INTRODUCTION

OF ACCOUNTING
CHAPTER 1
DEFINITION OF ACCOUNTING
Accounting is the process of identifying, recording and communicating economic
information that is useful in making economic decisions.

“Accounting is the art of recording, classifying and summarizing in a significant

manner and terms of money, transactions and events, which are, in part at least,
of a financial character and interpreting the result thereof”. – AICPA
DEFINITION OF ACCOUNTING
“Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is
intended to be useful in making economic decisions, in making reasoned choices
among alternative courses of action.” – AICPA

“Accounting refers to the process of identifying, measuring and communicating

economic information to permit informed judgments and decisions by users of
the information”. – AAA
ESSENTIAL ELEMENTS OF THE DEFINITION OF
ACCOUNTING
1. Identifying – The accountant analyzes each business transaction and identifies
whether the transaction is an “accountable events” or “non-accountable events”.
This is because only accountable events are recorded in the books of accounts.
2. Recording – The accountant recognizes (i.e. records) the identified
“accountable events”. This process is called “journalizing.”
After journalizing, the accountant classifies the effects of the event on the
“account”
Account is the basic storage of information in accounting, e.g. “cash, land, sales,
etc.”
ESSENTIAL ELEMENTS OF THE DEFINITION OF
ACCOUNTING
3. Communicating - At the end of each accounting period, the accountant
summarizes the information processed in the accounting system in order to
produce meaningful reports. This is made normally through reporting of
“Financial Statement”.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. QUANTITATIVE INFORMATION

2. QUALITATIVE INFORMATION

3. FINANCIAL INFORMATION
ACCOUNTING AS SCIENCE AND ART

SOCIAL SCIENCE - Systematically gathered, classified and organized. It

pertains to fixed rules.

PRACTICAL ART – Use of creative skills and judgment. It pertains to the use of
estimation.
BOOKKEEPING AND ACCOUNTING

BOOKKEEPING – Process of recording the accounts or transactions of the

entity.

ACCOUNTING – Covers the whole process of identifying, recording and

communicating of financial information.
USERS OF ACCOUNTING INFORMATION

INTERNAL USERS – Directly involved in managing the business.

a. Business owners who are directly involved in managing the business.
b. Board of Directors.
c. Managerial Personnel
EXTERNAL USERS – Not directly involved in managing the business.
a. Existing and potential investors (Stockholders)
b. Lenders (Banks) and Creditors (Suppliers)
c. Government agencies (BIR, DTI, SEC)
d. Non-managerial employees
e. Customers
f. Public
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS
TO USERS NEEDS
1. General Purpose – Meeting the common needs. Normally provided by
financial accounting and is prepared primarily for external users.
2. Special Purpose – Meeting the specific needs. Normally provided by
management accounting or other branches of accounting and is prepared for
internal users.
EXAMPLES OF DECISIONS AND TYPES OF
INFORMATION NEEDED TO MAKE THOSE DECISIONS
USERS EXAMPLE OF DECISION TO EXAMPLE OF
MAKE INFORMATION NEEDED
1. EXTERNAL USERS *Existing investors: Audited FS of the business
(INVESTOR) Whether to hold or sell investment (General purpose information)
in stocks.
- To measure the value of the
*Potential investors: company.
Whether or not to buy shares of
stocks.
2. EXTERNAL USERS *Lender: Audited FS of the business
(LENDERS OR SUPPLIERS) Whether or not to extend loan to a (General purpose information)
business.
- To measure the ability to pay
*Supplier: debt.
Whether or not to extend credit to
a business.
EXAMPLES OF DECISIONS AND TYPES OF
INFORMATION NEEDED TO MAKE THOSE DECISIONS
USERS EXAMPLE OF DECISION TO EXAMPLE OF
MAKE INFORMATION NEEDED
3. INTERNAL USERS Whether or not to increase the Earning analysis (Special Purpose
(MANAGER) sales price of a product. Information – Tailored report)
4. INTERNAL USERS How much capital is needed to Budget report (Special Purpose
(MANAGER) manufacture a new product Information – Tailored report)
EXAMPLES IN WHICH ACCOUNTING IS USED IN
INVESTMENT AND CREDIT DECISIONS
EXTERNAL USER OF DECISION ACCOUNTING
INFORMATION INFORMATION
1. INVESTOR Shall invest in this business? Is Financial performance of the
this a profitable undertaking? business
2. CREDITOR Shall I lend money to this The ability of the business to
business? Does this business have generate revenue and cash flows
the ability to pay back my loan? from its operation
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
1. FINANCIAL ACCOUNTING > General record-keeping, i.e., > All busineses use financial
maintenance of Journals and accounting in their record-
Ledgers. keeping. These records provide
information that is also used in the
other branches of accounting.

>Businesses prepare general FS at

> Preparation of general purpose least annually for the use of
FS lenders, investors, or government
regulatory bodies.
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
2. MANAGEMENT > Preparation of specifically > Required by management to aid
ACCOUNTING tailored management reports them in performing their
management functions.
3. GOVERNMENT > General record-keeping and > Requried by the government and
ACCOUNTING preparation of financial reports for its agencies.
the government and its agencies. It
also includes the preparation of
budgets and accountability
reports.
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
4. AUDITING >Expression of an opinion on the >Business with gross annual sales
correspondence between or receipts exceeding P3,000,000
management assertions (FS) and are required to have their financial
established criteria. statements audited by independent
CPA.
*The most common form of an
audit opinion is the
Independent Auditors Report
which is attached to audited FS.
(Unqualified Opinion/Qualified
Opinion/Disclaimer
Opinion/Adverse Opinion)
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
5. TAX ACCOUNTING >Preparation of Tax Returns >All businesses are required to file
tax returns.
* Failure to file tax returns results
to penalty and imprisonment of
not less than 6 years but not
morethan 10 years.

> Providing tax advice.

> Some taxpayers may require the
professional advice of a tax
practitioner regarding the
management of taxes.
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
6. COST ACCOUNTING >Analyses of costs of products or >Businesses use cost accounting
services. to analyze the cost of their
products or services and the
effects of those costs in, among
others, earnings and pricing
policies.
COMMON BRANCHES OF ACCOUNTING

BRANCH OF ACCOUNTING TYPE OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
7. ACCOUNTING >Teaching of accounting and >Required by business students,
EDUCATION (ACADEME) related subjects. business owners, accounting
professionals in their CPD and
other interested parties.
8. ACCOUNTING RESEARCH > Accounting research papers, > Required by business owners
articles and similar publications professional organizations, and
other interested parties.
FORMS OF BUSINESS ORGANIZATION

FORM OF BUSINESS OWNERSHIP FORMATION/

ORGANIZATION REGISTRATION
1. SOLE PROPRIETOR >One individual (Sole Proprietor) > Reigistered with the DTI.
2. PARTNERSHIP > More than one (Partners) > Formed by contractual
agreement.

> Registered with SEC.

3. CORPORATION > More than one (Shareholders) > Formed by operation of law.

> Registered with the SEC.

4. COOPERATIVE > More than one (Members) > Formed in accordance with the
Cooperative Code.

> Registered with the CDA.

ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
SOLE PROPRIETOR

ADVANTAGES DISADVANTAGES
> You are the boss and you keep all the profits. > You assume all the risk of loss.

> Decision making is simple because you have > You take all responsibility and rely mostly on
complete control over the business. yourself in making decisions.

> Relatively easier and less costly to form because > It is more difficult to raise capital because you rely
there are fewer formal business requirements. mostly on your personal assets and loans to initially
finance the business.
> Lower extent of government regulation and
relatively lower taxes. > You are personally liable for the debts and
obligations of the business.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
PARTNERSHIP

ADVANTAGES DISADVANTAGES
> Better business decisions can be made because >Making business decisions may give rise to conflict
“two heads or better than one” among the partners.

> You share the business risk and the responsibiliy of > You don’t keep all the profits because you need to
running the business with your partner(s). share them with your partner(s).

>Compared to corporations and cooperatives,

partnership is easier to form because only contractual > Limited life, in the sense that a partnership can
agreement between the partners is needed. easily dissolved by withdrawal, retirement, death or
insanity of one of the partners.
> Greater capital compared to a sole proprietorship.

>Lesser capital compared to a corporation.

ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
PARTNERSHIP

ADVANTAGES DISADVANTAGES
> Relatively lower extent of government regulation > A partnership (other than a general professional
compared to corporation. partnership) is taxed like corporation.

> Unlimited liability. The partners can be held liable

for partnership debts up to their personal assets.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
CORPORATION

ADVANTAGES DISADVANTAGES
> A stockholder who is not a member of the > Your “say” on corporate affairs depends on the
corporation’s board of directors is relieved from number of shares you own. Those who own more
managerial responsibilities. Only the stockholders shares are the bosses and enjoy a larger share of the
that are elected as members of the board of directors corporation’s profits.
and those they hire or appoint are tasked with
managerial responsibilities. This can be an advantage
because a regular investor does not need to work for
the corporation to earn income.

> Limited liability of the owners because

stockholders are liable for corporate debts only up to > A corporation is more difficult and more costly to
the amount they have invested. form because there are more formal business
requirements.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
CORPORATION

ADVANTAGES DISADVANTAGES
> Greater capital and ease in raising additional funds > Greater extent of government regulation and
because a corporation can issue shares to a wider higher taxes.
extent of investors.

> If the corporation is listed, you can easily transfer > Unlike for a sole proprietorship or partnership
your shares to other investors by selling them in the where a business profits are easily distributed to the
stock market. Many investors earn profit, wait for owner(s), in a corporation, you have to wait for the
prices to go up, and then sell them. This activity is board of directors to declare dividends before you
referred to as stock trading. can get your share in the profits.

> Unlimited life, in the sense that withdrawal,

retirement, death or insanity of one of the
stockholders does not dissolve the corporation.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
CORPORATION

ADVANTAGES DISADVANTAGES
Although a corporation has a legal life of 50 years,
this can be renewed for an indefinite number of
renewals.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
COOPERATIVE

ADVANTAGES DISADVANTAGES
> Unlike in a corporation, your “say” on cooperative > A cooperative is prone to poor management.
affairs is not affected by the number of shares you Cooperatives are, more often than not, manage by
own. This is because, in a cooperative, each member members who are elected as board of directors rather
is entitled to only one vote regardless of his or her than by employed professional managers. Since there
shareholdings. However, members with larger is one membe, one vote policy in a cooperative,
shareholdings are entitled to larger share in profit influential members tend to dominate the election
(net of surplus). process. The result is that those who get elected may
not be the ones who are most qualified for the task.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
COOPERATIVE

ADVANTAGES DISADVANTAGES
>A cooperative is generally exempt from paying > A cooperative is susceptible to corruption. Due to
taxes. This is the main advantage of a cooperative its management structure and lack of profit motive,
and the most common reason why cooperatives are the elected officers may be inclined to act on their
organized. Moreover, a cooperative may receive personal interests.
assistance from the government.
ADVANTAGES AND DISADVANTAGES OF THE
DIFFERENT FORMS OF BUSINESS ORGANIZATION
COOPERATIVE

ADVANTAGES DISADVANTAGES
>Compared to a corporation, a cooperative is easier > The Cooperative Code places some restriction on
and less costly to form because there are fewer the distribution of a cooperative’s profit to its
formal business requirements. members. More specifically, the Code requires the
cooperative to appropriate a portion of its annual
profit to some funds. Only the remaining portion can
be distributed to the members.

Furthermore, when the cooperative is dissolved the

amount accumulated in a fund called the “reserve
fund” will not be returned to the members, but rather
donated to another cooperative or to the community.
TYPES OF BUSINESS ACCORDING TO ACTIVITIES

*SERVICE BUSINESS
*MERCHANDISING (TRADING)
*MANUFACTURING
ADVANTAGES AND DISADVANTAGES OF DIFFERENT
TYPES OF BUSINESS
SERVICE BUSINESS
ADVANTAGES DISADVANTAGES
> No inventory need to maintain. > Requires to always be physically present
> Small capital might be enough. > It takes so much time to establish it’s customer-
> Perceived as expert of whatever field. base
> Need to maintain a good image
ADVANTAGES AND DISADVANTAGES OF DIFFERENT
TYPES OF BUSINESS
MERCHANDISING BUSINESS
ADVANTAGES DISADVANTAGES
> Small capital might be enough. > Its a must to have strategical place and also a
> Profit-determination. storage house.
> Easier to start. > Costs-dependent.
> Need to monitor the inventory level
ADVANTAGES AND DISADVANTAGES OF DIFFERENT
TYPES OF BUSINESS
MANUFACTURING BUSINESS
ADVANTAGES DISADVANTAGES
> Have a potential to widen the connection. > Requires bigger amount as start-up capital.
> Have the opportunity to establish a long-lasting > Challenges in terms of conceptualizing.
brand. > Costly warehousing and logistic costs.
> Strategical location is not necessary. > Maintain a healthy connection to many supplier of
> Better pricing policy your materials.
> Difficulty in terms of managing the production.