Burauen Community College

Poblacion District 9, Burauen, Leyte

College of Business and Accountancy

Handout 2 - CONFRAS

INTRODUCTION TO ACCOUNTING

OBJECTIVES:
1. Identify the environment of accounting, business organization, and business activities.
2. Compare and contrast the different definitions of accounting.
3. Identify possible career opportunities for accountants
4. Explain the different areas of accounting.

Accounting is a system meant for measuring business activities, processing of information into reports and
making the findings available to decision-makers. The documents, which communicate these findings
about the performance of an organization in monetary terms, are called financial statements.

Usually, accounting is understood as the Language of Business. However, a business may have a lot of
aspects which may not be of financial nature. As such, a better way to understand accounting could be to
call it “The Language of Financial Decisions”. The better the understanding of the language, the better is
the management of financial aspects of living.

Many aspects of our lives are based on accounting, personal financial planning, investments, income-tax,
loans and we have different roles to perform such as the role of a student, of a family head, of a manager,
or of an investor. Thus, the knowledge of accounting will be an added advantage in performing these
different roles.

ENVIRONMENT OF ACCOUNTING

The economic entity is the environment of accounting. Accounting is very important in the operations of
economic entities. Transactions of the economic entities are recorded and processed to produce general
purpose financial statements which serve as basis for the decisions. Economic entities that are engaged in
profit directed activities and divide the income to its stakeholders are called business entities. On the other
hand, economic entities that are engaged in profit directed activities but use the income to finance its
operations are called non- profit organizations.

The business entities take form as any type of business organization and may be engaged in any or a
combination of the different types of business activities to earn profit.

TYPES OF BUSINESS ORGANIZATION

Companies that are engaged in profit directed activities may take the form of any of the following business
organizations:

1. Sole/ Single Proprietorship

This type of business organization has one owner. All the income earned and losses incurred will be
borne by the sole owner.

2. Partnership

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 This type of business organization is a contract of two or more persons binding themselves to
contribute money, property or industry to a common fund, engage into business and share the profits
and losses among themselves.

3. Corporation
This type of business organization is owned by its stockholders. It is an artificial being created by
operation of law, having the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The stockholders are not personally liable for the
corporation’s debts. The corporation is a separate legal entity.

4. Cooperative
This type of business organization resembles the corporation but its primary objective is to enhance
rural and urban communities by engaging into profit directed activities to its members in the
community.

TYPES OF BUSINESS ACTIVITIES

Business organizations may engage into profit directed activities in any or combination of the following
business activities.

1. Servicing
The primary profit directed activities in servicing business is the performance of the services offered by
the company. They receive service income in exchange of the services rendered to the customers. Business
organization that are engaged in rendering of services to its clients for a fee include schools, barbershops,
hospitals, computer shops, hotels and others.

2. Merchandising
Purchasing and selling of goods are the primary profit directed activities in merchandising. A
merchandising company purchases goods from a supplier and sells the goods to customers at a profit.

3. Manufacturing
In a manufacturing comp any, the primary profit directed activities include purchasing of raw materials
from a supplier, processing of the raw materials into finished goods and selling the finished goods at a
profit. Some of the noted manufacturing companies in the Philippines include San Miguel Corporation,
Proctor and Gamble Manufacturing Company and others.

ACCOUNTING DEFINED

“Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money,
transaction and events which are in part at least of a financial character and interpreting the results thereof.”
(Committee on Accounting Terminology, American Institute of Certified Public Accountants).

“Accounting is the process of identifying, measuring and communicating economic information to permit informed
judgment and decision by users of the information.”
(Statement of Basic Accounting Theory, American Accounting Association).

“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.”
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 (Accounting Standards Council).

IMPORTANT CONCEPTS IN THE DEFINITION OF ACCOUNTING BY ASC

1. Service Activity
Accounting as a service activity renders accounting services to clients for a fee.

2. Quantitative Information and Financial in Nature

Accounting provides information expressed in numbers specifically, in peso value with regard to the
business transactions.

3. Economic Entities
The environment of accounting is the economic entities. Accounting plays a significant role in
documenting the business transactions of the economic entities.

BRANCHES OF ACCOUNTING
1. Auditing
This focuses on the examination of financial statements for the purpose of expressing an opinion as to
the fairness with which the financial statements are prepared. This is considered as the accountancy
profession’s most significant service to the public

2. Taxation
This includes the preparation of tax returns and the consideration of the tax consequences of
proposed business transactions or alternative courses of action. As typically known, accountants
involved in tax work are responsible for computing the amount of tax payable by both business
entities and individuals but their work is really more complex. Accountants with this specialization
aim to comply with existing tax statutes but are also in constant legal search for ways to minimize tax
payments.

3. Government Accounting
It is concerned with the identification of the sources and uses of the resources consistent with the
provisions of city, municipal, provincial or national laws.

4. Cost Accounting
This deals with the collection, allocation, and control of the cost of producing specific goods and
services. This accumulation and explanation of actual and prospective cost data is important to
control current operations and to plan for the future. Cost accounting now forms one of the main sub-
branches of management accounting.

5. Management Accounting
This incorporates cost accounting data and adapts them for specific decisions which management
may be called upon to make. A management accounting system incorporates all types of financial and
non-financial information from a wide range of sources.

6. Financial Accounting
A branch of accounting that focuses on the recording of business transactions and the periodic
preparation of reports on financial position and results of operations. Financial accountants accord
importance to generally accepted accounting principles. Financial accounting is the more specific term
applied to the preparation and subsequent publication of highly summarized financial information.

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THE ACCOUNTANCY PROFESSION
The practice of accountancy shall include, but not limited to, the following:

(a) Public Practice - shall constitute in a person, be it his/her individual capacity, or as a partner or as a
staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the
knowledge, science and practice of accounting, and as a qualified person to render professional services
as a certified public accountant; or offering or rendering, or both, to more than one client on a fee basis or
otherwise, services such as the audit or verification of financial transaction and accounting records; or the
preparation, signing, or certification for clients of reports of audit, balance sheet, and other financial,
accounting and related schedules, exhibits, statements or reports which are to be used for publication or
for credit purposes, or to be filed with a court or government agency, or to be used for any other purpose;
or the design, installation, and revision of accounting system; or the preparation of income tax returns
when related to accounting procedures; or when he/she represents clients before government agencies on
tax and other matters related to accounting or renders professional assistance in matters relating to
accounting procedures and the recording and presentation of financial facts or data.

(b) Commerce and Industry - shall constitute in a person involved in decision making requiring
professional knowledge in the science of accounting, or when such employment or position requires that
the holder thereof must be a certified public accountant.

(c) Academe/ Education

- shall constitute in a person in an educational institution which involve teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and other technically related subjects:
Provided, that members of the Integrated Bar of the Philippines may be allowed to teach business law and
taxation
subjects.

(d) Government- shall constitute in a person who holds, or is appointed to, a position in an accounting
professional group in government or in a government–owned and/or controlled corporation, including
those performing proprietary functions, where decision making requires professional knowledge in the
science of accounting, or where a civil service eligibility as a certified public accountant is a prerequisite.

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ASSESSMENT

1. Which of the following pertains to the type of business organization where the profit and losses are
divided among the partners of the business?
a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

2. What type of business organization requires having incorporators?

a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

3. What type of business organization where the ownership is only for one individual?
a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

4. Which of the following type of business organization where them stakeholders are called as
“member”?
a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

5. Joy and Jade agreed to contribute P 250,000 each to start a laundry business. They also agreed to divide
the profits and losses equally. What type of business organization is the laundry company of Joy and
Jade?
a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

6. Hannah owns 1,000 shares of Ed Bryan Company as of December 31, 2014. Ed Bryan Company declared
dividends on February 15, 2015 for outstanding shareholders as of December 31, 2014. What type of
business organization is Ed Bryan Company?
a. Sole proprietorship c. Corporation
b. Partnership d. Cooperative

7. Which of the following is the environment of accounting?

a. Business transactions c. Economic systems
b. Economic entities d. All of the above

8. What economic entity where earnings of the company are not distributed to the stakeholders but instead use
for the operations of the company?
a. Business transactions c. Non-profit organizations
b. Business Entity d. All of the above

9. Hannah owns 1,000 shares of Ed Bryan Company as of December 31, 2014. Ed Bryan Company declared
dividends on February 15, 2015 for outstanding shareholders as of December 31, 2014. What type of
economic entity is Ed Bryan Company?
a. Business transactions c. Non-profit organizations
b. Business Entity d. All of the above

10. A certified public accountant in public practice may engage in which of the following services, except
a. the audit or verification of financial transaction and accounting records.
b. the preparation, signing, or certification for clients of reports of audit, balance sheet, and other financial,
accounting and related schedules, exhibits, statements or reports.
c. the preparation of income tax returns when related to accounting procedures; or when he/she
represents clients before government agencies on tax and other matters related to accounting.
d. All of the above
e. None of the above

11. Erica is a certified public accountant. She is involved in decision making requiring professional knowledge
in the science of accounting. In what field of accountancy is Erica involved in?
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 a. Public practice c. Government
b. Commerce/ Industry d. Academe/ Education

12. Hon. Comm. Kim Henares is the Chief Commissioner of the Bureau of Internal Revenue. In which practice
of accounting, she is engaged in?
a. Public practice c. Government
b. Commerce/ Industry d. Academe/ Education

13. Which of the following branch of accounting deals with the preparation of general- purpose financial
statements based on the Generally Accepted Accounting Principles?
a. Auditing c. Financial Accounting
b. Management Services d. All of the above

14. Edison is a certified public accountant of SGV & Co. His primary responsibility is the examination of
financial statements for the purpose of expressing an opinion as to the fairness with which the financial
statements are prepared. Edison is engaged in which of the following branch of accounting?
a. Auditing c. Taxation
b. Management Services d. All of the above

15. Which of the following is the primary responsibility of a certified public accountant engaged in
management services?
a. the examination of financial statements for the purpose of expressing an opinion as to the fairness with
which the financial statements are prepared
b. the preparation of annual income tax returns and the determination of tax consequences of certain
business transactions
c. the various services for the effective and efficient management of the business
d. all of the above
e. None of the above

16. Which of the following is the primary responsibility of a certified public accountant engaged in taxation?
a. the examination of financial statements for the purpose of expressing an opinion as to the fairness with
which the financial statements are prepared
b. the preparation of annual income tax returns and the determination of tax consequences of certain
business transactions
c. the various services for the effective and efficient management of the business
d. all of the above
e. None of the above

17. What is the biggest of the local auditing firm in the country and the first to offer services outside the country?
a. Manabat, San Agusting & Co.
b. SGV & Co.
c. Isla, Lipana & Company
d. KPMG
e. None of the above

18. Which of the following is the revised Accountancy Act?

a. Presidential Decree No. 692
b. Republic Act No. 5166
c. Act No. 3105
d. All of the above
e. None of the Above

19. What is the professional organization of certified public accountants in the Philippines?
a. Association of CPA’s in the Philippines
b. Philippine Association of CPAs
c. Philippine Institute of CPAs
d. Filipino Association of Accountants
e. Non e of the above

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20. Taehyung is planning to engage in buying and selling of BTS merchandise. What type of business activity is
this?

A. Manufacturing
B. Servicing
C. Merchandising
D. All of the above

LEARNING ACTIVITY

Interview a Certified Public Accountant who is practicing in any of the following: 1.) public accounting,
2.) private accounting, 3.) government accounting, and 4.) academe.

Focus your interview to gather the following data:

- Academic preparations to become CPA
- Nature of the present work
- Challenges of the profession

Present the results of the interview in narrative format.

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