Far Lesson 1

Document no.
INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00
ACCOUNTING
CONCEPTS, PRINCIPLES
AND EQUATION
LESSON 1
INTRODUCTION TO ACCOUNTING (8 HOURS)
Accounting
Process of identifying, recording and communicating economic information that is useful in making
economic decisions.
Essential Elements on the Definition of Accountingp
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.
2. Recording – The accountant recognizes (i.e., records) the “accountable events” he has identified. This
process is called “journalizing.” After journalizing, the accountant then classifies the effects of the event
on the “accounts.” This process is called “posting.”
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. 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
intended to be useful in making economic decisions.
Types of information provided by accounting
1. Quantitative information
2. Qualitative information
3. Financial information
Functions of Accounting in Business
1. To provide external users with information that is useful in making investment and credit decisions; and
2. To provide internal users with information that is useful in managing the business.
Brief History of Accounting
Revision No. Details Organizer Reviewer Approving Date Page No.

00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 8 of 158
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Effective Date:
CORPORATION
September 2020
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 Accounting can be traced as far back as the prehistoric times, perhaps more than 10,000 years ago.
 Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which were usually cones,
disks, spheres and pellets. These tokens correspond to commodities like sheep, clothing or bread. They
were used in the Middle West in keeping records. After some time, the tokens were replaced by wet
clay tablets. During such time, experts concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
 Double entry records first came out during 1340 A.D. in Genoa.
 In 1494, the first systematic record keeping dealing with the “double entry recording system” was
formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The “double entry recording
system” was included in Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni and
Proportionista,” published on November 10, 1494 in Venice.
 The concept of “double entry recording” is being used to this day. Thus, Fra Luca Pacioli is considered
as the father of modern accounting.
Common Branches of Accounting
Branch of Accounting Types of Accounting Service Users of Service

Provided
1. Financial Accounting  General record-keeping, i.e.,  All businesses use financial
maintenance of Journals and accounting in their record-
Ledgers. keeping. These records
provide information that is
also used in the other
branches of accounting.
 Businesses prepare general
purpose Financial Statements
(FS) at least annually for the
use of lenders, investors, or
government regulatory
bodies.
2. Management Accounting  Preparation of specifically  Required by management to

tailored management aid them in performing their
reports. management functions.
3. Government Accounting  General record-keeping and  Required by the government
preparation of financial and its agencies.
reports for the government
and its agencies. It also
includes the preparation of
budgets and accountability
reports.
4. Auditing  Expression of an opinion on  Business with gross quarterly
the correspondence between revenues of P 150,000 are
management assertions and required to have their
establish criteria. financial statements audited
by an independent Certified
*the most common form of Public Accountant (CPA).
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CORPORATION
September 2020
Revision No. 00
such opinion is the

Independent Auditors’ Report
which is attached to audited
financial statements.
5. Tax Accounting/ Taxation  Preparation of tax returns.  All businesses are required to
 Providing tax advice. file tax returns.
 Some taxpayers may require
the professional advice of a
tax practitioner regarding the
management of taxes.
6. Cost Accounting  Analyses of costs of  Businesses use cost
products or services. accounting to analyze the
cost of their products or
services and the effects of
those costs in, among others,
earnings and pricing policies.
7. Accounting Education  Teaching of accounting and  Required by business
related subjects. students, business owners,
accounting practitioners in
their Continuing Professional
Development (CPD), and
other interested parties.
8. Accounting Reserch  Accounting research papers,  Required by business
articles and similar owners, professional, and
publications. other interested parties.
Users of Accounting Information
1. Internal users – those who are directly involved in managing the business. Examples:
 Business owners who are directly involved in managing the business
 Board of directors
 Managerial personnel
2. External users – those who are not directly involved in managing the business. Examples:
 Existing and potential investors (e.g., stockholders who are not directly involved in managing the
business)
 Lenders (e.g., banks) and Creditors (e.g., suppliers)
 Non-managerial employees-
 Public
Forms of Business Organizations
Form of Business Organization Ownership Formation/ Registration

1. Sole Proprietorship  One individual (i.e., sole  Registered with the DTI.
proprietor)
2. Partnership  More than one (i.e., partners)  Formed by contractual

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agreement.
 Registered with the Security
and Exchange Commission
(SEC).
3. Corporation  One to fifteen (i.e.,  Formed by operation of law.
stockholders/ shareholders)  Registered with the Security
and Exchange Commission
(SEC).
4. Cooperative  More than one (i.e., 
members)
Advantages and Disadvantages
Sole Proprietorship
Advantages Disadvantages
You are the boss and you keep all the profits.
You assume all the risk of loss.
Decision making is simple because you have You take all responsibility and rely mostly on
complete control over the business. yourself in making decisions.
Relatively easier and less costly to form because
It is more difficult to raise capital because you
there are fewer formal business requirements.
rely mostly on your personal assets and loans to
initially finance the business.
Lower extent of government regulations and You are personally liable for the debts and
relatively lower taxes. obligations of the business.
Partnership
Better business decisions can be made because Making business decisions may give rise to
“two heads are better than one”. conflict among the partners.
You share the business risk and the responsibility You don’t keep all the profits because you need
of running the business with your partners. to share them with your partners
Compared to corporations and cooperatives, a Limited life, in the sense that a partnership can
partnership is easier to form because only a be easily dissolved by the withdrawal,
contractual agreement between the partners is retirement, death or insanity of one of the
needed. partners.
Greater capital compared to a sole Lesser capital compared to a corporation.
proprietorship.
Relatively lower extend on government A partnership (other than a general professional
regulation compared to corporations. partnership) is taxed like a corporation.
Unlimited liability. The partners can be held liable
for partnership debts up to their personal assets.
Corporation
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Effective Date:
CORPORATION
September 2020
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A stockholder who is not a member of the Your “say” on corporate affairs depends on the
corporation’s board of directors is relieved from number of shares you own. Those who own
managerial responsibilities. Only the stockholders more shares are the bosses and enjoy a larger
that are elected as members of the board of share of the corporation’s profits.
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 A corporation is more difficult and more costly to
stockholders are liable for corporate debts only form because there are more formal business
up to the amount they have invested. requirements.
Greater capital and ease in raising additional Greater extend of government regulation and
funds because a corporation can issue shares to higher taxes.
a wider extent of investors.
If the corporation is listed, you can easily Unlike for a sole proprietorship or a partnership
transfer your shares to other investors by selling where business profits are easily distributed to
them in the stock market. Many investors earn the owner(s), in a corporation, you have to wait
profit this way- by buying shares at a cheap for the board of directors to declare dividends
price, with for prices to go up, and then sell before you get your share in the profits of the
them. This activity is referred to as stock trading. corporation.
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
Unlike in a corporation, your “say” on A cooperative is prone to poor management.
cooperative affairs is not affected by the number Cooperatives are more often than not managed
of shares you own. This is because, in a by members who were elected as board of
cooperative, each member is entitled to one vote directors rather than by employed professional
regardless of his or her shareholdings. However, managers. Since there is a “one-member, one
members with larger shareholders are entitled to vote policy” in a cooperative, influential members
larger amount of profit (net surplus). tend to dominate the election process. The
results is that those who are most qualified for
the task.
A cooperative is generally exempt from paying A cooperative is susceptible to corruption. Due to
taxes. This is the main advantages of a its management structure and lack of profit
cooperatives and the most common reason why motive, the elected officers may be inclined to
cooperatives are organized. Moreover, a act on their personal interests.
cooperative may receive assistance from the

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government.
Compared to a corporation, a cooperative is The Cooperative Code places some restrictions
easier and less costly to form because there are on the distribution of a cooperative’s profit to its
fewer formal business requirements. member’s. More specially, 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.
Furthermore, when the cooperative is dissolved,

the amount accumulated in a fund called the
“reserve fund” shall not be returned to the
members, but rather donated to another
cooperative to the community.
Limited liability- the members are liable for Compared to a corporation, it is more difficult for
cooperative debts only up to the amount they a cooperative to sustain growth. This is in part
have invested. because of the lack of profit motive and 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 effosrt resulting to the
waning down of their activities.
This does not mean though that all cooperatives
are small business. These are many multi-
billionaire cooperatives in your community.
Unlimited life, in the sense that the withdrawal, Unlike in a corporation where the stockholders
retirement, death or insanity of one of the can freely transfer his shares, in a cooperative,
members does not dissolve the cooperative. there are restrictions on the transfer of a
member’s shares. For example, the approval of
Although a cooperative has a legal life of 50 the board of directors must first be obtained
years, this can be renewed for an indefinite before a member can transfer his or her shares.
number of renewals.
Types of Business According to Activities
1. Service Business
2. Merchandising (Trading)
3. Manufacturing
Service Business
You don’t need to worry about inventory costs, You may not have a flexible personal time
warehousing and distribution costs because you because you need to be directedly involved in
don’t have any inventory. You only have some providing a service to a customer. You can stock
minimal supplies necessary in providing your inventory but not services.
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Effective Date:
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September 2020
Revision No. 00
services.
Until your business is big enough to be able to
hire other professionals to do the work for you,
you will need to render the services yourself.
You may only need a small capital because what Service business normally suffer first from
you are selling is your skill set and you only need decline in demand during times of economic
yourself to render a service. If you are a difficulty. This is because most services are
manufacturer, you need to buy raw materials perceived as luxuries rather than necessities for
and machinery to produce your product. survival.
You are perceived as an expert in your chosen Your business’ success depends on your
field. credibility
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.
Merchandising Business
Compared to a manufacturing firm, you may You need to have a retail store to display your
need a much lower start-up capital because you goods and the store must be in a strategic
don’t need to acquire machineries to produce location for it to attract more customers.
your goods.
You can take advantage of price fluctuations. For Less flexibility in managing costs. This is because
example, when goods are on sale, you can the cost of your goods is based primarily on their
acquire them at a discounted price and resell purchase price, which you do not control.
them at a much higher price. You can’t do this in
a service business.
Lower cost of quality. This is because “what you Keeping track of inventory is tedious, most
buy is what you sell.” especially when you are selling numerous and
varied items with fast turnover rate. Also, you
can incur additional costs due to spoilages, theft,
breakages, damages, and obsolescence.
It is much easier to start a merchandising Self-satisfaction is low because you did not
business because you don’t need to have an produce the products you sold.
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
You have a high growth potential. You need a high start-up capital.
You have the opportunity to establish a brand Conceptualizing a viable manufacturing business
that could last longer than your lifetime. is difficult.
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September 2020
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Self-satisfaction is high. You need to be continuously innovative and

abreast of changes in technology.
You may not need to have a strategically located Warehousing and logistics cost can be high.
retail store to display your products.
You can have a better pricing policy because You rely on raw materials.
mass production can decrease your unit cost
(often called ‘economies of scale’)
Greater flexibility in managing costs. Managing a manufacturing business can be
difficult because production processes are often
complicated and there is always some room for
improvement.
TEACHER’S INSIGHTS
For this lesson, please bear in mind the essential elements of the
definition of accounting. First is IDENTIFYING- identify the business
transactions whether accountable events or non-accountable events.
This is because we only record accountable events in the books of
accounts, from this RECORDING comes in (the second element) and
we call this process as journalizing. After recording/journalizing we
then classify the effects of the events on the accounts. This process
is called posting. After posting, we then summarize the information in
order to produce meaningful reports that will be used by interested
users, from this COMMUNICATING comes in (the last element).
* Accountable events are those that affect the assets, liabilities,

equity, income or expenses of a business.
* Accounts is the basic storage of information in accounting. e.g., cash, land, etc.


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Document no.

INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

Essential Elements on the Definition of Accountingp

Types of information provided by accounting

Brief History of Accounting

Revision No. Details Organizer Reviewer Approving Date Page No.

Common Branches of Accounting

Branch of Accounting Types of Accounting Service Users of Service

2. Management Accounting  Preparation of specifically  Required by management to

such opinion is the

Users of Accounting Information

Forms of Business Organizations

Form of Business Organization Ownership Formation/ Registration

Revision No. Details Organizer Reviewer Approving Date Page No.

Advantages and Disadvantages

Although a corporation has a legal life of 50

Revision No. Details Organizer Reviewer Approving Date Page No.

Furthermore, when the cooperative is dissolved,

Types of Business According to Activities

Self-satisfaction is high. You need to be continuously innovative and

* Accountable events are those that affect the assets, liabilities,

Revision No. Details Organizer Reviewer Approving Date Page No.

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