Fundamentals of

Accountancy, Business

BUSINESS ORGANIZATIONS AND

ACCOUNTING CONCEPTS & PRINCIPLES

Name of Student

Grade & Section

Mrs. Criselle D. Magdalita, CPA

Subject Teacher
I. Content Standard:
The learners demonstrate understanding of:
1. the various forms of business organizations (sole/single proprietorship, partnership,
corporation, and cooperatives)
2. the types of business according to activities, particularly service business,
merchandising business, manufacturing business
3. accounting concepts and principles

II. Performance Standard:

The learners shall be able to:
1. differentiate the forms of business organization in terms of nature of ownership
2. make a list of existing business entities in their community and identify the form of
business organization
3. differentiate the types of business according to activities
4. make a list of businesses in their community according to their activities
5. identify generally accepted accounting principles

III. Most Essential Learning Competencies:

The learners:
1. differentiate the forms of business organization
2. identify the advantages and disadvantages of each form
3. compare and contrast the types of business according to activities
4. identify the advantages, disadvantages, and business requirements of each type
5. explain the varied accounting concepts and principles
6. solve exercises on accounting principles as applied in various cases

IV. Learning Objectives:

After going through this lesson, the learners will be able to:
1. identify the forms of business organizations by nature of ownership
2. give examples of businesses in their respective communities and identify the form
3. identify the advantages and disadvantages of the four forms of business organization
4. review the types of business according to activities
5. describe a service entity and give examples
6. describe a merchandising entity and give examples
7. describe a manufacturing entity and give examples
8. enumerate the principles of accounting; differentiate each principle; and apply the
accounting principle in a business setting

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 Let us Pray

“Heavenly Father, You hold each of us in your loving hands. Come fill our hearts, minds and
bodies afresh with hope. Help us to cast our worries upon you, so that we can embrace our
learning today.

Bless us as we study and grow together. Come and anoint those who teach and tutor us to be
bringers of insight and knowledge. Lord, watch over us all, keep us safe within your Almighty
hand.

Amen.”

DISCUSSION

FORMS OF BUSINESS ORGANIZATIONS

The forms of business organizations in the Philippines are as follows:

1. Sole/single proprietorship
A sole or single proprietorship is owned by a single person or individual and is the simplest
among the forms of business organizations. The owner of this form of business is called the
proprietor or sole proprietor, who is also often the manager or operator. Common examples of
sole proprietorships are those small service-type businesses engaged in by professionals
practicing as individual practitioners like lawyers and accountants and those retail businesses
like sari-sari stores or mini convenience stores. A sole proprietorship must be registered with
the Department of Trade and Industry.

In a sole proprietorship form of business, the owner is the boss and keeps all the profits. If
the business incurs a loss, the owner assumes all of it. The owner is also personally liable for all
the debts of the business. Having a sole owner who takes charge of the business operations
makes the decision-making process in a sole proprietorship simple. However, as the owner
makes all the decisions, the results and repercussions of all decisions made are also the owner’s
responsibility. A sole proprietorship is relatively easier and less costly to set up compared to
other forms of business organizations. The increase in capitalization of a sole proprietorship
relies heavily on the owner’s resources (either through personal assets or obtaining loans), so it
has limited ability to raise capital.

2. Partnership
Partnership is a form of business owned by two or more individuals, called partners. They
enter a partnership contract and bind themselves to contribute money, property, or industry to a

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 common fund, with the intention of dividing the profits among themselves. A partnership needs
to be registered with the Securities and Exchange Commission (SEC).

In a partnership, the partners in the business have to share in the profits. They also distribute
any losses incurred among themselves. Generally, the partners in a partnership have unlimited
personal liability. It means they are liable to the extent of their personal properties for all the
partnership debts and obligations. Decision-making is not as simple as that in a sole
proprietorship because business decisions must be agreed upon by the partners to avoid potential
conflicts. Since all the partners are involved in decision-making, the risks and responsibilities
associated with the decision are borne by all the partners. A partnership is easy to form
compared to corporations and cooperatives and has higher capital than a sole proprietorship
because more than one person contributes to the business’s fund.

3. Corporation
A corporation is an artificial being created by operation of law. It is a separate legal entity.
Ownership in a corporation is divided into shares of stocks. The share of the stockholders or
shareholders in the profits of the corporation depends on their shares of stocks. The more shares
of stocks owned by a stockholder or shareholder, the larger the share in profits. Profits in a
corporation are distributed in the form of dividends. A corporation must be registered with the
SEC.

Unlike in other forms of business organizations, the stockholders or shareholders in a

corporation have limited liability, meaning they are not personally liable for the corporation’s
debts and are liable only up to the extent of their investment. Decision-making in a corporation
is delegated to the board of directors, elected by the stockholders or shareholders, and the
appointed or hired managers. A corporation is more complex and subjected to more government
regulations compared to the other forms of business organization; therefore, it is more difficult
and costly to form. However, it is easy for a corporation to increase capital and raise additional
funds through issuance of shares.

4. Cooperative
A cooperative is owned by more than one individual, called members. A cooperative is an
association of individuals who joined together to contribute capital and cooperate to achieve
certain goals. The members of a cooperative are expected to patronize their products and/or
services. A cooperative must register with the Cooperative Development Authority (CDA).

A cooperative is generally exempt from paying taxes and may receive assistance from the
government. The members of a cooperative also have limited liability, which means they are
liable for cooperative debts only up to the amount they have invested. The cooperative’s
distribution of surplus (profits) is limited because the Cooperative Code restricts the distribution
of its surplus to its members by requiring the cooperative to set aside a portion of its annual

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 surplus for some funds (general reserve fund, education and training fund, community
development fund, and optional fund).

THREE TYPES OF BUSINESSES ACCORDING TO ACTIVITIES

There are three major types of businesses according to activities. They are as follows:
1. Service business – involves the performance or rendering of services to clients for a certain
fee. Examples of service businesses include salons or barber shops, carwash shops, repair
shops, accounting firms, law firms, schools, tutorial centers, and review centers.
2. Merchandising business – is also called trading business and pertains to the buying and selling
of goods. Examples of merchandising businesses are department stores, RTW stores, grocery
stores, sari-sari stores, and drug stores.
3. Manufacturing business – converts raw materials into finished products. Products sold by
manufacturing businesses undergo a production process before being sold to customers.
Examples are food manufacturing companies (Nestle Philippines, Inc., Coca-Cola Beverages
Philippines, Inc., etc.), pharmaceutical manufacturers (Unilab, Inc., Pascual Laboratories, Inc.,
etc.) and car manufacturers (Toyota, Isuzu, Mazda, etc.).

ACCOUNTING CONCEPTS AND PRINCIPLES

The Generally Accepted Accounting Principles (GAAP)

Because of the various user’s need for financial information, usually presented in the form of
financial statements, the accounting profession has developed standards that are generally accepted
and universally practiced. These standard principles, assumptions, and procedures are called the
generally accepted accounting principles (GAAP). These principles guide accountants in
measuring, recording, and reporting the financial activities of an enterprise.

Basic Accounting Concepts and Principles

Accounting concepts and principles serve as the accountants' guide in recording transactions, so
users of the accounting information would have reasonable assurance that the information is
reliable and appropriately prepared. The accounting concepts and principles, therefore, help
accountants to accomplish the objectives of accounting. They make accounting information more
useful to users. The concepts and principles continuously evolve to address the changes in
economic conditions, business practices, and needs of financial statement users.

Listed below are some of the basic accounting concepts and principles that help direct and regulate
the accounting practice.

a. Entity Concept (or Separate Entity Concept) - requires that activities of the entity be
kept separate and distinct from the activities of its owner and all other economic entities.

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 b. Historical Cost Concept (or Cost Principle) - dictates that companies record assets at
their cost.
c. Going Concern Assumption - the financial statements are prepared on the assumption that
an enterprise is a going concern and will continue in operation for the foreseeable future.
d. Matching - some costs are initially recognized as assets and charged as expenses only
when the related revenue is recognized.
e. Revenue Recognition Principle - dictates that revenue is to be recognized in the
accounting period when goods are delivered, or services are rendered or performed.
f. Expense Recognition Principle - dictates that expenses should be recognized in the
accounting period in which goods and services are used up to produce revenue and not
when the entity pays for those goods and services.
g. Accrual Basis of Accounting - income is recorded in the period when it is earned rather
than when it is collected, while expense is recorded in the period when it is incurred rather
than when it is paid.
h. Prudence (or Conservatism) - The observance of some degree of caution when exercising
judgments under conditions of uncertainty. Such that, if there is a choice between a
potentially unfavorable outcome and a potentially favorable outcome, the unfavorable one
is chosen. This is necessary so that assets or income are not overstated, and liabilities or
expenses are not understated.
i. Periodicity Concept (or Time Period, or Reporting Period) - requires that an entity’s
life be meaningfully subdivided into equal time periods for reporting purposes.
j. Stable Monetary Unit Concept - requires that companies include in the accounting
records only transaction data that can be expressed in terms of money. The Philippine peso
is a reasonable unit of measure and that its purchasing power is relatively stable.
k. Materiality Concept - depends on the size and nature of the item judged in the particular
circumstances of its omission. Financial reporting is only concerned with information that
is significant enough to affect evaluations and decisions.
l. Cost-benefit (or Cost Constraint) - The costs of processing and communicating
information should not exceed the benefits to be derived from the information’s use.
m. Adequate Disclosure Principle (or Full Disclosure Principle) - requires that all relevant
information that would affect the user’s understanding and assessment of the accounting
entity be disclosed in the financial statements.
n. Consistency Principle - requires that firms use the same accounting method from period
to period to achieve comparability over time within a single enterprise. However, changes
are permitted if justifiable and disclosed in the financial statements.

Qualitative Characteristics of Useful Financial Information

Qualitative characteristics are the traits that determine whether an item of information is useful to
users. Without these characteristics, financial information may be deemed useless and not serve its
purpose of guiding users to make informed decisions.

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Fundamental qualitative characteristics:
• Relevance- Information is relevant if it can affect the decisions of users. Confirmatory and
predictive roles are the principal ingredients of relevance and are interrelated. Materiality
is an entity-specific aspect of relevance.
✓ Predictive value – the information can be used in making predictions
✓ Confirmatory value – the information can be used in confirming past predictions
• Faithful representation- Faithful representation means the information provides a true,
correct, and complete depiction of what it purports to represent. Faithful representation
means representation of the substance of an economic phenomenon instead of
representation of its legal form only. (Substance over form)

Faithfully represented information has the following:

o Completeness – all information necessary for users to understand the phenomenon
being depicted is provided.
o Neutrality – information is selected or presented without bias.
o Free from error – there are no errors in the description and in the process by which
the information is selected and applied.

Enhancing Qualitative Characteristics:

• Comparability – the information helps users in identifying similarities and differences
between different sets of information.
• Verifiability – different users could reach consensus as to what the information purports to
represent.
• Timeliness – the information is available to users in time to be able to influence their
decisions.
• Understandability – users are expected to have:
o reasonable knowledge of business activities; and
o willingness to analyze the information diligently.

Fundamental vs. Enhancing

• The fundamental qualitative characteristics are the characteristics that make information
useful to users.
• The enhancing qualitative characteristics are the characteristics that enhance the usefulness
of information.

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 References

• Ballada, W. (2022). Basic financial accounting and reporting made easy, 24th edition.
DomDane Publishers.
• Ferrer, R. C., & Millan, Z. V. B. (2017). Fundamentals of accountancy, business &
management part 1. Bandolin Enterprises.
• Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd ed. Valencia Education Supply
• Weygandt, J. et. al. (2012) Accounting Principles, 10th ed. John Wiley & Sons (Asia) Pte.
Ltd.

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