Chapter 1

Introduction to Accounting

ACCOUNTING AND THE BUSINESS

KINDS OF BUSINESS
(as to operation)

1. Trading or Merchandising
➢ This involves the buying of goods or merchandise
➢ They make profit by selling the merchandise at prices that are higher than their purchase cost
➢ Ex. Supermarkets, Groceries, Bookstores

2. Manufacturing
➢ This buys raw materials and uses them in making a new product.
➢ Product will be sold at a price higher than the cost of production
➢ Ex. Manufacturers of drugs, tables, pens

3. Service
➢ Rendering of services for a certain fee which is higher than the cost of services rendered.
➢ It offers professional skills, expertise, advice, and consultation (Intangible products)
➢ Ex. Banks, salons, repair shop

FORMS OF BUSINESS
(as to ownership)

1. Sole Proprietorship
➢ Owned by only one person called Proprietor
➢ Advantages
○ The owners keeps all the profit
○ The owners makes all the decisions
○ It is easy to form and operate
➢ Disadvantages
○ Unlimited liability if the business has unpaid debts, the creditors can run after the owners properties.
○ The life of the business is limited to the life of the owner
○ The amount of capital is limited only to the wealth of the owner
➢ Regulated by Department of Trade and Industry (DTI)

2. Partnership
➢ Owned by two or more owners called partners
➢ Advantages
○ Easy yo operate
○ Higher capital
➢ Disadvantages
○ Profit are divided among the partners
○ A partner can be held liable for the acts of the other partners
○ unlimited liability
➢ Article 1767 by the 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 profits among themselves.
➢ The details of the arrangement between two partners are outlined in a written document called articles of
partnership
➢ Profits are divided based on their agreed sharing.
 ➢ Regulated by Securities and Exchange Commission (SEC)

3. Corporations
➢ Is a business whose capital is divided into shares of stock owned by several people called shareholders or
stockholders.
➢ Advantages
○ Can easily raise additional capital by selling shares in public
○ Limited liability
➢ Disadvantages
○ Complicated to set up
○ Subject to several legal restrictions
➢ Section 2 of revised corporation code of the Philippines A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
➢ It is considered a separate legal entity (artificial person) under the corporation law with ownership divided
into transferable shares of stocks.
➢ The corporation begins its existence from the date the articles of incorporation is approved by the
Securities and Exchange Commission (SEC)

4. Cooperative
➢ The owners are called members
➢ Advantages
○ Enjoy certain tax exemptions privilege
○ Promotes the concept of sharing resources
○ Limited liability
➢ Disadvantages
○ Limited distribution of surplus
Internal Users
➢ These are individuals inside the company who plan, organize, and run the business.
➢ The users are directly involved in the managing and operating the business.
➢ Accounting information is presented to internal users usually in the form of management account, budget,
forecast, and financial statements. *this information will support whatever decision of the internal users
➢ Management (Managers)
➢ Employees - to know the stability and profitability of the business. And also to know whether the company
can afford salary increase and other benefits
➢ Owners - to know what’s happening in the business. To know whether they need to find investors or
creditors

External Users
➢ Those individuals outside the company who have financial claims or interest to the business.
➢ The users are not directly involved in the managing and operating the business.
➢ Potential/ Prospective Investors - to know if it is worthwhile investing in the business.
➢ Lending Institutions - to know whether the business can ay its outstanding loan
➢ Suppliers and Creditors - to know the risk when they give credit term to the business
➢ Customers - they interested to the stability of the business, which is the supplier of their needs
➢ Government- to know whether the business is paying the correct taxes or is complying with all government
requirements
➢ General Public - they may be interested in the affairs of the business for their own personal and varied
reasons.
 NATURE OF ACCOUNTING

Accounting Standard Council.

➢ It is a service activity. Its function is to provide quantitative information, primarily financial in nature,
about economic entities that are intended to be useful in making economic decisions.
➢ Service is the occupation or function of serving
➢ Accounting is an activity rather than an outcome
➢ Financial in nature means that information can be expressed in monetary terms. Ex. Peso

DEFINITION OF ACCOUNTING

American Institute of Certified Public Accountants.

➢ It is an art of recording, classifying and summarizing in a significant manner in terms of money,
transactions, and events which are, in part at least, of financial character, and interpreting the results
thereof.
➢ Accounting is considered an art, because it requires the use of skills and creative thinking. The information
is presented in an artistic and orderly manner.
➢ It is considered as science but not an exact science since the rules and principles are constantly changing.
The accounting methods and procedure are accordance to the Generally Accepted Accounting Principles
which is widely used and accepted

American Accounting Association.

➢ It is a process of identifying, measuring and communicating economic information to permit informed
judgment and decisions by the users of the information.

FUNCTION OF ACCOUNTING
Four distinct function of accounting

1. Recording
➢ Popularly known as Bookkeeping
➢ It is the process in which transactions are recorded in the book of original entry after they have been
identified and measured.
➢ This is a BIR requirement.Can be done manually or with the use of the computer

2. Classifying
➢ Grouping together similar items or accounts for the purpose of systematic recording and preparation of
reports.

3. Summarizing
➢ Preparation of formal accounting reports or financial statements at the end of the accounting period.

4. Interpreting
➢ Analysis of the financial statements by developing financial ratios and explaining their significance.
➢ This is the only function the computer cannot perform hence accountants are still useful

ROLE OF ACCOUNTING IN BUSINESS

1. It helps the owner or managers to make plans and decisions.

2. It reports and analyzes business transactions through the financial statements.
3. It communicates the financial information to all interested parties.
 BRANCHES OF ACCOUNTING
Because different users of accounting have different needs and requirements, several branches of accounting have
emerged

1. Financial Accounting
➢ Deals with reporting of past activities and events.
➢ Primarily intended for external users.

2. Managerial Accounting
➢ Focuses on the information which can be useful to management when it performs its basic functions or
making decisions
➢ Primarily intended of internal users

3. Cost Accounting
➢ Deals with determination of the cost of goods manufactured and sold
➢ To determine the profitability of the business
➢ Can be useful for both internal and external users

4. Government Accounting
➢ Specifically deals with the reporting of past activities or transactions of the government

5. Auditing
➢ Deals with the verification of fairness. Whether they are in accordance with the generally accepted
accounting principles.

6. Taxation
➢ Determination of the different taxes imposed upon a business by the government.
➢ It helps clients to follow rules set by tax authorities

7. Accounting Education
8. Accounting Research

ACCOUNTING REPORTS
At the end of an accounting period, accounting reports called “financial statements” are prepared.

Statement of Comprehensive Income (Income statement)

➢ Shows the result of operations of a business enterprise. It shows whether the business makes a profit or loss
➢ Accounts: Revenue and Expense

Statement of Financial Position (Balance sheet)

➢ Shows the financial condition of the business
➢ Accounts: Assets, Liabilities, and Equity

Statement of Changes in Owner’s Equity

➢ Supplementing the balance sheet
➢ It shows increase or decrease in the equity of the owner

Statement of Cash Flow

➢ Shows the sources (inflows) and uses (outflows) of cash
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
➢ Are principles, including concepts and assumptions, which have gained international acceptance in the
business world and the accountancy profession.
➢ Guiding principles in how to record transactions
➢ This is the assurance of the external users that the statement prepared by the accountant are more or less
fairly presented
➢ Knowledge of these principles serves as guide to the accountancy in the practice of accountancy
➢ Financial Accounting Standard Board (FASB)
➢ Philippines Accounting Standards (PAS)
➢ Philippine Financial Reporting Standards

1. Business Entity Concept

➢ Business is having a separate personality from the owners
➢ The personal transactions of the owner are separate of the business entity

2. Going Concern Concept

➢ The business will continue operation indefinitely unless there’s evidence of contrary

3. Accrual Basis of Accounting

➢ Revenue is recognized when it is earned
➢ Expense is recorded when it is incurred
➢ Regardless of when payment is received or paid

4. Objectivity
➢ Transaction can be verified thru supporting documents
➢ Information provided is free from bias

5. Cost Principle
➢ Recorded at the actual cost no estimated cost
➢ The Amounts shown in the financial statement are historical costs

6. Matching Cost Against Revenue

● Revenue must be matched against the revenue for the same period
● To know if the business earn profit or loss

7. Consistency
- Financial statement must be comparative.
- The application of the accounting methods, procedures, or principles must be consistent.

8. Accounting Period
- Regular time intervals
- Calendar: Jan 1 - Dec 31
- Fiscal: Any starting point + 12 months

9. Full Disclosure
- Financial statements should reflect all significant events or facts
- Sufficient information for informed judgment

10. Materiality
● Company has 100m kulang 1k - not material
● Company has 5k kulang 1k - material
 11. Conservatism

GOVERNMENT REGULATORY AGENCIES (APPLICABLE FOR ACCOUNTING)

Professional Regulation Commission (PRC)

- Administrating the professional examination

Board of Accountancy (BOA)

- Conducting semi-annually CPA license examination.
- In charge of regulating the practice of accountancy
- Composed of Chairman, Vice Chairman, an 5 members to be appointed by the PH President upon
recommendation of Philippine Institute of Certified Public Accountants (PICPA) and Professional Regulation
Commission (PRC)
- Under the jurisdiction of PRC

Financial Reporting Standard Council (FRSC)

- Formerly known as the Accounting Standard Council (ASC)
- In charge of formulating or developing accounting standard
- This council is a creation of the Professional Regulation Commission thru the recommendation of Board of
Accountancy

Department of Trade and Industry

- Regulating sole proprietorship

Securities and Exchange Commission (SEC)

- Regulating partnership, corporation, and foundation

Cooperative Development Authority (CDA)

- Regulating the operations of cooperative

Bureau of Internal Revenue (BIR)

- Collecting of taxes

Bangko Sentral ng Pilipinas

- Formerly known as Central Bank of the Philippines
- Regulating the operation of banks and other financial institutions

ACCREDITED PROFESSIONAL ORGANIZATIONS OF CERTIFIED PUBLIC ACCOUNTANTS

Philippine Institute of Certified Public Accountants (PICPA)

- Organization of all certified public accountants (CPA) in the philippines
- Its primary objective is to improve the quality service rendered by CPA
- Under its umbrella are
- Association of Certified Public Accountants in Education (ACPAE),
Government Association of Certified Public Accountants (GACPA),
Association of Internal Auditors (AIA),
Association of Certified Public Accountants in Commerce and Industry (ACPACI)
Association of Certified Public Accountant in Public Practice (ACPAPP)

FIELD OF ACCOUNTANCY
Private Accounting
- Accountants can be employed in any private firm
 - Employed as accounting clerks, bookkeepers, internal auditors, chief accountant or controller (Highest
accounting officer)
- To assist management in planning and controlling entity’s operation

Government Accounting
- Accountant are employed in any government agency in any capacity or position requiring accounting
knowledge
- Government hire the most number of accountants
- Custody and administration of public funds
- Ex. BIR, COA, BSP, SEC

Public Accounting
- Accountants can practice their profession by rendering professional services for a certain fee just like lawyers.
- Only CPA can engage in public accounting
- Big 4: SDV & co. Navarro Amper & co., Isla lipana & co., RG manabat & co.
- Auditing Service CPA will audit the books and certify the fairness of financial statements. This is called
external auditing where non-employees will do the auditing.
- Tax Service CPA will prepared the tax returns of the client company
- Management Advisory Services CPA will act as management consultant on matters pertaining to accounting
and finance.
- College instructors

BRIEF HISTORY OF ACCOUNTING

PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA 9298)

- An act regulating the practice of accounting in the Philippines

Scope of the Practice of Accountancy

Section 4 of this act enumerate the scope of the practice of accountancy
1. Practice of Public Accountancy
2. Practice of Commerce and Industry
3. Practice of Education/Academe
4. Practice of Government

Practice of Accountancy
- Practice of CPA of his/her profession

a. Certified Public Accountant - is a person who is a holder of a valid certificate of registration/professional

license and professional identification card issued by the PRC in accordance with this act.
b. Certified Public Accountant in Public Practice - shall refer to individual rendering opinion on the fairness of
the financial statements
c. Certified Public Accountant in Commerce and Industry - refer to the officer or employee in private
enterprise involved in accounting, audit, etc
d. Certified Public Accountant in Education - refer to a person involved in teaching accounting, auditing, and
management advisory services and other technically related subjects leading to the degree of accountancy.
e. Certified Public Accountant Government Service - refer to employee appointed to the position in the
professional accounting or auditing group in government or government owned and controlled corporations

Prohibition in the Practices of Accountancy

Section 26 of the act states that no person shall practice accountancy, os use the title “Certified Public
Accountant” or “CPA” or use any title, sign, advertisement or offers to practice accountancy unless shal
person have received from the board a certificate or registration/professional license and be issued a
 professional identification card or a valid temporary/special permit duly issued to him/her by the board
and the commission

Qualification of Application for Examination

Section 14 states that any person for examination shall be
A. aIs a Filipino Citizen
B. Is of good moral character
C. I a holder of the degree of Bachelor of Science in Accountancy conferred by any institute duly
recognized and accredited by the Commission on Higher Education (CHED)\
D. Has no yet been convicted of any criminal offense

Scope of Examination
Section 15 states that examination for CPA shall cover but not limited to
a. Theory of Accounts (TOA)
b. Business Law and Taxation (BLT)
c. Management Services (MS)
d. Auditing Theory (AT)
e. Auditing Problems (AP)
f. Practical Accounting Problems 1 (P1)
g. Practical Accounting Problems 2 (P2)

Rating in the licensure examination

Section 16 , candidates must obtain a general average of 75% with no grade lower than 65% in any subject

If the candidate fails to obtain at least a general average of 75% and a rating of at least 65% in each of the
subjects re-examined, he/she shall be considered a failure in the entire examination.

Continuing Professional Education (CPE)

Section 32 states that all CPA shall abide by the requirements, rules and regulations on continuing professional
education to be promulgated by the Board.

Foreign Reciprocity
Section 34 states that citizens of foreign countries may be allowed to practice accountancy in the Philippines in
accordance with the provision of existing laws

Person who are not citizen of the philippines shall not be allowed to practice accountancy in the philippines
unless he/she can prove, in the manner provided by the rules of the court that