CHAPTER 1: INTRODUCTION TO ACCOUNTING

•Accounting is a process of recording, classifying, and summarizing

financial information that is useful in making economic decisions.

•The language of business. (layman's term)

DEFINITION:
1. ART
1.1 RECORDING -Journalizing
•Books of account/Record
•Books of original entry/journals

Kinds of Journal
1.General Journal -Adjusted Journal Entries
-RE
-Closing Entries
2.Special Journal
Types of Special Journal
a. Cash Receipt Journal -all debit
b. Cash Disbursements Journal -all credit
c. Sales Journal -all sales on account
d. Purchase Journal -all purchase on account

Kinds of Ledger
1. General Ledger -control accounts
-ending balances
2. Subsidiary Ledger -more specific ledger
-for accounts payable & accounts receivable
-to track existing balance of customers and/or
suppliers

1.2 CLASSIFYING -

1.3 SUMMARIZING
*Trial balance -to check the equality of the total debits and
total credits
•Unadjusted Trial Balance -Permanent Account,
Temporary Account, Mixed Account
-prepare adjusting journal entries
•Adjusted Trial Balance -Permanent Account and
Temporary Account
-prepare closing entries
-to close nominal acc., to update capital acc.
•Post-Closing Trial Balance -permanent account
 Types of Account
1. permanent account/Balance sheet account/Real account
2. Temporary acc/income statement acc/nominal account
3. mixed account

1.4 ANALYZING of financial statement

2. PROCESS
2.1 IDENTIFYING/Identification process - transaction & events
-The accountant analyzes each business
transaction and identifies whether the transaction is an "accountable
event" or "non-accountable event."
a) ACCOUNTABLE EVENTS - also known as
‘economic events’ are those that affect the assets, liabilities, equity,
income or expenses of a business.
- Needs to be recognized/ recorded /journal
b) NON-ACCOUNTABLE EVENTS - not recorded
in any books of accounts and doesn’t affect the A,L,E
-Needs to be looked into whether material (significant) or
immaterial (insignificant).
*Material needs to be disclosed to the notes of financial
statement

2.2 MEASURING/ measurement basis - Conceptual framework

a) Historical Cost - how much you purchased an asset that
doesn’t change in time amount on assets of liability initialy recorded
b) Realizable Value - (exit value=assets) (settlement
value=liabilities) -the amount by which an asset/liability could be
sold/settled as of now in an exchange transaction.
c)Present/Discounted Value - time value of money
d)Current Cost - amount you need to purchase the same item.

2.3 COMMUNICATING
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 - numbers, units, or quantities
2. QUALITATIVE INFORMATION - words or descriptive forms
3. FIANANCIAL INFORMATION - expressed in money

Bookkeeping and Accounting

Bookkeeping and accounting are not the same although bookkeeping is part of
accounting
 Bookkeeping -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 - covers the whole process of identifying, recording, and
communicating information to interested users

Function of Accounting in Business

-to provide information to users
1. To provide external users with information that is useful in making, among
others, investment and credit decisions; and
2. To provide internal users with information that is useful in managing the
business.

TYPE OF USERS
1. INTERNAL USERS -those who are directly involved in managing the
business.
EXAMPLES:
 Business Owners
 Managers
 Board of Directors
 Managerial Personnel

2. EXTERNAL USERS -those who are not directly involved in managing the
business.
EXAMPLES:
 SCGLEPI
*Suppliers and other trade creditors
- Goods & Service
-Short Term -> Liquidity
-Long Term -> Solvency (Asset>Liability)
*Customers -product dependency
*Government -taxation
*Lenders -Money + Interest
*Employees -Stability & Profitability
*Public -foundations
*Investors -current & potential
-users of financial statement
DIFFERENT BRANCHES OF ACCOUNTING
 Branch of Type of Accounting Service Provided
Accounting
1. Financial  General record- keeping, I.e.,
Statement maintenance of Journals and Ledgers
 Preparation of general purpose
financial statements (FS)
2. Management  Preparation of specifically tailored
Accounting management reports.
3. Taxation  Preparation of tax returns.
*Failure to file tax retums results to penalty
and imprisonment of not less than 6 years
but not more than 10 years.
 Providing tax advice
4. Government  General record- keeping and
Accounting preparation of financial reports for the
government and its agencies. It also
includes the preparation of budgets and
accountability reports.
5. Auditing  Expression of an opinion on the
correspondence between management
assertions and established criteria.
*the most common form of an audit opinion
is the Independent Auditors" Report which
is attached to audited financial statement
6. Cost Accounting  Analyses of costs of products or
services.
7. Accounting  Teaching of accounting and related
Education subjects.
8. Accounting  Accounting research papers, articles
Research and similar publications.
Users of Service
 All businesses use financial
accounting in their record-
keeping. These records
provide information that is
also used in the other branches
of accounting.
 Businesses prepare general
purpose FS at least annually
for the use of lenders,
investors, or government
regulatory bodies.
 Required by management to
aid them in performing their
management functions.
 All businesses are required to
file tax returns.
 Some taxpayers may require
the professional advice of a tax
practitioner regarding the
management of taxes.
 Required by the government
and its agencies.
 Businesses with gross annual
sales or receipts exceeding
$3,000,000 are required to
have their financial statements
audited by an independent
Certified Public Accountant
(CPA)
 Businesses use cost accounting
to analyze the cost of their
products or services and the
effects of those costs in,
among others, earnings and
pricing policies.
 Required by business students
business owners, accounting
professionals in their
Continuing Professional
Development (CPD), and other
interested parties.
 Required by business owners,
professional organizations. and
other interested parties.
 FORMS OF BUSINESS ORGANIZATION

1. Sole or Single Proprietorship -owned by only one individual called sole proprietor.
-Registered with the DTI
2. Partnership -owned by two or more individuals called partners.
-Formed by contractual agreement.
-Registered with the SEC
3. Corporation -owned by more than one individual called stockholders/shareholders.
-Formed by operation of law
-Registered with the SEC
4. Cooperative -owned by more than one individual called members.
-Formed in accordance with the Cooperative Code
-Registered with the CDA

ADVANTAGES AND DISADVANTAGES OF THE DIFFERENT FORMS OF BUSINESS

ORGANIZATIONS

Sole Proprietorship
ADVANTAGES
 You are the boss and you keep all the profits
 Decision making is simple because you have
complete control over the business.
 Relatively easier and less costly to form
because there are fewer formal business
requirements.
 Lower extent of government regulation and
relatively lower 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.
DISADVANTAGES
 You assume all the risk of loss.
 You take all responsibility and rely mostly on
yourself in making decisions.
 It is more difficult to raise capital because you
rely mostly on your personal assets and loans
to initially finance the business.
 It is more difficult to raise capital because you
rely mostly on your personal assets and loans
to initially finance the business.
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.

Corporation
ADVANTAGES DISADVANTAGES
 A stockholder who is not a member of the  Your "say" on corporate affairs depends on
corporation's board of directors is relieved the number of shares you own. Those who
 from managerial responsibilities. Only the
stockholders 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 shares
to a wider extent of investors
 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, in the sense that the
withdrawal. retirement, death or insanity of
one of the stockholders does not dissolve the
corporation.
Although a corporation has a legal life of 50
years, this can be renewed for an indefinite number
of renewals.
Cooperative
ADVANTAGES
 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.
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.
 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.
DISADVANTAGES
 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 portion can
be distributed to the members.
  Limited liability-the members are liable for
cooperative debts only up to the amount they
have invested.
 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.

 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
 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.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

1. Service Business -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:
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.)

2. Merchandising Business -(or trading business) is one that buys and sells goods without changing their
physical form.
EXAMPLES:
a) General merchandise resellers (grocery stores, department stores, hardware stores, pharmacies, online
stores, sari-san stores, etc.)
b) Distributors and dealers (rice wholesalers, vegetable dealers 2nd-hand cars dealers, etc.)

3. Manufacturing Business -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:
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 (dothing factories, animal feeds factories, plastic wares factories, etc.)

Agribusiness -dole/del monte

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
CHAPTER 2: ACCOUNTING CONCEPTS AND PRINCIPLES