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Basic Meaning of Accounting
The most basic meaning of the word "account" is "a story, description
or explanation." You could give someone an account of what happened
during your last vacation. You could refer to your travel journal for
details and you could show pictures that you took while you were on
your vacation.
Accounting is a method of telling a story or giving a description of
events. The story is always about items that have a value -- where
they came from, how much they were worth, how much they cost, how much
they were sold for, what happened to them, and how much of them are on
hand at any given time.
In accounting, every time something valuable changes hands, or is changed,
or used to make something else, is given away, or received, promised to
another or thrown out, very exact details of it are recorded. These details
are then organized and presented in summarized forms.
Accounting is a very old subject. The word "account" comes from the
Latin words "ad" + "computere", which mean "to reckon together." The
word "reckon" means "to count up, compute or calculate." The word
"reckon" comes from an Old English word "recenian," which means "to
explain."
Over the centuries, an entire language and system of rules and techniques
devoted to describing events that affect valuable items have come into
existence.
Accounting has its own language. The specialized words and meanings
that are used in accounting are sometimes found in common use. Most
of the time, the common use forms of these words have a different meaning
than what is used in accounting.
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Generally Accepted Accounting Principles (GAAP)
The accounting rules and techniques developed over the centuries have been
arranged into guidelines. In the U.S., these are referred to as
"Generally Accepted Accounting Principles" or "GAAP." These are a summary
of the generally accepting rules, procedures and principles of accounting.
The purpose of formulating the "GAAP" was to standardize accounting rules
so that everyone using accounting information could be in agreement as to
the meanings of the information and could then correctly interpret it.
Accounting rules and procedures continually grow, change and improve.
There are a number of accounting associations and government agencies that
influence "Generally Accepted Accounting Principles" and formulate
decisions that add to them or change them.
The Internal Revenue Service is one of the government agencies that has
a major influence on accounting practices. The IRS creates and enforces
rules for determining how income should be taxed. These rules are referred
to as tax law. In some cases, these rules may actually conflict with GAAP.
The IRS will sometimes change or restrict the meanings of accounting terms
to suit tax law. As a result, one must use caution when working with IRS
rules. Sometimes one has to use accounting practices peculiar to the IRS,
because they are required by tax laws, even where these do not conform to
GAAP. Tax accounting is a specialized area, requiring additional study.
Bookkeeping is one of the many functions that are done in accounting.
The basic function of bookkeeping is to record the details of changes to
items of value.
Both accounting and bookkeeping will be more thoroughly defined and their
functions explained in greater detail later on in these materials.
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Basic Definitions Related to Accounting
The following are some of the most basic words that you will encounter
in studying the subject of bookkeeping and accounting. These definitions
have been arranged in a very specific order so that each new definition
builds on words that have already been defined.
These are not all of the definitions possible for these words. They are
the simplified definitions of these words that are useful in learning the
subject of bookkeeping and accounting. These definitions are intended
to prepare the way for more complex and specific definitions later on in
this manual.
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Law
A rule of conduct or procedure, recognized by custom or established by an
authority, considered as binding on members of a community, nation, etc.
Forming a vast, often unseen influence on our everyday lives are the laws
of the land. Developed over a period of thousands of years and handed down
from generation to generation, the laws of the land come from the
agreements people have made as how things should be done. Over time,
these agreements became rules to be obeyed. When these rules or
agreements are taken up and confirmed or created and confirmed by the
government of the land, they become law of the land.
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Legal
Conforming with or permitted by law.
Laws are present to say what is permitted or is acceptable. A legal
activity is an activity that is allowed by the laws of the land.
An illegal activity is an activity that is not permitted and can bring
about penalties if carried out.
Laws also lay out how one will go about proving the truth of situations
or how the law may be carried out. As an example of this, the law of
the United States says that one is innocent until proven guilty.
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Owner
One who has the legal evidence of the right to possess or control a
thing or has possession of a thing.
The law has laid out specific methods of proving ownership. Written
statements, testimonials from others and various kinds of documents
can all be legal evidence of ownership.
Of course, in some cases, possession really is nine-tenths of the law.
Cash is a great example of this. If you put a twenty dollar bill on a
table and somebody picks it up and puts it in their pocket, its theirs,
unless you have some method of proving that it was yours and they took
it from you without your permission.
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Title
The legal evidence of one's right of ownership or possession.
On large, expensive items like houses, properties, vehicles and so on,
there are very specific methods of proving ownership.
This proof of ownership is called the "title." Some changes of title
must be recorded with certain government agencies responsible for
keeping track of ownership of these large, expensive items.
The government became involved in tracking these sorts of things
because of the high number of people who had been swindled.
This word "title" is often used to ask who the legal owner of something
is, for example, "Who has title to this car?"
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Exchange
The act of giving and receiving of one thing for another.
Exchange is what life is all about. All through your life you are
giving and receiving various things. So is everyone else around you.
You give your cat some food. Your cat gives you companionship. You
do some work for somebody -- they give you some food. You give the
grocery store money and the grocery store gives you some groceries.
There are literally billions upon billions of exchanges going on throughout
the world, day in and day out.
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Tangible
Anything composed of matter, that is physical in nature, that can be
touched or measured in terms of physical properties.
Can you touch it? Can you see it? Can you weigh it or measure it?
Can others? Then it is tangible.
The word tangible originally comes from a Latin word "tangere" which
means "to touch."
Examples of things that are tangible are trees, refrigerators, telephones,
tables, chairs, houses, land, mountains and so on.
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Intangible
Anything that exists, but is not physical in nature and can only be
measured in terms of the results of its presence or application.
An idea is an intangible. You can't touch an idea. It is impossible to
directly weigh or measure. You can only see the results of an idea. You
are seeing the results of an idea when you read a book or watch a movie.
A unique and valuable idea can be communicated, written down, drawn or
recorded in some fashion. Then, and only then can you actually see it.
You still can't measure the idea itself, but you can see or hear the
results of it.
Another type of intangible is goodwill. This is such things as prestige
and friendly relations. An individual or group can develop goodwill
over a period of years through fair dealings, friendly behavior, concern
and good work done. Goodwill, or the lack of it, can have a tremendous
influence on the ability of an individual or group to expand and prosper.
Work is an intangible. You can't actually weigh or measure work being
done by any simple method. You can't touch work. But you can see the
result of the work that was done. As an example, a house is being built
on an empty lot. You can see the workmen working, but you can't touch
the actual energy being expended as work. If you watch long enough, you
will see the result of the work down -- where there was an empty lot,
there is now a house.
Some would argue that there are specialized methods of measuring labor.
Even so, one is measuring the effects of the application of labor.
Measurable or not, you still can't touch the actual energy that is involved.
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Materials
Anything tangible that can be used to create or develop something.
Anything tangible that something else can be made from.
Materials are such things as wood, concrete, metal, plastics, glass,
paper and so on.
Raw materials are those things that require processing of some kind to
become useful. A good example is silicon, the raw material glass is
made from. Another example is timber that must be processed to become
usable lumber.
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Labor
The application of energy, in the form of skills or knowledge or mental
or physical effort to create or develop something.
Materials are not particularly useful unless someone figures out how to
make them into something else and then does the work to make them into
something else.
Labor is not tangible. The results of labor are tangible.
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Valuable
Something that is needed or wanted by someone and can be exchanged
for something else that is needed or wanted.
For the purposes of this definition, a thing is only as valuable as
it can be exchanged for something else or as valuable as it is useful
to someone.
Some things, like money and precious metals, are generally agreed to
be valuable as they can easily be exchanged for other things.
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Value
How much something can be exchanged for in comparison to other things.
Like beauty, value is in the eyes of the beholder. How vital is the need
for it? How useful is it? How badly is it wanted? Is it scarce or
abundant? How does it compare to others just like it? Is its value
being regulated by a government agency?
What do people agree is the value? Is there a price war between
competing sellers?
Value is really a matter of agreement between people.
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Produce
To create anything of value that can be exchanged for something else of value.
Product
Something of value that has been created or developed, that can be exchanged
for something else of value.
There are all manner of things that can be produced.
There are works of art, music, videos and books.
There are things like oil, gasoline, lumber, paper, ink glass and a whole
host of valuable materials.
There are things that are assembled, such as cars, stereos, computers,
and so on.
There are things that are grown and packaged for sale, such as fruits,
vegetables, meats, dairy products and so on.
The government produces currency and coins, among other things.
The question is, are they of a good enough quality or desirable enough
to be exchanged for other things?
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Manufacture
To make or process a product, especially on a large scale.
Some things, like fruits and vegetables, are simple to make and require
very little change to become a product. You just help Mother Nature along.
Others, like gasoline, iron, steel, cheese, and so on are processed from
raw materials that are not particularly valuable until they are processed.
Still others, like automobiles, require a great deal of fabrication and
assembly to become a product. Some things are processed to increase
their value. Food is often heavily processed to give it a nice color
or texture or make it easy to prepare. The processing is done to
increase the value of the food.
A manufacturer processes, fabricates and assembles materials into a
finished form. Often, manufacturing requires highly specialized
equipment and skilled technicians.
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Industry
Any specific branch of production or manufacturing.
You will often hear about an "industry." A good example of this is the
movie industry. What is being referred to is all the various people,
companies, producers, thinkers and so on who are involved in producing
movies.
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Money
Officially issued coins and paper currency that serve as a medium of
exchange and a measure of value and may be used as payment for goods
and services and for settlement of debts.
Money is a very handy innovation. Rather than carrying around the
products you have produced and attempting to find someone who has
something you want, who wants the product you have, and is willing
to trade, you just trade your products for money. Then you can trade
the money for somebody else's products.
These days you don't even really have to carry any money around with you.
You can just carry your check book or bank card around with you. This
is even handier, although it can be annoying to have to bring out your
ID all the time or put up with the delays of the electronic tellers.
You put your money in the bank and the banks keep track of everything
for a fee. This method of handling money is safer than carrying around
a lot of cash and a lot more convenient than having to go to the bank
all the time to draw out the cash you need to pay for things.
The government works very hard to maintain a standard of value for
money by printing what they think will be enough money to meet the needs
of all involved and to respond to changes in other nation's moneys. When
they print too much money, there is inflation. When the government prints
too little money, there is deflation. When they estimate the need to print
money correctly, and correctly analyze what is going in the other countries
of the world, they are successful in their efforts and the value of the
money stays on an even keel. The U.S. government has generally done well
in comparison to other nations in carrying out this activity.
Various things are agreed to have various values. These values are
expressed in terms of money. "How much is it worth?" is answered in
terms of money. Seldom do you ever hear a response such as "it's worth
two pigs and a hen."
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Buy
To obtain ownership of something with money or other valuables.
Buying is a process of offering money or some other valuable for some
product that you want to have or own. On larger items, you would obtain
a bill of sale or some other written document that would provide evidence
that you now own the item.
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Sell
To transfer ownership of something for money or valuables.
Selling is a process of offering a product in exchange for money or
some other valuable. When you receive the money, you give the buyer
the product or service. You might give them a receipt or bill of sale
so they can prove that they now own it. This process is referred to as
a transfer of ownership.
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Barter
To exchange the ownership of products without the use of money.
Barter is trading goods and services for goods and services. Barter
has been a method of exchanging products for thousands and thousands of
years.
Money has made the practice of barter almost obsolete, as it is so
much more convenient than hauling around products and trying to find
people to exchange them with.
There are now computerized barter services that produce lists of
people seeking barter. Sometimes this is an effective method of gaining
goods and services you might not otherwise be able to buy.
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Profit or Loss
The difference between what it costs to produce or purchase something
and what it is sold for.
If something cost you $10.00 to make or buy, and you sold it for $15.00,
you made a profit of $5.00. You now have more money or valuables than
what you started out with.
On the other hand, if something cost you $15.00 to make or buy and you
sold it for $10.00, you have a loss of $5.00. You now have less than
what you started out with.
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Goods
Any tangible product that is bought and sold for profit.
Most goods are produced from raw materials. These are processed
and then assembled into finished goods. Fabric used to make
clothing is a good example. A cotton farmer grows a cotton crop.
One manufacturer will process it so can be used to make cloth. Another
manufacturer will produce the cloth and perhaps dye it. Another will
make buttons, another will make thread. All of these goods are used
by a manufacturer that makes finished clothing. The manufacturer
sells the finished clothes in large quantities to their distributors,
who in turn sell them to various stores. The stores put them on
display and the public comes and buys them.
The word comes from an Anglo-Saxon word "god" which means "fit or suitable."
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Services
Any product resulting from labor that is bought or sold for profit.
Services are generally intangible because they are the application of
mental or physical skills or abilities.
Services include such things as repair work, bookkeeping, accounting,
tax preparation, consulting, data processing, typing, and so on.
Services produce changes in materials or goods. The changes restore or
increase the usefulness or value of the materials or goods.
A repairman, for instance, fixes a broken heater so that it works
properly and is restored to usefulness.
A bookkeeper sorts and records information in an orderly fashion so
that it can be utilized to find information and produce useful reports.
A carpenter applies his skills to fashion useful objects from wood.
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Merchandise
Anything bought or sold for profit.
Merchandise usually consists of tangible items bought in large quantities from their
manufacturers or wholesalers as finished goods. Because a large quantity
of them are bought at one time, they are priced lower than what they would
be priced if the items were sold one at a time. The buyer then marks up
the price of each item to be sold, and sells one or a few at a time to
buyers who have no need or desire for a large number of the item.
Common merchandise items are clothing, food, jewelry, cosmetics, computers,
TVs, radios, and so on.
The merchandiser usually does not make the finished product. He buys it
in bulk quantities and resells it for a higher price. If people want
the products he offers and he is able to sell all of them for more than
he paid for them, he makes a profit. If not, he has a lot of useless
products lying around and a loss.
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Trade
An exchange, as in barter, buying and selling.
As a commonly used word, trade involves any exchange of goods or services.
As an example, children trade baseball cards.
It can also be used to describe a certain group of individuals or group
who are involved in trading products or services within a certain type
of industry. They will explain matters about their "trade" to you.
They will have "trade" magazines. They will have "trade" associations.
They will have "trade" secrets. The people of a particular trade have
something in common, usually in the form of specialized knowledge,
skills or products.
It can also refer to the professions that require a particular
construction skill or handicraft, such as carpentry. These professions
are often referred to as "the trades." People who do this type of
work are referred to as "tradesmen."
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Market
To trade, or trade in general.
Anything bought or sold, traded, or bartered is part of "the market".
If market conditions are poor or down, trade is slow and buyers are not buying.
If market conditions are good or up, trade is doing very well, and buyers
are buying.
If you are planning to market a product of some kind, you are planning
to offer, display and sell it.
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Market
A place where something is offered for sale.
Throughout history, sellers have gathered together in a particular
location, placing the goods and services they have to offer on display.
This was done at a particular location that had been approved by the
local land-owners or perhaps the Church. The purpose of the market
was to attract buyers for the goods or services. This location was
referred to as the "market". When people said they were taking their
goods to "market", they meant a physical location.
Most markets have been replaced by store fronts and individual locations.
There still are public markets, such as swap meets, farmer's markets and
trade fairs, where a number of different sellers gather and offer their
goods and services in the traditional manner. Most of the public markets
that still exist are devoted to offering specific goods or services.
Some are curiosities, designed to capture the attention of tourists or
fun-seekers.
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Market
Trade that involves a specific type of product or service.
A market can be defined by the type of product or service involved.
All of the places where a particular product or service are being offered,
displayed and sold, during a particular time are included in a particular
market.
As an example, there is the automobile market. All of the different types
of automobiles that are manufactured and sold are included in this market.
The market includes the automobiles themselves, the manufacturers,
the sellers, the buyers, and the places where the automobiles are built,
stored and displayed. New automobiles might be displayed in a fancy show
room. Used automobiles might be kept at the seller's home, with the offer
to sell being made in an ad in a newspaper. No matter where the selling
location in, no matter how the buyers are persuaded to buy, no matter
how many buyers and sellers are involved, they are all dealing in the
same market -- the automobile market.
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Market
Trade that involves a particular region where one can buy or sell, or a
particular category of people or groups who are considered to be buyers.
Instead of defining a market by the type of product or service, a market
may be described by a region or geographical area.
An example would be that the North American market could be divided into
three smaller markets -- the Canadian market, the American market,
and the Mexican market.
It could be defined by a category of people who are considered to be
buyers, such as the college market, or the health care provider market.
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Commerce
The exchange of materials, products, goods, services and other valuables,
especially on a large scale, for profit.
Commerce generally refers to trade on a large scale, especially between
states or nations.
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Commercial
Related to or engaged in commerce.
A commercial activity is concerned with creating profits through production
or trade.
It can additionally mean "produced in large quantities."
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Consume
To use or use up, eat or drink a product or service.
There are those who produce a thing and there are those who consume it.
Some things, such as food, paper, pencils and so on have a short life
span and are used up or eaten immediately. These are consumables.
Other things last over a period of years, yet gradually wear out, such as
clothing, equipment, furniture and so on.
Other things, such as property improvements, last for very long periods
of times. They too have a tendency to deteriorate and eventually lose
their value and usefulness.
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Public
Those who may be grouped together for any given purpose.
An actor will speak of his "public." He is referring to his particular
audience.
There could be a public consisting of 8 to 10 year old boys. This public
would probably be interested in buying action figures. A store selling
action figures would try to reach that public as it would greatly improve
their ability to sell action figures.
In trade, "public" usually means individuals who have a potential desire
for a particular product or service.
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Consumer
One who consumes a product, as distinguished from a producer. One of the
buying public.
Consumers are commonly referred to as customers, clients or buyers.
These are the individuals that purchase, consume, and use commercially
produced goods and services.
In some industries, such as the computer industry, the consumer is referred
to as the "end-user." This is the person who will ultimately use the goods
or services.
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Wealth
Any surplus of valuables that is not used up or consumed.
Wealth is a matter of not having to consume or use all of your
valuables to maintain a desirable lifestyle or level of activity.
Is there anything left over? If there is, and there is a great deal of
it, then there is wealth.
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Capital
Wealth in any form used or available for use for the production of more
wealth or valuables.
You've heard the old saying, "It takes money to make money." This is
referring to capital.
In its broadest sense, capital includes anything of value. If you
counted up every single item of value in a country, including its
people, you would have the total capital of a country. This is the total
wealth of that country.
On a smaller scale, capital can be considered to be wealth in the form
of the necessary items to begin and maintain production and generate
sales of the products produced. Typical items would include land,
buildings, machinery, equipment, advertising and so on. All of these
things have a real monetary value and are kept on hand.
Capital can be used to upgrade machinery or equipment or expand an
activity so as to improve or increase its production and sales.
Capital can be used to purchase goods or services, with the intention
of re-selling, or renting them to others.
Capital that is in a monetary form can be lent to others for a fee.
Banks, and other lenders provide capital. They charge a fee for the
use of the money. The fee that is charged is referred to as "interest".
Capital may just be money that is stored in a bank, ready and available
for use.
The essence of capital is that it is a surplus of valuables. It isn't
needed to maintain personal activity or lifestyle and so can be used to
purchase items that will be used over short or long periods of time to
develop further wealth.
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Invest
To use money or capital for the purchase of products or services or
other valuable items with the expectation of profit.
People invest in all manner of things, hoping that they can make a
profit on them. They are referred to as investors.
They may have some reason to believe that the value of an item may
go up in value in the future, so they purchase it. When the value does
go up, they will sell it and make a profit. If the value goes down instead,
they will lose all or part of their investment.
They may believe that a certain product or service can be marketed in a
profitable manner and so invest time, money and energy to carry out
the idea.
They may provide money or capital to one or more people that they think
will be able to use it to make a profit, who will pay them a share of the
profits that are made from its use.
On a very personal level, they may invest in their own education so that
they may command a better wage or salary, and so increase their earning
power. This is a form of personal profit. This is a form of investment,
but a person who invests in this fashion not be referred to as an investor.
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Enterprise
Any organized project or on-going activity, with a particular objective,
undertaken by one or more individuals or groups of individuals.
This term refers to an entire organization that is attempting to get
something done.
It can also refer to business organizations in general. You will hear
this term when people are speaking of "free enterprise."
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Establishment
An enterprise that has acquired an separate and recognizable identity,
a specific location in space, material resources, capital and other
valuables, which has been set up and is maintained on an on-going basis,
to carry out the objectives of the enterprise.
Factories, stores, offices, firms, plants and so on are all establishments.
These are all locations organized for conducting business activities.
A secondary definition is "The Establishment," which means those in power
in business and government and the system under which such power is
exercised, maintained and carried out.
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Organize
To bring together or combine in an orderly arrangement for the purpose
of carrying out an objective.
One can organize spaces, furnishings and fixtures.
One can organize equipment and machinery to produce products.
One can organize materials for storage and retrieval purposes.
One can organize people and assign particular functions or duties
to each person.
The idea of organization is to create an efficient arrangement of spaces,
furnishings, equipment, materials, goods and labor so that one can
easily and effectively produce something of value.
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Business
As an activity, business is defined as the carrying on of trade or commerce,
involving the use of capital, and having, as a major objective, profits
derived from sales of goods or services.
The key here is that a business activity has, as its major objective,
profit. A business has invested time and valuables into acquiring
equipment, goods, services and so on and uses these to acquire more
equipment, goods and services. The owners expect to derive personal
income from its activity, greater than they would earn working for
some other business or greater than what they originally contributed
to the business.
A hobby is carried out for enjoyment. If it makes a profit, that's great.
If not, that's fine. Profit is not the major objective of a hobby.
Enjoyment is.
Business, as a term, is often used to indicate industrial or commercial
activity in general.
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Business
A commercial enterprise or establishment owned by one or more individuals
or groups.
Does it have a separate and recognizable identity? Does it communicate
or operate from a specific location? Is its main purpose to create
profits through commercial activities?
Then it is a business.
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Economics
Economics is the subject that deals with the production, distribution
and consumption of wealth.
Economic matters are those to do with the practical management of the
material resources or valuables (the wealth) of a nation, a community
or a business establishment.
The subject of the economy of a nation is concerned with the development
and management of the material wealth of that nation.
If one is economizing, one is frugally managing money, materials,
resources and the like so as to obtain the most for one's efforts.
This makes sense if you consider that wealth is a surplus of valuables
that one doesn't need to use to live on or make one's way.
Economic activities are activities that develop or manage wealth.
The word economy came from a Greek word "oikos" which means "house" and
"nemein" which means "to manage."
So economy originally meant " to manage house."
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Finance
The subject of monetary affairs
Finance has to do with money in all of its many forms. It is concerned
with dollars and cents. It is concerned with checks, cash, coins, loans,
capital, and the manipulation of monetary wealth in general.
It is concerned with the theory and practice underlying dealings in
money and its commercial uses.
If it is financial, it is about money. If it is financial, it will be
talked about in terms of dollars and cents. It is concerned with the
management and movement of money throughout a nation, a community or
any other establishment. Or it can be concerned with objectives,
rules, and guidelines for the use of money.
A Financial Manager is concerned with analyzing financial information
and making decisions about the use of the money a business has as its
disposal. A good financial manager will make decisions that result
in more money for the business. A bad financial manager will make
decisions that will result in less money for the business and
eventual failure.
A specialized use of the word finance has to do with supplying money for
the purpose of carrying out commercial activities. A bank will finance a
business, or perhaps a private individual will finance a business.
When they do this, they are supplying money to the business so it can
operate and obtain the items it needs to function.
A supplier may finance a business by allowing a business time to pay
for the items its needs to operate. The supplier gives the business
goods and the business is expected to pay the supplier at some later
agreed upon point in time.
However it is done, in this specialized use of the term, financing is
a method of obtaining money or funds to use to carry out one's activities
or obtain the items one needs.
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