CHAPTER 1
in numbers, quantities, or units.
INTRODUCTION TO ACCOUNTING
DEFINITION OF ACCOUNTING
Accounting process of identifying, recording
and communicating economic information that is
useful in making economic decisions.
ESSENTIAL ELEMENTS OF THE DEFINITION OF
ACCOUNTING
1. Identifying - The accountant analyzes each
business transaction and identifies whether the
transaction is an "accountable event" or "non-
accountable event." This is because only
"accountable events" are recorded in the books of
accounts. "Non-accountable events" are not recorded
in the books of accounts.
"Accountable events" (or 'economic events') are
those that affect the assets, liabilities, equity, income
or expenses of a business. Sociological and
psychological matters are outside the scope of
accounting.
2. Recording - The accountant recognizes (i.e.,
records) the identified "accountable events." This
process is called "journalizing."
 After journalizing, the accountant then
classifies the effects of the event on the
"accounts." This process is called "posting."
Account is the basic storage of information in
accounting in e.g., “cash”, “land”, “sales”, etc.
3. Communicating – At the end of each accounting
period the accountant summarizes the information
processed in the accounting system in order to
produce meaningful reports. This is important
because information processed in the accounting
system is useless unless it is communicated to
interested users. Accounting information is
communicated to interested users through
accounting reports, the most common form of which
is the financial statements.
Nature of accounting
Accounting is a process with the basic purpose of
providing information about economic activities that
is intended to be useful in making economic
decisions.
Types of information provided by accounting
1. Quantitative information - information expressed
2. Qualitative information - information expressed in
words or descriptive form. Qualitative information is
found in the notes to financial statements as well as
on the face of the other components of financial
statements.
3. Financial information - information expressed in
money. Financial information is also quantitative
information because monetary amounts are normally
expressed in numbers.
Accounting as science and art
1. As a social science, accounting is a body of
knowledge which has been systematically gathered,
classified and organized.
2. As a practical art, accounting requires the use of
creative skills and judgment.
Accounting as an information system
A system is one that consists of an input, a process,
and an output.
For example, in your digestive system, the input is the
food you eat; the process is when your body
produces digestive juices to convert the food into an
output called? ......energy! (The output my friend is
energy. The one you are thinking of is called waste.)
Your body needs energy so it can function properly.
Similarly, in an accounting system, the inputs
are the identified accountable events; the processes
are recording, classifying and summarizing; and the
output is the accounting report that is communicated
to the users.
Bookkeeping and Accounting
Although bookkeeping function is part of accounting,
bookkeeping and accounting are not the same.
 Bookkeeping refers to the process of
recording the accounts or transactions of an
entity. Bookkeeping normally ends with the
preparation of the trial balance. Unlike
accounting, bookkeeping does not require
the interpretation of the significance of the
information processed.
 Accounting, on the other hand, covers the
whole process of identifying, recording, and
communicating information to interested
users.
Functions of Accounting in Business
Accounting is often referred to as the "language of
business" because it is fundamental to the
communication of financial information.
 Accounting has the following two broad 2. Special purpose accounting information is
functions in a business: information designed to meet the specific needs of
particular statement users. It is provided by
1. To provide external users with information that is
management accounting or other branches of
useful in making, among others, investment and
accounting and is prepared primarily for internal
credit decisions; and
users.
2. To provide internal users with information that is
Examples of decisions and types of information
useful in managing the business.
needed to make those decisions
Users of Accounting Information
User Example of Example of
Users of accounting information are broadly classified
decision to information
into two, namely: make needed
1. Internal users - those who are directly involved in 1. ➢ Existing ➢ Audited
managing the business. Examples of internal users External investor: financial
include: user Whether to hold statements of
a. Business owners who are directly involved in (Investor) or sell the business to
managing the business investment in aid in analyzing
b. Board of directors stocks. the value of the
c. Managerial personnel company.
➢ Potential (General purpose
2. External users - those who are not directly investor: information)
involved in managing the business. Examples of Whether or not
external users include: to buy shares of
stocks.
a. Existing and potential investors (e.g., stockholders
2. ➢ Lender: ➢ Audited
who are not directly involved in managing the
External Whether or not financial
business) user to extend loan to statements of
b. Lenders (e.g., banks) and Creditors (e.g., suppliers) (Lender or a business. the business to
c. Government agencies (e.g., Bureau of Internal supplier) aid in analyzing
Revenue 'BIR', Securities and Exchange Commission ➢ Supplier: the company's
'SEC') Whether or not ability to pay its
d. Non-managerial employees to extend credit debts. (General
e. Customers to a business. purpose
information)
f. Public
3. Internal ➢ Whether or ➢ Analysis of
user not to increase the effects of
(Manager) the sale price of sales volume and
a’ product. sales prices to
earnings.
(Special purpose
information)
4. Internal ➢ How much ➢ Budget
user capital is needed report. (Special
(Manager) to manufacture a purpose
new product? information)

Examples in which accounting is used in investment

and credit decisions
Types of accounting information classified as to
External Decision Accounting
users' needs
user of information
1. General purpose accounting information - is
information
information designed to meet the common needs of
1. Investor • Shall I invest in • The
most statement users. It is provided by financial this business? Is financial
accounting and is prepared primarily for external this a profitable performance
users. undertaking? of the
business.
2. Creditor • Shall I lend • The
 money to this ability of the ➢ General purpose financial statements are those
business? Does business to statements that cater to the common needs of
this business have generate external users, primarily the potential and existing
the ability to pay revenue and investors, and lenders and other creditors.
back my loan? cash flows
from its ➢ Financial accounting is governed by the
operations. Philippine Financial Reporting Standards (PERSs).

The scope of this book is the fundamentals of

Now that we have understood how accounting plays financial accounting and reporting.
an important role in making business decisions, let us
have a brief overview on how accounting came to be. Financial accounting vs. Financial reporting
The terms "financial accounting" and "financial
Brief history of accounting reporting" are often used interchangeably. Although,
Accounting can be traced as far back as the both focus on general purpose financial statements,
prehistoric times. Since the dawn of civilization when financial reporting endeavors to promote principles
mankind began to engage in trade, perhaps more that are also useful to "other financial reporting."
than 10,000 years ago, methods of record keeping "Other financial reporting" comprises
and accounting have been invented. information provided outside the financial
As early as 8500 B.C., accounting has already statements that assists in the interpretation of a
existed. Archaeologists have found clay tokens as old complete set of financial statements or improves
as 8500 B.C. in Mesopotamia which were usually users' ability to make efficient economic decisions.
cones, disks, spheres and pellets. These tokens
correspond to commodities like sheep, clothing or Financial statements vs. Financial report
bread. They were used in the Middle West in keeping ➢ Financial statements are the structured
records. After some time, the tokens were replaced representation of an entity's financial position and
by wet clay tablets. During such time, experts results of its operations. They are the end product of
concluded this to be the start of the art of writing. the accounting process and the means by which
(Source: http://EzineArticles.com/456988)
information gathered and processed are periodically
Other ancient civilizations keeping account records
communicated to users.
are Babylonia (4500 B.C.), Egypt (2250 B.C.), China
and Greece. ➢ A financial report includes the financial
In the middle ages (13th and 15th centuries), statements plus other information provided outside
trade flourished in places such as Florence, Venice the financial statements that assists in the
and Genoa. This has brought advancement in account interpretation of a complete set of financial
keeping methods. In 1211 A.D., one of the systems in statements or improves users' ability to make
accounting was kept by a Florentine banker. However, efficient economic decisions.
the system was primitive as the concept of equality Financial statements Financial report
for entries was absent. Double entry records first 1. Statement of 1. Statement of
came out during 1340 A.D. in Genoa. financial position financial position
In 1494, the first systematic record keeping 2. Statement of profit 2. Statement of profit
dealing with the "double entry recording system" was or loss and other or loss and other
formulated by Fra Luca Pacioli, a Franciscan monk comprehensive income comprehensive income
and mathematician. The "double entry recording 3. Statement of 3. Statement of
system" was included in Pacioli's book titled "Summa changes in equity changes in equity
di Arithmetica Geometria Proportioni and 4. Statement of cash 4. Statement of cash
Proportionista," published on November 10, 1494 in flows flows
5. Notes 5. Notes
Venice.
6. Additional 6. Additional
The concept of "double entry recording" is
statement of financial statement of financial
being used to this day. Thus, Fra Luca Pacioli is position position
considered as the father of modern accounting. 7. Other information

Common branches of accounting Financial reporting is the provision of financial

1. Financial accounting - is the branch of accounting information about an entity that is useful to external
that focuses on general purpose financial statements. users, primarily the investors, lenders, and other
creditors, in making investment and credit decisions. 5. Tax accounting - is the preparation of tax returns
and rendering of tax advice, such as the
Primary objective of financial reporting determination of tax consequences of certain
To provide information about an entity's economic proposed business endeavors.
resources (assets), claims to those resources
6. Cost accounting - is the systematic recording and
(liabilities and equity), and changes in those
analysis of the costs of materials, labor, and overhead
resources (income, expenses and other changes).
incident to the production of goods or rendering of
Secondary objective of financial reporting services.
To provide information useful in assessing the entity's
7. Accounting education - refers to teaching
management stewardship (ie., how efficiently and
accounting and accounting-related subjects in an
effectively the entity's management has discharged
organized learning environment. It is a process of
its responsibilities to use the entity's economic
facilitating the acquisition of knowledge and skills
resources).
regarding one or more of the other branches of
("The term 'entity' refers to the ‘reporting entity’. A accounting.
reporting entity is one that is required, or chooses, to
8. Accounting research - pertains to the careful
prepare financial statements, for example a 'business.
analysis of economic events and other variables to
However, not only businesses prepare financial
understand their impact on decisions. Accounting
statements. Other types of organizations, such as
research includes a broad range of topics, which may
non-profit organizations, the government, or even a
be related to one or more of the other branches of
private individual, may also prepare financial
accounting, the economy as a whole, or the market
statements. Yes, even you can prepare your own
environment. Examples are provided below:
personal financial statements. Actually, government
employees are required to prepare and submit their Accounting research Related branch of
personal financial statement called the 'SALN' or topic accounting
Statement of Assets, Liabilities and Net worth.) • Impact of fair value • Financial
measurement on the accounting
2. Management accounting - involves the financial statements.
accumulation and communication of information for • Inventory • Management
use by internal users. An offshoot of management management and its accounting
accounting is management advisory services which effect on earnings.
includes services to clients on matters of accounting, • Internal controls and • Auditing
modern technology.
finance, business policies, organization procedures,
• Becoming a certified • Accounting
product costs, distribution, and many other phases of
public accountant. education
business conduct and operations.

Financial accounting Management

Summary:
accounting
Focuses on the Focuses on the Branch of Type of Users of
information needs of information needs of Accounting accounting service
external users. internal users. service provided
1. Financial ➢ General record ➢ All businesses
Accounting - keeping, i.e., use financial
3. Government accounting - refers to the accounting maintenance of accounting in
for the government and its instrumentalities, focusing Journals and their record-
attention on the custody of public funds, the purpose Ledgers. keeping. These
records provide
or purposes to which those funds are committed, and information that
the responsibility and accountability of the is also used in the
individuals entrusted with those funds. other branches of
accounting.
4. Auditing - involves the inspection of an entity's
financial - statements or business processes to
ascertain their correspondence with established
criteria. ➢ Businesses
➢ Preparation of prepare general
 general purpose purpose FS at of their products
financial least annually for or services and
statements (FS). the use of the effects of
lenders, those costs in,
investors, or among others,
government earnings and
regulatory pricing policies.
bodies. 7. ➢ Teaching of ➢ Required by
2. ➢ Preparation of ➢ Required by Accounting accounting and business
Managemen specifically tailored management to Education related subjects. students,
t Accounting management aid them in business owners,
reports. performing their accounting
management professionals in
functions. their Continuing
3. ➢ General ➢ Required by Professional
Government record- keeping the government Development
Accounting and preparation of and its agencies. (CPD), and other
financial reports interested
for the government parties.
and its agencies. It 8. ➢ Accounting ➢ Required by
also includes the Accounting research papers, business owners,
preparation of Research articles and similar professional
budgets and publications. organizations,
accountability and other
reports. interested
4. Auditing ➢ Expression of ➢ Businesses parties.
an opinion on the with gross
correspondence annual sales or
between receipts Forms of Business Organizations
management exceeding A business is an activity where goods or services are
assertions and P3,000,000 are exchanged for money. A person who is engaged in
established criteria. required to have business is called an entrepreneur or businessman.
their financial
*The most common
Businesses in the Philippines are organized in
statements
form of an audit opinion audited by an one of the following:
is the Independent
independent
Auditors' Report which 1. Sole or single proprietorship - is a business that is
is attached to audited Certified Public
financial statements. Accountant owned by only one individual. It is the most common
(CPA). and simplest form of a business organization. The
5. Tax ➢ Preparation of ➢ All business owner is called a "sole proprietor."
Accounting tax returns. businesses are A sole proprietorship is registered with the
required to file Department of Trade and Industry (DTI).
* Failure to file tax tax returns.
returns results to
penalty and
2. Partnership - is a business that is owned by two or
imprisonment of not more individuals who entered into a contract to carry
less than 6 years but not
on the business and divide among themselves the
more than 10 years.
earnings therefrom. The business owners are called
➢ Providing tax partners.
➢ Some
advice. A partnership is registered with the Securities
taxpayers may
and Exchange Commission (SEC).
require the
professional 3. Corporation - a corporation is also owned by more
advice of a tax
than one Individual. However, unlike a partnership, a
practitioner
corporation is created by operation of law rather than
regarding the
management of
a contract. Ownership in a corporation is represented
taxes. by shares of stocks. The owners are called
stockholders or shareholders.
6. Cost ➢ Analyses of ➢ Businesses A corporation is an artificial being or a
Accounting costs of products use cost juridical person, meaning in the eyes of the law, a
or services. accounting to
analyze the cost
corporation is like a person, separate from its owners.
Therefore, a corporation can transact on its own, The founding members of a cooperative shall
have its own properties, incur its own obligations, not be less than 15 individuals. However, a
and sue or be sued. cooperative can have as many members as its by-laws
For example, when you buy goods from a permit.
corporate business, you are actually transacting with A cooperative is registered with the
the corporation and not its owners. If you get sick Cooperative Development Authority (CDA).
from consuming the goods, you will sue the
corporation and not its owners.
A partnership also has a juridical personality. Summary: Forms of Business Organizations
However, unlike for corporations, the partners are
Form of Ownership Formation/
viewed as agents of the partnership. Meaning, the business Registration
partners transact on behalf of the partnership. organizatio
For example, if you transact with a partner of n
a business, you are transacting with the partnership 1. Sole ➢ One ➢ Registered with
through the partner; while if you transact with a proprietor individual (i.e., the DTI.
stockholder, this does not necessarily mean that you sole proprietor)
2. ➢ More than ➢ Formed by
are transacting with the corporation.
Partnership one (i.e., contractual
The incorporators (i.e., founders) of a partners) agreement.
corporation shall not be more than 15. However, a
corporation can have as many stockholders as its ➢ Registered with
authorized capitalization permits. the SEC.
A corporation is registered with the Securities 3. ➢ More than ➢ Formed by
and Exchange Commission (SEC). Corporation one (i.e., operation of law
stockholders)
4. Cooperative - a cooperative is also owned by more ➢ Registered with
than one individual. However, a cooperative is the SEC.
formed in accordance with the provisions of The 4. ➢ More than ➢ Formed in
Cooperative one (i.e., accordance with the
Philippine Cooperative Code of 2008. The owners of a
members) Cooperative Code.
cooperative are called members.
From the root word "cooperate," a
➢ Registered with
cooperative is an association of individuals who the CDA.
joined together to contribute capital and cooperate in
order to achieve certain goals.
For example, a group of farmers may form a Advantages and Disadvantages of the Different
cooperative to acquire delivery trucks to be used in Forms of Business Organizations
transporting their produce to the market. In here, the Sole Proprietorship
farmers voluntarily join together to achieve a
common goal, which is to address their need to get Advantages Disadvantages
their produce to the market. ▸ You are the boss ▸ You assume all the risk of
and you keep all loss.
Another concept of a cooperative is that the profits.
members need to patronize the cooperative's goods ▸ Decision making ▸ You take all responsibility and
or services. In the example above, the member is simple because rely mostly on yourself in making
farmers shall hire delivery trucks from the you have complete decisions.
cooperative rather than from other businesses. If the control over the
business.
cooperative earns profit (net surplus), a farmer can
▸ Relatively easier ▸ It is more difficult to raise
recover his costs through patronage refunds. and less costly to capital because you rely mostly
Patronage refund pertains to the profit that a form because there on your personal assets and
cooperative returns to its owners. It should be noted are fewer formal loans to initially finance the
that a member who has not patronized any of the business business.
services of the cooperative for an unreasonable requirements.
▸ Lower extent of ▸ You are personally liable for
period of time may be removed from the cooperative
government the debts and obligations of the
upon the majority vote of the board of directors. regulation and business.
A cooperative also has juridical personality relatively lower
similar to a corporation. taxes.

Partnership
Advantages
▸ Better business
decisions can be made
because "two heads are
better than one."
▸ You share the business
risk and the responsibility
of running the business
with your partner(s).
▸ Compared to
corporations and
cooperatives, a
partnership is easier to
form because only a
contractual agreement
between the partners is
needed.
▸ Greater capital
compared to a sole
proprietorship.
▸ Relatively lower extent
of government regulation
compared to
corporations.
Corporation
Advantage
▸ A stockholder who is
not a member of the
corporation's board of
directors is relieved from
managerial
responsibilities. Only the
stockholders that are
elected as members of
the board of directors and
those they hire or appoint
are tasked with
managerial
responsibilities. This can
be an advantage because
a regular investor does
not need to work for the
corporation to earn
income.
▸ Limited liability of the
owners because
stockholders are liable for
corporate debts only up
to the amount they have
invested.
▸ Greater capital and
ease in raising additional
funds because a
corporation can issue
Disadvantages
▸ Making business
decisions may give rise to
conflict among the
partners.
▸ You don't keep all the
profits because you need
to share them with your
partner(s).
▸ Limited life, in the
sense that a partnership
can be easily dissolved by
the withdrawal,
retirement, death or
insanity of one of the
partners.
▸ Lesser capital
compared to a
corporation.
▸ A partnership (other
than a general
professional partnership)
is taxed like a corporation.
▸ Unlimited liability. The
partners can be held liable
for partnership debts up
to their personal assets.
Disadvantage
▸ Your "say" on
corporate affairs depends
on the number of shares
you own. Those who own
more shares are the
bosses and enjoy a larger
share of the corporation's
profits.
▸ A corporation is more
difficult and more costly
to form because there are
more formal business
requirements.
▸ Greater extent of
government regulation
and higher taxes.
shares to a wider extent
of investors.
▸ If the corporation is
listed, you can easily
transfer your shares to
other investors by selling
them in the stock market.
Many investors earn profit
this way-by buying shares
at a cheap price, wait for
prices to go up, and then
sell them. This activity is
referred to as stock
trading.
▸ Unlimited life-the
withdrawal, retirement,
death or insanity of one of
the stockholders does not
dissolve the corporation.
Cooperative
Advantage
▸ Unlike in a
corporation, your "say" on
cooperative affairs is not
affected by the number of
shares you own. This is
because, in a cooperative,
each member is entitled
to only one vote
regardless of his or her
shareholdings. However,
members with larger
shareholdings are entitled
to larger share in profit
(net surplus).
▸ A cooperative is
generally exempt from
paying taxes. This is the
main advantage of a
cooperative and the most
common reason why
cooperatives are
organized. Moreover, a
cooperative may receive
assistance from the
government.
▸ Compared to a
corporation, a cooperative
is easier and less costly to
form because there are
fewer formal business
requirements.
▸ Unlike for a sole
proprietorship or a
partnership where
business profits are easily
distributed to the
owner(s), in a
corporation, you have to
wait for the board of
directors to declare
dividends before you can
get your share in the
profits.
Disadvantage
▸ A cooperative is prone
to poor management.
Cooperatives are, more
often than not, managed
by members who were
elected as board of
directors rather than by
employed professional
managers. Since there is a
'one- member, one-vote'
policy in a cooperative,
influential members tend
to dominate the election
process. The result is that
those who get elected
may not be the ones who
are most qualified for the
task.
▸ A cooperative is
susceptible to corruption.
Due to its management
structure and lack of
profit motive, the elected
officers may be inclined to
act on their personal
interests.
▸ The Cooperative Code
places some restrictions
on the distribution of a
cooperative's profit to its
members. More
specifically, the Code
requires a cooperative to
appropriate a portion of
its annual profit to some
funds. Only the remaining

▸ Limited liability-the
members are liable for
cooperative debts only up
to the amount they have
invested.
▸ Unlimited life, in the
sense that the
withdrawal, retirement,
death or insanity of one of
the members does not
dissolve the cooperative.
Although a cooperative
has a legal life of 50 years,
this can be renewed for
an indefinite number of
renewals.
Types of Business According to Activities
The following are the major types of business
according to the activities they undertake:
1. Service business
2. Merchandising (Trading)
3. Manufacturing
portion can be distributed
to the members.
Furthermore, when the
cooperative is dissolved,
the amount accumulated
in a fund called the
"reserve. fund" will not be
returned to the members,
but rather donated to
another cooperative or to
the community.
▸ Compared to a
corporation, it is more
difficult for a cooperative
to sustain growth. This is
in part because of the lack
of profit motive and the
lack of management
expertise. Moreover, a
cooperative's success
strongly depends on the
members' cooperation
and members are not
always willing to
cooperate. The success of
a business depends on
continuing effort. Sadly,
many cooperatives are
zealous at the start but
fail to sustain continuing
effort resulting to the
waning down of their
activities. This does not
mean though that all
cooperatives are small
businesses. There are
many multi-billionaire
cooperatives in our
country. Some might be
located in your
community.
▸ Unlike in a corporation
where the stockholder
can freely transfer his
shares, in a cooperative,
there are restrictions on
the transfer of a
member's shares. For
example, the approval of
the board of directors
must first be obtained
before a member can
transfer his or her shares.
Service business
A service business is one that offers services as its
main product rather than physical goods. A service
business may offer professional skills, expertise,
advice, lending service, and similar services.
Examples of service businesses include:
a. Schools
b. Professionals (accounting firm, law firm,
electrician, etc.)
c. Hospitals and clinics
d. Banks and other financial institutions
e. Hotels and restaurants
f. Transportation and travel (taxi operator, travel
agency, etc.)
g. Entertainment and event planners (wedding
planners, concert promoters, etc.)
Merchandising Business
A merchandising business (or trading business) is one
that buys and sells goods without changing their
physical form.
Examples of merchandising businesses include:
a. General merchandise resellers (grocery
stores, department stores, hardware stores,
pharmacies, online stores, sari-sari stores, etc.)
b. Distributors and dealers (rice wholesalers,
vegetable dealers, 2nd-hand cars dealers, etc.)
Manufacturing business
A manufacturing business is one that buys raw
materials and processes them into final products.
Unlike a merchandising business, a manufacturing
business changes the physical form of the goods it
has purchased in a production process.
For example, a business that buys and sells
eggs is a merchandising business. On the other hand,
a business that buys eggs and uses the eggs as
ingredient in making cakes for sale is a manufacturing
business.
Examples of manufacturing businesses include:
a. Car manufacturers (Toyota, Isuzu, Volkswagen, etc.)
b. Technology companies (Apple, Samsung, Sony, etc.)
c. Food processing companies (San Miguel Pure
Foods, Silver Swan, etc.)
d. Factories (clothing factories, animal feeds factories,
plastic wares factories, etc.)
Some businesses, called hybrid businesses,
engage in more than one type of activity. For
example, a restaurant uses ingredients to cook a meal
(manufacturing), sells Coca-Cola drinks
(merchandising), and serves food to customers
(service). Nevertheless, a hybrid business is classified
into one of the major types based on the activity that
is most in line with the business' purpose.
Restaurants are expected to fill-in customer orders
and provide dining services, thus, they are more of a
service-type business.
Advantages and Disadvantages of the Different
Types of Business
Service Business
Advantages
▸ You don't need to
worry about inventory,
warehousing and
distribution costs because
you don't have any
inventory. You only have
some minimal supplies
necessary in providing
your services.
▸ You may only need a
small capital because
what you are selling is
your skill set and you only
need yourself to render a
service. If you are a
manufacturer, you need
to buy raw materials and
machinery to produce
your product.
▸ You are perceived as
an expert in your chosen
field. People respect you.
You can also have fans!
way you act in the society.
▸ Since a service
business is founded on
good reputation, it is
more costly to commit an
error in a service business
compared to a
merchandising business.
For example, if a
merchandising business
erroneously sells
damaged goods, the
customer can just return
Disadvantages the goods and have them
replaced. However, if you
▸ You may not have a
are a barber and commits
flexible personal time
an error, you can't just
because you need to be
replace your customer's
directly involved in
hair!
providing a service to a
customer. You can stock
inventory but not service.
Merchandising Business
For example, if you are a
Advantages Disadvantages
manufacturer, you can
▸ Compared to a ▸ You need to have a
spend over time to
manufacturing firm, you retail store to display your
produce goods, stock
may need a much lower goods and the store must
them, and then take a
start-up capital because be in a strategic location
break. However, if you are
you don't need to acquire for it to attract more
a doctor, you are on call,
machineries to produce customers.
and have to be the one to
your goods.
personally examine a
▸ You can take advantage ▸ Less flexibility in
patient.
of price fluctuations. For managing costs. This is
example, when goods are because the cost of your
Until your business is big
on sale, you can acquire goods is based primarily
enough to be able to hire
them at a discounted price on their purchase price,
other professionals to do
and resell them at a much which you do not control.
the work for you, you will
higher price. You can't do
need to render the
this in a service business. *In a manufacturing
services yourself.
business, you can cut
▸ Service businesses
down costs by redesigning
normally suffer first from
your product, improving
decline in demand during
your processes, acquiring
times of economic
more efficient machines,
difficulty. This is because
employing more skillful
most services are
personnel, and so much
perceived as luxuries
more.
rather than necessities for
▸ Lower cost of quality. ▸ Keeping track of
survival.
This is because "what you inventory is tedious, most
For example, a guy with
buy is what you sell." especially when you are
low funds would refrain
selling numerous and
from having a haircut and
In a service or varied items with fast
uses his funds for food
manufacturing business, turnover rate, like for
instead. A smart gal with
you need to continually example if your business is
low funds would cut back
improve your products to a hardware store or a
her expenditures on spa
maintain their salability. In grocery store. Also, you
and pedicure.
a merchandising business, can incur additional costs
▸ Your business' success
if a certain product is not due to spoilages, theft,
depends on your
selling well, you can just breakages, damages, and
credibility. Personally, you
stop buying it and find an obsolescence.
must have a good
alternative product,
reputation. You need to
another brand maybe.
be always discreet in the
▸ It is much easier to ▸ Self-satisfaction is low
things you say and the
 start a merchandising
business because you
don't need to have an
expertise or a special skill
(service business) and you
don't need to have
invented a new product or
have conceptualized an
innovative idea for an
existing product
(manufacturing business).
Manufacturing Business
Advantages
▸ You have a high growth
potential because you can
tap into a wider market
and can produce in large
quantities.
▸ You have the
opportunity to establish a
brand that could last
longer than your lifetime.
This is the ultimate dream
of most entrepreneurs.
▸ Self-satisfaction is high.
Knowing that consumers
are happy and satisfied
with a tangible product
you have produced brings
you pride and joy.
▸ You may not need to
have a strategically
located retail store to
display your products
because you can sell
directly to wholesalers
rather than to end
consumers.
▸ You can have a better
pricing policy because
mass production can
decrease your unit cost
(often called
'economies of scale').
For example, you are
paying rent of P100,000
for your factory space. If
you produce only 1 unit
of a product, your unit
cost is high because the
rent will be allocated to
only 1 unit, i.e.,
P100,000 unit cost
(P100,000-1 unit).
because you did not
produce the products you
sold.
Disadvantages
▸ You need a high start-
up capital to acquire
machineries, to employ
people, and to acquire a
big space for your
production.
▸ Conceptualizing a
viable manufacturing
business is difficult. This is
why more entrepreneurs
would rather engage in
merchandising.
▸ You need to be
continuously innovative
and abreast of changes in
technology. If another
company comes up with a
better and cheaper
product, your product will
automatically lose
demand.
▸ Warehousing and
logistics costs can be high.
▸ You rely on raw
materials. You need to
manage them properly to
ensure that they are
available when they are
needed. This is because
a shortage in a raw
material can disrupt
your operation, and
that can be very costly.
For example, when
cooking rice, all the
ingredients you need
must be available. You
cannot cook the rice
now and just add the
water later on.
Therefore, you need to In a merchandising
sell this unit for more business, if you run out
than P100,000 to earn of a specific good, you
profit. However, if you don't necessarily need
produce 10,000 units, to close your store
your unit cost would be because you can still sell
much lower because other goods.
the rent will be
allocated to more units, Also, more accounting
i.e., P10 (P100,000 work is needed. That is
10,000 units). You can why there is a separate
branch of accounting
now sell each unit at a
formed primarily for
much lower price. manufacturing businesses,
i.e., cost accounting.
Chapter 1 Summary:
• Accounting is a process of identifying, recording and
communicating economic information that is useful in
making economic decisions.
• Only "accountable events" are recorded in the
books of accounts. Accountable events are those that
affect the assets, liabilities, equity, income or expenses
of a business.
• The information processed in an accounting system
is communicated to interested users through accounting
reports (e.g., financial statements).
• Accounting is considered the "language of business"
because it is essential in the communication of financial
information.
• Accounting provides information that is useful in
making
economic decisions.
• The common branches of accounting include the
following: (1) Financial accounting (2) Management
accounting (3) Government accounting (4) Auditing.
(5) Tax accounting, (6) Cost accounting (7) Accounting
education, and (8) Accounting research.
• Financial accounting focuses on the information
needs of external users, while management accounting
focuses on the information needs of internal users.
• External users are those who are not directly
involved in managing the business. Internal users are
those who are directly involved in managing the
business.
• Accounting information may be either (a)
general purpose or (b) special purpose. General
purpose accounting information provided by
financial accounting and is prepared primarily for
external users. Special purpose accounting
information is provided by management
accounting or other branches of accounting and is
prepared primarily for internal users.
• The different forms of business organization
are: (1) Sole proprietorship (2) Partnership, (3)
Corporation, and (4) Cooperative
• The types of business according to activities
are: (1) Service business; (2) Merchandising
business, and (3) Manufacturing business

PROBLEMS
PROBLEM 1: TRUE OR FALSE
1. All events involving an entity are recorded in the
books of accounts.
2. Sociological and psychological matters are within
the scope of accounting.
3. Accountable events are recorded in the books of
accounts through a process called "journalizing."
4. Measuring is the phase in accounting where
financial statements are prepared and provided to
interested users.
5. The basic purpose of accounting is to provide
information about economic activities that is
intended to be useful in making economic decisions.
6. As a practical art, accounting requires the use of
creative skills and judgment.
7. Bookkeeping refers to the whole process of
identifying, recording, and communicating
information to interested users.
8. Investment and credit decisions are most likely to
be made by internal users of financial information.
9. Financial accounting is concerned with the
preparation of information geared towards the
common and specific needs of external users only.
10. Financial statements are the structured
representation of an entity's financial position and
results of its operations.
PROBLEM 2: TRUE OR FALSE
1. A "reporting entity" (or simply 'entity') is one that
is required, or chooses, to prepare financial
statements.
2. Accounting information is expressed only in
numbers but never in words.
3. You are planning on investing in the shares of
stocks of ABC Inc. You then downloaded ABC Inc.'s
financial statements from the internet to help you
analyze whether the current market price of ABC
Inc.'s shares are undervalued or overvalued. In this
regard, you are considered an internal user of
financial statements.
4. The output in the financial accounting process is
the financial statements.
5. In a partnership or a sole proprietorship, the
owners' liability for business' debts is limited only to
the amount the owner has contributed to the
business.
6. Unlike bookkeeping, accounting requires the
interpretation of the significance of the information
processed.
7. In most cases, the start-up capital for a
manufacturing business is more significant compared
to a service business.
8. The corporate form of business organization
provides the highest degree of continuity.
9. A business that converts raw materials into final
products is called a merchandising business.
10. Auditing is the branch of accounting that involves
the inspection of an entity's financial statements or
business processes to ascertain their correspondence
with established criteria.
PROBLEM 3: FOR CLASSROOM DISCUSSION
Definition, nature and function of Accounting
1. Which of the following does not properly describe
accounting?
a. It is a process by which useful information is
generated.
b. It is a social science.
c. It requires the application of creative skills and
judgment.
d. It is often referred to as the "language of the soul."
Users of accounting information
2. Which of the following is considered an internal
user of financial information?
a. Rank and file employees of the reporting entity
b. Stockholders of the entity who are not directly
involved in managing the entity
c. Lenders and other creditors
d. The entity's management
3. What type of information needs of users do
general purpose financial statements cater to?
a. common needs
b. specific needs
c. a and b
d. caring needs
4. Which of the following is least likely to be a
decision made by an external user of the financial
information of an entity?
a. whether to buy, hold or sell investment in stocks
b. whether to extend loan or other forms of credit
c. whether to obtain additional financing
d. all of these are decisions that external users make
Branches of accounting PROBLEM 4: MULTIPLE CHOICE
5. This branch of accounting deals with the 1. It is the phase in accounting where an event is
preparation of general purpose financial statements. determined whether or not it is to be recorded in the
a. General accounting books of accounts.
b. Management accounting a. Accountable event
c. Financial accounting b. Identifying
d. Auditing c. Measuring
d. Communicating
6. General purpose financial statements are intended
to meet 2. These are events that affect the assets, liabilities,
a. all the information needs of all users - external and equity, income or expenses of a business.
internal alike. a. Accountant's events
b. the common needs of both external and internal b. Internal events
users. c. External events
c. the common needs of external users, primarily d. Accountable events
investors, lenders and other creditors. d. both the
3. It is the basic storage of information in accounting
common and specific needs of external users.
a. Cash
Forms of business organizations b. Vault
7. This type of business organization is created by a c. Account
contractual agreement between two or more d. Memory Card
individuals.
4. Accounting information is communicated to
a. corporation
interested users most commonly through
b. cooperative
a. financial statements.
c. partnership
b. statement of accounts
d. sole proprietorship
c. Journals
Types of business according to activities d. Call and text
8. Which of the following refers to a manufacturing
5. Information expressed in numbers is called
business?
a. Quantitative information
a. buying and selling of goods in their original form
b. Qualitative information
b. sale of a skill-set and not necessarily a physical
c. Financial information
object
d. Numerical information
c. ability or potential to mass-produce
d. absence of ability to stock goods for future sale 6. Accounting is fundamental to the communication
of financial information. Thus, accounting is often
Advantages and disadvantages of the different
referred to as
types of business
a. a practical art.
9. A disadvantage of a partnership is
b. a social science
a. better decisions - "two heads are better than one."
c. the "language of the soul."
b. business risk is assumed by more than one owner.
d. "language of business."
c. unlimited life.
d. unlimited liabilities of the partners. 7. Which of the following is considered an internal
user?
10. This type of business organization has the
a. Investors
tendency to become monopolistic. It can hamper the
b. Management
economy by funneling wealth to only few individuals
c. Creditors
(i.e., the organization's top owners) restricting the
d. Rank and file employees
redistribution of wealth to the majority of the
members of the society. 8. It refers to accounting information designed to
a. Cooperative meet the common needs of most statement users.
b. Sole proprietorship a. General purpose information
c. Partnership b. Special purpose information
d. Corporation c. Common information
d. All of these
9. An internal user's economic decisions least likely c. Management accounting
include which of the following? d. Tax accounting
a. Whether or not to increase the sale price of a
5. Mr. Clouds owns a car dealership. Mr. Clouds buys
product.
used cars, refurbish them and then sells them. Mr.
b. Whether or not to extend credit to a business.
Clouds is the only owner of the business. <List A>
c. Whether to increase or decrease the production of
What form of business origination is Mr. Clouds' car
a certain product.
dealership and <List B> what type of business activity
d. Whether to increase the salaries of existing
is Mr. Clouds' engaged in?
employees or to hire additional employees.
<List A> <List B>
10. The focus of financial accounting is the
a. Sole proprietorship Service
preparation of
b. Sole proprietorship Trading
a. general purpose financial statements.
c. Partnership Trading
b. special purpose financial statements.
d. Corporation Manufacturing
c. a and b
d. journals and ledgers. 6. Inventory, warehousing and distribution costs are
the least worry of a business that engages in what
PROBLEM 5: MULTIPLE CHOICE
type of business activity?
1. The Philippine Financial Reporting Standards
a. Service
(PFRSS) are most relevant to which branch of
b. Merchandising or Trading
accounting?
c. Manufacturing
a. Taxation
d. None of these
b. Financial accounting
c. Management accounting Use the following information for the next two questions :
d. b and c You want a new laptop computer and a good internet
connection so you can market your products on
2. These are the end product of the accounting
Facebook. The problem is you are short of cash. So,
process and the means by which information
you went to Papa to get a loan but he said, "No way,
gathered and processed are periodically
Jose!"
communicated to users.
a. Financial statements 7. Which of the following would most likely persuade
b. Accountable events Papa to give you the loan?
c. Journals and Ledgers a. Cry like a spoiled brat while running up and down
d. Accountant the stairs.
b. Look at Papa with teary eyes while wiping the
3. The primary objective of financial reporting is
liquid dripping from your nose.
a. to provide information about an entity's economic
C. Get Mama on your side.
resources.
d. Show Papa your projected financial statements,
b. to provide information useful in assessing the
explain to him your business plan and confidently
entity's management stewardship.
assure him that you will pay back the loan.
c. to comply with the PFRSS.
d. to provide information about an entity's economic 8. Papa's decision on whether to extend you a loan is
resources (assets), claims to those resources a decision made by a(an)
(liabilities and equity), and changes in those a. external user.
resources (income, expenses and other changes). b. internal user.
c. wise man.
4. Mr. George, an accountant, prepared a report
d. kuripot man.
showing all the past due accounts of the business,
collection trends, financial ratios and analyses. Mr. 9. You are a business owner. It came to your attention
George stamped the word "confidential" on all the that some of your products are overstocked, while
pages of the report because the report is intended for some are frequently out-of-stock. Warehousing costs
management's use only. The preparation of the have been increasing and you are losing potential
report is most likely to be within the purview of sales. To come up with a right mix of products to
which branch of accounting? store in your warehouse, what should you do?
a. Financial accounting a. Fire your sales personnel.
b. Cost accounting
b. Fire your warehouse custodian.
c. Cry like a little baby; face pressed on a pillow.
d. Obtain an accounting record of your sales per
product line and identify which products are sold
faster than the others. Stock more of those products
and stock less of the products that take longer to sell.
10. Your friend offered you a business proposal.
According to your friend, the initial investment is
P10,000. You will some products - 2 skin whitening
soaps and 1 bottle dishwashing liquid. If you get
other investors to invest and those other investors
get other investors and those "other" other investors
get some more investors, you will receive a house
and lot! (Wow!) As a business learner, you should do
any of the following except
a. give your parent's hard earned money to your
friend.
b. ask if your friend's business is properly registered
with government regulatory agencies, e.g., Securities
and Exchange Commission 'SEC'. Ask if you can
examine the related registration documents.
c. obtain an objective understanding of your friend's
business and its ability to give you a house and lot.
Ask if your friend owns a house and lot. If he or she
answers "No," there is a small chance that he or she
could give you one.
d. say LOL. In your mind, you are thinking "I am an
accounting student. You cannot fool me with your
scam."
(i.e., from savings or borrowings or both)
- Difficulties faced by the owner during the start-up
period
e. Other information....(use your imagination; be
creative!)
NOTE: Be polite and courteous.....chances are, this
could be a life-changing experience for you...I hope.
Enjoy!)
PROBLEM 7: ESSAY
If you have the opportunity to put up a business,
what would it be and why?
*NOTE: Disregard any financial restrictions that you
may have. Imagine you have the money you need to
put up any business you like. However, you need to
consider any skills that you currently have or skills
you are willing to acquire. Such skills can be technical
(e.g., cooking skills, computer programming, art,
music, mathematics, gardening, carpentry, etc.) or
non-technical (e.g., communication skills, people
skills or 'charisma', street smart, etc.). Also, you need
to consider the things or activities that make you
happy- those that motivate you, those that you find
fulfilling.
Final note: Be honest to yourself! You will be graded
based on your honesty, so don't write things just to
impress your teacher. Enjoy.

PROBLEM 6: CASE STUDY

Instructions:
1. Interview someone who has a business. He or she
can be a relative, a friend, a neighbor (e.g., an owner
of a sari-sari store nearby), or anyone (e.g., an owner
of a food stall in your school's canteen).

2. Let him or her tell you a story on how his or her

business came to be. (Important: Listen, and listen
well. Do not interrupt while he or she tells you his or
her story. Notice any spark of passion in his or her
eyes.)

3. Summarize his or her story and pass it to your

teacher for grading. At the minimum, your summary
should include the following:
a. Name of the business

b. Form of the business and type of business activity

c. Nature of products or services
d. Brief history of the business
- Reason for putting up the business (including any
interesting facts and circumstances - most businesses
have this!)
- Initial capital and how that capital was generated