Lesson 1: The Accounting Environment and Accounting 4.

Choosing the right form of business and the right

Framework
Accounting
➢ may also be defined as a process of recording,
classifying, and summarizing transactions and events which are
financial in nature and interpreting the results thereof.
As a Business Language
➢ Accounting is defined as a service activity whose
function is to prepare financial reports that will provide relevant
information about the business.
Revenue
type of operation.
Forms of Business
1. Sole Proprietorship – a business set up and
managed by one person.
2. Partnership – a business owned by two or more
persons called partners. Most often the partners are also
the managers.
3. Corporation – a business organized as a separate
legal entity from the owners. An investor simply buys
shares of stocks in a corporation and become a
shareholder. It is managed by a Board of Directors elected
by the shareholders from among themselves.

➢ Receipts for goods or services rendered. Types of Business Operation

Expenses • Service
• Merchandising
➢ Amount paid for services received by the business.
• Manufacturing
Profit or Net income
Types of Business Activities
➢ The take-home pay.
• Operating
The role of Accounting • Financing
• Investing
• Accounting does this for a business.
1. Tracks down business activities, Management involves four processes:
2. analyzes, calculates, and records these activities, and a. Planning – starts with determining the goals of
3. prepares a progress report the business and linin gup activities to accomplish these
• these three steps are the first part of accounting process called goals.
Bookkeeping. b. Organizing – creating divisions, appointing
managers, hiring, and defining the roles of duties of each
History of Accounting
one.
• the earliest bookkeeping records were used to keep track of c. Directing – overseeing the daily operations of
pyramids and palaces being constructed especially in Babylonia and carrying out the planned activities – managers must act,
Egypt. decide, agree, argue, question, approve, solve.
• The first accounting book was written by Cotrugli. d. Controlling – means guarding and guiding people
• The modern double entry bookkeeping system could be traced to ensure tasks and activities are done according to plans
from the book prepared in 1494 by an Italian mathematician, fr. and some standard of performance. It prevents
Luca Pacioli, entitled Summa de Arithmetica. commission of error.
• Bookkeeping was introduced by the Spaniards in the Philippines
Users of Financial Information
and a bookkeeper was called Tenedor de Libro.
• Owner or Investor
A business is an economic unit that engages in buying and selling of
• Manager
goods or services. Its major concern is how best it can utilize its
resources such as machines, raw materials, labor skills, number of • Lender or Creditor
men at the least possible cost. Success is measured in terms of • Government
profit and increase in funds. • Supplier
• Employee
Risk is the element of uncertainty in an outcome. • Customer
Ways to reduce risks:

1. Careful planning and control by the manager

2. Making a business plan
3. Having adequate knowledge about the product or service
FINANCIAL REPORTS
1. Income Statement – reports the financial performance of
the business and is also called profit or loss statement or statement
of earnings. Income Statement is a performance reports of revenues
against costs and expenses.
2. Statement of Owner’s Equity – another report prepared
by accountant which explains the activities for a period that caused
the owner’s equity to change. Four activities affecting Owner’s
equity: investment, withdrawal or recovery of capital, profit, or
loss. Statement of Owner’s Net Worth is a progress report showing
changes in your wealth.
3. Statement of Cash Flow – shows what caused the
change in the cash. It shows the kinds of activities: financing
(investment and loan), investing (acquisition and sale of properties,
and operating (revenues and expenses). Statement of Cash Flows is
a cash report showing where the money came from and where the
money was used.
4. Statement of Financial Position – formerly called balance
sheet shows how healthy or robust the enterprise is when it shows
a listing of accumulated resources (cash and properties) owned and
a listing of the accumulated liabilities (debts or obligations to pay)
owned by the enterprise. The net asset shows the net value or net
worthy of the firm which belongs to the owner. Statement of
Financial Position is a progress report showing a list of assets and
liabilities.
FRAMEWORK OF ACCOUNTING
The framework is a pervasive structure which sets the boundaries
of the accounting practice with its basic rules, objectives, and
assumptions. Assists the
a. Financial Reporting Standard Council (FRSC) in
developing future and reviewing existing Financial Reporting
Standards.
• If a conflict should arise between Financial Reporting Standard
and a concept within the accounting framework, the standard shall
prevail.
Difference between a Standard and a Concept
➢ A standard is specific, example a standard for measuring
and recognizing cash. While a concept is more or less a general rule
such as a rule for asset recognition.
PROFESSIONAL REGULATORY BODIES
The practice of accounting profession, among others, is
governed by regulatory bodies such as PICPA, BOA, and
PRC. The financial reports prepared are also affected by
the rulings and promulgations issued out by the SEC, BSP,
and BIR.
1. Professional Regulation Commission (PRC)
➢ This is a government body in charge of
regulating and licensing the practice of any profession in
the Philippines.
2. Board of Accountancy (BOA)
➢ Popularly known as the Board, it has the same
duties as PRC but limited only to accounting profession.
3. Philippine Institute of Certified Public
Accountants (PICPA)
➢ Integrated national organization of CPAs
accredited by the Board and PRC.
4. Securities Exchange Commission (SEC)
➢ It regulates business operations specifically that
of partnerships, corporations, and other entities seeking
a license or franchise to operate in the Philippines.
Foreign companies are included, as well.
5. Bangko Sentral ng Pilipinas (BSP)
➢ BSP regulates the operations of all banks and
financing institutions in the Philippines and is tasked to
control price of goods and products, promote and
maintain peso stability, and monitor importations and
exportations of products.
6. Bureau of Internal Revenue (BIR)
➢ BIR exacts tax and license compliance from
people and business entities earning income. The
taxpayers are required to fill up and submit periodic tax
returns and pay for licenses, fees, and taxes.