BAEN 1 – Accounting Principles (BSBA)

Lesson 1: Accounting and Its Environment

Introduction:
Accounting is the information system that measures
business activities, processes that information into reports, and
communicates the results to decision-makers. The better one
understands accounting; the better one can manage the
financial aspects of living and the better the financial decisions
will be.
Definition of Accounting:
 
The Statement of Financial Accounting Standards (SFAS) defines
accounting as:
 
“Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic activities, that is
intended to be useful in making economic decisions”.
The American Institute of Certified Public Accountants (AICPA) defines accounting as
follows:
 

“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 financial
character, and interpreting the results thereof.”
 
The American Accounting Association (AAA) defines accounting as follows:
 

“Accounting refers to the process of identifying, measuring, and communicating

economic information to permit informed judgments and decisions by users of the
information.”
BRIEF HISTORY OF ACCOUNTING:
The present recording system which is already innovative in the procedure and is
designed to fit the changing need of our current economic development gives
growth also to the development in the practice of accounting profession worldwide
can be traced in the work of a Franciscan monk by the name of Luca Pacioli.
In Venice, as early as November 1494, this Franciscan monk had published
a book that contained the primary principles of Mathematics and incidentally a set
of accounting procedures. The title of this book was “Summa de Arithmetica,
Geometria, Proportioni et Propotionalita” (Everything about Arithmetic, Geometry,
Proportions, and Proportionality) which later earned him the title “Father of
Accounting”
 
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TYPES OF BUSINESS OPERATION:

A business firm earns profit depending on its type of operation or activity. They may be classified in
terms of what they offer, sell, or produce. There are at least three general types of business operation as
follows:
 
1. Service Business – a business that provides services as its main product with no physical form. It may
be an exercise of profession, expertise, advice, and other similar products.
 

Examples:
a. Laundry shops
b. Hospitals
c. Professionals like Medical Practitioners, Lawyers, Accountants, etc.
d. Schools
e. Banks
2. Merchandising Business – a business that buys and sells goods or products without changing its form. They buy
products at wholesale price and sells the same at retail price.
 

Examples:
a. Drugstore
b. Furniture stores
c. Groceries and supermarkets
d. Department store
e. Appliance store
 
3. Manufacturing Business – a business that buys raw materials and supplies to be processed or manufactured into
finished products for sale at a profit. (Rafael Lopez, Revised Edition 2018)
 

Examples:
f. Car manufacturers like Toyota, General Motors, Hyundai, etc.
g. Makers of athletic shoes like Nike, Adidas, etc.
h. Garment factories
i. Beverages companies like Coca-Cola, Pepsi-Cola, etc.
j. Manufacturers of personal products like Unilever, Lamoiyan Corp.
FORMS OF BUSINESS ORGANIZATION
 

There are three (3) forms of business organization as follows:

 
1. SOLE PROPRIETORSHIP – a business owned by only one person or individual. This is the simplest
form of business organization where capital is owned and provided by one person called “proprietor”
who may manage the business by himself or hire another person to do so. (Lopez, 2018)
 
Characteristics of Sole Proprietor:
a. Single Ownership – only one person owned the business
b. One-man Control – owner manages the business
c. Less Legal Formalities – very few legal restrictions
d. No Sharing of Profit and Loss – owner bears the business profit or loss
e. Risk – owner bears all the risks
 Advantages of Sole Proprietor:
a. Ease of Formation – easy to open/register and close the business
b. Prompt Decision – owner solely makes the decision
c. Secrecy – benefits of business confidentiality
d. Flexibility – easy to adjust concerning the business operation
e. Freedom – total control on the part of the owner
Disadvantages of Sole Proprietor:
f. Limited Capital – only the owner made the investment
g. Unlimited Liability – bears all the business liabilities in case of closure
h. Lack of Continuity – business ceases when an owner dies or incapacitated
i. Limited Size – the owner is the sole investor
j. Lack of Managerial Expertise – limited management skills
PARTNERSHIP – a business owned by two or more individuals who entered into a contract to carry on a business and
divide the profits among themselves. (Win Ballada, 2018)
Characteristics of Partnership:
Mutual Contribution
Division of Profits and Loss
Co-ownership of Contributed Assets
Mutual Agency
Limited Life

Advantages of Partnership: Disadvantages of Partnership:

a. More Capital Infusion – more partner, more funds to a. Indefinite or Limited Life – disagreements may arise

the business among the partners

b. Ease in Business Management – because more b. Unlimited Liability – each partner is liable for the

owners are involved partnership debts

c. Benefit of Collaboration - better business decisions
d. Sharing of business risk and responsibility
e. Low extent of government regulations
c. Conflict in Decision Making – there is a risk of
disagreements and friction
d. Division of Profits among Partners
e. Joint Accountability -
3. CORPORATION – a business organized by one or more shareholders/stockholders that
has a separate legal personality from its owners. It is created by the operations of law and the
ownership is represented by the shares of stocks.
 
Attributes of Corporation:
a. An artificial being – with separate personality and apart from its shareholders or members.
b. Created by operation of law – it requires special authority or grants from the State, either by a
special incorporation law that directly creates the corporation or by means of general
corporation law.
c. Enjoys the right of succession – has the capacity of continued existence
d. Has the power, attributes, and properties expressly authorized by law or incident to its
existence.
Advantages of Corporation:
a. Easy Availability of Capital – greater ability to acquire or raise funds
b. Unlimited Life – continuity of existence
c. Ownership Transfer – shares of stocks can be transferred without the consent of the other
shareholders
d. Limited Liability – shareholders liability up to the extent of their investment
e. Management is centralized in the board of directors

Disadvantages of Corporation:
f. Complex Process – relatively complicated in formation and management
g. Start-up Costs are higher - difficult and costly to organize
h. Greater degree of government control and supervision
i. Subject to heavier taxation than other forms of business organization
j. Abuse of power – there is the tendency of corruption
4. COOPERATIVE – 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, patronizing their products and
services and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles. (CDA)
 
Characteristics of Cooperative:
a. Voluntary membership – anybody is free to join and can leave anytime
b. Open membership – open to all who are interested
c. Equal voting rights – based on the principle of “one man, one vote”
Advantages of Cooperative:
a. Unlimited life
b. Equality of members
c. Tax benefits
d. Limited liability
e. Greater ability to attract capital
 
Disadvantages of Cooperative:
f. Shared control
g. One member, one vote
h. Prone to poor management
i. Difficulty to sustain growth
j. Susceptible to corruption
USERS OF FINANCIAL INFORMATION
The financial information of a business entity is used by a variety of groups and for different
purposes. Users of financial information are called stakeholders who have interest in the
business. They can be grouped into either internal or external users.
 
Internal Users – they are the primary users of financial / accounting information.
 
1. Investors / Owners
- To assess how well their business is performing.
- To know about the profitability of the overall business
- To determine whether they should buy, hold or sell their investments
 
2. Management
- To plan, monitor and make business decisions
- To monitor the business performance as compared to past performance,
competitor analysis, key performance indicators, and industry benchmarks.
 
3. Employees
- To assess the ability of the enterprise to provide remuneration, retirement
benefits, and employment opportunities.
- To have the chances of joining the business as potential investors as well.
External Users
 
1. Lenders and Creditors
- To determine whether their loans and the related interest will be paid when due

2. Customers
- To assess the continuance of an enterprise especially when they have a long-term involvement with or are dependent
on the enterprise.
 
3. Suppliers and Other Trade Creditors
- To determine whether amounts owing to them will be paid on maturity
- To assess whether the business condition for sustainable growth
 
4. Government and their Agencies
- To regulate the activities of the entity, determine taxation policies, and as a basis for national income and similar
statistics.
 
5. Public
- Enterprises affect members of the public in a variety of ways. For example, enterprises make substantial contributions
to the local economy in many ways including the number of people they employ and their patronage of local suppliers.
Financial statements may assist the public by providing information about the trends and recent developments in the
prosperity of the enterprise and the range of its activities. (Rafael Lopez, Jr., 2018)
 
Online Reference:
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