Introduction to Accounting

Mark Antony A. Rosales, CPA

Department of Accountancy, CEBA
 Definitions of Accounting

Introduction to Accounting
 What is Accounting?

• Accounting has evolved in response to the social and

economic information needs of society.

• In a market economy, information helps decision-makers

make informed choices regarding the allocation of scarce
resources under their control.

Introduction to Accounting
 What is Accounting?

• Accounting is a system that measures business activities,

processes information into reports and communicates the
results to decision-makers.

• Accounting qualifies business communication. For this

reason, accounting is called the language of business.

Introduction to Accounting
 What is Accounting?

• Several definitions of accounting have been provided by

authoritative bodies around the world.

Introduction to Accounting
 What is Accounting?

• 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 decisions. (Accounting Standards Council,
1983)

Introduction to Accounting
 What is Accounting?

• Accounting is an information system that measures,

processes and communicates information about an
economic entity. (Financial Accounting Standards Board,
1978)

Introduction to Accounting
 What is Accounting?

• Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgements and decisions by users of the information.
(American Accounting Association, 1966)

Introduction to Accounting
 What is Accounting?

• 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 a financial character, and interpreting the results
thereof. (American Institute of Certified Public
Accountants, 1953)

Introduction to Accounting
 What is Accounting?
Financial
Accounting Standards American Accounting American Institute of
Accounting
Council Association Certified Public Accountants
Standards Board
Accounting is a Accounting is an Accounting is the Accounting is the art of
service activity. Its information process of recording, classifying and
function is to provide system that identifying, summarizing in a
quantitative measures, measuring and significant manner and in
information, primarily processes and communicating terms of money,
financial in nature, communicates economic transactions and events
about economic information about information to permit which are, in part at least,
entities that is an economic informed judgements of a financial character,
intended to be useful entity. and decisions by and interpreting the
in making economic users of the results thereof.
decisions. information.
Introduction to Accounting
 Users of Information

Introduction to Accounting
 Users of Information

• Decision-makers need information. The more important

the decision is, the greater is the need for reliable
information.

• There are two basic types of accounting information users:

external and internal.

Introduction to Accounting
 External Users

• External users are individuals and others that have current

or potential financial interest in the reporting entity but are
not involved in the daily operations of the entity.

• The information needs of these users are diverse so that

only the primary or the general-purpose financial
statements are provided.

Introduction to Accounting
 External Users

• These users may include owners, stockholders, creditors,

customers, suppliers, government agencies, potential
investors, brokers, trade association and the general public.

• The information needs of this type of users are served by

the branch of accounting called financial accounting.

Introduction to Accounting
 Internal Users
• Internal users include the board of directors, CEO, CFO, vice
presidents, internal auditors, business unit managers, plant
managers and supervisors.

• These employees have different specific goals that are

designed to help the entity attain its overall strategies and
mission.

• Management accounting serves the information needs of

this group.
Introduction to Accounting
 Forms of Business Organizations

Introduction to Accounting
 Forms of Business Organizations

• In the Philippines, a business may be organized as a:

1. Sole proprietorship

2. Partnership

3. Corporation

Introduction to Accounting
 Sole Proprietorship

• This business organization has a single owner called the

proprietor who generally is also the manager.

• Sole proprietorships tend to be small service-type.

• The owner receives all profits, absorbs all losses and is

solely responsible for all debts of the business.

Introduction to Accounting
 Sole Proprietorship - Advantages

1. Easy to set up and discontinue.

2. Requires a small amount of capital to start.

3. Profits accrue to the owner.

4. Total control on the part of the owner.

Introduction to Accounting
 Sole Proprietorship - Disadvantages

1. Unlimited personal liability.

2. Limited management skills.

3. Limited access to capital.

4. Lacks continuity in case of death or incapacity of the

owner.

Introduction to Accounting
 Partnership

• In a contract of partnership, two or more persons bind

themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profit
among themselves. Two or more persons may also form a
partnership for the exercise of a common profession. (Civil
Code of the Philippines, Article 1767)

Introduction to Accounting
 Partnership

• The partnership has a juridical personality separate and

distinct from that of each of the partners.

• Partnerships resemble sole proprietorships, except that

there are two or more owners of the business.

Introduction to Accounting
 Partnership - Characteristics

1. Mutual contribution – of money, property, or industry to a

common fund

2. Division of profits and losses

3. Co-ownership of contributed assets

Introduction to Accounting
 Partnership - Characteristics

4. Mutual agency

5. Limited life

6. Unlimited liability

7. Income taxes – taxed as a corporation

Introduction to Accounting
 Advantages and Disadvantages of a Partnership

Advantages vs. proprietorships

1. Brings greater financial capability to the business.

2. Combines special skills, expertise and experience of the
partners.
3. Offers relative freedom and flexibility of action in decision-
making.
4. Risks are shared.

Introduction to Accounting
 Advantages and Disadvantages of a Partnership

Advantages vs. corporations

1. Easier and less expensive to organize.

2. More personal and informal.

Introduction to Accounting
 Advantages and Disadvantages of a Partnership

Disadvantages

1. Profits are shared.

2. Easily dissolved and thus unstable compared to a
corporation.
3. Mutual agency and unlimited liability may create personal
obligations to partners.
4. Less effective than a corporation in raising large amounts
of capital.
Introduction to Accounting
 Corporation

• A corporation is an artificial being created by operation of

law, having the right of succession and the power,
attributes and properties expressly authorized by law or
incident to its existence. (Revised Corporation Code of the
Philippines, Sec. 2)

Introduction to Accounting
 Attributes of a Corporation

1. A corporation is an artificial being with a personality

separate and apart from its individual shareholders or
members.

2. It is created by operation of law.

Introduction to Accounting
 Attributes of a Corporation

3. It enjoys the right of succession.

4. It has the powers, attributes and properties expressly

authorized by law or incident to its existence.

Introduction to Accounting
 Advantages of a Corporation

1. The corporation has the legal capacity to act as a legal

entity.

2. Shareholders have limited liability.

3. It has continuity of existence.

4. Shares of stock can be transferred without the consent of

the other shareholders.
Introduction to Accounting
 Advantages of a Corporation

5. Its management is centralized in the board of directors.

6. Shareholders are not general agents of the business.

7. Greater ability to acquire funds.

Introduction to Accounting
 Disadvantages of a Corporation

1. A corporation is relatively complicated in formation and

management.

2. There is a greater degree of government control and

supervision.

3. It requires a relatively high cost of formation and

operation.

Introduction to Accounting
 Disadvantages of a Corporation

4. It is subject to heavier taxation than other forms of

business organizations.

5. Minority stockholders are subservient to the wishes of the

majority.

6. In large corporations, management and control have been

separated from ownership.

Introduction to Accounting
 Disadvantages of a Corporation

7. Transferability of shares permits the uniting of

incompatible and conflicting elements in one venture.

Introduction to Accounting
 Cooperatives

Definition, basic principles

Introduction to Accounting
 Cooperatives

A cooperative is
• an autonomous and duly registered association of persons,
with a common bond of interest, who have voluntarily
joined together

• to achieve their social, economic, and cultural needs and

aspirations

• by making equitable contributions to the capital required;

Introduction to Accounting
 Cooperatives

• Patronizing their products and services and

• Accepting a fair share of the risks and benefits of

undertaking

• In accordance with a universally accepted cooperative

principles.

Introduction to Accounting
 Cooperatives

• Cooperatives in the Philippines are supervised by the

Cooperative Development Authority, an agency directly
under the Office of the President.

Introduction to Accounting
 Objectives and Goals of a Cooperative

The primary objective of every cooperative is to help improve

the quality of life of its members. Toward this end, the
cooperative shall aim to:
1. Provide goods and services to its members to enable them
to attain increased income, savings, investments,
productivity, and purchasing power, and promote among
themselves equitable distribution of net surplus through
maximum utilization of economies of scale, cost-sharing
and risk sharing;
Introduction to Accounting
 Objectives and Goals of a Cooperative

2. Provide optimum social and economic benefits to its

members;
3. Teach them efficient ways of doing things in a cooperative
manner;
4. Propagate cooperative practices and new ideas in business
and management;

Introduction to Accounting
 Objectives and Goals of a Cooperative

5. Allow the lower income and less privileged groups to

increase their ownership in the wealth of the nation; and
6. Cooperate with the government, other cooperatives and
people-oriented organizations to further the attainment of
any of the foregoing objectives.

Introduction to Accounting
 Cooperative Principles

• One of the ways cooperatives differ from other business

structures is their adherence to cooperative principles and
values that reflect social, political, and business concerns.

• The seven principles used by the International Cooperative

Alliance today are generally accepted by cooperatives
worldwide.

Introduction to Accounting
 Cooperative Principles

1. Voluntary and open membership

2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training, and information
6. Cooperation among cooperatives
7. Concern for community

Introduction to Accounting
 Cooperative Principles

1. Voluntary and open membership

• Cooperatives are voluntary organizations, open to all
persons able to use their services and willing to
accept the responsibilities of membership, without
gender, social, racial, political or religious
discrimination.

Introduction to Accounting
 Cooperative Principles

2. Democratic member control

• Cooperatives are democratic organizations controlled
by their members, who actively participate in setting
their policies and making decisions. Men and women
serving as elected representatives are accountable to
the membership. In primary cooperatives members
have equal voting rights (one member, one vote) and
cooperatives at other levels are also organised in a
democratic manner.
Introduction to Accounting
 Cooperative Principles

3. Member economic participation

• Members contribute equitably to, and democratically
control, the capital of their cooperative. At least part
of that capital is usually the common property of the
cooperative. Members usually receive limited
compensation, if any, on capital subscribed as a
condition of membership.

Introduction to Accounting
 Cooperative Principles

3. Member economic participation

• Members allocate surpluses for any or all of the
following purposes: developing their cooperative,
possibly by setting up reserves, part of which at least
would be indivisible; benefiting members in
proportion to their transactions with the cooperative;
and supporting other activities approved by the
membership.

Introduction to Accounting
 Cooperative Principles

4. Autonomy and independence

• Cooperatives are autonomous, self-help
organizations controlled by their members. If they
enter into agreements with other organizations,
including governments, or raise capital from external
sources, they do so on terms that ensure democratic
control by their members and maintain their
cooperative autonomy.

Introduction to Accounting
 Cooperative Principles

5. Education, training, and information

• Cooperatives provide education and training for their
members, elected representatives, managers, and
employees so they can contribute effectively to the
development of their co-operatives. They inform the
general public - particularly young people and
opinion leaders - about the nature and benefits of co-
operation.

Introduction to Accounting
 Cooperative Principles

6. Cooperation among cooperatives

• Cooperatives serve their members most effectively
and strengthen the cooperative movement by
working together through local, national, regional
and international structures.

Introduction to Accounting
 Cooperative Principles

7. Concern for community

• Cooperatives work for the sustainable development
of their communities through policies approved by
their members.

Introduction to Accounting
 Cooperatives

Advantages of a Cooperative

Introduction to Accounting
 Advantages of a Cooperative

1. Unlimited life
2. Equality of members
3. Tax benefits
4. Limited liability
5. Greater ability to attract capital
6. Afford greater business volume with the resulting benefit
of bigger profits which will be shared by more people

Introduction to Accounting
 Disadvantages of a Cooperative

1. Shared control
2. One member, one vote

Introduction to Accounting