FUNDAMENTAL 1 REVIEW 11 BY: NEBRIJA

FORMS OF BUSINESS ORGANIZATIONS

SOLE/SINGLE PROPRIETORSHIP
“Suppose you want to open your own sari-sari store that will need PHP10,000 to start and you used
your PHP10,000 savings to start the said
business. You are the sole owner of the said sari-sari store. This type of business is called sole/single
proprietorship.”
• A form of business that is owned by one person; the simplest, and the most common form of
business organization
• It is not separate from the owner. The business and the owner are inseparable
b. ADVANTAGES OF SOLE/SINGLE PROPRIETORSHIP
• The owner keeps all the profits.
• The owner makes all the decisions.
• It is easy to form and operate.
c. DISADVANTAGES OF SOLE/SINGLE PROPRIETORSHIP
• The life of the business is limited to the life of the owner. Once the owner dies,
the business will cease to operate under the name of the proprietor.
• The amount of capital is limited only by the wealth of the proprietor.
PARTNERSHIP
“What if the needed amount to start your dream sari-sari store is PHP50,000 and you only have
PHP25,000 cash savings. You ask Juan, your friend if he is willing to invest his PHP25,000 and
become part owner of the sari-sari store. Assuming he agrees, what form of business organization
was created?”
a. PARTNERSHIPS
• A form of business owned by two or more persons. The details of the
arrangement between the partners are outlined in a written document called
articles of partnership.
• Profits are divided among partners based on their agreed sharing.
• The owner is called a partner.
b. ADVANTAGES OF PARTNERSHIP
• Higher capital because two or more persons will contribute to the common fund.
• It is easy to operate like a sole/single proprietorship
c. DISADVANTAGES OF PARTNERSHIP
• The profits are divided among the partners.
• A partner can be held liable for the acts of the other partners.
• In a lawsuit, the personal properties of the partners can be held beyond their
contributions and may be used to answer for any liability of the partnership.
CORPORATIONS
“Assuming your dream is to open a grocery store and not just a sari-sari store but you will need
PHP1,000,000 to start the said business. You have only PHP25,000, your friend Juan has
PHP25,000, and your mother is willing to invest her PHP50,000, but still these are not enough to
start your dream grocery store. Where will you get the money to raise the PHP1 million? You may
consider setting up a corporation?”
a. CORPORATIONS
• A corporation is a business organized as a separate legal entity (artificial person) under the
corporation law with ownership
divided into transferable shares of stocks
• Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
• The corporation begins its existence from the date the Articles of Incorporation is approved by the
Securities and Exchange
Commission (SEC).
• The SEC (Securities and Exchange Commission) is the government agency primarily tasked to
regulate private corporations in
the Philippines.
• The owners are called stockholders or shareholders.
• The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
• The voting rights of a shareholder is generally based on the percentage of ownership.
• The management of the business is delegated by the shareholders to the Board of Directors
• The ownership is divided into shares and the value of one share may be denominated at a smaller
amount, for example at
PHP10 per share.
• The proof of ownership is evidenced by a stock certificate.
b. ADVANTAGES OF CORPORATION
• Can easily raise additional funds by selling shares of stocks to the public.
• Shareholders are not personally liable for the debts of the corporation. The extent of their liability is
limited to their equity
(ownership) in the corporation.
c. DISADVANTAGES OF CORPORATION
• It is relatively complicated to set up.
• Subject to several legal restrictions as listed in the Corporation Code of the Philippines
COOPERATIVES
“Assuming all the mothers in your barangay decided to open a sari-sari store where all the members
can buy in cash or in credit. Some
mothers were also taught how to sew dresses and bags as part of the project of the group. These bags
are then sold to a certain company.
Aside from that, the organization provides seminars to the members on various topics involving
mothers and their roles. At the end of the year,
the profits are distributed among the members based on their capital contribution. The amount of
their purchases in the sari-sari store during
the year is also computed and they receive something out of the profit/surplus based on their
purchases. This form of business organization is
called a cooperative.
a. COOPERATIVES
• A cooperative is a duly registered association of persons with a common bond of interest,
voluntarily joining together to
achieve their social, economic and cultural needs.
• The owners are called members who contribute equitably to the capital of the cooperative.
• The members are expected to patronize their products and services.
• The word ‘cooperative’ appears in the name of the entity.
• This form of business organization is regulated by the Cooperative Development Authority (CDA).
b. ADVANTAGES OF COOPERATIVES
• Enjoys certain tax exemption privilege
• Promotes the concept of sharing resources
c. DISADVANTAGES OF COOPERATIVES
• Limited distribution of surplus
• Requires continuous education programs for members.
• The members have active and direct participation in the business of the cooperative.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

Introduction
A business is an organization that converts inputs or resources such as material, labor and overhead into
outputs which are usually goods or services. There are three(3) major types of business, according to
activities, as follows:
1. Service business;
2. Merchandising business;
3. Manufacturing business.
Service Businesses Service
businesses generally utilize their employees to provide intangible products or services to customers. They
perform services for a fee. These services include professional skills, advice, expertise, and other related
products. The primary source of revenue of service businesses is the performance of services, often
referred to as Service Revenues.

One concept in business is the operating cycle. Operating cycle is the time it takes for a company to
create products, sell these products and collect cash payments from customers. For service companies, the
major phases of their operating cycle include paying out money for employees and other operating
expenses, performing the services, and collecting cash payments from customers.

Advantages of Service businesses:

- Absence of inventory or tangible goods held by the business
- No production facilities required
Disadvantages of Service businesses:
- Constant evaluation and training of human capital/employees
- Good employment benefits to attract, retain and motivate highly skilled employees
Merchandising businesses
Unlike service businesses, merchandising businesses sell tangible products. This type of business buys
finished or almost finished goods from their suppliers and resells the same to customers. Merchandising
businesses primarily earn revenues from the sale of the goods or merchandise, also known as Sales
Revenue or Sales.

There are two (2) types of merchandising businesses – retailers and wholesalers. A retailer sells goods
directly to the customers, while a wholesaler sells goods to retailers.

The operating cycle of a merchandising business is typically longer than that of a service business. It
starts with the purchase of goods to be held for resale, also known as Inventory. It eventually sells the
inventory to customers, and the cycle ends with the receipt of cash payments. The purchase of inventory
and its subsequent sale lengthen the cycle.
Advantages of merchandising businesses:
- Can easily promote sales since there is an existence of a tangible product
- Generally consume less conversion time, effort and cost.
Disadvantages of merchandising businesses:
- Necessity to hold inventory
Manufacturing businesses
Manufacturing businesses, or simply manufacturers, are relatively complicated organizations than service
and merchandising businesses. As the name suggests, manufacturers create their own products. They use
raw materials, components, or parts which are processed using machines, computers, and labor to produce
finished goods.
Similar to merchandising businesses, they earn revenues primarily from the sale of their manufactured
products. The products of manufacturing businesses can be sold directly to consumers, retailers, and other
manufacturers.
Since a manufacturing business produces its own products, its operating cycle generally has the longest
period compared to service and merchandising. It has an additional phase which is the production of
goods. These goods are also held as inventory and later sold to its customers.
Advantages of manufacturing businesses:
- Quality control
- Can easily promote sales since there is an existence of a tangible product.
Disadvantages of manufacturing businesses:
- Need for huge initial capital outlay - Need to hold inventory - Need to finance quality control
procedures - Need to monitor overhead costs such as utilities, etc.

Accounting Concepts and Principles, (Ballada, 2017).

GAAP – Generally Accepted Accounting Principles refer to a common set of accounting principles,
standards, and procedures issued by the Financial Accounting Standard Board (FASB)
PFRS – Philippine Financial Reporting Standard – Guiding Principles how to record transactions here in
the Philippines
PAS – Philippine Accounting Standard - Guiding Principles how to record transactions here in the
Philippines
IFRS – International Financial Reporting Standard
IAS – International Accounting Standard
1. Materiality Principle This includes all assets that are immaterial to make a difference in the financial
statements which the company should record as an expense. Example: Robi, an accounting clerk,
purchased a friction pen. She estimated it to have a useful life up to three months. Since a friction pen is
immaterial relative to assets, it should be recorded as an expense.
 2. Going-Concern Principle This means that the business is expected to continue indefinitely. Example:
Mr. Clark’s sushi business is experiencing difficulty, but he is still expecting it to continue that is why he
still updates his books of account.
3. Time Period Principle The financial statements are usually divided into specific time intervals. The
business should report the financial statements appropriate to a specific period. Example: Teresita is an
accountant of ABC Company. Her boss requires her to prepare financial statements every month.
4. Monetary Unit Principle Any amount involved in the business is stated into a single monetary unit.
Example: A fast food chain has branches all over the world but their financial statements must be reported
in peso since they also have branch here in the Philippines
. 5. Business Entity Principle In this principle, there is a separation and distinction of transactions between
the business enterprise and its owner or investor. Example: Aling Babes, the owner of a mini grocery
store, separates the assets and liability of her business from her personal transactions. All transactions of
the business will be just in the business while her personal matters will be hers only.
6. Cost Principle This is an accounting principle wherein accounts should be recorded initially at cost as
well as assets at their respective cash amounts at the time the asset was purchased. Example: When the
owner of a sari-sari store buys a calculator, it should be recorded in the cash register at its price when it
was bought.
7. Accrual Accounting Principle In this principle, revenue should be recognized when earned regardless
of collection. Same goes with expenses which are recorded when incurred regardless of payment. But in
the Cash Basis Principle, revenue is logged when collected, and expenses should be recorded when paid.
A Cash Basis is not generally an accepted principle today. Example: When a painter finishes performing
his services, he should record it as revenue even if his professional fee is still uncollected. When the
painter has to pay his studio rent, he should record it as an expense even if it is unpaid.
8. Matching Principle In this principle, cost should be matched with the revenue generated. It requires
that the expenses incurred during a period be recorded in the same period in which the related revenues
are earned. Example: Siony sold the goods to her customers, the revenue increases and the inventories
decrease. The reduction of the inventories in relation to revenues is called the cost of goods sold and it
should be recorded in the period in which the revenues were earned.
9. Disclosure Principle All necessary, relevant, and material information should be reported in this
principle for transparency. Example: Aleena bought a computer for her computer shop. She made sure
that it was recorded on the financial reports.
10. Conservatism Principle This is also known as prudence. Assets and income should not be overstated
while liabilities and expenses should not be understated. In case of doubt, expenses should be recorded at
a higher amount. Revenue should be recorded at a lower amount. Example: Suppose an asset owned by
Mico, like inventory was bought for Php 20,000.00 but can now be bought for Php 15,000.00. Then the
company must immediately write down the value of the asset to at Php 15,000.00 because of the lower
cost in the market. But if the inventory was bought for Php 20,000.00 and now has a market value of Php
25,000.00, it must still be shown as
Php 20,000.00 on the books because the gain is only recorded when the inventory or asset is sold.
11. Objectivity Principle In this concept, financial statements of an organization must be presented with
supporting solid evidence and the intent behind this principle is to keep the management and the
department of accounting from making financial statements that are affected by their opinions and biases.
Example: Martimart Enterprise is trying to get a financing from Madas Bank for some expansion but the
enterprise’s bank wants to see a copy of its financial statements before it approves loan of the enterprise.
The enterprise’s bookkeeper prints out an income statement from its accounting system and mails it to the
bank. Most likely, Madas Bank will reject this financial statement because an independent party did not
prepare it.