Branches of Accounting:

“Accounting is divided into several branches to better serve the needs of different users with varying
information needs. These branches sometimes overlap and they are often closely intertwined.”

Financial Accounting Financial accounting is the broadest branch and is focused on the needs of external
users. Financial accounting is primarily concerned with the recognition, measurement and
communication of economic activities. This information is communicated in a complete set of financial
statements. It is assumed under this branch that the users have one common information need.
Financial accounting conforms with accounting standards developed by standard-setting bodies. In the
Philippines, there is a Council created to set these standards. Examples of these financial reports
include:

• the balance sheet (statement of financial condition)

• income statement (the profit and loss statement, or P&L)

• statement of cash flows Financial accounting is primarily concerned with processing historical data.
Although financial accounting generally meets the needs of external users, internal users of accounting
information also use these information for their decision-making needs.

Management (or Managerial) Accounting

Management accounting emphasizes the preparation and analysis of accounting information within the
organization. The objective of managerial accounting is to provide timely and relevant information for
those internal users of accounting information, such as the managers and employees in their decision-
making needs. Oftentimes, these are sensitive information and is not distributed to those outside the
business - for example, prices, plans to open up branches, customer list, etc. Managerial accounting
involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and
similar areas.

Government Accounting

Government accounting is the process of recording, analyzing, classifying, summarizing, communicating

and interpreting financial information about the government in aggregate and in detail reflecting
transactions and other economic events involving the receipt, spending, transfer, usability and
disposition of assets and liabilities. This branch of accounting deals with how the funds of the
government are recorded and reported.

• What are the sources of income of the government? Possible Answer: Taxes paid by Filipinos

• Where do these taxes go?

accounting deals with these transactions, the recording of inflow and outflow of funds of the
government.

Auditing

There are two types of auditing: external and internal auditing.

External auditing refers to the examination of financial statements by an independent CPA (Certified
Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and
compliance with the generally accepted accounting principles (GAAP).

The audit does not cover 100% of the accounting records but the CPA reviews a selected sample of
these records and issues an audit report.

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 policies. It focuses on evaluating the adequacy of a company's internal control
structure by testing segregation of duties, policies and procedures, degrees of authorization, and other
controls implemented by management.

Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation
of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as
ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other tax-related
matters.

Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers to the recording,
presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing
businesses since they have the most complicated costing process. Cost accountants also analyze actual
and standard costs to help managers determine future courses of action regarding the company's
operations.

Cost accounting will also help the owner set the selling price of his products. For example, if the cost
accounting records shows that the total cost to produce one can of sardines is PHP50, then the owner
can set the selling price at PHP60.

Accounting Education

This branch of accounting deals with developing future accountants by creating relevant accounting
curriculum. Accounting professionals can become faculty members of educational institutions.
Accounting educators contribute to the development of the profession through their effective teaching,
publications of their research and influencing students to pursue careers in accounting. Accounting
teachers share their knowledge on accounting so that students are informed of the importance of
accounting and its use in our daily lives.

Accounting Research

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. Researchers typically choose a subject area
and a methodology on which to focus their efforts. The subject matter of accounting research may
include information systems, auditing and assurance, corporate governance, financials, managerial, and
tax. Accounting research plays an essential part in creating new knowledge. Academic accounting
research "addresses all aspects of the accounting profession" using a scientific method. Practicing
accountants also conduct accounting research that focuses on solving problems for a client or group of
clients. The Accounting research helps standard-setting bodies around the world to develop new
standards that will address recent issues or trend in global business.

INTERNAL USERS I

nternal 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

SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS

Internal users of accounting information are those who are involved in planning, organizing and running
the business. They need more detailed information on a timely basis in order to support their decisions.
Examples of these internal users are managers, employees and owners.

The external users of accounting information are those individuals or organizations outside a company
who are interested in its financial information. Examples of these external users are potential investors,
suppliers and government agencies.

Forms of Business Organizations

1. Discuss sole/single 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. This type of business is called sole/single proprietorship.”

a. Ask what is their idea of a sole/single proprietorship. Possible responses:

• A form of business is owned by one person; the simplest, and the most common form of
business organization

b. The advantages of sole/single proprietorship. Possible responses:

 • The owner keeps all the profits.

• The owner makes all the decisions.

• It is easy to form and operate.

c. Discuss the disadvantages of sole/single 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

2. Introduce the concept of partnership by asking the following suggested questions: “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?”.

a. Partnerships

• 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.

b. The advantages of a partnership

• Higher capital because two or more persons will contribute to the common fund.

• It is easy to operate like a sole/single proprietorship

c. The disadvantages of a 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.

3. Introduce the concept of a corporation by asking the following suggested questions: “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? You may consider setting up a corporation?”

a. corporations

• 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

• The corporation begins its existence from the date the Articles of Incorporation is approved by
the

• Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.

Securities and Exchange Commission (SEC).

• The SEC (Securities and Exchange Commission) is the government agency primarily tasked to
regulate private corporations in the Philippines.

• 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.

• 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.

At this point, the teacher will share a sample of a stock certificate and articles of incorporation.

b. The advantages of a corporation

• 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. c. Discuss the disadvantages of
a corporation

• It is relatively complicated to set up.

• Subject to several legal restrictions as listed in the Corporation Code of the Philippines

4. Discuss the nature of cooperatives by asking the following suggested questions: “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. This form of business organization is called a cooperative.

a Cooperatives

• 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).

b. The advantages of a cooperative

• Enjoys certain tax exemption privilege

• Promotes the concept of sharing resources

c. The disadvantages of a 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

3 types of business organizations:

• Service Business

This type of business offers professional skills, advice and consultations. Examples: barber shops and
beauty parlors, repair shops, banks, accounting and law firms

• 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". Examples are: book stores, sari-sari stores, hardware stores
• 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

Additional information: There are businesses that may be classified under more than one type of
business. A bakery, for example, combines raw materials in making loaves of bread (manufacturing),
sells hot pan de sal (merchandising), and caters customers’ orders in small coffee table servings of
ensaymada and hot coffee (service).


Accounting Concepts and Principles

• Business entity principle – a business enterprise is separate and distinct from its owner or investor.

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

o Philippine companies are required to report financial statements annually.

o 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 :

o Jollibee should report financial statements in pesos even if they have a store in the United States.

o 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 :

o When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to
represent as evidence.
o When a company incurred a transportation expense, a voucher should be prepared as evidence.

• Cost principle – accounts should be recorded initially at cost.

Example :

o When Jollibee buys a cash register, it should record the cash register at its price when they bought it.

o 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.

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. 36

• 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.

The Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY

Types of Major Accounts
1.The types of major accounts: Assets, Liabilities, Owner’s Equity, Income and Expense.

Define Assets, Liabilities, Owner’s Equity, Income and Expense

• Assets are the resources owned and controlled by the firm.

• Liabilities are obligations of the firm arising from past events which are to be settled in the future.

• Equity or Owner’s Equity are the owner’s claims in the business. It is the residual interest in the assets
of the enterprise after deducting all its liabilities.

• Income is the increase in economic benefits during the accounting period in the form of inflows of
cash or other assets or decreases of liabilities that result in increase in equity. Income includes revenue
and gains.

• Expenses are decreases in economic benefits during the accounting period in the form of outflows of
assets or incidences of liabilities that result in decreases in equity.

2. Assets

The difference between Current vs. Non-Current Assets, and Tangible vs. Intangible Assets.

• Current Assets are assets that can be realized (collected, sold, used up) one year after year-end date.
Examples include Cash, Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.

• Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after year-
end date. Examples include Property, Plant and Equipment (equipment, furniture, building, land), long
term investments, etc.

• Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.

• Intangible Assets are non-physical assets such as patents and trademarks

The account titles used for Asset Accounts.

Define each account and differentiate one from the other.

Current Assets
• Cash is money on hand, or in banks, and other items considered as medium of exchange in business
transactions.

• Accounts Receivable are amounts due from customers arising from credit sales or credit services.

• Notes Receivable are amounts due from clients supported by promissory notes.

• Inventories are assets held for resale

• Supplies are items purchased by an enterprise which are unused as of the reporting date.

• Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become
expenses through the passage of time.

• Accrued Income is revenue earned but not yet collected

• Short term investments are the investments made by the company that are intended to be sold
immediately

Non-Current Assets

• Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.

• Long term Investments are the investments made by the company for long-term purposes

• Intangible Assets are assets without a physical substance. Examples include franchise and copyright.

3. Liabilities

Liabilities are the debts and obligations of the company to another entity.

• The differences of Current vs. Non-Current Liabilities.

Current Liabilities.

Liabilities that fall due (paid, recognized as revenue) within one year after year-end date. Examples
include Accounts Payable, Utilities Payable and Unearned Income.

Non-current Assets are liabilities that do not fall due (paid, recognized as revenue) within one year after
year-end date. Examples include Notes Payable, Loans Payable, Mortgage Payable, etc.

• The Account Titles used for Liability Accounts. Define each account and differentiate one from the
other.

Current Liabilities Accounts Payable are amounts due, or payable to, suppliers for goods purchased on
account or for services received on account. Notes Payable are amounts due to third parties supported
by promissory notes. Accrued Expenses are expenses that are incurred but not yet paid (examples:
salaries payable, taxes payable)l Unearned Income is cash collected in advance; the liability is the
services to be performed or goods to be delivered in the future.

Non-Current Liabilities Loans Payable Mortgage Payable

4. Owner’s Equity

Owner’s Equity is the residual interest of the owner from the business. It can be derived by deducting
liabilities from assets.

• The Account Titles used for Equity Account. Define each account and differentiate one from the other.

Capital is the value of cash and other assets invested in the business by the owner of the business.
Drawing is an account debited for assets withdrawn by the owner for personal use from the business.

5. Income

• What Income is. Income is the Increase in resources resulting from performance of service or selling
of goods.

•where Income increases and decreases in the accounting equation. Income increases equity.

• examples of Income Accounts. Service revenue for service entities, Sales for merchandising and
manufacturing companies

6. Expense

•what Expense is. Expense is the decrease in resources resulting from the operations of business

• where Expense increases and decreases in the accounting equation. Expenses decreases Equity in the
accounting equation

• examples of Expense Accounts Salaries Expense, Interest Expense, Utilities Expense