Introduction

Fundamentals of Accountancy, Business,

and Management 1
 Accounting
The process of gathering financial
information about a business and reporting
this information to its end users.
American Accounting Association (AAA)

Accounting is the process of IDENTIFYING,

MEASURING, AND COMMUNICATING
economic information to permit informed
judgement and decisions by users of the
information.
 Identifying
- Involves selecting economic events that are
relevant to a particular transaction.
Example:
- Sales of bread and other bakery products
- Purchases of flour that will be used for baking
- Purchases of trucks needed to deliver the
products
 Recording
• Involves keeping a chronological diary of
events that are measured in pesos.
• The diary referred to in the definition are
the journals and ledgers which will be
discussed in the future chapters.
 Communicating
• Occurs through the preparation and
distribution of financial and other
accounting reports.
 According to Accounting Theory …
• Accounting is a service activity.
• Accounting is a process.
• Accounting is both an art and a discipline.
• Accounting deals with financial information
and transactions.
• Accounting is an information system.
 “Language of Business”
• Accounting by means of business
information is communicated to business
owners and stakeholders.
• The role of accounting in business is to
provide information for managers and
owners to use in operating the business.
 Function of Accounting
Mr Juan is a retired government employee who is good at
baking. One day he decides to put up a bakery shop in
your barangay. He renovates a portion of his house to
serve as the area for the production of bread. He
purchases baking equipment and raw materials to produce
five different types of bread. Mr. Juan also hires Jose to
help him with the baking and, at the same time, to be in-
charge of sales. Mr. Juan pays Jose on a weekly basis.
Every day, Mr. Juan’s wife deposits the daily cash sales in
their bank account at XY Savings Bank. With the help of
accounting, what possible decisions or questions of Mr.
Juan can accounting provide an answer to?
 Financial Accounting
The broadest branch and is focused on the
needs of external users.
– Income Statement
– Balance Sheet
– Statement of Cash Flows
 Managerial Accounting

• Emphasizes the preparation and analysis of

accounting information within the
organization.
• Prices, Plans to open up branches, Customer
list
• Involves financial analysis, budgeting ad
forecasting, cost analysis, evaluation of
business decisions.
 Auditing
• External Auditing- examination of financial
statements by an independent CPA with
the purpose of expressing an opinion as to
fairness of presentation and compliance
with the GAAP (Generally Accepted
Accounting Principle).
 Auditing
• Internal Auditing deals with determining
the operational efficiency of the company
regarding the protection of the company’s
assets, accuracy and reliability of the
accounting data, and adherence to certain
management principles.
 ACCOUNTING

• Tax accounting helps clients follow rules

set by tax authorities.
• It includes tax planning and preparation of
tax returns.
 Cost Accounting
• Refers to the recording, presentation, and
analysis of manufacturing costs.
• Analyze actual and standard costs to help
managers determine future courses of
action regarding the company's
operations.
Deals with developing future
accountants by creating
relevant accounting curriculum.
 Accounting Research
• Focuses on the search for new knowledge
on the effects of economic events on the
process of summarizing, analyzing,
verifying, and reporting standardized
financial information, and on the effects of
reported information on economic events.
 Users of Accounting Information
• External Users
• Internal Users
 Internal Users
Internal users of accounting information are
those individuals inside a company who
plan, organize, and run the business. These
users are directly involved in managing and
operating the business. These include
marketing managers, production
supervisors, finance directors, company
officers and owners
 External Users
External users are individuals and
organizations outside a company who want
financial information about the company.
These users are not directly involved in
managing and operating the business. The
two most common types of external users
are potential investors and creditors.
 External Users
• Potential Investors use accounting information to
make decisions to buy shares of a company .
Creditors (such as suppliers and bankers) use
accounting information to evaluate the risks of granting
credit or lending money.
• Government regulatory agencies such as Securities
and Exchange Commission (SEC), Bureau of Internal
Revenue (BIR), Department of Labor and Employment
(DOLE), Social Security System (SSS), and Local
Government Units (LGUs).
Forms of Business Organization
• Sole Proprietorship
• Partnership
• Corporation
• Cooperative
 Sole Proprietorship
“Suppose you want to open your own sari-sari
store that will need PHP10,000 to start and you
used your PHP10,000 savings to start the said
business. You are the sole owner of the said sari-
sari store”.
 Sole Proprietorship
• A form of business is owned by one
person
• The simplest, and the most common form
of business organization.
• It is not separate form the owner. The
business and the owner are inseparable.
 Advantages of Sole Proprietorship:
• The owner keeps all the profits.
• The owner makes all the decisions.
• It is easy to form and operate.
 Disadvantages of
Sole Proprietorship
• The life of the business is limited to the life
of the owner. Once the owner dies, the
business will cease to operate under the
name of the proprietor.
• The amount of capital is limited only by the
wealth of the proprietor
 Partnership
“What if the needed amount to start your dream
sari-sari store is PHP50,000 and you only have
PHP25,000 cash savings. You ask Juan, your
friend if he is willing to invest his PHP25,000 and
become part owner of the sari-sari store. Assuming
he agrees, what form of business organization was
created?”
 Partnership
• A form of business owned by two or more
persons. The details of the arrangement
between the partners are outlined in a
written document called articles of
partnership.
• Profits are divided among partners based
on their agreed sharing.
• The owner is called a partner.
 Advantages of Partnership:
• Higher capital because two or more
persons will contribute to the common
fund.
• It is easy to operate like a sole/single
proprietorship
 Disadvantages of Partnership
• The profits are divided among the partners.
• A partner can be held liable for the acts of the
other partners.
• In a lawsuit, the personal properties of the
partners can be held beyond their contributions
and may be used to answer for any liability of
the partnership.
 Corporation
“Assuming your dream is to open a grocery store
and not just a sari-sari store but you will need
PHP1,000,000 to start the said business. You have
only PHP25,000, your friend Juan has
PHP25,000, and your mother is willing to invest
her PHP50,000, but still these are not enough to
start your dream grocery store. Where will you get
the money to raise the PHP1 million?”
 Corporation
• A corporation is a business organized as a
separate legal entity (artificial person) under the
corporation law with ownership divided into
transferable shares of stocks
• Emphasize that it is the law (Corporation Code
of the Philippines) that creates a corporation.
 Corporation
• The corporation begins its existence from
the date the Articles of Incorporation is
approved by the Securities and Exchange
Commission (SEC).
• The SEC (Securities and Exchange
Commission) is the government agency
primarily tasked to regulate private
corporations in the Philippines.
 Corporations
• The owners are called stockholders or
shareholders.
• The word
‘Corporation/Incorporation/Corp./Inc.’
appears in the name of the entity.
• The voting rights of a shareholder is
generally based on the percentage of
ownership.
 Corporations
• The management of the business is
delegated by the shareholders to the
Board of Directors
• The ownership is divided into shares and
the value of one share may be
denominated at a smaller amount, for
example at PHP10 per share.
• The proof of ownership is evidenced by a
stock certificate.
 Advantages of Corporations
• Can easily raise additional funds by selling
shares of stocks to the public.
• Shareholders are not personally liable for
the debts of the corporation. The extent of
their liability is limited to their equity
(ownership) in the corporation.
 Disadvantages of Corporation
• It is relatively complicated to set up.
• Subject to several legal restrictions as
listed in the Corporation Code of the
Philippines.
 Cooperative
“Assuming all the mothers in your barangay decided to open a
sari-sari store where all the members can buy in cash or in
credit. Some mothers were also taught how to sew dresses
and bags as part of the project of the group. These bags are
then sold to a certain company. Aside from that, the
organization provides seminars to the members on various
topics involving mothers and their roles. At the end of the year,
the profits are distributed among the members based on their
capital contribution. The amount of their purchases in the sari-
sari store during the year is also computed and they receive
something out of the profit/surplus based on their purchases.”
 Cooperative
• A cooperative is a duly registered association of persons
with a common bond of interest, voluntarily joining together
to achieve their social, economic and cultural needs.
• The owners are called members who contribute equitably
to the capital of the cooperative.
• The members are expected to patronize their products and
services.
• The word ‘cooperative’ appears in the name of the entity.
• This form of business organization is regulated by the
Cooperative Development Authority (CDA).
 Advantages of Cooperative:
• Enjoys certain tax exemption privilege
• Promotes the concept of sharing
resources
 Disadvantages of Cooperative
• Limited distribution of surplus
• Requires continuous education programs
for members.
• The members have active and direct
participation in the business of the
cooperative.
 Types of Business
According to Activities
• Service Business
• Merchandising Business
• Manufacturing Business
 Service Business
This type of business offers professional
skills, advice and consultations.
Service Business
 Merchandising Business
• This type of business buys at wholesale
and later sells the products at retail. They
make a profit by selling the merchandise
or products at prices that are higher than
their purchase costs. This type of business
is also known as "buy and sell".
Merchandising Business
 Manufacturing Business
• This type of business buys raw materials
and uses them in making a new product,
therefore combining raw materials, labour
and expenses into a product for sale later
on.
• Examples are: shoe manufacturing
businesses, car manufacturing plants
Manufacturing
 Petness First Petshop
Juan dela Cruz opened his pet shop business called Petness First
Petshop. He opened a bank account for his business and deposited
PHP500,000. The business earned PHP50,000 but he had doubts with
the recorded expense of PHP70,000. He is not sure if he should include
the following items as expenses:

Salary expense 20,000

Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 70,000
Accounting Concepts and Principles

The activity is an application of the Business

Entity Principle which is one of the most
important principles in accounting.
 Business Entity Principle
- A business enterprise is separate and distinct from its owner
or investor.

Examples :
- If the owner has a barber shop, the cash of the barber shop
should be reported separately from personal cash.

- The owner had a business meeting with a prospective client.

The expenses that come with that meeting should be part of the
company’s expenses. If the owner paid for gas for his personal
use, it should not be included as part of the company’s
expenses.
 Going Concern Principle
- Business is expected to continue
indefinitely.

Example:
When preparing financial statements, you
should assume that the entity will continue
indefinitely.
 Time Period Principle
– financial statements are to be divided into
specific time intervals.

Example :
• Philippine companies are required to report
financial statements annually.
• The salary expenses from January to
December 2015 should only be reported in
2015.
 Monetary Unit Principle
– amounts are stated into a single monetary unit

Example :
• Jollibee should report financial statements in
pesos even if they have a store in the United
States.
• IHOP should report financial statements in
dollars even if they have a branch here in the
Philippines
 Objectivity Principle
– financial statements must be presented with
supporting evidence.

Example :
• When the customer paid Jollibee for their order,
Jollibee should have a copy of the receipt to
represent as evidence.
• When a company incurred a transportation
expense, a voucher should be prepared as
evidence.
 Cost principle
– accounts should be recorded initially at cost.
Example :
• When Jollibee buys a cash register, it should
record the cash register at its price when
they bought it.
• When a company purchases a laptop, it
should be recorded at the price it was
purchased.
 Accrual Accounting Principle
– revenue should be recognized when
earned regardless of collection and
expenses should be recognized when
incurred regardless of payment. On the
other hand, the cash basis principle in which
revenue is recorded when collected and
expenses should be recorded when paid.
Cash basis is not the generally accepted
principle today.
 Accrual Accounting Principle
Example:
When a barber finishes performing his
services he should record it as revenue.
When the barber shop receives an electricity
bill, it should record it as an expense even if
it is unpaid.
 Matching principle
– cost should be matched with the revenue
generated.

Example:
When you provide tutorial services to a
customer and there is a transportation cost
incurred related to the tutorial services, it
should be recorded as an expense for that
period.
 Disclosure principle
– all relevant and material information
should be reported.

Example:

The company should report all relevant

information.
 Conservatism Principle
– also known as prudence. In case of doubt,
assets and income should not be overstated
while liabilities and expenses should not be
understated.
Example:
In case of doubt, expenses should be
recorded at a higher amount. Revenue
should be recorded at a lower amount.
 Materiality Principle
– in case of assets that are immaterial to make a
difference in the financial statements, the
company should instead record it as an expense.

Example:
A school purchased an eraser with an estimated
useful life of three years. Since an eraser is
immaterial relative to assets, it should be
recorded as an expense.