CHAPTER 1 C.
According to the Accounting Standards
BASIC FINANCIAL STATEMENTS (FS)
- One of the most important documents in
starting a business
*Stewardship Function – business should be
transparent on the performance and standing of
the business to its stakeholders.
A COMPLETE FS HAS THE FF:
A. Statement of Financial Position
B. Income Statement
C. Statement of Changes in Equity
D. Statement of Cash Flows
E. Notes
OBJECTIVES OF FS
- Provide information about the financial
position, financial performance, and
cash flows of a business
- Provide information about a business
assets, liabilities, equity, income and
expenses
BUSINESS TRANSACTIONS
- Interaction between business and other
stakeholders.
- Have to be identified, measured, and
documented.
DEFINITION OF ACCOUNTING
A. According to American Accounting
Association (AAA), accounting is the
process of identifying, measuring, and
communicating economic information to
permit informed judgement and
decisions by users of the information.
B. According to the American Institute of
Certified Public Accountants (AICPA),
accounting is the art of recording,
classifying, and summarizing in a
significant manner and in terms of
money, transactions and events which
are in part at least of financial character,
and interpreting the results thereof.
Council (ASC), 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.
NATURE OF ACCOUNTING
*Monetary Transactions= ACCOUNTING
*Non-Monetary Transactions= NOT ACCOUNTING
Accounting is also an “information system”
*INFORMATION SYSTEM – set of
interrelated components that work together to
achieve a common purpose.
*For businessmen, entrepreneurs, managers,
and stakeholders, accounting is a service
activity.
FUNCTION OF ACCOUNTING IN BUSINESS
1. To fulfill the stewardship functions of
the management
2. To help interested users come up with
informed decisions
3. To support daily operations of the
business
BOOKKEEPING vs ACCOUNTING
BOOKKEEPING: recording of monetary
transactions
ACCOUNTING: is broader as it includes the
bookkeeping functions
FRATER LUCA BARTOLOMES PACIOLI
- Italian monk
- Mathematician
- Father of Modern Accounting
- Lived in Venice
- Popularized the system of recording
business transactions using
memorandum books, journal books, and
ledger books.
 CHAPTER 2
BRANCHES OF ACCOUNTING
A. PUBLIC ACCOUNTING
- Offers to perform any activity that will
result to the issuance of an attest report
that is in accordance with professional
standards.
- Usually works in firms offering its
services to various clients
- Certified Public Accountants (CPAs)
SERVICES OF A PUBLIC ACCOUNTANT:
1. EXTERNAL AUDITING
- Expresses an opinion whether
statements have been fairly presented or
not
- Issues an independent audit report for
the findings
2. TAX PREPARATION AND
PLANNING SERVICE
- Advises and help clients in tax planning
and preparing tax returns
- Represents the clients in any tax-related
case filed by the BIR
3. MANAGEMENT ADVISORY
SERVICES
- Financial planning and control and the
development of accounting and
computer systems
- Advices managers on the installation of
accounting system, finance, budgeting,
business processes, introduction to new
products, and other business activities.
B. PRIVATE ACCOUNTING
- Development and interpretation of
accounting information intended to
assist management in operating the
business.
- Deals with the day-to-day accounting
needs of a business/company.
SERVICES OF A PRIVATE ACCOUNTANT:
1. FINANCIAL ACCOUNTING
- Provides economic and financial
information for investors, creditors, and
other external users.
- Focuses of recording and classifying of
business transactions while applying
generally accepted accounting principles
(GAAP).
- Information gathered from financial
accounting helps investors and creditors in
deciding where to place their scarce
resources.
2. COST ACCOUNTING
- Focuses on accumulating manufacturing
costs for financial reporting and decision-
making purposes
3. BUDGETING
- Detailed collection and reporting of the
expenditures and revenues involved ina
business or company operations.
4. ACCOUNTING INFORMATION
SYSTEM
- Collects and processes transaction data
5. TAX ACCOUNTING
- Deals with the preparation of various tax
returns and doing tax planning for the
business.
6. INTERNAL AUDTING
- Checks if business operations are
complying to management policies.
- Evaluates the efficiency of business
operations.
C. GOVERNMENT ACCOUNTING
- System used in government offices to
record and report financial transactions
- This reveals how public funds have been
generated and utilized.
 D. ACCOUNTING EDUCATION
- Responsible for training future
accountants
CPAs in SPECIALIZED AREAS:
1. Forensic Accounting: provide the
detective work needed to investigate and
examine evidence of white-collar financial
crimes such as stealing or fraud.
2. Information Technology Services: seeks
individuals who can design and implement
customized software systems.
3. Environmental Accounting: determine
how companies can be both profitable and
environmentally responsible.
4. International Accounting:
knowledgeable in international trade rules
and regulations, international mergers,
government regulations, tax laws, and
overseas transactions. Often travel abroad
and can speak and understand different
languages.
CHAPTER 3
INTERNAL USERS
- Make decisions on behalf of the
organization.
1. Managers/Management- they plan, run,
and organize a business.
a. Top-level Management – oversee the
performance of the whole
organization and set its strategic
direction
b. Middle-level Management – ensure
that their unit’s performances are
aligned with the organization’s
objectives.
c. Lower-level Management – oversee
the day-to-day operations and direct
employees in the performance of
tasks.
2. Employees/Labor Unions- assess the
company’s profitability and stability and
their consequence on future salary and job
security.
3. Owners- provide the capital of business.
Need accounting information to help them
decide whether they should withdraw or
increase their investments.
EXTERNAL USERS
- Who make their decisions based on the
company’s financial information.
1. Potential and Existing Investors- to help
them decide whether they should invest or
not in the business. Want to know
potential returns on their investments.
2. Creditors and Potential Creditors-
assess the credit worthiness and the
capability of the business to pay its
obligation including the related interests
on maturity date.
3. Customers- assess the financial position
of their suppliers. To know whether the
business will continue to honor its product
warranties.
4. Suppliers- to determine whether the debts
owed to them will be paid when due or
whether the customer has enough fun or
resources to pay the goods to be delivered
or the services to be rendered.
5. Tax Authorities- to determine the
credibility of the tax returns filed on
behalf of the company. To know if the
business paid the correct amount of taxes.
6. Regulatory Bodies- ensure the company’s
disclosure of accounting information is in
accordance with the rules and regulations
set in order to protect the interest of the
stakeholders.
7. Public- to know how the business affects
the economy possible prospects for
employment and/or for educational and
research purposes.
 CHAPTER 4
TYPES OF BUSINESSES ACCORDING TO
OWNERSHIP:
1. Sole Proprietorship
- Owned by only one individual
- Simplest and least costly form of
ownership
- Risky; assumes unlimited liability and in
most cases personal assets are on the line
if the business cannot pay its creditors.
- Common to small business entities
- Taxes the owner and not the business
2. Partnership
- Owned by two or more individuals
- Profit is divided among the partners as per
partner’s agreement with written
agreement called articles of co-
partnership.
a. General Partnership – unlimited
liability.
b. Limited Partnership – limited
partners and at least one general
partner.
- Unlimited liability and limited life
4. Cooperative
- At least 15 members to function
- Board of directors and officers to manage
the business operations.
- Members become part of the cooperative
by purchasing shares
a. Incorporated
b. Unincorporated
TYPES OF BUSINESS ACCORDING TO
ACTIVITES
1. Service Business
- Provide intangible products (skills,
proposals, expertise)
2. Merchandising Business
- “buy and sell” business
3. Manufacturing Business
- Materials are bought to create a new
product

3. Corporation
- 5-15 incorporators
- Owners have limited liability and limited
involvement from the operations
- Board of directors take control of the
operation’s activities.
a. Profit Corporation – issues to its
owners or shareholders shares of
stocks which are evidenced by stock
certificate.
b. Non-Profit Corporation – does not
issue shares of stocks
*By-laws- contain provisions for internal
administration of the operation.