Fundamentals of Accounting

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions.

Types of Accounting Information

1. Financial Accounting – refers to the information describing the financial resources, obligations and activities
of an economic entity. It generally intended for external users such as investors and creditors.
2. Management Accounting – involves the development of interpretation and analysis of accounting
information which id primarily intended to internal users such as the management.
3. Tax Accounting- is a specialized field within the accounting parlance. Some aspects are based on financial
accounting information but it is adjusted to conform to the tax statutes for reporting purposes.

Four Major Areas of Professional Accountancy Practice

1. Practice in Public Accountancy
 Accountants in this sector provide services to the public. They maybe public practitioners or a
member of a partnership.
 It involves main areas such as audit services, taxation services, management consulting services
as well as business recovery and insolvency management.
2. Practice in Commerce and Industry
 Constitute a person involved in decision making requiring professional knowledge in the science of
accounting, or when such employment or position requires that the holder thereof must be a
Certified Public Accountant.
 Accountants working in this sector should have a wide range of function such as external and
internal financial reporting, taxation and internal auditing.
3. Practice in Government
 Constitute person who holds, or is appointed to a position in the accounting professional group in
government or in a government owned and/or controlled corporations (GOCCs), including
proprietary functions where decision making requires professional knowledge in the science of
accounting or where civil service eligibility as a certified public accountant is a prerequisite.
4. Practice in Education/ Academe
 Constitute individuals in educational institutions which are involved in teaching accounting,
auditing, management advisory services, business law, taxation and other technical-related
subjects.
Users of Financial Statements
A. Users may directly or indirectly have an economic interest in a specific business. Users with direct interests
usually invest in or manage the business, and the users with indirect interests advice, influence or represent
users with direct interests.
1. Users with direct interests include
a. Investors and potential investors
b. Suppliers and Creditors
c. Employees
d. Management
2. Users with indirect interests include
a. Financial advisor or analyst
b. Stock markets or exchanges

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c. Regulatory Authorities
B. External users use financial statements to determine whether doing business with the firm is beneficial.
a. Investors need information to decide whether to increase, decrease or obtain an investment in a
firm.
b. Creditors need information to determine whether to extend credit under what terms.
c. Financial advisors and analysts need financial statements to help investors evaluate particular
investments
d. Stock exchanges need financial statements to evaluate whether to accept a firm’s stock for listing
or whether to suspend the stock’s trading.
e. Regulatory agencies may need financial statements to evaluate the firm’s conformity with
regulations and to determine price levels in regulated industries.
C. Internal users are financial statements to make decisions affecting the operations of the business. These
users include management, employees, and the board of directors.
a. Management needs financial statements to assess the financial strengths and deficiencies to
evaluate performance results and past decisions and to plan for future financial goals and steps
toward accomplishing them.
b. Employees want financial information to negotiate wages and fringe benefits based on the
increased productivity and value they provide to a profitable firm.

Types of Business based on the Nature of Operations

1. Service business is one which is engaged in rendering of services to another party for a specified fee.
2. Trading or Merchandising business is engaged is buying and selling of goods called merchandise for resale
to various customers.
3. Manufacturing business is engaged in converting raw materials into finished goods and resells such to
traders and other consumers.
4. Hybrid business is one which is engaged in two or more than one type of business operations.

Forms of Business Organizations

1. Single or Sole Proprietorship is owned by an individual called the proprietor who has complete control of the
operations of the business. The owner is entitled of all the benefits and losses incurred by the business. He
is also the lone decision maker. Sole proprietorship is the easiest to form.
2. Partnership is owned by two or more individuals called partners who bind themselves to contribute money,
property, and industry to a common fund with the intention of dividing the profits among themselves. The
written agreement of the partners which is called the Articles of Co-Partnership will be filed to the Securities
and Exchange Commission (SEC). It composes of the governing formation, operation and dissolution of the
partnership
3. Corporation is an artificial being created by the operation of law, having the rights of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence (Corporation Code,
Section 2) The incorporation process is initiated by the filing of Articles of Incorporation with the SEC.

Important Activities in Accounting

1. Identifying is the recognition and non-recognition of business activities or events. It is said to be accountable
if it affect the assets, liabilities and equity of the entity. Non-accountable events are those that cannot be
quantified or expressed in monetary terms such as entering into agreements.

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2. Measuring is the process of assigning peso amount to the accountable economic events.
3. Communicating is the process of preparing and distributing accounting reports to various users.

Phases of Accounting
1. Recording is the process of writing down accountable transactions to the books of accounts called journal
(book of original entry). The technical term for this transaction is called bookkeeping. Bookkeeping is a
systematic and chronological recording of business transactions and events which are quantifiable. It is said
to be systematic since it conforms with the Generally Accepted Accounting Principles (GAAP)
2. Classifying is the sorting or grouping of similar and interrelated transactions into their respective classes.
This is accomplished by posting to the ledger (book of final entry). Ledger is a group of accounts
categorized into asset, liability, equity, revenue and expense accounts.
3. Summarizing is achieved through the preparation of financial statements or reports. Financial statements
summarize the effects of all accountable business transactions that had occurred within the accounting
period.
4. Interpreting is being done after all the transactions are summarized in the financial statements in order to
analyse or assess the liquidity, solvency and profitability of the firm

Business Entity Concept states that an organization stands apart from any other organizations or individuals as a
separate economic unit. Transactions of different entity should be accounted for separately. In like manner as the
personality of the owner/s of a business is separate and distinct from that of a business, thus, transactions of the
business should not be combined with personal transactions of the owner.

Accounting Cycle
1. Identifying
2. Journalizing
3. Posting
4. Preparation of Preliminary Trial Balance
5. Preparation of Adjusting Entries and Worksheet
6. Preparation of Financial Statements
7. Preparation of Closing Entries
8. Preparation of Post-closing Trial Balance
9. Preparation of Reversing Entries

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