( ACC 082 - BASIC ACCOUNTING FOR HM and T.M.

)
TRICIA MARIE D. AUSAN
Lesson title: References
Lesson Objectives:
At the end of this module, I should be able to:
(State your objective)

TYPES OF BUSINESS ORGANIZATION

There are 4 main types of business organization: sole proprietorship, partnership, corporation and
limited liability or LLC.

● SOLE PROPRIETORSHIP: The simplest and most common form of business ownership, sole
proprietorship is a business owned and run by someone for their own benefit. The business’
existence is entirely dependent on the owner’s decisions, so when the owner dies, so does the
business.

● PARTNERSHIP: These come in two types: general and limited. In general partnerships, both
owners invest their money and are both 100% liable for business debts. In other words, even if
you invest a little into a general partnership, you are still potentially responsible for all it’s debt.
General partnerships do not require a formal agreement - partnerships can be verbal or even
implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a
certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for
business debts according to their portion of ownership or investment.

● CORPORATION: They are for tax purposes, separate entities and are considered a legal
person. This means among other things, that the profits generated by a corporation are taxed as
the “ personal income “ of the company. Then, any income distributed to the stakeholders as
dividends or profits are taxed again as the personal income of the owners.

● LIMITED LIABILITY COMPANY (LLC): Similiar to limited partnership, an LLC provides owners
with limited liabilty while providing some income advantages of a partnership. Essentially, the
advantages of partnerships and corporations are combined in an LLC, mitigating some of the
disadvantages of each.

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ACCOUNTING FUNDAMENTAL CONCEPTS AND BASIC PRINCIPLE

BASIC ACCOUNTING CONCEPTS

There are a number of conceptual issues that one must understand in order to develop a firm
foundation of how accounting works. These basic accounting concepts as follows:

● ACTUAL CONCEPT. Revenue is recognized when earned, and expenses are recognized when
assets are consumed. This concept means that a business may recognize revenue, profits and
losses in amounts that vary from what would be recognized based on the cash received from
customers or when cash is paid to suppliers and employees. Auditors will only certify the
financial statements of a business that have been prepared under the accruals concept.

● CONSERVATISM CONCEPT. Revenue is only recognized when there is a reasonable certainty

that it will be realized, whereas expenses are recognized sooner, when there is a reasonable
possibility that they will be incurred. This concept tends to result in more conservative financial
statements.

● CONSISTENCY CONCEPT: Once a business chooses to use a specific accounting method, it

should continue using it on a go-forward basis. By doing so, financial statements prepared in a
multiple periods can be reliably compared.

● ECONOMIC ENTITY CONCEPT. The transaction of a business are to be kept separate from
those of its owners. By doing so, there is no intermingling of personal and business transactions
in a company’s financial statements.

● GOING CONCERN CONCEPT. Financial statements are prepared on the assumption that the
business will remain in operation in future periods. Under this assumption, revenue and
expense recognition may be deferred to a future period, when the company is still operating.
Otherwise, all expense recognition in particular would be accelerated into the current period.

● MATCHING CONCEPT. The expenses related to revenue should be recognized in the same
period in which the revenue was recognized. By doing this, there is no deferral of expense
recognition into later reporting periods, so that someone viewing a company’s financial
statements can be assured that all aspects of a transaction have been recorded at the same
time.

● MATERIALITY CONCEPT. Transactions should be recorded when not doing so might alter the
decisions made by a reader of a company’s financial statements. This tends to result in a
relatively small-size transactions being recorded, so that the financial statements
comprehensively represent the financial results, financial position and cash flows of a business.

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BASIC PRINCIPLES OF ACCOUNTING

● REVENUE RECOGNITION PRINCIPLE. When you are recording information about your
business, you need to consider the revenue recognition principle. This is the period of time
where revenues are recognized through the income statement of your company. In order for
your revenues to be recognized in the period that the services were provided if you are on the
accrual basis. If you are on the cash basis then the revenues need to be recognized in the
period the cash received.

● COST PRINCIPLE. Recording your assets when you purchase a product or service helps keep
your businesses up expenseses orderly. It’s important to record the acquisition price of anything
you spend money on and properly record depreciation for those assets.

● MATCHING PRINCIPLE. Expenses should be matched to revenues recognized in the same

accounting period and be recorded in the period the expense was incurred. If there is a period
of time where revenue was recognized on sold products or services, then the cost of those
things should be recognized.

● FULL DISCLOSURE PRINCIPLE. The information on financial statements should be complete

so that nothing is misleading. With this intention, important partners or clients will be aware of
relevant information concerning your company.

● OBJECTIVITY PRINCIPLE. The accounting data should consistently stay accurate and be free
of personal opinions. Make sure the data is also supported by evidence that can include
vouchers, receipts, and invoices. Having an objective viewpoint, in this case, helps rely on
financial results. For example: your viewpoint may not be objective olif you once worked for the
same company that you are now an auditor for because your relationship with this client might
skew your work.

FINANCIAL STATEMENTS

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It represent a formal record of the financial activities of an entity. These are written reports that
quantify the financial strength, performance and liquidity of a company. Financial statements reflect the
financial effect of business transactions and events on the entity.

4 TYPES OF FINANCIAL STATEMENTS

1) STATEMENT OF FINANCIAL POSITION. It is also known as the Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of the following three elements:

● ASSETS: Something a business owns or control (e.g. cash, inventory, plant and machinery,
etc).

● LIABILITIES: Something a business owes to someone (e.g. creditors, bank loans. etc).

● EQUITY: What the business owes it to its owners. This represents the amount of capital that
remains in the business after its assets are used to pay off its outstanding liabilities. Equity
therefore represents the difference between the assets and liabilities.

2) INCOME STATEMENT. It is also known as the Profit and Loss Statement, reports the
comapany’s financial performance in terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:

● INCOME: What the business has earned over a period (e.g. sales revenue, dividend income,
etc).

● EXPENSE: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc).

3) CASH FLOW STATEMENTS. Presents the movement in cash and bank balances over a
period. The movement in cash flow is classified into the following segments:

● OPERATING ACTIVITIES: Represents the cash flow from primary activities of a business.

● INVESTING ACTIVITIES: Represents cash flow from the purchase and sale of assets other
than inventories (e.g. purchase of a factory plant).

● FINANCING ACTIVITIES: Represents cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.

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4) STATEMENT OF CHANGES IN EQUITY. It is also known as the Statement of Retained
Earnings, details the movement in owner’s equity over a period. The movement in owner’s
equity is derived from the following components:

● Net Profit or loss during the period as reported in the income statement.

● Share capital issued or repaid during the period.

● Dividend payments.

● Gains or losses recognized directly in equity (e.g. revaluation surpluses)

● Effects of change in accounting policy or correction of accounting error.

ELEMENTS OF ACCOUNTING

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1) ASSETS: Assets refers to a resources owned and controlled by the enity as a result of past
transactions and events, from which future economic benefits are expected to flow to the entity.
In simple terms, assets are properties rights owned by the business. They may be classified as
current or non-current.

A) CURRENT ASSETS: Assets are considered current if they are held for the purpose of being
traded, expected to be realized or consumed within twelve months after the normal operating
cycle (whichever is longer), or if it is cash. Example of current assets are:

● Cash and Cash Equivalents - bills, coins, funds of current purposes, checks, etc).

● Receivables - accounts receivable (receivable from customers). Notes receivable (receivables

supported by promissory notes), Rent receivable, Interest receivable, Due from employees (or
advances to employees) and other claims.

● Inventories - assets held for sale in the ordinary course of business.

● Prepaid Expenses - expenses paid in advance such as prepaid rent, prepaid insurance, prepaid
advertising and office supplies.

B) NON-CURRENT ASSETS: Assets that do not meet the criteria to be classified as current.
Hence, they are long-term in nature - useful for a period longer than 12 months or the
company’s normal operating cycle. Examples of non-current asset accounts include:

● Long-term Investments - investments for long-term purposes such as investment in stocks.

bonds and properties; and funds set-up for long term purposes.

● Land - land area owned for business operations (not for sale).

● Building - such as office building, factory, warehouse or store.

● Equipment - machinery, furniture and fixtures (shelves, tables, chairs, etc). Office equipment,
computer equipment, delivery equipment and other.

Accumulated Depreciation - This is a valuation account which represents the decrease in value
of a fixed asset due to continued use, wear and tear, passage of time and obsolescence. It is a contra-
asset account and is presented as a deduction to the related fixed asset.

● Intangibles - long-term assets with no physical subtance such as goodwill, patent, copy right,
trademark etc.

● Other long-term assets

2) LIABILITIES: Liabilities are economic obligations or payable of the business. Company asstes come
from 2 major sources borrowing from lenders of creditors and contributions by the owners. The first

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refers to liabilities; and the second to capital. Liabilities represent claims by other parties aside from the
owners against the assets of a company. Like assets, liablilities may be classified as either current or
non-current.

A) CURRENT LIABILITIES: A liability is considered current if it is due within 12 months after the
end of the balance sheet date. In other words, they are expected to be paid in the next year. If
the company’s normal operating cycle is longer than 12 months, a liability is considered current
if it is due within the operating cycle. Current liabilities include:

● Trade and other payables - such as Accounts payable, Notes payable, Interest payable, Rent
payable, Accrued Expenses, etc.

● Current Provisions - estimated short-term liabilities that are probable and can be measured
reliably.

● Short-term Borrowings - financing arrangements, credit arrangements or loans that are short-
term in nature.

● Current-portion of a long-term Liability - the portion of a long-term borrowing that is currently

due. Example: For long-term that are to be paid in annual installments, the portion to be paid
next year is considered current liability; the rest, non-current.

● Current Tax Liabilities - taxes for the period and are currently payable.

B) NON-CURRENT LIABILITIES: Liabilities are considered non-current if they are not currently
payable, i.e. they are not due within the next 12 months after the end of the accounting period or
the company’s normal operating cycle, whichever is shorter. In other words, non-current
liabilities are those that do not meet the criteria to be considered current. Non-current liabilities
include:

● Long term notes, bonds and mortgage payables.

● Deferred tax liabilities; and

● Other long-term obligations

3) CAPITAL: It is also known as net assets or equity, capital refers to what is left to the owners after all
liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is
affected by the following:

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● Initial and additional contributions of owner/s (investments).

● Withdrawals made by owner/s (dividends for corporations).

● Income; and

● Expenses.

Owner contributions and income increase capital. Withdrawals and expenses decrease in portion
varies according to form of ownership. In a sole proprietorship business, the capital is called “ Owner’s
Equity or Owner’s Capital. “ In partnership it is called “ Partner’s Equity or Partner’s Capital. “ And in
corporation is called “ Stockholder’s Equity. “ In addition to the three elements mentioned, there are two
items that are also considered as key elements in accounting. They are income and expenses.
Nonetheless, these items are ultimately included as part of capital.

4) INCOME: Income refers to an increase in economic benefit during the accounting period in the form
of an increase in asset or a decrease in liability that results in increase in equity, other than contribution
from owners. Income encompasses revenues and gains.

Revenues refer to the amounts earned from the company’s ordinary course of business such as
professional fees or service revenue for service companies and sales for merchandising and
manufacturing concerns.

Gains come from other activities such as gain on sale of equipment, gain on sale of short-term
investments and other gains.

Income is measured every period and is ultimately included in the capital account. Example of
income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest
Income, Royalty Income and Sales.

5) EXPENSE: Expenses are decreases in economic benefit during the accounting period in form of a
decrease in asset or an increase in liability the result in decrease in equity, other than distribution to
owners.

Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense,
Salaries Expense, Income Tax, Repairs Expense, etc.. and losses such as Loss from fire, Typhoon
Loss and Loss fron Thef. Like income, expenses are also measured every period and then closed ad
part of capital.

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