Lesson 1

Accounting and the

Business Environment
Ms. Eunice L. Ambrocio, CPA

JOSE MARIA COLLEGE

First Semester, S.Y. 2020-2021
 Definition of Accounting
1

Users of Accounting
2 Information and their needs

TOPICS
3 Types of Business Activities
Accounting and the Business
Environment

4 Forms of Business Organization

5 Branches of Accounting
 Explain briefly the importance
1 of accounting in business.

Describe the type of

2 information needs by each
OBJECTIVES
group of user
Accounting and the Business
Environment Differentiate the forms of
3 business organizations as to
form and activity

4 Describe the different branches of

accounting and specialization
WHY DO WE STUDY
ACCOUNTING?
Business, defined.
A business refers to any organization or
enterprise engaged in activities to
produce and sell goods or services to
earn profit.
To be able to achieve its objective of earning
profit, owners need to know from time to time
the profits earned or losses sustained by the
business.

1) To evaluate present operations.

2) To make sound decisions.
3) To attain goals and objectives.
Accounting, defined.
#1. Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgment and decision by users of the
information. (American Accounting Association)

There are three important activities included from the

definition.
1. Identifying
2. Measuring
3. Communicating
Identifying the
‘accountable events’

Identifying is the process of analyzing

events and transactions to determine
whether or not they will be recognized in
the books.
Accountable event, defined.
An accountable event is an event that has an
effect on the assets, liabilities or equity of an
entity and its effect can be measured
reliably. This is also known as economic
activity where an entity participates.
Measuring
Measuring involves assigning numbers,
normally in monetary terms to the economic
transactions and events.
Communicating

Communicating is the process of transforming

economic data into useful accounting
information, such as financial statements and
other accounting reports for dissemination to
various users.
Accounting, defined.
#2. 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 a financial character and interpreting the results
thereof. (American Institute of Certified Public
Accountants)
Accounting, defined.
From the definition, the process of communication
involves three aspects:

1. Recording
2. Classifying
3. Summarizing
Recording refers to the process of systematically committing to
writing accountable events identified and measured in the books of
account in a systematic and chronological manner.

Classifying refers to the process of grouping similar and related

items into their respective account.

Summarizing refers to putting together in a brief form the

recorded and classified transactions and events. This includes the
preparation of the financial statements and other accounting
reports.
Accounting, defined.
#3. 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 decision. (Accounting
Standards Council)
Development of Accounting
Accounting records can be traced back to the ancient
1 civilizations of China, Babylonia, Greece and Egypt.

The first known description of double entry book keeping was

2 first published in 1494 by Lucas Pacioli.

Industrial revolution necessitated the development of more

3 sophisticated accounting system, rather than pricing the goods

based on guesses about the costs.

The increase in competition and mass production of goods led

4 to the rise of accounting as a formal branch of study.
Role of Accounting in Business
Accounting is a system meant for measuring business
activities, processing of information into reports and
making the findings available to decision-makers. The
documents, which communicate these findings about
the performance of an organization in monetary terms,
are called financial statements. Financial statements and
accounting reports tell the story of how a company is
doing financially, thus, accounting is often referred to as
the language of business.
The Users of Accounting
Information and their needs
The Users
Internal users are those that runs, manages and operates the
daily activities within the organization. These are persons who
have access to accounting information and who can customize
the accounting information to meet their requirements.

External users are those individuals who take interest in the

account information of an organization but they are not part of
the organization’s administrative process. These are persons
who do not have direct access to the accounting records of an
organization. They rely on information that is supplied to them
by the preparers of information.
The Internal Users
• Owners – needs to assess how well the business
is performing.
• Management – decisions concerning the
running of the business and strategic planning for
the future.
• Employees – decisions on personal matters, e.g.
promotion, appointments, security and training.
The External Users
• Investors and potential investors – they need
information to help them determine whether they
should buy, hold or sell. Shareholders are also
interested in information which enables them to
assess the ability of the enterprise to pay dividends.

• Unions and employee groups – information on

the stability, profitability and distribution of wealth
within the business.
The External Users
• Lenders and financial institutions – they are
interested in information which enables them to
determine whether their loans and interest thereon
will be pain when due.

• Suppliers and creditors – they are interested in

information which enables them to determine
whether amounts owing to them will be paid on
maturity.
The External Users
• Customers – information on the continued
existence of the business and thus the probability of
a continued supply of products, parts and after sales
service.

• Government and their agencies – they require

information to regulate the activities of the
enterprise and determine taxation policies.
The External Users
Competitors – information on the relative strengths
and weaknesses of their competition and for
comparative and benchmarking purposes. Whereas
the above categories of users share in the wealth of
the company, competitors require the information
mainly for strategic purposes.

The public – information on the role and

contribution of businesses to society.
Types of Business
Types of Businesses
There are three major types of businesses:
1. Service Business
2. Merchandising Business
3. Manufacturing Business
Service Business
A service type of business provides
intangible products (products with no
physical form). Service type firms offer
professional skills, expertise, advice, and
other similar products.

Examples:
Salons, repair shops, schools, banks,
accounting firms, and law firms.
Merchandising Business
This type of business buys products at wholesale
price and sells the same at retail price. They are
known as "buy and sell" businesses. They make
profit by selling the products at prices higher than
their purchase costs. A merchandising business sells
a product without changing its form.

Examples:
Grocery Stores, Convenience Stores,
Distributors, and other resellers.
Manufacturing Business
Unlike a merchandising business, a manufacturing
business buys products with the intention of using
them as materials in making a new product. Thus,
there is a transformation of the products
purchased. A manufacturing business combines
raw materials, labor, and overhead costs in its
production process. The manufactured goods will
then be sold to customers.
Hybrid Business
These are companies that may be
classified in more than one type of
business. A restaurant, for example,
combines ingredients in making a fine
meal (manufacturing), sells a cold bottle of
wine (merchandising), and fills customer
orders (service).
Forms of Business
Organizations
Forms of Business Organizations
These are the basic forms of business
organizations:
1. Sole Proprietorship
2. Partnership
3. Corporation
4. Cooperative
Sole Proprietorship
A sole proprietorship is a business owned by
only one person. It is easy to set-up and is the
least costly among all forms of ownership. The
owner faces unlimited liability; meaning, the
creditors of the business may go after the
personal assets of the owner if the business
cannot pay them. The sole proprietorship form
is usually adopted by small business entities.
Partnership
A partnership is a business owned by two or
more persons who contribute resources into
the entity. The partners divide the profits of
the business among themselves.
Corporation
A corporation is a business organization that has
a separate legal personality from its owners.
Ownership in a stock corporation is represented
by shares of stock. The owners (stockholders)
enjoy limited liability but have limited
involvement in the company's operations. The
board of directors, an elected group from the
stockholders, controls the activities of the
corporation.
Cooperative
A cooperative is a business organization owned
by a group of individuals and is operated for their
mutual benefit. The persons making up the group
are called members. Cooperatives may be
incorporated or unincorporated. Some examples
of cooperatives are: water and electricity (utility)
cooperatives, cooperative banking, credit unions,
and housing cooperatives.
 Sole Partnership Corporation Cooperative
Proprietorship

Number of One Two or More Five or more Fifteen or more

Owners

Owners' Proprietor Partners Stockholder or Members

Designation Shareholder

Creation By the will of the By the agreement By operation of law By operation of law
owner among partners

Owners' Unlimited liability Unlimited Liability Limited to the extent of Limited to the extent of
Liability for stockholders' members' contribution
losses contribution only only

Tax Liability Partner is taxed Generally, both the Both the Corporation Cooperatives and
and not the Partnership and the and Stockholders are share of members from
business resulting partners are taxed taxed resulting in the profit of
in lower taxes resulting in higher higher taxes cooperative generally
taxes are not taxable
Major Areas of Accounting
Financial Accounting
Focuses on the development and
communication of financial information for
external users.
Management Accounting
This area is concerned primarily with financial
reporting for internal users. Internal users,
especially management, have control over the
accounting system and can specify precisely
what information is needed and how the
information is to be reported.
Tax Accounting
This area is concerned with the type of
information that will assist business entities in
complying with tax laws and regulations
Government Accounting
It deals with the recording and reporting of
government agencies. It is a branch of
accounting that aims to produce transparent
financial information about the allocation and
utilization of government funds.
 END OF
DISCUSSION