CHAPTER 1: INTRODUCTION TO ACCOUNTING
Business Defined
 A legally-recognized organizational entity existing within an
economically free country designed to sell goods and/or provide
services to consumers, usually in an effort to generate profit.
 A commercial activity engaged in as a means of livelihood or profit.
 May be profit-oriented or non-profit-oriented enterprise
o Profit-oriented enterprise aims to earn income or profit
through the provision of goods and/or services to consumers
o Non-profit-oriented enterprise aims to achieve socio-civic or
charitable aims
Business and Record-keeping
 Records are kept for transparency
 Accounting is the information system which helps a business
enterprise to be accountable for its decisions and activities
Forms of Business Enterprises (according to nature of operations)
1. Service business/service concern
 Simplest form of business
 Provides services to clients or customers in exchange for fees, rent,
interest or royalties
2. Merchandising business/trading concern
 Purchase goods from suppliers and without altering the state of the
goods bought, sell at a higher price than cost
3. Manufacturing business/manufacturing concern
 Most complex activities
 Manufacturer sells goods at a higher price than cost
 Manufacturer produces the goods that it sells to customers
Business Ownership
1. Sole Proprietorship
 Most basic legal form of business
 Has only one owner, the proprietor
 May operate on his/her own, or may employ others
 Advantages:
o Easier to form compared to partnerships and corporations
o Have uncomplicated business transactions and minimal
regulatory requirements
o Decisions can be arrived in less time, implemented faster
o Proprietor enjoys all the profits
 Disadvantages:
o Financing problems occur because of the enterprise’s limited
ability to raise capital
o Expansion is limited in proportion to the contributed resources
by the proprietor
o Expansion only focuses on areas in which proprietor is proficient
(expert)
o No benefit of second opinion on decisions made
o Proprietor bears the risks and losses which may be incurred
o Sole proprietor has unlimited personal liability – his/her
personal property may be used to satisfy the obligations due to
creditors
2. Partnership
 Association of two or more persons who bind themselves to
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves
 Governed by the Civil Code of the Philippines
 Partners must agree among other things
 Accountants and lawyers usually form partnerships for the purpose
of practicing their respective professions.
 Advantages:
 o Easier to organize compared to a corporation
o Burden of management is usually shared among partners
o More ideas are exchanged and brainstormed  better decision-
making
 Disadvantages:
o Partnerships can raise more capital but it still depends on the
capability of each partner to invest resources
o The plurality of owners may result to disagreements
o Life of partnership is fragile (easily dissolved)
 By agreement
 By withdrawal of one or more partners
 By death of or incapacity of a partner
o Partners have unlimited personal liability for debts
3. Corporation
 Most complex form of business organizations
 Shareholder  a person who invests in a corporation
 Certificate of stock: evidences the rights of the shareholders
expressed in the number of shares he purchased
 Follows the Corporation Code
 Board of directors: centralized management of operations
 Advantages:
o Greatest capacity to raise capital
o Capital may be raised by selling shares of stock to the public
o Transfer of shares does not require the consent of other
shareholders
o May exist for a period not longer than 50 years, subject to
renewal
o Limited liability of owners
 Shareholders are liable to 3rd parties for the losses of the
corporation only to the limit of their fully-paid investments
 Lenders cannot take the personal assets of the stockholders
 Disadvantages:
o Cost of forming and managing a corporation is relatively high
o Subject to greater scrutiny, regulation, control and supervision
by the government
o More complex management
o Corporations have limited powers as stated in the Corporation
Code of the Philippines and its own Articles of Incorporation
o Subject to high income tax rate
4. Cooperatives
 Autonomous associations of persons united voluntarily to meet their
needs and aspirations through jointly owned and democratically
controlled enterprises
 Examples: housing, utility or agriculture cooperatives
Economic Decisions
 Decisions which affect the resources it controls and the obligations to
other enterprises
 Accounting provides financial information used by the management
to make economic decisions
Accounting Defined
 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.
 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
 Is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by
users of the information
Basic Purpose of Accounting
 To supply financial information to users of the information to help
them make informed judgments and better decisions
Accounting  the Language of Business

 Language used to communicate financial information to interested Republic Act No. 9298  the Philippine Accountancy Act of 2004
parties (business owners, management, employees, government)
 Objectives:
 Users of financial information understand what is happening in the
o Standardization and regulation of accounting education
business enterprise
o Examination for registration of certified public accountants
Accounting and Bookkeeping Distinguished o Supervision, control and regulation of the practice of
accountancy
 Bookkeeping
 Article II  creation of the Professional Regulatory Board of
o Procedural or mechanical aspect of accounting
Accountancy
o Involves the set-up, update, and maintenance of accounting
o Enforce the provisions of the Philippine Accountancy Act
records
o Right to issue, suspend, revoke, reinstate CPA certificates for
o May be done by properly trained non-accountants
the practice of profession
 Accounting
o Composed of a chairman and 6 members – all appointed by the
o Conceptual and goes beyond bookkeeping
President
o Interpretation of information recorded under bookkeeping
o Can only be done by certified public accountants The CPA Board Exams

The Accountancy Profession  Passing the CPA Board Exams is a requirement to join the
accountancy profession
 Attributes:  Requisites to the satisfaction of the Board:
1. Mastery of particular intellectual skill, acquired by training and o Filipino citizen with good moral character
education o Holder of the degree of Bachelor of Science in Accountancy
a. Finish a degree in Bachelor of Science in Accountancy
o Has not been convicted of any criminal offense involving moral
b. Pass the government examination administered by the
turpitude
Professional Regulatory Board of Accountancy
 Passed  general average of 75% with no grades lower than 65% in
i. Given the title: “Certified Public Accountant (CPA)”
any subject
2. Adherence by its members to a common code of values and
 Conditional  a rating of 75% and above in at least the majority of
conduct established to maintain an objective outlook
the subjects
a. Code of Ethic  mandatory for all CPAs which provides
o Remaining subjects must be taken within two years and must
guidance for “what is the right thing to do” situations
acquire a general average of at least 75% and at least 65% in the
3. Acceptance of a duty to society as a whole
subjects reexamined; otherwise, he shall be considered failed in
a. Reliance on CPAs for sound financial accounting and reporting,
the entire examination
effective financial management and competent advice
  Failed  if the candidate fails to obtain at least a general average of
75% and a rating of at least 65% in each subjects
 Candidates who fail 2 complete examinations shall be disqualified
from taking another set of examinations unless reenrolled in a 24-
unit refresher course
 Middle East region (8500 BC): clay objects to represent commodities
 Ancient civilizations use papyri as the medium for record-keeping
 Genoa (1340 AD): double-entry records
Luca Pacioli and the Summa

Sectors of Accounting Practice  Luca Pacioli: Father of Double-Entry Bookkeeping

 Public practice The Industrial Revolution

o Render independent professional services to the public  18th to 19th centuries, commerce boomed and birth of corporations
o CPAs charge professional fees for these services  Conflict between management and shareholders  demand for
o Auditing financial statements audit
 Most common service provided o Management  too optimistic in reporting the financial
 Independent examination of financial statements condition of the business
o Tax services o Owners  true and fair view of the status of the business
 Preparation of tax returns
 CPAs: experts in accounting and taxation Fields of Accounting
o Management consulting services
 Changing needs  more complex accounting policies/procedures
 Providing advisory/consulting services to clients
1. Financial accounting
 Commerce and Industry
a. General-purpose financial statements
o Private accountants
b. Needs of external users
o Controller/ comptroller: highest accounting officer in a business
2. Management accounting
organization
a. Financial reporting for internal users
o Assist management in planning and controlling a company’s
3. Cost accounting
operation
a. Measures a business costs
 Education and the Academe
4. Tax accounting
o Professors, reviewers or researchers
a. Compliance with the tax laws
o Clarify and address emerging accounting issues b. Minimizing the company’s tax bill through legal means
o Prepare aspiring CPAs for the Licensure Examinations 5. Government accounting
 Government a. Proper custody, disposition and accounting for public funds
o Hired as staff, auditor, budget officer or consultant in
government units Accounting and Information Technology

Accounting- Then and Now  IT: big boost in terms of efficiency and timeliness
 Computers can take over most of the clerical aspects of accounting
but can never replace the professional judgment of an accountant
 Accounting is a dynamic profession
 CPA: one of the most-sought-after professionals in the business
world