CHAPTER 3 Chapter Objective:

FORMS AND TYPES OF BUSINESS ORGANIZATIONS At the end of this chapter, students must be able to:
Topic Overview: 1. Differentiate the forms of business organizations.
1. Forms of business organization 2. Enumerate the advantages and disadvantages of each
2. Types of business according to activities form.
3. Compare and contrast the types of business according
to activities.
4. Enumerate the advantages, disadvantages, and
business requirement of each type.

FORMS OF BUSINESS ORGANIZATION

1. Sole proprietorship
A sole proprietorship is a business owned by one person, called the proprietor, who invests his money or capital in the
business.

2. Partnership
Two or more persons own a single business. The owners of a partnership are called partners. Partnership is created by
the mere agreement of the partners. From then, the partners contribute resources and industry into the common fund
and divide the profits of the venture among themselves based on their agreement.

3. Corporation
A corporation is created by at least five, but not more than, fifteen persons and with the consent of the government.
Corporations raise capital by issuing certificates of ownership called "stocks" or "shares" to interested persons. A person
who bought these shares from the corporation is a shareholder. A shareholder is a part owner of a corporation to the
extent of the number of his shares.

4. Cooperatives
A cooperative is a business formed and co-owned by its members. Members share the same interest or industry. For
example, miners who want to form a business to market their gold production can organize a marketing cooperative. The
cooperative buys the production of the members and sell the same to outsiders. The members benefit from the
cooperative from the ease of access to market. Each member need not have to individually market his production
because they have a common business (the cooperative) which shall market the same.
CHAPTER 4
BASIC ACCOUNTING CONCEPTS AND PRINCIPLES
Topic Overview:
This chapter discusses the basic accounting concepts and principles in the preparation of financial statements.
The concepts to be introduced in the following sections have a very pervasive impact on accounting.

BASIC ACCOUNTING ASSUMPTIONS

1. Going concern assumption
2. Accounting entity
3. Periodicity assumption / Accounting period assumption
4. Accrual
5. Monetary unit
Accounting assumptions are concepts or principles in the preparation of financial statements.

GOING CONCERN CONCEPT

The underlying assumption in the preparation of financial statements is the going concern assumption.

Financial statements are prepared on the assumption that the entity will continue in operation into the foreseeable
future without the need or intention to stop operation. As such, the resources to be realizable and the obligations of the
business are presumed payable in the normal course of business.

If there is significant doubt that the business will continue in operations ("Going concern problem"), the going concern
assumption is forgone and financial statements will be prepared under a Terminating concern basis. Under this basis, the
historical cost valuation is abandoned. The resources and obligation of the entity are re-measured to estimated

THE ACCOUNTING ENTITY CONCEPT

An entity is an object of accounting. Accounting presents financial information regarding an entity. An entity can be a
business, a person, an organization or the government.
A business is a separate accounting entity from its owners. Hence, in preparing financial reports about the business,
transactions of the owners are excluded.

PERIODICITY ASSUMPTION/ACCOUNTING PERIOD ASSUMPTION-

The periodicity assumption is an offshoot of the going concern assumption. The presumed indefinite life of the business
is broken into distinct equal time periods called "accounting period" over which the financial performance and financial
condition of the business are accounted and reported to users of the financial statements.
Income is not measured from the start-up of business up to its dissolution but is rather reported every accounting
period.
Most business enterprises use the annual accounting period and adopt either the calendar year or fiscal year accounting
period. A calendar year starts January 1 and ends December 31. A fiscal year is any 12 month period that starts any day
other than January 1 and ends any day other than December 31.

ACCRUAL BASIS
Under the accrual method, income are recorded in the accounting period they are earned regardless of when they are
collected whereas expenses are recorded in the period incurred regardless of when they are paid.

MONETARY OR MEASUREMENT CONCEPT - Only financial transactions are recorded and reported in terms of money
such as the Peso. Non-financial information is not recorded but information relevant to users of financial statements is
noted via a memo entry in the books.

OTHER ACCOUNTING CONCEPTS

1. Realization concept 2. Matching concept 3. Duality concept

REALIZATION CONCEPT

Income is recognized when it is realized or earned. Income is said to be realized when one of the contracting party
performed his obligation on the contract, thus have established a right to demand from the other party.
Realization of income from sale of goods. Income from the sale of goods is realized when ownership to the goods passes
to the customer.

Realization of income from sales of services. Income from the sale of services is realized when services are rendered
based on the extent of completion.

MATCHING CONCEPT

The matching concept relates to the timing of recognition of an expense. It postulates that expenditures shall be
expensed (i.e., matched with income) in the accounting period the benefits of the expenditure are realized by the entity.
An expenditure is an outflow of resources or an obligation requiring future outflow of resources.

Types of expenditure:

1. Capital expenditures these are expenditures that benefits future accounting periods. These are recorded in accounting
as assets. a. Supplies, b. Inventory, c. Equipment, d. Land, e. Building, f. Prepaid expense

2. Period expenditures - these are expenditures that benefits only the current accounting period. These are recorded as
expenses. a. Salaries, b. Utilities, c. Rent, d. Interest, e. Cost of sales

Recognition of expenses

Expenses are recognised in the income statement when a decrease in future economic benefits related to a decrease in
an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of
expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the
accrual of employee entitlements or the depreciation of equipment).

*Cash Basis of Accounting

There is also another accounting method for income and expense called the Cash Basis of Accounting. Under this
method, income is recorded when collected regardless of when earned while expense is recorded when paid regardless
of when it is incurred.

Cash basis is justified on the standpoint of practical grounds because generally speaking, cash is king in business.
Moreover, accrued income may not be realized or collected after all.
GAAP prescribes the accrual basis but not the cash basis. In practice, many businesses use cash basis in recording income
and expense but converts them to accrual basis when the financial statements are prepared for the general public. The
use of cash basis is allowable in practice if its use does not significantly or materially result in misstatement of reported
income and expense.

DUALITY CONCEPT - In accounting, each transaction is portrayed as a two-fold effect on at least two elements of financial
statements. This is one of the most important basic accounting concepts you must appreciate.
This two-fold effect is recorded in the accounting books as a debit and a credit entry in the accounting books.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Current generally accepted accounting principles (GAAP) make use of a
combination of these accounting concepts and principles in the preparation of financial statements. GAAPs in the
Philippines are popularly known as Philippine Financial Reporting Standards (PFRSs).