CHAPTER 1

ACCOUNTING AND ITS ENVIRONMENT

 Fundamental Business Model

Capital 4 Sales
1

3
Business Owner
Operating Asset Products or
Cash
Assets Use Services
Banks

2
5 Return Costs

1. The investors provide the capital for the business. The cash investment will then be held in a bank
account.
2. The cash in the business can be:
a) Converted into another type of asset that will be used in the business or sold
b) Spent on operating cost such as salaries, rentals & utilities
3. The combination of business resources provides the basis for producing the products or services
4. The sale of product or service generates an asset called receivable. This asset once collected will
produce a cash inflow for the business
5. The cash inflow from collections will be used to:
a) Pay debts with interest on their loans to the company.
b) Return some cash to the owner
c) The rest of the cash can be sent back to the cycle (stage 2)

 Types of Business
Type of Business Activity Structure Examples
Service Selling people’s Hiring skilled staff and Software Development;
time selling their time Accounting Firm;
Law Firm/ Legal Firm
Trader Buying and selling Buying a product; Wholesaler;
products Making them for sale Retailer
as is

Manufacture Designing Taking raw materials Vehicle Assembly;

products; and using equipment Construction;
Aggregating and staff to convert Engineering; Electricity;
components; and them into finished Water; Food and Drink;
 Assembling goods Chemicals; Media;
finished products Pharmaceuticals
Raw Materials Growing and Buying blocks of land Framing; Mining; Oil
extracting raw and using them to
materials provide raw materials
Infrastructure Selling the Buying operating Transport (airport
utilization of assets (typically large operator, airlines,
infrastructure assets); Selling trains, ferries, buses);
occupancy often in Hotels; Telecoms;
combination with Sports facilities;
services Property Management
Financial Receiving Deposits, Accepting cash from Banks; Investment
Lending and depositors and paying House
Investing Money them interest using
the money to provide
loans to borrowers,
charging them fees
and interest higher
than the depositors
receive
Insurance Pooling Premiums Collecting cash from Insurance
of many to meet many customers;
claims of a few Investing the money
to pay the losses
experienced by a few
customers

 Forms of Business Organizations

Sole Proprietorship
 Single owner called proprietor
REMEMBER!
 The owner receives all profits and absorbs all losses Business Entity Concept /
and solely responsible for all debts Economic Entity Assumption
Partnership states that the recorded
 Owned by two or more persons who bind themselves activities of a business entity
to contribute money, property or industry to a should be kept separate
common fund, with the intention of dividing the profits from the recorded activities
among themselves of its owner(s) and any other
 Owners are called partners business entities
 Each partner is personally liable for the debt incurred by
the business
Corporation
 Owned by the stockholders
  Artificial being created by the operation of law, having
rights of succession and the powers, attributes and REMEMBER!
Corporation is a separate legal
properties expressly authorized by law or incident to
entity
its existence
 The stockholders are not personally liable for the debt
of the corporation

 Sizes of Business
Micro
 Net assets of P3M and below
 Less than 10 employees
Small
 Net assets of above P3M to P15M
 10-99 employees
Medium
 Net assets of above P15M to P100M
 100-199 employees
Large
 More than P100M net assets
 200 and above employees

 Activities in Business Organizations

Financing
 Obtaining financial resources
o Primary sources are owners and creditors
 Repaying creditors
 Paying a return to the owners
Investing
 Acquiring other resources used in the transformation process
o Land, building equipment, etc.
 Disposal and replacement of these resources
Operating
 Involve the use of resources to design, produce, distribute and market goods and
services

 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 (Philippine Institute of Certified Public Accountants, PICPA)
 Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by the users of the information
(American Accounting Association, AAA)
  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)
 Accounting is an information system that measures, processes and communicates
financial information about an identifiable economic entity.

Bookkeeping – is an accounting support function that involves the systematic recording of

business transaction in financial terms

 Phases of accounting
 Recording
 Classifying
 Summarizing
 Identifying

 Fundamental Concepts

CAPITAL PROVIDERS (Investors and Creditors) AND THEIR

Primary users of accounting information
CHRACTERISTICS

Constraints COST

Pervasive Criterion
DECISION USEFULNESS

Fundamental
RELEVANCE Qualities FAITHFUL REPRESENTATION

Productive Free from

Ingredients
Value ofConfirmatory
fundamental
Value
qualities
Completeness Neutrality Error

Timeliness
Enhancing Verifiability
Comparability Qualities Understandability

 Accounting Information System

 Information System (IS) – is a formal, sociotechnical, organizational system designed to
collect, process, store, and distribute information
Information Systems – is an academic study of systems with a specific reference to
information and the complementary networks of hardware and software that people and
organizations use to collect, filter, process, create and also distribute data

 Parts of Information System

 People  Input Devices
 Procedure  The system unit
 Software  Secondary Storage
 System Software  Output Devices
 Application Software  Communication Devices
 Hardware  Data

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This diagram illustrates how

economic activities flow
into the accounting process,
which produces accounting
information, which are used
in making economic
decisions and taking specific
actions thus resulting to
economic activities

 Effective AIS should achieve the following objectives

Cost Benefit Principle – to process information efficiently at the least cost
Control Principle – to protect entity’s assets, to ensure that data are reliable, and to
minimize wastes and the possibility of theft and fraud
Compatibility Principle – to be in harmony with the entity’s organizational and human
factors
Flexibility Principle – to be able to accommodate growth in the volume of transactions
and for organizational changes

 Types of AIS
Manual Systems – utilize paper-based journals and ledger
Computer-based Transaction Systems – utilize computer-based journals and ledger
Database Systems – embed accounting data within the business event data on which they
are based
 Stages of Data Processing

INPUT PROCESSING OUTPUT