FUNDAMENTALS OF ABM 1

SHS 2020-2021 Second Semester

FORMS OF BUSINESS ORGANIZATION

 Sole Proprietorship - has a single owner called a proprietor who generally is also the manager
 Partnership - 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
 Corporation - owned by its shareholders/stockholders; artificial being created by operation of law,
having the rights of succession and the powers, attributes and properties expressly authorized by law
or incident to its existence
PURPOSE OF BUSINESS ORGANIZATION
 Service - performs services for a fee; ex: law firms, accounting and audit firms, beauty salons,
recruitment agencies
 Merchandising - purchases goods that are ready for sale and sells these to customers; ex: car dealers,
supermarkets
 Manufacturing - buys raw materials, converts them into products, and then sells the finished products
to other companies or to final customers; ex: paper mills, steel mills, car manufacturers, drug
manufacturers
ACTIVITIES IN BUSINESS ORGANIZATION
 Financing Activities - methods an organization uses to obtain financial resources from financial
markets;
Primary sources of financing for businesses: owners and creditors (banks, suppliers)
ex: acquiring a bank loan, repaying creditors, paying a return to owners
 Investing Activities - methods where capital from financing activities is used to acquire other resources
- that is to transform resources from one form to a different form, which is more valuable, to meet the
needs of the people;
ex: acquisition of land, equipment, buildings, disposal of PPE when they are no longer needed
 Operating Activities - methods involving the use of resources to design, produce, distribute, and
market goods and services;
ex: research and development, design and engineering, purchasing, human resources, production,
distribution, marketing and selling, and servicing
DEFINITION OF ACCOUNTING
 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
 the process of identifying, measuring, and communicating economic information to permit informed
judgments and decisions by users of the information
 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
PHASES OF ACCOUNTING
 Measuring
In order that accounting information will be useful, it must be expressed in terms of a common
financial denominator - money; to measure a business transaction, the accountant must decide when
the transaction occurred, what value to place on the transaction and how the components of the
transaction should be classified;
 Classifying
effects of numerous transactions are reduced by grouping them
 Summarizing
achieved through the preparation of financial statements
 Interpreting or Analyzing
evaluating the financial statements as to the entity’s liquidity, profitability, and solvency

FUNDAMENTAL CONCEPTS
 Entity Concept - an accounting entity should stand apart from other organizations and individuals as a
separate economic unit; its transactions should be accounted for separately
 Periodicity Concept - meaningfully subdividing an entity’s life into equal time periods for reporting
purposes
 Stable Monetary Unit - using the Philippine peso as a reasonable unit of measure and using it as though
each peso has the same purchasing power as any other peso at any time
BASIC PRINCIPLES
 Objectivity Principle - accounting records and statements are based on the most reliable data available
so that they will be as accurate and as useful as possible; they must be based on information that flows
from activities documented by objective evidence (source documents)
 Historical Cost - acquired assets should be recorded at their actual cost and not at what management
thinks they are worth as at reporting date
 Revenue Recognition Principle (Accrual) - revenue is to be recognized in the accounting period when
goods are delivered or services are rendered or performed
 Expense Recognition Principle (Accrual) - expenses should be recognized in the accounting period
when goods and services are used up to produce revenue and not when the entity pays for them
 Adequate Disclosure - requires that all relevant information that would affect the user’s understanding
and assessment of the accounting entity be disclosed in the financial statements
 Materiality - financial accounting is only concerned with information that is significant enough to affect
evaluations and decisions; Materiality depends on the size and nature of the item judged in the
particular circumstances of its omission
 Consistency Principle - firms should use the same accounting method from period to period to achieve
comparability over time within a single enterprise; however, changes are permitted if justifiable and
disclosed in the financial statements
ACCOUNTANCY - SCOPE OF PRACTICE
 Practice of Public Accountancy
 Practice in Commerce and Industry
 Practice in Education/Academe
 Practice in Government
CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES - FUNDAMENTAL PRINCIPLES
 Integrity - a professional accountant should be straightforward and honest in all professional and
business relationships; this also implies fair dealing and truthfulness
 Objectivity - a professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments
 Professional Competence and Due Care - professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a client or employer receives
competent professional service based on current developments in practice, legislation, and techniques
 Confidentiality - a professional accountant should respect the confidentiality of information acquired
as a result of professional and business relationships and should not disclose any such information to
third parties without proper and specific authority unless there is a legal or professional right or duty to
disclose
 Professional Behavior - a professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession
BRANCHES OF ACCOUNTING
 Auditing
 Bookkeeping
 Cost Accounting
 Financial Accounting
 Financial Management
 Management Accounting
 Taxation
 Government Accounting
USERS OF FINANCIAL INFORMATION/FINANCIAL STATEMENTS (External and Internal)
 Owners, Investors, Employees, Lenders, Suppliers, Customers, Government and their agencies, Public
OBJECTIVE OF FINANCIAL STATEMENTS
- to provide information about the financial position, performance, and changes in financial position of an
enterprise that is useful to a wide range of users in making economic decisions
UNDERLYING ASSUMPTION
 Going Concern
assumption that an entity has neither the intention nor the need to liquidate or curtail materially the
scale of its operations

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

  Materiality - Threshold Quality
 Relevance - information has the quality of relevance when it influences the economic decisions of users
by helping them evaluate past, present, or future events, or confirm, or correct their past evaluations
 Reliability - information has the quality of reliability when it is free from material error and bias and can
be depended upon by users to represent faithfully that which it either purports to represent or could
reasonably be expected to represent
o Faithful Representation
o Substance over Form
o Neutrality
o Prudence/Conservatism
o Completeness
 Comparability
 Understandability
ELEMENTS OF FINANCIAL STATEMENTS
Financial Position
 Assets - resources controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise
Current - cash, cash equivalents, notes receivable, accounts receivable, inventories, prepaid expenses
(rent, advertising, insurance, etc.)
Noncurrent - property, plant and equipment (land, building, machinery, vehicle, etc. ), investments,
intangible assets (patent, franchise, copyright, etc.), and other assets
 Liabilities - present obligations of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits
Current -notes payable, accounts payable, accrued liabilities (salaries payable, utilities payable, interest
payable etc.), unearned revenues
Noncurrent - mortgage payable, bonds payable, other debts of the enterprise
 Equity - residual interest in the assets of the enterprise after deducting all its liabilities
Financial Performance
 Income - increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants
Revenue - arises in the course of ordinary activities of an enterprise (sales, fees, interest, dividends,
rent)
Gain - represent other items that meet the definition of income and may, or may not arise in the
course of ordinary activities of an enterprise (ex: gain from disposal of PPE)
 Expenses - decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants
Ordinary Expenses - arising in the course of the ordinary activities of the enterprise (distribution or
selling, administrative, operating)
Losses - represent other items that meet the definition of expense and may or may not, arise in the
course of the ordinary activities of an enterprise (ex: loss on sale of old machinery)
THE ACCOUNT
basic summary device of accounting; a detailed record of the increases, decreases, and balance of each
element that appears in the entity’s financial statements

ACCOUNT TITLE
Left side or Debit side Right side or Credit side

Normal Balance of an Account

the side of the account - debit or credit - where increases are recorded
 Assets, Expenses, Withdrawals - Debit
 Liabilities, Owner’s Equity (Capital), Income - Credit
THE ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
TYPES AND EFFECTS OF TRANSACTIONS
 Source of Assets - an asset account increases and a corresponding claims account (L or OE) increases
 Exchange of Assets - One asset account increases and another asset account decreases
 Use of Assets - an asset account decreases and a corresponding claims account increases
 Exchange of Claims - one claims account increases and another claims account decreases

RECORDING BUSINESS TRANSACTIONS

Accounting Cycle: Sequential Steps and Aims
Step 1 Identification of events to be recorded
Step 2 Transactions are recorded in the journal
Step 3 Journal entries are posted to the ledger
Step 4 Preparation of a trial balance
Step 5 Preparation of the worksheet including adjusting entries
Step 6 Preparation of the financial statements
Step 7 Adjustments are journalized and posted
Step 8 Closing entries are journalized and posted
Step 9 Preparation of a post-closing trial balance
Step 10 reversing entries are journalized and posted

The Journal
 Format
Date Account Titles and Explanation PR Debit Credit
1 2019
2 July 1 Cash 500,000
3 Diaz, Capital 500,000
4 Initial investment.
 Simple and Compound Entry

Identifying types of transactions and Journalizing transactions

 Initial Investment -
 Rent Paid in Advance -
 Note Issued for Cash -
 Service Vehicle Acquired for Cash -
 Insurance Premiums Paid in Advance -
 Office Equipment Acquired on Account (with down payment) -
 Supplies Purchased on Account -
 Accounts Payable Partially Settled -
 Revenues Earned and Cash Collected -
 Salaries Paid -
 Received Advance Payment from Clients -
 Revenues Earned on Account -
 Unearned Revenues Collected -
 Withdrawal of Cash by the Owner -
 Expenses Incurred but Unpaid -
 Accounts Receivable Partially Collected -
 Expenses Incurred and Paid -
The Ledger
A grouping of the entity’s accounts used to classify and summarize transactions, and to prepare data
for basic financial statements
 Permanent Accounts/ Real Accounts (balance sheet accounts - A, L, OE)
 Temporary Accounts/Nominal Accounts (income statement accounts - income and expenses)