INTRODUCTION TO ACCOUNTING AND BUSINESS

1 Objectives1 INTRODUCTION TO ACCOUNTING AND BUSINESSA fter studying this chapter, youshould be able to:1 Describe the nature of a the role of ACCOUNTING the importance of businessethics and the basic principles ofproper ethical the profession of the development of ac-counting principles and relate themto the ACCOUNTING equation anddefine each element of the how BUSINESS transactionscan be stated in terms of the result-ing changes in the basic elements ofthe ACCOUNTING the financial statements of aproprietorship and explain how the ratio of liabilities to owner sequity to analyze the ability of abusiness to withstand poor : DON CARSTENS/BRAND X PICTURESDNDo you use ACCOUNTING ?

2 Yes, we all use ACCOUNTING information in one form or an-other. For example, when you think about buying a car, you use ACCOUNTING -type in-formation to determine whether you can afford it and whether to lease or , when you decided to attend college, you considered the costs (the tuition,textbooks, and so on). Most likely, you also considered the benefits (the ability to ob-tain a higher-paying job or a more desirable job).Is ACCOUNTING important to you? Yes, ACCOUNTING is important in your personal lifeas well as your career, even though you may not become an accountant. For exam-ple, assume that you are the owner/manager of a small Mexican restaurant and areconsidering opening another restaurant in a neighboring town.

3 ACCOUNTING informa-tion about the restaurant will be a major factor in your deciding whether to open thenew restaurant and the bank s deciding whether to finance the primary objective in this text is to illustrate basic ACCOUNTING concepts that willhelp you to make good personal and BUSINESS decisions. We begin by discussing whata BUSINESS is, how it operates, and the role that ACCOUNTING of a BusinessYou can probably list some examples of companies with which you have recentlydone BUSINESS . Your examples might be large companies, such as Coca-Cola, DellComputer, or They might be local companies, such as gas stationsor grocery stores, or perhaps employers.

4 They might be restaurants, law firms, ormedical offices. What do all these examples have in common that identify them asbusinesses?In general, a businessis an organization in which basic resources (inputs), suchas materials and labor, are assembled and processed to provide goods or services(outputs) to come in all sizes, from a local coffee house toa DaimlerChrysler, which sells several billion dollars worth of cars and trucks eachyear. A BUSINESS s customers are individuals or other businesses who purchase goodsor services in exchange for money or other items of value. In contrast, a church isnot a BUSINESS because those who receive its services are not obligated to pay objective of most businesses is to maximize profits.

5 Profitis the differencebetween the amounts received from customers for goods or services provided andthe amounts paid for the inputs used to provide the goods or services. Some busi-nesses operate with an objective other than to maximize profits. The objective ofsuch nonprofit businesses is to provide some benefit to society, such as medical re-search or conservation of natural resources. In other cases, governmental units suchas cities operate water works or sewage treatment plants on a nonprofit basis. Wewill focus in this text on businesses operating to earn a profit. Keep in mind, though,that many of the same concepts and principles apply to nonprofit businesses as of BusinessesThere are three different types of businesses that are operated for profit: manufac-turing, merchandising, and service businesses.

6 Each type of BUSINESS has businesseschange basic inputs into products that are sold toindividual customers. Examples of manufacturing businesses and some of their prod-ucts are as the nature of complete glossary of terms appears at the end of the 1 INTRODUCTION to ACCOUNTING and Business3 Manufacturing BusinessProductGeneral MotorsCars, trucks, vansIntelComputer chipsBoeingJet aircraftNikeAthletic shoes and apparelCoca-ColaBeveragesSonyStereos and televisionsMerchandising businessesalso sell products to customers. However, rather thanmaking the products, they purchase them from other businesses (such as manufac-turers).

7 In this sense, merchandisers bring products and customers together. Examplesof merchandising businesses and some of the products they sell are shown BusinessProductWal-MartGeneral merchandiseToys R UsToysCircuit CityConsumer electronicsLands books, music, video retailerService businessesprovide services rather than products to customers. Exam-ples of service businesses and the types of services they offer are shown BusinessServiceDisneyEntertainmentDelta Air LinesTransportationMarriott HotelsHospitality and lodgingMerrill LynchFinancial adviceSprintTelecommunicationsTypes of BUSINESS OrganizationsThe common forms of BUSINESS organization are proprietorship, partnership, cor-poration, or limited liability corporation.

8 In the following paragraphs, we briefly de-scribe each form and discuss its advantages and proprietorshipis owned by one individual. More than 70% of the businessesin the United States are organized as proprietorships. The popularity of this form isdue to the ease and the low cost of organizing. The primary disadvantage of propri-etorships is that the financial resources available to the BUSINESS are limited to the in-dividual owner s resources. Small local businesses such as hardware stores, repairshops, laundries, restaurants, and maid services are often organized as a BUSINESS grows and more financial and managerial resources are needed, itmay become a partnership.

9 A partnershipis owned by two or more proprietorships, small local businesses such as automotive repair shops, musicstores, beauty salons, and clothing stores may be organized as partnerships. Currently,about 10% of the businesses in the United States are organized as corporationis organized under state or federal statutes as a separate legaltaxable entity. The ownership of a corporation is divided into shares of stock. Acorporation issues the stock to individuals or other businesses, who then becomeowners or stockholders of the primary advantage of the corporate form is the ability to obtain large amountsof resources by issuing stock.

10 For this reason, most companies that require large in-vestments in equipment and facilities are organized as corporations. For example,Toys R Ushas raised over $400 million by issuing shares of common stock to fi-nance its operations. Other examples of corporations include General Motors, Ford,International BUSINESS Machines (IBM), Coca-Cola, and General eight out of every tenworkers in the United States areservice 1 INTRODUCTION to ACCOUNTING and Business4 About 20% of the businesses in the United States are organized as that most large companies are organized as corporations, over 90% of thetotal dollars of BUSINESS receipts are received by corporations.