BASIC ACCOUNTING

PART I

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 a financial character, and interpreting the results thereof. - American
Institute of Certified Public Accountants (AICPA)

Types of Business

Services – selling peoples time (e.g. accounting firm, law firm)

Trading/Merchandising – Buying and selling products (e.g. wholesaler, retailer)

Manufacturing – Designing products, aggregating components and assembling

finished products (e.g. construction, pharmaceuticals)

Forms of Business Organizations

Sole Proprietorship – this business organization has a single owner called

proprietor who generally is also the manager. (e.g. accountants, physicians,
lawyers)

Advantages:

A. Minimal costs and requirements in formation

B. The owner can withdraw assets and profits of business anytime at his or
her own discretion.
C. Decision making is solely depends on owner
D. Duration of the life of the business solely depends on its owner

Disadvantages:

A. Resources are limited as capital provided by the owner

B. Liabilities are unlimited as he or she is accountable to all creditors of the
business.
 C. Knowledge to management is limited to one person.

Partnership – is a business owned and operated by two or more persons who

bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.

Advantages:

A. Minimal costs and requirements in formation

B. More funds contributed from investment of partner
C. More knowledge, experience and skills when it comes to management.
D. There can divisions of labor between or among partners.

Disadvantages:

A. The partners are liable for the action of each partner

B. General partner has unlimited liabilities
C. Disagreement between or among partners can lead to withdrawal of one
or more partners.
D. Death, retirement, withdrawal, or incapacity of partner results in the
dissolution of partnership.
E. Admission of new partner depends on approval of other partners.

Corporation – is a business owned by its stockholders. It is an artificial being

created by the operation of law, having the rights of succession and the
powers, attributes and properties expressly authorized by law or incident to its
existence.

Advantages:

A. Stockholders have limited liabilities.

B. Has continuity of existence
 C. More funds from stockholders and investors.
D. Management is centralized to its board of directors
E. Shares of stocks is transferable without consent of other shareholders.

Disadvantages:

A. Costly in formation
B. Shareholders have little or no participation in management
C. Distribution of dividends depends on the declaration of board of directors

Four Aspects of Accounting

1. Recording – writing down of business transactions chronologically in the

books of account as they transpire.
2. Classifying – sorting similar and related business transactions into the three
categories of assets, liabilities, and owner’s equity.
3. Summarizing – preparing the financial statements from the transactions
recorded in the books of account that are designed to meet the
information needs of its users.
4. Interpreting – Representing the qualitative and quantitative financial
information about the business transactions in a language
comprehensible to the users of financial statements. By interpreting the
data in the financial statements, users are able to determine the financial
standing of the company as well as its stability and growth potential. Users
interpret financial information relating to specific business decisions. This
makes accounting the language of the business.

Generally Accepted Accounting Principles (GAAP)

 These are general statements or “rules” and “procedures” that serve as

guides in the practice of accounting.
 These are standards, assumptions, and concepts with general
acceptability
 These are measurement techniques and standards used in presentation
and preparation of financial statements.
 Accounting System – comprises the methods used by business to keep
records of its financial activities and to summarize these accounts in
periodic accounting system.
 Transaction – completed action which can be expressed in monetary
terms.

Fundamental Concepts

1. Entity Concept – regards that business enterprise as separate and distinct

from its owners and from other business enterprises.
2. Periodicity – an entity’s life can be meaningfully subdivided into equal
time periods for reporting purposes. One year is usually considered as one
accounting period.
o Accounting period can be classified as:
 Calendar Year – a twelve-month period that starts on January
1 and ends on December 31.
 Fiscal Year – a twelve-month period that starts on any month
of the year other than January and ends after the starting
period. (e.g. May 1 2018 – April 30, 2019)
3. Going Concern – is a concept which assumes that the business enterprise
will continue to operate indefinitely.

Basic Accounting Principle

1. Objectivity Principle – states that all business transactions that will be

entered in accounting records must be duly supported by verifiable
evidence.
 2. Historical Cost – means that all properties and services acquired by the
business must be record at their original acquisition cost.
3. Accrual Principle – states that income should be recognized at the time it
is earned such as when goods are delivered or when services have been
rendered. Likewise, expenses should be recognized at the time they are
incurred, such as when goods and services are actually used and not at
the time when the entity pays for it.
Adequate Disclosure – states that all materials that will significantly affect
the financial statements must be indicated.
4. Materiality – means that financial reporting is only concerned with
information significant enough to affect decisions. This refers to relative in
relative importance of an item or event.
5. Consistency – means that approaches used in reporting must be uniformly
employed from period to period to allow comparison of results between
time periods. Any changes must be clearly explained.

References
Ballada, W. (2018). Basic Financial Accounting and Reporting. Manila: DomDane
Publishers.

Ong, F. L. (2016). Fundamentals of Accounancy, Business and Management 1 for Senior

High School. Quezon City: C & E Publishing, Inc.