FUNDAMENTALS OF ACCOUNTANCY, BUSINESS &
Classifying- Sorting or grouping of similar
MANAGEMENT 1
Preliminary Exam Reviewer
Academics Committee
© Allyssa Riel Adriano © Carmela Palanog
© Angelica Garcia
Accounting
 The art of analyzing financial transactions
and economic events, recording them,
classifying them into accounts, summarizing
them, reporting, and interpreting the
results. (Frias & Pefianco, 2017)
 A system that helps businesses track events
that affects them. The process involves
identifying the events that affect a
business, recording these events, and
communicating the summarized results of
all events within a particular period. (De
Guzman, 2017)
 bridges the gap between the information
and the users.
Financial information- processed data which
possess figures and representations that can affect
the decisions of the users.
Use of information- necessity for data arises as the
need to make decisions comes.
Nature of Accounting
1. An art
> by using professional judgment and
skepticism.
2. A science
> accounting is a process of identifying,
analyzing, and communicating financial
information. That is why it is considered as
a science.
3. Information System
> communication tool about an entity’s
financial information.
4. Service Activity
> provide quantitative information for
making economic decision.
Functions and phases of accounting
1. Identifying and Analyzing- identifying and
analyzing accountable and non-accountable
transactions.
o effect of economic events/transactions
on the business.
2. Recording- Writing the effects of the
events/transactions that have been
analyzed.
o Input the information in the accounting
books called “journals”.
2.
transactions into specific account titles.
o The journalized transactions and events
are classified in ledgers.
4. Summarizing- assets, liabilities, owner’s
equity, income, expense
5. Reporting- final output of accounting
(financial statements)
6. Interpreting- Directs attention to the
significance of various matters and
relationships.
Functions of Accounting
1. Keeping systematic records of business
transactions.
2. Protecting properties of the business.
3. Communicating results to various parties in,
connected, or interested, with the business.
4. Meeting Legal Requirements
History of Accounting
o 1494 – Friar Luca Pacioli wrote a book which
contains discussions on the double-entry
bookkeeping system.
o The book was entitled Summa de
Arithmetica, Geometria, Proportioni et
Proportionalita.
o He is known as the Father of Double-Entry
Bookkeeping. (Hinayon, Beticon, James, 2010)
Users of accounting information
Internal: welfare of the business
1. Owner/Investor- existing investor/s
2. Employees- only considered as internal user
if he/she decides for the welfare of the
business; concerned with the company’s
profitability
3. Manager/Management- decision-making for
the company
External:
1. Regulatory bodies- e.g. Government (tax)
2. Customers- continuance of an enterprise
3. Potential Investors
4. Lenders/ Creditors/ Suppliers
5. Researchers/ General Public- gives us
information about the economy’s condition
Branches of Accounting
1. Public Accounting
o attestation and consultancy are the
main outputs of services provided by
this branch of accounting.
o utmost integrity
o 3rd party; arbiter
 E.g. External Audit(or), Tax Preparation and o provides information for management
Planning Services, Management Advisory and financial accounting
Service o control and analyses of cost of products
 Auditing – unbiased examination to and services
check accuracy of information; adds  International Financial Recording Standards
credibility to the financial (IFRS)
statements  International Accounting Standards (IAS)
 External Audit- expression of opinion
on assertions made in financial 3. Government Accounting
statements o same as private but works for government
o recording and reporting financial
a. Independent Auditor’s Report- oversees the transactions relating to the revenues and
process of accounting. expenditures of the government
b. External Auditor Report o transparency on generation and utilization
of public’s funds
 Tax Accounting
o preparation of tax returns Commission on Audit (CoA)- responsible for
o tax advising services keeping the government’s general accounts
o determination of proper taxable and disseminates accounting rules &
income regulations
Department of Budget and Management –
2. Private Accounting formulation and implementation of national
o setting up systems of recording business budget
transactions aggregated in financial statements. General Appropriations Act (GAA) - states
o development and interpretation of how much an agency can spend for the year
accounting information to assist management in Bureau of Treasury- safekeeping of
decision-making. national funds; also responsible for the
o process of daily transactions of the company management and control of the
o recording and analysis disbursement of such funds.

a. Financial Accounting
o produces general purpose financial  Presidential decree 1445, Section 110
statement 1. Past operations and present
o caters the needs of external and conditions
internal users 2. Basis for guidance
o balance sheet, income statement, cash 3. Report on the financial position and
flow statement results of operations.
o must follow accounting standards under:
1) PFRS (Philippine Financial  New Government Accounting System (NGAS)
Reporting System)
2) PAS (Philippine Accounting 4. Accounting Education and Research
Standards) o branch responsible in training future
accountants
b. Management Accounting o teaching financial accounting, financial
o produces specific purpose financial management, management accounting,
information taxation, auditing, and assurance.
o internal users only o CHED Memorandum #3 s.2007
o management advisory services
o information regarding the conduct of  Accounting Education- teaching of
the business accounting fundamentals
o cost-benefit analysis, financial analysis,
financial budgeting o Bachelor of Science in Accountancy
o Before a BSA graduate can practice
c. Cost Accounting (Manufacturing only) public accountancy, he/she needs to
o under Management Accounting pass the Certified Public Accountant
(CPA) Board Examinations. It has 7
 subjects, an average grade of 75%
must be achieved with no single
subject going below 60%.
 Accounting Research
o accounting and financial publication
o creation of new knowledge
o development of standards to cope up
with changing financial landscape
5. Tax Accounting
o taxes are the lifeblood of the government
o follows the pronouncements of the
National Internal Revenue Code (NIRC)
6. Forensic Accounting (fraud examination)
o Fraud detection, fraud prevention,
litigation support
7. International Accounting
o Study of standards, guidelines, and rules
of accounting that exists within a country
Business Organizations based on structure or
ownership
1. Sole Proprietorship - Businesses formed by a
single individual
o The simplest form in which a business could
operate
o Does not have separate legal existence from
the owner
o Transacts with third parties under the name
of the owner
o Features:
a. Ease of Formation – it is much easier to
establish compared to other business
organizations. Can be started only with a small
amount of capital.
b. Owner has full control of the business – no
more meetings required. No problems in
decision making. No internal conflict regarding
business decisions can occur.
c. Owner can mix personal and business
assets – a sole proprietor may use his/her
personal assets to help the business recover.
d. Owner have all the profits for themselves –
determination of profit-sharing schemes would
not be a problem
e. Simple taxation – owner only needs to
declare the income of the business in his/her
tax returns and it will be taxed accordingly
f. Unlimited Liability – owners are personally
liable for all the liabilities a business incurs.
Creditors, customers, the government, and
other outside parties can go after the personal
assets of the owners even after extinguishing all
assets of the business.
g. Difficulty of raising additional capital –
owner is the only person that can provide
additional capital. In case the owner does not
have any more resources, he could search for
creditors willing to lend additional funds.
h. Lack of ideas – since the owner is only one
making business decisions, ideas will be limited
to him/her only. Having more decision makers
is equivalent of having more minds to think of
ideas how to improve business, and how to solve
business problems.
2. Partnership - Contract whereby two or more
persons bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing profits among themselves.
o Two or more persons may also form a
partnership for the exercise of a profession.
o Features:
a. Separate Legal Existence – it is an artificial
being created by operations of law. It enters
into contracts under its own name. Its income
is not taxed as a separate entity; after the
income has been distributed to the partners, it
will be included in their respective tax returns
and will be taxed accordingly.
b. Mutual Agency – the acts of a partner are
binding on a partnership even though he/she
has no authority to do so, as long as the act
concerns the normal business operations of the
partnership.
c. Unlimited Liability – partners are still liable
for debts and obligations that cannot be paid by
the partnership assets.
d. Limited Life – life of the partnership can be
easily ended through dissolution or liquidation.
– occurs when
one of the partners withdraws from the
 partnership, or if a new partner is admitted.
Withdrawal and admission are normal in a
partnership.
– ends the
operations/life of the partnership. During
liquidation, partnership assets are realized,
liabilities are paid, and the remaining assets, if
any, are distributed to the partners.
e. Co-ownership of Partnership Property – in
the formation of a partnership, partners
contribute money, property, and industry into
a common fund. These contributions do not
belong to the respective partners individually
anymore, but to the partnership as a whole.
f. Partnership Agreement – Law states that
partnership is a “contract”. Thus, a partnership
can be formed orally or in written form.
However, to protect the partners, it is ideal
that the partnership be in written form.
Other Forms of Partnership
a. Limited Partnership – At least one partner
has unlimited liability (General partner), and at
least one partner has limited liability (Limited
partner).
Maximum loss a limited partner can have
is only to the extent of his/her investment.
Only general partners can participate in
the management of the partnership.
3. Corporation - The law defines a corporation as
“an artificial being created by operation of law,
having the right of succession and the powers,
attributes, and properties expressly authorized by
law or incident to its existence.”
o Corporations are formed by individuals
called “incorporators”.
o They can be organized to generate profit,
or it may be not-for-profit.
o They can be classified as public or private.
A public corporation has thousands of
stockholders (owners) while a privately
held corporation has only a few.
o Features:
a. Separate Legal Existence – a corporation is
treated by the law as an artificial being separate
and distinct from its owners. It can enter into
transactions and contract under its name.
b. Limited Liability – The maximum loss a
stockholder can lose is only up to the extent of
his/her investment
c. Transferable Ownership Rights – ownership
rights in a corporation are represented by stocks.
Stocks can be transferred even without the consent
of other stockholders.
d. Virtually Unlimited Life – A corporation shall
exist for not more than 50 years from the date of
formation. But they may be extended as long as the
stockholders want to continue the operations, but
the extension shall not exceed 50 years.
admission, death, of stockholders. These events
only change the composition of the owners of the
corporation.
e. Corporation Management – Stockholders may
elect a board of directors to manage the
corporation. The board of directors represents the
interest of the stockholders and they are
responsible for creating operating policies for the
company. Stockholders may also be a member of
the board of directors.
f. Government Regulations – Corporations are
subject to stricter regulations. Being major
contributors to the economy, corporations are
closely being monitored by the government.
Regulations are designed not only for the
protection of the public interest, but also for the
stockholders as well.
g. Double Taxation – Income of the corporation is
taxed both in the corporate and individual level. In
a corporation, the income is already taxed before
being distributed to stockholders. Once a
stockholder receives his/her share of the income,
it is included in his/her tax return, and is taxed
accordingly.
Business
such as material, labor, and overhead into outputs
which are usually either goods or services.
– ability of a company to generate
profit
– ability of a company to pay long-term
debt
 – ability of a company to generate cash 6. Use of Judgment and Estimates - Accounting
estimates are approximations made by accountants
or the management for the preparation in the
a. Service companies- Firms that generally use
financial statements.
their employees to provide services. These services
include professional skills, advice, expertise, etc. - Records that can be precisely measured (cash,
equipment, accounts payable, etc) obviously does
b. Merchandising Companies- Buys finished or
not to be estimated.
almost finished goods from suppliers and resells the
same to customers. 7. Prudence - The accountant must make sure that
income and assets are not overstated, and that
- Primarily earns revenues from the sale of
liabilities and expenses are not understated.
goods or merchandise, also known as sales
revenue or sales. - Prudence is the preferred course of action when
making judgments; deliberately being too
c. Manufacturing companies- They create their
conservative is not an acceptable practice
own products with the use of raw materials which
are processed using equipments and labor. 8. Substance Over Form - Financial statements
should truthfully and faithfully represent the
- Typically employ large-scale production.
financial condition and performance of a company.
- They earn revenues through selling their For this to be possible, the substance of every
products, thus through sales. financial transaction should exceed its legal form.
- When the substance differs from the transaction,
Accounting Concepts and Principles follow its legal form.
1. Business Accounting/Entity Principle - This 9. Going Concern - States that the operations of a
concept states that the business is considered business will continue indefinitely into the future.
distinct and separate from the owner(s) of the - Operations of a business is not expected to stop
business. - Personal transactions of the owners are in the near future and it will not be forced to
not included in the records of the business liquidate its assets and pay off its liabilities.
2. Double-effect of Business Transactions - 10. Matching Principle - Expenses are recognized
Whenever a business transaction takes place, in the same period as the related revenue.
accounting assumes that the value received is equal
to the value given up. - Revenues of a business ALWAYS comes with
expenses.
3. Periodicity (Time Period Concept) - Assumes
that the operating life of a business can be divided
into time periods of equal length, called accounting
periods.
4. Accrual Basis - Income is recognized when it is
earned, regardless of when cash is received.
- Expenses are recognized when incurred,
regardless of when cash is paid.
Cash basis – Income is recorded when cash is
received.
5. Stable Monetary Unit - For a business
transaction to be included in the accounting
records and financial statements of the enterprise,
it is expressed in terms of a uniform means of
measurement (Eg. Peso).