ACCOUNTING IN BUSINESS
Importance of Accounting in Business
All business have one thing in common, they need
financial information before making decisions. And this
financial information is being provided by the accountant
by preparing the following financial statements:
 Statement of Financial Position - list of assets and
liabilities
 Income Statement - revenues against costs and
expenses
 Statement of Cash Flows - cash inflows and outflows
 Statement of Owner's Net Worth - showing changes in
wealth
A business is an economic unit that engages in buying and
selling of goods or services.
A major concern of a business is how best to use its
resources:
 money
 machines
 materials
 men
It focuses on productivity: produce and sell more to
obtain profit.
Most often its success is measured in terms of profit.
• Profit generates more funds or resources for the
business.
• With more funds, it is possible for the business to
expand and create more job opportunities.
• Subsequently, more properties acquired, more goods
produced and sold and more taxes are paid to the
government
FUNDING A BUSINESS
• The primary source of funds or capital (resources such
as money) is the investor or owner of the business.
• If the capital put up by the owner is not enough, other
sources of capital are the relatives, friends or financing
institutions such as banks and cooperatives.
FORMS OF BUSINESS ORGANIZATION
 Sole Proprietorship
- This business organization has a single owner
called the proprietor who generally is also the manager.
This tend to be small service-type businesses and retail
establishments.
 Partnership
- Is a business owned and operated by two or
more persons who bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing the profits among themselves.
 Corporation
- A corporation is a business owned by its
stockholders.
TYPES OF BUSINESS OPERATIONS
 Service
-Selling people’s time
-Hiring skilled staff and selling their time.
 Merchandising
-Buying and selling products.
 Manufacturing
-Designing products, aggregating components and
assembling finished products.
ACTIVITIES IN BUSINESS ORGANIZATIONS
The three types of business activities are as follows:
 Financing Activities
-are the methods an organization uses to obtain
financial resources from financial markets and how it
manages these resources.
• A business starts with financing activities when the
owner finances the business.
• If the owner’s contribution is insufficient, additional
financing can be extended by banks and other financing
institution.
• Included under this activities are capital withdrawn by
the owner and loan repayment.
 Investing Activities
- Involve the selection and management of long term
resources that will be used to develop, produce and sell
goods and services.
• It also involves disposal and replacement of these
resources. Examples are acquisition of properties in land,
furniture, machineries and equipment and other
resources needed in the business and selling them when
they are no longer needed.
 Operating Activities
- involve the use of resources to design, produce,
distribute, and market goods and services.
• It includes activities involving business operations such
as activities related to earning of income when goods or
services are sold and the incurring of expenses when they
are paid.
“Accounting is a service activity. Its function is to
provide quantitative information, primarily financial
in nature, about economic entities, that is intended
to be useful in making economic decision.” –
Accounting Standards Council (ASC), succeeded by
Financial Reporting Standards Council (FRSC).
Other definitions of accounting from other
organizations:
 “Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at
least, of financial character, and interpreting the
results thereof.” – American Institute of Certified
Public Accountants (AICPA)
 “Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgment and
decision by users of the information.” –American
Accounting Association (AAA)
From the definitions above, we can have the
following processes of accounting:
1. Identifying – this is the process of identifying
business transactions as accountable events or non
accountable events. Only accountable events are
recorded in the books of accounts and non
accountable events are not. Accountable events are
events that affect the assets, liabilities, equity,
income and expenses of a business.
2. Measuring – this is the process of assigning
amounts or value to the accountable economic
transactions and events.
3. Communicating – this is the process of
communicating accounting information to
interested users by preparing and distributing
accounting reports, the most common form of which
is the financial statements.
NATURE AND PURPOSE OF ACCOUNTING
 Accounting is a process which function is to
provide financial information about economic entities
to statement users so that they could make informed
judgment and better decision.
ACCOUNTING AS A BUSINESS LANGUAGE
 Accounting is a bridge between the company and the
statements users. From the business activities which
accounting accumulates, reports will be prepared and vital
information communicated to the users.
 Accounting speaks in a language that enables readers to
understand what is happening in a business, if it is doing
well in terms of finances, before readers or users make
decisions.
 It is difficult for users to make financial decisions that
are not supported by facts. These facts are contained in
the accounting reports.
COMPANY
accumulates financial data
through its various activities
ACCOUNTING
processes the financial data and
prepares financial reports
STAKEHOLDERS or USERS
read the reports
and make decisions
BRIEF HISTORY OF ACCOUNTING
- Accounting can be traced back as far as ancient
civilizations of China, Babylonia, Greece and Egypt.
 It was initiated in Babylonia and Egypt around 3600B.C.
They maintained various types of records of their business
activities. Clay tablets were used to record payment of
wages.
 Archaeologists have found clay tokens in Mesopotamia
as old as 8500 B.C. which were usually cones, disks,
spheres and pellets. They were used in keeping records.
 Between 13th and 15th centuries, trade flourishes in
places such as Florence, Venice and Genoa which brought
advancement in account keeping records.
Amatino Manucci was the inventor of the double
entry bookkeeping. He is a partner in Giovanno, Farolfi &
Company, Florence merchants. He kept financial records
for the firm’s branch in Salon, Provence which survive
from 1299 to 1300. These financial records, although
incomplete show enough detail to be identified as double
entry bookkeeping. They are the oldest known existing
examples of double entry system.
Luca Pacioli, a Franciscan friar and a mathematician
formulated the first systematic record keeping dealing
with the double entry recording system in 1494. The
double entry recording system was included in Pacioli’s
book titled “Summa de Arithmetica Geometria
Proportioni and Proportionista” published on November
10, 1494 in Venice.
INTRODUCTION TO ACCOUNTING PART 2
BRANCHES OF ACCOUNTING
The main branches of accounting and their brief
description are as follows:
 Auditing – is the independent verification and
examination that ensures the fairness and reliability of the
reports that management submits to users outside the
business entity.
 Bookkeeping – is the routine activity of recording,
classifying and summarizing business transactions in a
systematic manner. It is the procedural aspect of
accounting.
 Cost Accounting – is the process that involves the
recording of cost data in books of accounts..
 Financial Accounting – focused on the recording of
business transactions and the periodic preparation of
reports on financial position and results of operation.
Financial Management – a relatively new branch of
accounting that deals more on the management of the
entity’s financials.
 Management Accounting – deals with financial and non
-financial information primarily for managers and other
internal users to assist them in planning,
directing and controlling the affairs of the business.
 Tax Accounting – involves the preparation of tax
returns and the consideration of the tax consequences of
proposed business transactions or alternative course
of actions.
 Government Accounting – deals with the
administration or use of public funds to bring about
service to the people. It is concerned with the
identification of the sources and uses of resources
consistent with the law to ensure proper custody
and disposition of these public funds.
CORE COMPETENCIES FOR ACCOUNTANTS
• The core competencies for accountants identify the
knowledge , skill and professional values that the new
CPAs need to have in order to face the challenges of
todays changing environment successfully.
• The strategic goal is to produce technically competent
and ethical professional accountants ready to compete
locally and internationally.
Therefore, the higher education structure should
develop the following minimum core competencies:
 Knowledge - the CPA’s knowledge must cover general
knowledge, business knowledge, information technology
knowledge and accounting knowledge.
 Skills - the skills to be developed include:
o intellectual skills which involve skills in analysis, problem
solving, strategic/critical thinking, o interpersonal skills
which involve developing the ability of CPAs to work in
groups and being a team player, o communication skills
which involve active listening skills and the ability to
communicate effectively.
o Values
o Professional ethics – the accountancy profession aims
to work in accordance with the highest standards of
professionalism. Hence, the need for CPAs to conform to
the ethical standards of the profession become vital.
These ethical standards include integrity, objectivity,
independence, professional competence and due care,
confidentiality and professional behavior.
o Moral values – CPAs need also to distinguish between
what is morally right or wrong.
CARREER OPPORTUNITIES
The professional accountant is presented with a lot of
opportunities. They can be engaged in any of the
following areas of competence:
 Public Practice
This is a career field where the accountants offer
to the public expert services for a fee. These services
include accounting, auditing, tax and management
advisory services. Public accountants, who practice
individually or as members of public accounting firms,
should be certified public accountants (CPAs).
 Commerce and Industry
Another career field, where accountants are
employed. Entry level positions are financial accounting
staff, management accounting staff, tax accounting staff,
cost accountant. Middle level positions - comptroller,
budget officer, senior auditor, senior information system
auditor, senior forensic auditor. Advanced level positions
– Chief financial officer, chief information officer.
 Government
Another career field where accountants work as
an accountant, auditor, budget officer, or electronic data
processing head of any of the government agencies and
non-profit organizations. They man be hired by the
following government agencies: Commission on Audit,
Bureau of Internal Revenue, Department of Finance,
Department of Budget and Management, Bangko
Sentral ng Pilipinas and local government units.
 Education
Another professional field where the accountants
assume the role of a teacher, researcher and reviewer.
Accounting professors develop students to be competent
and prepare them for the CPA licensure examinations. All
accounting subjects for accountancy and non accountancy
students and finance subjects for accountancy students
should be handled by CPAs only.
ACCOUNTANCY ACT OF 2004
 The accountancy profession is governed by a law,
Republic Act No. 9298 known as the "Philippine
Accountancy Act of 2004"
 An Act regulating the practice of Accountancy in the
Philippines, This was signed into law by President Gloria
Macapagal Arroyo on May 13, 2004.
 This law repealed Presidential Decree No. 692,
otherwise known as The Revised Accountancy Law which
was enacted May 5, 1975.
 Objectives of the Act: (Article I, sec. 3, RA 9298)
(a) The standardization and regulation of accounting
education;
(b) The examination for registration of certified public
accountants; and
(c) The supervision, control, and regulation of the practice
of accountancy in the Philippines.
Professional Regulatory Board of Accountancy
 Article II of the Accountancy Act provides for the
creation of the Professional Regulatory Board of
Accountancy.
 The agency tasks to enforce the provisions of the
Accountancy Act.
 Included in its powers and function is the supervision of
the registration, licensure and practice of accountancy in
the Philippines as well as the right to suspend, revoke, or
reinstate the Certificate of Registration for the practice of
the accountancy profession. (Section9,
Article II of the Act)
CERTIFIED PUBLIC ACCOUNTANT LICENSURE
EXAMINATION
 SEC. 13, Article III of the Accountancy Act - Certified
Public Accountant Examinations -All applicants for
registration for the practice of accountancy shall be
required to undergo a licensure examination to be
given by the Board in such places and dates as the
Commission may designate subject to compliance with the
requirements prescribed by the Commission in
accordance with Republic Act No. 8981.
 SEC. 14. Qualifications of Applicants for Examinations.
– Any person applying for examination shall establish the
following requisites to the satisfaction of the Board that
he/she: (a) is a Filipino citizen; (b) is of good
moral character; (c) is a holder of the degree of Bachelor
of Science in Accountancy conferred by a school, college,
academy or institute duly recognized and/or accredited by
the CHED or other authorized government offices; and (d)
has not been convicted of any criminal offense involving
moral turpitude.
THE ACCOUNTING EQUATION AND THE
DOUBLE –ENTRY SYSTEM
BASIC ACCOUNTING CONCEPTS
Accounting concepts and principles are a set of
logical ideas and procedures that guide the accountant in
recording and communicating economic information.
Separate Entity Concept – Under this concept, the
business is considered separate and distinct from its
owner. Only business transactions are recorded in the
books of accounts of the business and the personal
transactions of the owner are not included.
Time Period (Periodicity Concept) – This concept assumes
that the operating life of an enterprise maybe divided into
series of reporting periods. This allows accounting to
report on a timely basis the needed information of the
users of financial statements to assess the
condition and performance of the business.
Going Concern Assumption – Under this concept, the
business is assumed to continue in operation for an
indefinite period of time.
Stable Monetary Unit – Under this concept , all business
transactions are recorded and measured using only one
unit of measurement. The unit of measurement in the
Philippines is the Philippine peso. It is also assumed that
the purchasing power of peso is stable and therefore
changes in the purchasing power due to inflation are
ignored.
Materiality Concept – This concept guides the accountant
when applying accounting principles. This is because
accounting principles are applicable only to material
items. An item is considered material if its omission or
misstatement could influence economic decision.
ACCOUNTING STANDARDS
▪ Accounting standards like the basic accounting concepts
serve as guide when recording and communicating
accounting information.
▪ The difference of standards from concepts is that the
standards provide a more detailed application of
concepts.
▪ They also prescribe which principle is most appropriate
for specific economic transactions.
▪ They also require certain information that should be
included in financial reports and how this information is
presented.
Development of the Accounting Standards
◻ International Accounting Standard Committee (IASC)
was created in 1973
to harmonize accounting standards across different
countries
⮚ International Accounting Standards (IAS) - standards
promulgated by the
IASC.
◻ International Accounting Standard Board (IASB)
succeeded IASC in 2001.
Main objective of the board - to develop a uniform set of
high quality, understandable and enforceable global
accounting standards. The purpose is to achieve a higher
degree of comparability and transparency of financial
reporting to help the world’s capital markets and other
users make economic decisions.
⮚ International Financial Reporting Standards (IFRS) –
standards promulgated by the IASB, consists of the
following:
■ IFRS,
■ IAS
■ Interpretation of IFRS and IAS
The Accounting Standards in the Philippines
◻ Accounting Standard Council (ASC) - created in Nov.
18, 1981 by PICPA- accounting standard setting body in
the Philippines. composed of eight members. It was
formed to establish and improve accounting standards
that will be generally accepted in the Philippines.
⮚ The accounting standards in the Philippines called
“Statement of Financial Accounting Standards (SFAS)
were basically US bases until gradually the Philippines
adopt the IAS and IFRS starting 1997.
Financial Reporting Standard Council (FRSC) – created in
2004 by PRC replacing the ASC – was created to assist the
BOA to carry out its powers and functions provided under
the Republic Act 9298, the Philippine Accountancy Act of
2004.
⮚ It was then that the Philippines decided to adopt the
accounting standards issued by the IASC and IASB and
they are known as:
■ PFRS corresponding to IFRS
■ PAS corresponding to IAS
■ Interpretation of the PFRS and PAS corresponding to
IFRS and IAS
◻ The FRSC consists of 15 members with a chairman.
The Philippines has three financial reporting frameworks:
 the Philippine Financial Reporting Standards (PFRSs)
 the Philippine Financial Reporting Standard for Small
and Medium-Sized Entities (PFRS for SMEs) and
 the Philippine Financial Reporting Standard for Small
Entities (PFRS for SEs).
The Securities and Exchange Commission has the
authority to prescribe the financial reporting framework
to be used by corporations in the Philippines.
In September 2022, the Professional Regulatory Board of
Accountancy (BOA) issued Board Resolution No. 44
(s. 2022) that contains the approval of the following:
 Adoption of the IFRS Sustainability Disclosure
Standards that will be developed by the International
Sustainability Standards Board (ISSB) in the preparation
of the general-purpose financial statements; and
 Renaming of the Financial Reporting Standards Council
(FRSC) to Financial and Sustainability Reporting
Standards Council (FSRSC)
 The change in name considers the expanded role of
FSRSC in the adoption of future Sustainability Disclosure
Standards. This is in light of the increasing demand for
high quality, transparent, reliable and comparable
reporting by companies on climate and other
environmental, social and governance (ESG) matters.
THE CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
◻ Objective of Financial Reporting
◻ Qualitative Characteristics of Useful Information -
fundamental, enhancing
◻ Elements –definition, recognition, measurement
◻ Capital and capital maintenance
Qualitative Characteristics of Useful Information
◻ Fundamental qualities
■ Relevance – predictive value, confirmatory value
■ Faithful representation – completeness, neutrality, free
from bias
◻ Enhancing qualities
■ Understandability
■ Verifiability
■ Timeliness
■ Comparability
General Purpose Financial Statements
The general purpose financial statements are:
1. Statement of Financial Performance (Income
Statement)
2. Statement of Changes in Owner’s Equity
3. Statement of Financial Position
4. Statement of Cash Flow
THE ELEMENTS OF FINANCIAL STATEMENTS
Elements of Financial Position:
❖ Asset- is a present economic resource controlled by
the entity as a result of past event. An economic resource
is a right that has the potential to produce economic
benefits.
Examples:
◻ Current Assets - Cash, Accounts Receivable, Notes
receivable, Inventories, Prepaid expenses
◻ Noncurrent Assets – Property, Plant and Equipment,
Intangible Assets
❖ Liability – is a present obligation of the entity to
transfer an economic resource as a result of past events.
Examples:
• Current Liabilities- Accounts Payable, Notes Payable,
Accrued Liabilities, Unearned Revenues
• Non current Liabilities – Mortgage Payable, Bonds
Payable
❖Equity – is the residual interest in the assets of the
enterprise after deducting all liabilities.
Examples:
• Capital, Withdrawals/Drawing, Income Summary
Elements of Financial Performance:
❖ Income – is increase in assets, or decrease in liabilities,
that result in increases in equity, other than those relating
to contributions from holders of equity claims.
Examples:
• Service income, Sales
❖ Expenses – are decreases in assets, or increases
liabilities that result in decreases in equity, other than
those relating to distribution to holders of equity claims.
Examples:
• Cost of Sales, Salaries Expense, Rent Expense, Utilities
Expense, Supplies Expense, Insurance Expense,
Depreciation Expense, Interest Expense.
USINESS TRANSACTIONS AND THE
ACCOUNTING EQUATION
❖ A business transaction is an exchange of values
involving two parties or within the enterprise.
❖ All business transactions that are taken up in the
accounting records of the enterprise should have
supporting source documents.
❖ In accounting, business transactions are presented in
terms of the elements of the financial statements that are
affected by each transaction. This is done through the
basic accounting equation, which states that:
ASSET = +LIABILITY EQUITY
BUSINESS TRANSACTIONS AND THE ACCOUNTING
EQUATION
In analyzing business transactions for purposes of
recording, always remember the following:
✔ In every transaction, value received = value parted
with, the two values must always be equal.
✔ The basic accounting equation must always be
maintained.
Effects of business transactions on the accounting
equation
◻ Increase in Asset = Increase in liability
◻ Increase in Asset = Increase in equity
◻ Increase one Asset = Decrease in another Asset
◻ Decrease in Asset = Decrease in Liability
◻ Decrease in Asset = Decrease in Owner’s Equity
◻ Increase in Liability = Decrease in Owner’s Equity
◻ Increase in Owner’s Equity = Decrease in Liability
◻ Increase in one Liability = Decrease in another Liability
◻ Increase in one Owner’s Equity = Decrease in another
Owner’s Equity
What is an account?
❖ An account is a basic summary device of
accounting. It is a detailed record of the increases,
decreases and balance of each element that appears
in an entity’s financial statements. It resembles the
letter T the reason why it is called T Account
DEBITS AND CREDITS- THE DOUBLE ENTRY
SYSTEM
❖ Accounting is based on a double entry system
which means that the dual effect of a business
transaction is recorded. A debit side entry must have
a corresponding credit side entry. Each transactions
affects at least two accounts. The total debits for a
transaction must always equal the total credits.
❖ An account is debited when an amount is entered
on the left side of the account and credited when an
amount is entered on the right side of the account.
ASSET = LIABILITIES + EQUITY + INCOME - EXPENSES
Note: Income is added while expenses are deducted
in the equation. These are because income increases
equity and expenses decreases equity. This is also the
reason increase in income is recorded on the credit
side while increase in expense is recorded on the
debit side.