Why It Matters:

Accounting and
Finance
WHY L E A R N A B O U T ACCO U NT ING A ND F I NA NCE ?
Why It Matters: Accounting and Finance
• Billy Joel has had 33 Top 40 hits and 23 Grammy nominations
• In 1990, he was presented with a Grammy Legend Award.
• Inducted into the Songwriters Hall of Fame in 1992, Joel was presented with
the Johnny Mercer Award, the organization’s highest honor, in 2001.
• In 1999 he was inducted into the Rock & Roll Hall of Fame, and has received
the Recording Industry Association of America Diamond Award, presented
for albums that have sold over 10 million copies.
• In November, 2014, Billy Joel received The Library of Congress Gershwin
Prize for Popular Song.
• In 2014 he also received the once-in-a-century ASCAP Centennial Award,
presented to American music icons in recognition of their incomparable
accomplishments in their respective music genres and beyond
Why It Matters: Accounting and Finance
• So, what does Billy Joel have to do with accounting?
• Joel never took accounting or knew enough about its basic principles to be an informed
consumer of his own financial information.
• How can we tell?
• In 1989 Billy Joel filed a $90-million lawsuit against his former manager, Frank Weber, for
mishandling his income and expenses.

• According to the court documents, just two of the charges were the following:
• Weber double-billed Joel for music videos, cheated him on expenses (including travel and
accounting fees), and mortgaged Joel’s copyrights for $15 million without disclosing it on Joel’s
financial statements.
• Weber caused phony financial statements to be issued to Joel, which painted an unrealistic
picture of Joel’s finances and the value of his investments and failed to reflect liabilities,
guarantees, loans, and mortgages on the financial statements.

• How was Joel supposed to have known this was happening and prevented it? How
could understanding something about accounting have helped him? How can it
help you?
Why It Matters: Accounting and Finance
• In order to ask a question, you have to possess enough knowledge about a
subject to know what to ask.
• Even understanding how to compare financial statements between multiple
periods could have helped.
• Knowing what should have appeared on the various financial statements
might have helped Joel spot gaps and missing information.
• Becoming an informed consumer of financial and accounting information
can teach you what to look for, tip you off to irregularities, and reduce your
likelihood of being a victim of others’ financial dishonesty or mistakes.
• In short, there are many good reasons to study accounting even if you don’t
plan to be an accountant.
The World of Business
and Accounting
CHA PT E R 2
What You’ll Learn
• Describe profit, risk-taking, and entrepreneurs
• Describe service, merchandizing, and manufacturing businesses
• Compare the sole proprietorship, partnership, and corporate forms of
business
• List the advantages 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
Exploring the World of Business
• Read Becoming an Entrepreneur: Aveda Corporation
• What do you think?
Competed against giants of the cosmetics/beauty industry
As an unknown, had to prove his products were superior
Faced the risk of losing money
Worked long hours to launch the new business

• Why do you think accounting is referred to as a “language”?

Is a means of communicating financial information
It has terms with precise meanings
Exploring the World of Business
2. 1
Exploring the World of Business
• Review the Main Idea

• Why is the U.S. economy sometimes called a market economy?

The market (purchasers, consumers) dictate economic conditions through laws of
supply and demand

• What is an important feature of the free enterprise system?

Offers many choices
A person is allowed to own a business as long as s/he is willing to take risks
Key Terms
• free enterprise system • merchandising business
• profit • manufacturing business
• loss • sole proprietorship
• entrepreneur • partnership
• capital • corporation
• service business • charter
Exploring the World of Business
• What kinds of risk are involved in running a business?
Possibility of losing money; making legally questionable decisions; etc.

• Governments sometimes limit the types of businesses that can

operate, even in a free society.
• Do you think this is fair?
• Can you think of any examples from Thailand?
The Environment of Business
Exploring the World
of Business

free enterprise system

People are free to produce
Free Enterprise goods and services.
System
profit
The amount of money earned
Profit Loss over and above the amount spent
to keep the business operating.

loss
When a business spends more
money than it earns.
Types and Forms of Businesses
Exploring the World
of Business

$
All types of businesses need capital to begin.

capital
Money that investors, banks, or
business owners supply for a
business to begin.
Types and Forms of Businesses
Exploring the World
of Business

Service Merchandising Manufacturing

Business Business Business

manufacturing business
merchandising
A business that buys raw
service business business
materials, uses labor and
A business that A business that buys
machinery to transform them
provides a finished products and
into finished products, and
needed service resells them to
sells the finished products to
for a fee. individuals or other
individuals or other
businesses.
businesses.
Types and Forms of Businesses
Exploring the World
of Business

Sole Partnership Corporation

Proprietorship

sole proprietorship
A business owned by one person.

partnership
A business owned by two or more persons.

corporation
A business recognized by law to have a life of its own.
Types and Forms of Businesses
Exploring the World
of Business

• Why do you think sole proprietors might prefer having few

regulations to follow?
Forms required by regulations can be complicated, require time
Might need to hire a lawyer, which reduces profits
Types and Forms of Businesses
Exploring the World
of Business

• In what way could the item “shared risks” by considered an

advantage?
Two or more partners share the risk, so might not be as great as it would be for one
person
 Types and Forms of Businesses
Exploring the World
of Business

A corporation must obtain a charter. • A corporation is recognized by law “to have a life of its
own.” What does this mean?
charter Receive a charter to operate and is separate from the owners
Legal permission to operate. Can operate like an individual in the eyes of the law
Do the Math
• Gain on sale: 200 shares x ($45-$39) = $1,200

• Gain per share: $45 - $39 = $6

• Market value of remaining shares: 300 shares x $45 = $13,500

Assess Your Entrepreneurship Potential
• What categories did you score 3 or lower?

• What ways could you improve your potential?

Synthesizing
Local businesses include sole proprietorships, partnerships, and
corporations.

• In pairs, give me examples of each.

Key Terms Review
• free enterprise system • merchandising business
• profit • manufacturing business
• loss • sole proprietorship
• entrepreneur • partnership
• capital • corporation
• service business • charter
Section 1 Quiz
1. What is the major characteristic of a free enterprise system?
Individuals have the right to make their own choices in purchase/selling of goods

2. What are some traits of successful entrepreneurs?

Risk-takers; self-starters; assertive; creative; excellent time management; excellent
problem solving skills

3. What are three types of businesses that operate to earn a profit?

Service, merchandizing, and manufacturing

4. What type of business does things for its customers and charges
them a fee?
Service
Section 2.1 Exploring the World
of Business

Glencoe Accounting
Accounting: The Universal
Language of Business
2. 2
Accounting: The Universal Language of
Business
• Review the Main Idea

• What kinds of financial decisions do you make?

Whether to purchase an item or save your money; etc.

• What information do you use to make decisions?

How much money you have; what your fixed expenses are; what future income and
expenses will be; etc.
Key Terms
• accounting system • management accounting
• manual accounting system • business entity
• computerized accounting • accounting period
system
• going concern
• GAAP
• financial reports
• financial accounting
The Accounting System
Accounting: The Universal
Language of Business

Manual Accounting
System

Two types of accounting

systems
Computerized
Accounting System

accounting system
Designed to collect, document, and report on financial transactions affecting
the business.

manual accounting system computerized accounting system

When accounting information is When accounting information is
processed by hand. processed by recording it into a
computer.
The Accounting System
Accounting: The Universal
Language of Business

What Is
GAAP?

GAAP (generally accepted accounting principles)

The set of rules that all accountants use to prepare
financial reports.
The Accounting System
• What would happen if everyone used a different set of rules when
driving?

• How do you think this relates to accounting?

GAAP guides people through financial information in a consistent way from one
company to another
The Accounting System

What Are
financial reports?

financial reports
Documents that present summarized information
about the financial status of a business.
Using Accounting Reports for Making
Business Decisions

Individuals outside the business who

have an interest in the business

Two groups that use

accounting reports
Individuals inside the business
Using Accounting Reports for Making
Business Decisions

Those interested in the financial accounting reports of a business include:

Local, state, and Employees,

Investors federal consumers, and
government competitors

financial accounting
The type of accounting that focuses on
reporting information to external users.
Using Accounting Reports for Making
Business Decisions

Purchasing decisions
Management accounting Hiring decisions
Production decisions
reports are prepared for Payments
managers involved in: Sales
Collections

management accounting
The type of accounting that focuses on reporting
information to management; often referred to as
accounting for internal users of accounting
information.
Accounting Assumptions

GAAP Assumptions
business entity
Business entity The accounting assumption that
a business exists independently
of its owner’s personal holdings.
Accounting period The accounting records and
reports are maintained separately
and contain financial information
related only to the business.
Going concern
Accounting Assumptions

GAAP Assumptions

Business entity accounting period

The period of time covered by
an accounting report.

Accounting period
going concern
The accounting assumption that a
business is expected to operate
Going concern indefinitely.
Do the Math
• Annual rent: $25,250
• (1,000 sq. ft. x $1.75) x 12 months = $21,000
• .05 x $85,000 = $4, 250
• $21,000 + $4,250 = 25,250
Problem 2-2
• Might decide not to continue investing
• Continue and hire a more experienced salesperson
• Ask for new paint/awnings in return for the higher rent
Problem 2-3
• Business entity: Greenwood Sky Divers
• Going concern: for 6 years
• Accounting period: 1 year
Synthesizing
Accounting plays an important role in a free enterprise system.

• Write a paragraph explaining what this means.

Key Terms Review
• accounting system • management accounting
• manual accounting system • business entity
• computerized accounting • accounting period
system
• going concern
• GAAP
• financial reports
• financial accounting
Section 2 Quiz
1. What is an accounting system?
Organized process the records and reports financial info from business transactions
2. Why are financial reports so important for a business?
Used to make critical decisions—whether to buy stock in a company, loan money, etc.
3. What type of accounting focuses on reporting information to internal
users?
Management
4. What are the three basic accounting assumptions?
Business entity; accounting period; going concern
5. What is the accounting assumption that an organization exists
independently of its owner’s personal holdings?
Business entity
Homework
• Problems 2-4 to 2-8