The Basic Function of Accounting in Business

The aspects of accounting can be summed up to one basic function which is the generation of
relevant and timely financial information for interested parties. The data provided by accountants
can assist investors, government agencies, creditors, and management in making sound decisions.
The financial information provided about the activities of an economic organization makes it
easily comprehensible for users to assess its financial position as of a given time and results of
operations for a given period. This qualitative and quantitative financial data used by users relating
to specific business decisions makes accounting the language of business.
 THE DIFFERENT BRANCHES OF
ACCOUNTING

 Financial Accounting
 Management Accounting
 Government Accounting
 Auditing
 Tax Accounting
 Cost Accounting
 Accounting Education
 Accounting Research
 FINANCIAL ACCOUNTING

Financial accounting deals with the theoretical framework covering accounting principles and
concepts relative to measurement and valuation as applied to assets, liabilities, stockholder’s
equity, retained earnings, revenue, and expense accounts in relation to the preparation and
presentation of financial statements.

The financial information provided by financial accounting in used for decision making by
both internal and external users. Internal users include, owners, shareholders, and management
while external users include creditors, potential investors, employees, and government agencies.
 MANAGEMENT ACCOUNTING

The Institute of Management Accountants (IMA) defines management

accounting as a profession that involves partnering in management decision
making, devising planning and performance management systems, and
providing expertise in financial reporting and control to assist management
in the formulation and implementation of an organization’s strategy.
 GOVERNMENT ACCOUNTING

Section 109 of Presidential Decree (PD) No. 1445 states that government accounting
encompasses the process of analyzing, classifying, summarizing, and communicating all
transactions involving the receipt and disposition of government funds and property, and
interpreting the results thereof. The agencies responsible in performing government
accounting functions are the Commission of Audit (COA), the Department of Budget and
Management (DBM), and the Bureau of Treasury (BTr).
 AUDITING

Auditing is the examination and review of accounting reports in order to ascertain

their fairness, propriety, and reliability. The independent auditor’s opinion provides
reasonable assurance that the financial statements under examination fairly present the
company’s financial position and results of operation in accordance with the generally
accepted accounting principles (GAAP).
 TAX ACCOUNTING

Tax services provided by accountants include the preparation of monthly value

added tax, percentage tax, expanded withholding tax returns, quarterly and annual tax
returns, and any other taxes applicable to business. Accountants work closely with clients
in order to avoid tax problems with the Bureau of Internal Revenue (BIR) and other local
agencies through proper tax compliance while advising clients about ways and measures
to minimize taxes.
 COST ACCOUNTING

Cost accounting includes the collection, determination, allocation, assessment,

interpretation, and control of cost data, particularly the cost of production in a
manufacturing concern. The cost of production includes the raw materials, direct labor,
factory overhead, and all other costs involved incident in each stage of production of the
finished goods.
 ACCOUNTING EDUCATION

Accounting education involves planned grading and formal teaching in an

educational institution. The professional accountant imparts knowledge to students
enrolled in an accounting subject either in basic accounting or in higher accounting
subjects. Accountants in the academe usually take post graduate studies to achieve the
required tenure.
 ACCOUNTING RESEARCH

Accounting research involves conducting a careful and diligent study aimed at

discovering and interpreting facts, revising accepted theories in the light of new facts, or
the practical application of such new or revised theories for the generation of a new
knowledge. It includes collecting information about a particular subject in order to decide
and implement new standards in accounting, presenting current events that might affect the
profession, or discovering new theories that will have on existing accounting knowledge.
 Users of Financial Information

Internal Users

Internal users are the primary users of financial information who are inside the reporting entity and
are directly involved in managing the company’s daily operations. They are the decision makers who
make the strategic and operational decisions for the company.
Internal Users

 Investors/ Owners/ Stockholders

These parties provide the financial resources to keep the business going. They decide
whether to invest or not depending on the estimated amount of income on the investment.
Upon investment, they would want to know the financial position or results of operation of
their business investment.
Internal Users

 Management

Organizational managers use financial information to set goals for their companies.
Managers evaluate their progress towards these goals and use financial data as a guide for
future management actions.

 Employees

Although the employees are not directly involved in the decision making of the
company, they are nonetheless interested in the financial information of the company to
determine if they have a future in the company.
 Users of Financial Information
(cont.)

External Users

External users are secondary users of financial information who are parties outside the
company. They may not be directly involved in the company’s operations but their decisions
may significantly affect the business entity.
External Users

 Financial Institutions/ Creditors

Before extending credit, financial institutions use financial information to determine the
capacity of the business organization to pay its obligations and their interests at the appropriate
time.

 Government

Financial information is important for tax purposes and in checking of compliance with
Securities and Exchange Commission (SEC) requirements.
External Users

 Potential Investors/ Creditors

Before making an investment or extending credit, potential investors or creditors may

not only be interested in the company’s current financial position and results of operations,
but also in the company’s financial history. This should give them the assurance that their
investment will yield a reasonable rate of return or the credit extended will be paid within a
reasonable period of time.
 Types of Business Organizations

1. Sole/ Single Proprietorship is a business owned and managed by only one person.

Advantages

 There are minimal costs and requirements in the formation.

 The owner can withdraw the assets and profits of the business anytime at his or her own discretion.

 Decision making is solely in the hands of the owner.

 The duration of the life of the business solely depends on its owner.
Disadvantages

 Resources are limited as the capital is provided only by the owner.

 The liability of the owner is unlimited as he or she is accountable to all creditors of the
business.

 Infusion of knowledge in the management of the business is limited to one person only,
which is the owner.
 Types of Business Organizations
(cont.)
2. Partnership is a business organization owned and managed by two or more people who agree to
contribute money, property, or industry to a common fund for the purpose of earning a profit.

Advantages

 There are minimal costs and requirements in the formation.

 There are more funds contributed from the investments of the partners.

 There is infusion or more knowledge, experience, and skills from two or more partners.

 There can be division of labor between or among partners.

Disadvantages

 The partners are liable for the actions of each partner as a result of mutual agency.

 A general partner has unlimited liability if the other partners are limited partners or are insolvent.

 Disagreement between or among partners can lead to the withdrawal of one or more partners.

 The death, retirement, withdrawal, or incapacity of a partner results in the dissolution of the partnership.

 Admission of a new partner depends upon the approval of the other partners.
 Types of Business Organizations
(cont.)
3. Corporation is a form of business organization managed by an elected board of directors. The investors are called stockholders

and the unit of ownership is called share of stock.

Advantages

 The stockholders only have limited liability, as their liability extends only up to the amount of their capital investment.

 A corporation has continuous existence as its life is indefinite.

 There is more infusion of funds from the stockholders or investors.

 Shares of stocks can be transferred without the consent of other shareholders.

 Management of the corporation is vested upon its board of directors.

Disadvantages

 A corporation entails many requirements and is more costly than a partnership.

 The government exercises strict control over corporations and imposes high taxes.

 Shareholders have little or no participation in the management of the corporation.

 Distribution of the net income depends upon the declaration of dividends by the board of directors.

 In large corporations, there is formal or impersonal relationship between employees and management due to the big
number of employees. Hence, chances of creating a personal and friendly atmosphere in the corporate setting are
minimal.
 Types of Business Organizations
(cont.)
4. Cooperatives

Under Section 3 of Republic Act 6938, a cooperative is a duly registered association of persons, with a
common bond of interest, who have voluntarily joined together to achieve a lawful common social or
economic end, making equitable contributions to the capital required and accepting a fair share of the risks
and benefits of the undertaking in accordance with universally accepted cooperative principles.

In short, a cooperative is an association of small producers and consumers who come together
voluntarily to form a business which they own, manage, and patronize.
Advantages

 The prices of products offered to consumers are lower due to direct purchases of cooperative
members from producers or manufacturers.

 Cooperative are managed by the members themselves; thus, saving on management costs which
leads to lower prices of products inuring to the benefit of the consumers.
Disadvantages

 There is limited capital due to underprivileged members.

 The cooperative is strictly for members only and shares cannot be transferred to non-
members.

 Lack of efficient managements as it is managed only by its members.

 Legal Requirements in the Formation of a
Business

The sole proprietorship is the easiest business to register. It is registered

with the Department of Trade and Industry (DTI) under its Bureau of Trade
Regulation and Consumer Protection.
 For a partnership, the business is registered with the Securities and Exchange Commission (SEC) upon
submission of the following documents:

 Proposed Articles of Partnership

 Name Verification Slip

 Bank Certificate Deposit

 Alien Certificate of Registration, Special Investors Resident Visa, or proof of other types of vise (in case of
foreigners)

 Proof of Inward Remittance (in case of non-resident aliens)

 For corporation, the following are the incorporation documents required to be filed with the
Securities and Exchange Commission (SEC):

 Articles of Incorporation

 By-laws

 Treasurer’s Affidavit which should state compliance with the authorized subscribed and paid-up
capital stock requirements.

 Bank Certificate which should state that the paid-up capital portion of the authorized capital stock has
been deposited to the issuing bank.
 What should be stated upon registration of a
corporation?

 The name of the corporation which must not be identical, or deceptively or confusingly similar to
any existing corporation.

 The purpose of the corporation

 Principal office of the corporation

 The term or life of the corporation which should not exceed fifty [50] years. This corporate lifetime
may, however, be extended for another fifty [50] years but the extension must not be effected earlier
than five [5] years before the expiration of its term.
 For a cooperative, the business is registered with the Cooperative Development Authority (CDA)
upon submission of the following documents:

 Economic Survey

 Notarized Articles of Cooperation and By-Laws

 Bonds of accountable officer or officers

 Notarized sworn statement of the treasurer certifying that the required subscription and payment of the
authorized share capital and paid-up capital have been fulfilled.
 Three Types of Business Activities/
Operations

1. Service is a type of business operation engaged in the rendering of services. A service type of
business earns based on the skill or quality of service it offers. In order for the business to grow, its
people or employees have to be trained. For example, a well-known hair cutter cannot perform all the
hair and makeup services to his or her customers. He/she has to continuously maintain, if not improve,
the quality of service offered to his/her customers.

Examples: dental clinic, barber shop, laundry service

2. Trading/ Merchandising is a type of business engaged in the buying and selling of goods. Merchandising
includes the process of managing and marketing the products sold to its customers. Sales have to be
optimized in order to make money. Customer demands have to be satisfied with the quality of products sold.
The tedious processes of forecasting, purchasing, pricing, and marketing of products in order to generate
sales are essential in the trading or merchandising business.

Examples: grocery, sari-sari store

3. Manufacturing is engaged in the production of items to be sold. It involves the purchasing and converting
of raw materials to finished goods. This type of business incurs overhead costs aside from the wages and
materials used in the production of goods. A rise in price in one of these costs causes an increase in the price
of goods produced. Aside from this, there are certain expenses incurred even during periods of non-
manufacturing such as rent, insurance, worker benefits, and machine depreciation. Hence, careful planning is
involved in manufacturing.

Examples: shoe factory, food processing