Lesson 1: Introduction To Accounting
Lesson 1: Introduction To Accounting
LEARNING MODULES
Internal Users
Owner They are interested to know whether the business should be maintained, increased,
decreased, or disposed of completely. They also want to know whether they are getting
a fair return for his/her investment.
Management Financial information serves a measure for making future financial decisions and a
measure of its effectiveness.
External Users
Investors (Potential Investors) They are interested in the financial statement to determine whether
to acquire ownership in the firm.
Creditors (Potential Creditors) They are interested to investigate whether the firm can meet its
obligations before granting loans or credits.
Employees They are interested in accounting information to enable them to
assess the ability of the firm to provide remuneration and other
benefits.
Government The government needs accounting information to regulate the firm’s
activities and determine the basis for taxation policies.
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FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES
Accounting can be traced as far back as prehistoric times, perhaps more than 10,000 years
ago. Archeologists found writings in cones, disks, spheres, and pellets which serve as
records.
Public accounting is a professional service rendered by a CPA to the public for a fee.
1. Auditing It primarily centers on the critical examination of financial statements by an
independent CPA to express an opinion regarding the fairness of the
contents of the financial statements.
2. Management Advisory It assists the management through industrial advice regarding accounting,
Services finance, budgeting, business policies, and organization procedures.
3. Tax Services It deals with the preparation of income tax returns, business, and transfer
taxes. The accountant represents the client in tax assessment and
investigations conducted by the BIR.
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FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES
Government accounting mainly focuses on the custody of government funds and their purposes and is
generally used in accounting for the national government and its political instrumentalities.
Accounting education refers to CPAs teaching accounting in various colleges and universities.
A sole proprietorship is a business entity owned by one person and registered with DTI.
Advantages Disadvantages
Easy to start; only a few legal requirements. The owner bears all the losses.
Only the owner decides for the business. The owner bears all responsibility and decision-
making.
All profits are for the owner. Limited resources, e.g. capital and managerial
skills.
Lower extent of government regulation and Unlimited liability. The owner is legally liable for
relatively lower taxes. all business debts.
A partnership is a business entity owned by two or more persons called partners and registered with the SEC.
Advantages Disadvantages
Partners are sharing ideas towards a better Joint decision making may give rise to conflict
business decision. among partners.
Partners share the business risk and the Profits are divided among partners.
responsibility of running the business.
Easy to form – Mere agreement organizes a Limited life, since a partnership can be easily
partnership. dissolved by the withdrawal, retirement, death, or
insanity of one of the partners.
Joint resources, e.g. capital and skills. Lesser capital compared to a corporation.
Relatively lower extent of government regulation A partnership other than a general professional
compared to corporations. partnership is taxed like a corporation.
Unlimited liability - The partners can be held liable
for partnership debts up to their personal assets.
A corporation is an artificial person under the operation of the law and its existence as evidenced by its
registered Articles of Incorporation and Corporation By-Laws with the SEC.
Advantages Disadvantages
Limited liability because shareholders are liable for Shareholders have limited access and control over
corporate debts only up to they have invested. management and operations.
Greater source of resources, e.g. capital and skills. Costly and difficult to organize.
Unrestricted transfer of ownership. Greater government regulation and higher taxes.
Renewable and perpetual life. Profits are only shared through dividends when
declared by the board of directors.
Service business deals with the rendering of services to customers such as tailoring shops, beauty shops, and
professional firms.
Advantages Disadvantages
No or minimal inventory costs. Demand more personal time from the owner.
Minimal capital is needed. A service business is usually affected the most
during economic recession especially when it does
not cater to the basic needs.
Promote expertise. Largely depends on the owner’s credibility and
more costly to commit an error.
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FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES
Merchandising business deals with the buying and selling of goods for profit.
Advantages Disadvantages
Lower start-up capital than a manufacturing Requires retail stores in a strategic location.
business.
More opportunities for lesser purchase prices Lesser control on the purchase price of goods.
during sale offering more discounts.
Easy to start since it is only buying and selling. Higher inventory costs.
Manufacturing business involves the purchase of raw materials and converting these raw materials into
finished products.
Advantages Disadvantages
Potential for high growth. High start-up capital.
Opportunity to establish a brand that could last Conceptualizing a viable manufacturing business is
longer than your lifetime. difficult.
Do not need a retail store. Need to be always updated and innovative.
Better pricing policies due to economies of scale. Warehousing and logistics costs can be high.
Greater flexibility in controlling costs. Too much reliance on raw materials.
Manufacturing processes are too complicated and
difficult to manage.
Suggested Readings
1. Basic Financial Accounting and Reporting (2019) by Ballada & Ballada, pp. 1-1 to 1-48.
2. Financial Accounting & Reporting (Fundamentals) 2nd Edition (2019) by Millan, pp. 1-25.
3. Accounting Principles 13th Edition (2018) by Weygandt, Kimmel, & Kieso, pp. 1-1 to 1-25.
References
1. Ballada, W. & Ballada, S. (2019). Basic Financial Accounting and Reporting 22nd Edition.
Manila, Philippines: DomDane Publishers.
2. Millan, Z. V. (2019). Financial Accounting & Reporting (Fundamentals) 2nd Edition. Baguio
City, Philippines: Bandolin Enterprise.
3. Smith, M. (2018). Luca Pacioli: The father of accounting (2018). Available at SSRN:
https://ssrn.com/abstract=2320658 or http://dx.doi.org/10.2139/ssrn.2320658
4. Philippine Institute of Certified Public Accountants - Northern Metro Manila Chapter.
(2018). PFRS.
5. Torres, J. (2018). 95 years of invaluable service. https://www.manilatimes.net/2018/03/08/
opinion/analysis/95-years-of-invaluable-service/384747/
6. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting Principles 13th Edition.
Asia: John Wiley & Sons (Asia) Pte Ltd.