FINANCE - the word finance is derived from the
latin word finer, meaning “to end” or “to pay.”
 a field that is concerned with the allocation
(investment) of assets and liabilities
(known as elements of the balance
statement) over space and time, often under
conditions of risk or uncertainty.
 Finance can also be defined as the science of
money management.
OTHER DEFITINIONS OF FINANCE
1. Shetty et al. (1995) - viewed finance as the
operational or practical side of economics,
the practical science of the production and
distribution of wealth. Production is
acquisition while distribution is utilization.
2. Saldana (1997 - added that finance, as a
discipline, is concerned with identifying,
evaluating, and managing sources and use of
cash in order to increase the value of the
business enterprise to its present owners.
3. Medina (2007) - defined finance as the
study of acquisition and investment of cash
for the purpose of enhancing value and
wealth.
FINANCE is the function of:
• allocating available funds
• acquiring needed funds; and
• utilizing these funds to achieve set of goals.
CLASSIFICATION OF FINANCE
A. As to Form of Negotiation
 Direct Finance - is involved in direct
borrowing. It involves lending to ultimate
borrowers. A person may obtain a loan from
another person to serve his needs.
 In direct finance, the security acquired
(called direct security) by the surplus unit
(lender) is the same security issued by the
deficit unit (borrower).
 DIRECT SECURITY - is a financial
instrument a deficit unit issues and sells to a
surplus unit with or without the help of a
market specialist like the financial
intermediaries.
 Indirect Finance - involves financial
intermediaries in the real sense of the word.
 This means that financial intermediaries
(called secondary security) act as
middlemen when they buy securities for
resale or simply facilitate the sale from
the original issuers to the final buyers.
 The transaction that happens when
deficit units borrow with the use of
financial intermediaries
 The securities involved are indirect
securities or secondary securities, and
the transaction happens in the indirect
market or the intermediation market.
 B. As to User
• Public Finance - deals with the revenue and
expenditure patterns of the government.
- It is concerned with government affairs
managing the government’s sources and
uses of funds.

- Government expenditures for infrastructure

like building streets, schools, bridges,
among others and payment of government
employees are government spending and
thus public finance.
• Private Finance - is a method of providing
funds for major capital investments, where
private firms are contracted to complete and
manage public projects.

Private Finance is divided further into:

a. PERSONAL FINANCE - refers to finance
conducted by individuals/consumers. A
family spending for their food, clothing,
shelter, recreation, education, among others
is personal finance.

b. FINANCE OF NON-PROFIT
ORGANIZATIONS - involves those
conducted by charitable, civic, religious
organizations, among others. These
organizations are not for profit, meaning
they do not aim to gain profit or increase in
wealth.

c. BUSINESS FINANCE - deals with

financing for business firms or for
commercial use, the goal of which is to
make profit.

- Businesses either produce goods and

services for sale or buy goods and sell the
same. Where to obtain capital for a
particular company and where to use it are
concerns of business finance.
TYPES OF BUSINESS ORGANIZATIONS
1. Service
 Engaged in rendering service.
 Could be rendering personal service like
barber shops, tailoring, dressmaking shops,
massage clinics and spas, laundry shops etc.
 Professionals like lawyers, accountants,
doctors, dentists also render service.
2. Trading and Merchandising
 Engaged in buying and selling merchandise.
 What they buy, they sell.
 Sari-sari stores, appliance stores,
construction and hardware supplies stores
and supermarkets are trading companies
 Even people who do “buy and sell” are
doing trading.
 Even intellectual properties are traded
including films, TV shows, brand name,
corporate identity and a celebrity (often
known as the merchandising side of the
entertainment business)
3. Manufacturing
 Those which buy raw materials and process
the same to convert them into finished
products which they sell.
4. Banking and Finance
 Firms that use money as its main object of
business (product) belong to the banking and
finance classification.
 Money and credit are their products
 They finance those who need money, and
they sell securities and other products for
purchase of those who have excess funds as
investments.
 Financial intermediaries also belong to this
classification.
• Financial Intermediaries – they
bring together those who provide
funds and those who need funds.
 Finance companies obtain funds by issuing
commercial papers (stocks and bonds) or by
borrowing from banks. They use the funds
by lending to individuals and businesses.
 Banks, lending institutions, credit companies,
pawnshops, savings and loan associations,
credit unions and even moneylenders
provide capital or lend money/grant loans.
 Insurance companies may also be classified
under the banking and finance category
because insurance companies collect
premiums (money) which they invest that
become their main source of income.
5. Mining or Extractive Industry / Mining
Companies
 Mining companies extract natural resources
like oil, gas, gold, copper, cement, among
others.
 These companies deplete these natural
resources; hence, while fixed assets are
depreciated, natural resources are said to be
depleted.
*Depleted -
decrease seriously or exhaust the abundance
or supply of.
 Dividends given to mining company
stockholders may either be dividends out of
earnings or return of capital called
liquidating dividends because their basic
products are depleted.
 Caltex (Philippines) Inc., Trans-Asia Oil and
Energy Development Corporation, Nido
Petroleum Philippines Pty. Ltd., etc.
and leather and sheep for meat and wool);
breeding farms for pigs and goats; orchard
for harvesting different kinds of fruits;
commercial kernels for various nuts and nut
products including corn.
- In essence, even mining and quarrying are
genetic industries.

6. Construction Companies
 Build houses, buildings, schools, roads,
bridges and other infrastructure.
 Similar to manufacturing as they start with
materials like cement, steel, gravel, sand,
wood and build a totally different product.

7. Genetic Industries
 Businesses involved in the production or
multiplication and reproduction of certain
species of plants and animals, either for sale
or for production of bio products like wool,
leather, medicinal herbs, among others.
 Such production, multiplication or
reproduction aim to create wealth, i.e., to
earn profit, as is the goal of all business
enterprises.
- Agriculture or farming for growing crops;
forestry for timber and lumber; fishing and
pisciculture (where fishes are grown in
ponds, canals and rivers); shrimp and prawn
culture; plant nurseries (where plants are
grown for sale); poultry farming, where
birds are raised for meat and aggs; animal
husbandry (where cattle are raised for milk
 BUSINESS STRUCTURES CHARACTERISTICS OF PARTNERSHIP
(AS TO OWNERSHIP) 1. Mutual agency
2. Voluntary association
3. Based on contract
1. SOLE PROPRIETORSHIP 4. Limited life
- Business unit owned and controlled by a 5. Unlimited liability
single individual. 6. Division of profit
- Simplest form under which one can operate 7. Co-ownership of contributed assets.
a business.
Advantages of Sole Proprietorship: LIMITED LIFE:
1. Ease of formation a. Death/withdrawal of a partner
2. Needs only a minimum capitalization b. Insolvency of a partner
3. Sole decision maker c. Incapacity of a partner
4. Easy to terminate d. Termination of the project or purpose
Disadvantages of Sole Proprietorship: e. Termination of the period specified in the
contract
1. Unlimited liability f. Admission of a partner
2. Limited access to capital
3. Limited skills, talents and capabilities
4. Inability to attract or retain good employees Advantages of Partnership:
5. Limited term of existence
6. Difficulty in measuring success 1. Ease of formation
7. Personal problems may hinder 2. Allows pooling of financial resources
operation/success 3. Allows pooling of skills, expertise and
experience of partners
4. Less government control, supervision and
2. PARTNERSHIP intervention
- Formal arrangement in which two or more
parties cooperate to manage and operate a
business TYPES OF PARTNERSHIP AS TO LIABILITY
- A legal form of business operation between OF PARTNERS
two or more individuals who share
management and profits A. GENERAL PARTNERSHIP
- Involves two or more owner carrying out a
NATURE OF PARTNERSHIP business purpose.
- General partners share equal rights and
1. Easier form of corporation responsibilities in connection with
2. It allows the pooling of resources for some management of the business
common purposes. - Any individual partner can bind the entire
3. It may compose of two partners only or group to a legal obligation.
dozens.
4. It is contractual in nature because it is
formed through a contract between or
among the partners. B. LIMITED PARTNERSHIP
- One in which there is at least one, but not all,
limited partner.
- There should be at least one general partner
to assume unlimited liability.
CORPORATION – An artificial body or being
organized in accordance with the provision of law
in which ownership is divided into shares of stocks.
CHARACTERISTICS OF A CORPORATION
1. Separate legal existence 4.
Limited liability of stockholders
2. Created by operation of law 5.
Continuity of existence
3. Transferable units of ownership 6.
Centralized management by the board of directors
ADVANTAGES OF A CORPORATION
1. Legal capacity to act as a legal entity
(artificial being)
2. Limited liability of stockholders
3. Transferability of shares
4. Continuity of life of the corporation
5. Greater ability to acquire funding
6. Greater ability to acquire talents, skills and
expertise.
PARTIES TO A CORPORATION
1. Corporators - Those who compose the
organization whether they are stockholders or
members.
2. Incorporators - Often referred to as “founders” of
the corporation; who originally organized the
corporation.
3. Stockholders/Shareholders - Are owners of
shares of stocks in a stock corporation.
4. Members - Are corporators of a non-stock
corporation.
5. Promoters - Promote or find potential
incorporators who may be interested in the
formulation of the corporation.
6. Board of Directors - Responsible for the
formulation of the overall policies for the
corporation.
7. Corporate Officers - Entrusted with the
implementation of all policies and rules of the
corporation.
INCORPORATION AND ORGANIZATION
OF A CORPORATION
There are three steps in the organization of a
corporation. These are:
1. Promotion - refers to the bringing together of the
incorporators & persons interested in forming a
corporation and procuring subscriptions or capital
for the corporation.
2. Incorporation - the process of formally
organizing the corporation.
The steps involved are:
a. Registration of business name with SEC
b. Drafting and execution of the Articles of
Incorporation by the incorporators
c. Execution of sworn affidavits and bank
deposit certificate
d. Filing of the Articles of Incorporation with
the securities and exchange commission
e. Issuance by the securities and exchange
commission of the certificate of
incorporation
3. Formal Organization and Commencement of
Business Operations
Formal Organization and Commencement of
Business Operation consist of the following steps:
a. Adoption of By-laws
b. Election of the Board of Directors
c. Election of Officers
d. Commencement of Business Operations
By laws - refer to the rules of action adopted by the
corporation for its internal government and for the
government of its officers, stockholders, and
members.
 CLASSIFICATIONS OF CORPORATIONS
 Public Corporations
- A corporation whose shares are traded to
and among the general public.
 Private Corporations
- A corporation founded by and composed of
private individuals principally for a
nonpublic purpose, such as manufacturing,
banking, and railroad corporations
A. As to Purpose
1. For profit (civil)
2. Non-profit
3. Charitable
4. Foundation
B. As to How Membership Is Represented
1. Stock Corporations
- a corporation in which the capital is contributed by
the shareholders and divided into shares represented
by certificates.
a. Open Corporations
– these are corporations of which
stocks are available for purchase by the general
public.
b. Closed Corporations
- these are corporations, ownership of which
is limited to selected persons.
2. Non-stock Corporations
– is a group organized for purposes other
than generating profit and in which no part of the
organization's income is distributed to its members,
directors, or officers
C. As to the State of Incorporation
1. Domestic Corporations
– A corporation is domestic in the
state/country from which it obtains its
charter.
2. Foreign Corporations
– A corporation is considered foreign
countries other than the one from which it obtains
its charter.
• Resident Foreign Corporation
• Non-resident Foreign Corporation
3. Multinational Corporations
– extends their operations in other
countries.
D. As to Number of Persons Composing the
Corporation
1. Corporation Sole
– is a legal entity consisting of a
single ("sole") incorporated office, occupied
by a single ("sole") natural person.
2. Corporation Aggregate
– is a separate legal entity formed by
several individual persons.
E. As to Legal Right to Corporate Existence
1. De jure Corporation
– A business that has complied
with all the requirements of its state
incorporation statute and is legally
allowed to do business as a corporation.
2. De facto Corporation
– is a corporation in fact but not in
law.
F. As to Relation to Other Corporations
1. Parent or Holding Corporations
– This is the original corporation
from which another corporation, called
sister company.
2. Sister Corporation
– This is the corporation whose share
of stock are owned in majority by the
parent of holding company.
  Corporate Capital
– is the mix of assets or resources a
company can draw on in financing its
business
 Classes of Shares/ Kinds of Stock
Shares of stock may be classified into:
1. Value on the stock certificate
a. Par value shares
b. No-par value shares
(1) with stand value
(2) without stated value

2. Rights to dividends
a. Common shares
b. Preferred shares
(1) as to assets
(2) as to dividends
(a) cumulative
(b) non-cumulative
(c) participating
(d) non-participating

 Organization Expense
– is the initial cost incurred to create a
company.
 Cooperative
– is a group of people who come
together and voluntarily cooperate for
their mutual, social, economic, and
cultural benefit.