounting?
 What is the role of accounting information
within the business environment?
 What is private enterprise, and what forms
does it take?
 What types of regulations do companies
face?
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Chapter Overview
 What activities contribute to the operations of
a company?
 Are there any guidelines for reporting to
company managers?
 Are there any guidelines in the United States
for reporting to people outside of a company?
 What role does ethics play in the business
environment?
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Reflection
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Private Enterprise
and Capitalism
 Businesses in the United States and most
other countries operate in an economic
system called private enterprise.
 In this system, individuals (people like you
and me) own companies (businesses) that
produce and sell services and or goods for a
profit.
 These companies generally fall into three
categories: service, merchandising, and
manufacturing.
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Service Companies
 Service companies perform services or
activities that benefit individuals or business
customers.
 Companies like A Great Cut, Midas Muffler
Shops, Merry Maids, UPS, and many
professional practices such as accounting,
law, architecture, and medicine, are all
service companies.
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Merchandising Companies
 Merchandising companies purchase goods
(sometimes referred to as merchandise or
products) for resale to their customers.
 Some merchandising companies are
wholesalers, meaning they sell their goods to
retailers or other commercial users.
Examples include plumbing supply stores,
electrical suppliers, or beverage distributors.
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Merchandising Companies
 Some merchandising companies are retailers,
meaning they sell their goods directly to
consumers like you and me.
 Most of the businesses you come in contact
with are probably retailers, such as JC
Penney, Toys ’R’ Us, amazon.com, and
Circuit City.
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Manufacturing Companies
 Manufacturing companies make their
products and then sell these products to their
customers.
 Unlike merchandisers who purchase readyto-sell merchandise, a manufacturer has no
goods to sell until they are manufactured.
 Examples of manufacturing companies
include General Motors, Black & Decker, and
Dell Corporation.
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Entrepreneurship
 Entrepreneurship is a combination of three
factors:
 A company owner’s idea for a
business.
 The willingness of the company’s
owner to take a risk in starting a
business.
 Abilities of the company’s owners and
employees to use capital and to
produce and sell goods or services.
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Sources of Capital
 Entrepreneurs can raise capital in two ways:
 Investing his/her own money into the
business for a greater future return or
finding other investors to do the same.
 Borrowing money from a bank or other
lending sources (creditors). Since
borrowings have specific repayment
schedules, they creates more risk for the
business.
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Business Organizations
 Business organizations or companies are a
significant aspect of the U.S. and world
economies.
 A company may be organized as a sole
proprietorship, partnership, or a corporation.
 Each of these business forms has its
advantages and disadvantages.
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Business Organizations
Exhibit 1-3
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Regulatory Environment
 Many different laws and authorities regulate
the business environment, covering issues
from consumer protection, environmental
protection, employee safety, hiring practices,
and taxes.
 Companies must comply with different sets
of regulations depending on the nature of
their business.
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Integrated Accounting
System
 An integrated accounting system is a means
by which accounting information about a
company’s activities is identified, measured,
recorded, and summarized so that it can be
communicated to users.
 External users include the many diverse
groups of people outside the company.
 Internal users include the managers and
employees within the company.
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Managerial Accounting
Information
 Management accounting information helps
managers plan, operate, and evaluate a
company’s activities.
 This information has an internal focus and is
free from the restrictions of regulatory bodies
interested in how companies report to
external users.
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Financial Accounting
Information
 Financial accounting information is organized
for the use of interested people outside of the
company.
 This information has an external focus and
must follow the guidelines of generally
accepted accounting principles, standards for
preparing financial accounting information.
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Basic Management
Accounting Reports
 Budgets: A financial plan that quantifies
managers’ plans and the impact on the
company’s operating activities and financial
position.
 Cost Analysis: The process of determining
and evaluating costs of specific products or
activities.
 Manufacturing Cost Reports: Cost reports
that help monitor and evaluate a company's
operations to determine if its plans are being
achieved.
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Generally Accepted
Accounting Principles (GAAP)
 Accepted principles, procedures, and
practices that companies use for financial
accounting and reporting in the United States.
 These principles, or “rules” must be followed
in the external reports of companies that sell
stock to the public in the United States and by
many other companies as well.
 GAAP covers a wide range of issues from
how to account for inventory, buildings,
income taxes, as well as specialized industry
guidelines.
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Basic Financial Statements
 Financial statements are accounting reports
used to summarize and communicate
financial information about a company.
 A company’s integrated accounting system
produces three major statements: the income
statement, the balance sheet, and the cash
flow statement, as well as a supporting
statement called the changes in owners’
equity.
 Each financial statement summarizes specific
information and serves specific purposes.
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Income Statement
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Balance Sheet
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Cash Flow Statement
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Ethics in Business
and Accounting
 A company’s financial statements are
meant to convey information about the
company to internal and external
users in order to facilitate decisionmaking.
 If the information in the financial
statements does not convey a realistic
picture, the decisions based on this
information can have disastrous
consequences.
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Code of Ethics
 The American Institute of Certified Public
Accountants (AICPA) has a professional code
of ethics that guides the professional work of
CPAs.
 The Institute of Management Accountants
(IMA) and the International Federation of
Accountants (IFAC) have a code similar to the
AICPA.
 Many companies have codes or statements
of company and business ethics to guide the
actions and behaviors of their employees.
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