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Lesson title: References

Lesson Objectives: upcounsel.com
At the end of this module, I should be able to: mosourcellink.com
- enumerate and define the different types of business google.com
organizations edupristine.com
- enumerate and explain the different accounting fundamental inc.com
concepts and basic principles wikipedia.org
- define and explain financial statements accountingverse.com
- enumerate and explain the elements of accounting bissfluent.com

A. LESSON PREVIEW/REVIEW
1) “Accounting is the language of business.” - Warren Buffett. Accounting is simply defined as the
process of recording and summarizing financial information in a useful way. It plays an
important role in our daily lives especially in our income and expenses. In this research paper,
the following topics will be tackled: Types of Business Organizations, Accounting Fundamental
Concepts and Basic Principles, Financial Statements, and the Elements of Accounting.

B. MAIN LESSON

1. Types of Business Organizations

The first step a business owner will take is deciding how the business will be structured. As
there are several types of business organizations, a business owner must know the advantages and
disadvantages of each form. It is a crucial part of the decision-making process of a business owner that
will impact in the long run.

There are four (4) types of Business Organizations.

1. Sole proprietorship
2. Partnerships
3. Corporation
4. Limited Liability Company

SOLE PROPRIETORSHIP

The vast majority of small businesses start out as sole proprietorships. These businesses are
owned by one person, usually, the individual who has day-to-day responsibility for running the
business. This type of organization is easy to set-up and is the least costly among all forms of
ownership or business organizations. 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.

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Advantages
- the owner receives all profits from the business
- profits are taxed only once
- the owner makes all the decisions in the business
- the owner has complete control of the business
- easy to start
- least expensive form of business organization or ownership

Disadvantages
- no separate legal status
- limited in raising funds (may have to acquire consumer loans)
- owner has unlimited liability if anything happens in the business (personal assets at risk)
- business dies with owner
- the owner makes all the decisions in the business

Examples of Sole Proprietorships

- small store businesses
- sari-sari store
- fish and meat stalls
- bakeries
- freelancers
- online shops/businesses

PARTNERSHIPS

In a Partnership, two or more people share ownership in a single business. Like proprietorships,
the law does not distinguish between the business and its owners. The profit of the business is divided
among the partners. In general partnerships, all partners have unlimited liability. In limited partnerships,
creditors cannot go after the personal assets of the limited partners.

Advantages
- easy to establish
- having partner/s may have complimentary skills
- profits are taxed only once
- more revenue available

Disadvantages
- there is unlimited liability for partners
- decision-making may be complicated
- profits must be shared with the partner/s
- business can suffer if the detailed partnership agreement is not in place

Examples of Partnership

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- Spotify & Uber
- Louis Vuitton and BMW
- Red Bull & GoPro

CORPORATIONS

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. It is considered by law to be a
unique entity, separate from those who own it. A corporation has a life of its own and does not dissolve
when ownership changes.

Advantages
- limited liability
- easy to raise funds through stocks
- is able to recruit professional management and change bad management due to separation of
ownership

Disadvantages
- corporate income is taxed twice; once as corporate profits, then as personal dividends
- there are greater possibilities for management disagreements
- establishing one is costly

COOPERATIVE

A cooperative is a business organization owned by a group of individuals and is operated for

their mutual benefit. The people making up the group are called members. Cooperatives may be
incorporated or unincorporated.

Advantages
- lower costs
- further marketing reach

Disadvantages
- fixed pricing
- less operational control

2. Accounting Fundamental Concepts and Basic Principles

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Accounting is extremely popular as the language of business. Through this language, it is easy
to analyze the financial condition and performance of the business. However, it is not that easy to
understand. There are eight (8) accountancy concepts and principles one should know. These are
Business Entity, Money Management, Dual Aspect Concept, Going Concern Concept, Consistency,
Profit Realization, Matching Principle, Accounting Year Concept.

BUSINESS ENTITY
In the field of business, the entity has a completely different meaning that is separated from the
business itself. An owner is a separate entity as compared to the product. Business entry and its
owners should be treated as two different entities as they are distinct from one another. Personal
transactions of the owner are to be kept separate from the business transactions. In simple terms, the
business account must be separated from the owner’s accounts.

MONEY MANAGEMENT
It is essential to express the financial accounting details in the terms of transitory details. This is
the main cause of why the financial statement and utility bills only show the half picture of the
commerce. Business transactions that can be expressed in terms of money can only be recorded in
accounting. The records of other transactions should be dealt with separately.

DUAL ASPECT CONCEPT

For every credit, a corresponding debit is made. The recording of a transaction is complete only
with this dual aspect. The dual aspect concept indicates that each transaction made by a business
needs to be recorded in two separate accounts. These accounts form a basis of double-entry
accounting and other financial accounting which is used to generate reliable financial statements.
The equation used in this concept is Assets = Liabilities + Equity

GOING CONCERN CONCEPT

It is assumed that a business can go on for a long time and carry out its obligations and
commitments effectively. This also assumes that business will not be forced to stop functioning and
liquidate its assets.

CONSISTENCY
This principle requires that once an organization has decided on a certain method, then they
have to follow the same method for all the other transactions and can change only if they have a sound
reason to do that. Companies can change an accounting principle or method if the new version in some
way improves the usefulness of the reported financial results.

PROFIT REALIZATION
According to this concept, profit is recognised only when it is earned. An advance or fee paid is
not considered a profit until the goods or services have been delivered to the buyer. The underlying

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logic behind this is that profit can only be when all the risk and reward-related to this have been
transferred.

MATCHING PRINCIPLE
The baseline of this principle is that for every entry of revenue there should be an equal
expense recorded for correctly matching the profits and the losses for a given period of time. This
concept follows the realization concept. First, the revenue is recognized and then we match the costs
associated with the revenue. So costs are matched with revenue, the reverse would be an incorrect
system.

ACCOUNTING YEAR CONCEPT

Each business chooses a specific time period to complete a cycle of the accounting process.
For example, monthly, quarterly, or annually as per a fiscal or calendar year.

3. Financial Statements

Financial Statements are written records of a business’s financial situation. They include
standard reports like the balance sheet, income or profit and loss statements, and cash flow statement.
They stand as one of the more essential components of business information, and as the principal
method of communicating financial information about an entity to outside parties. In a technical sense,
financial statements are a summation of the financial position of an entity at a given point in time.
Generally, financial statements are designed to meet the needs of many diverse users, particularly
present and potential owners and creditors. Financial statements result from simplifying, condensing,
and aggregating masses of data obtained primarily from a company's (or an individual's) accounting
system.

There are five types of Financial Statements. These are Income Statement, Balance Sheet,
Statement of Change in Equity, Statement of Cash Flow, Noted to Financial Statements.

INCOME STATEMENT

An income statement is a financial statement that shows you how profitable your business was
over a given reporting period. It shows your revenue, minus your expenses and losses. It indicates how
the revenues are transformed into the net income or net profit. It’s purpose is to show managers and
investors whether the company made profit or loss during the period being reported.

BALANCE SHEET

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The balance sheet is sometimes called the statement of financial position. It shows the balance
of assets, liabilities, and equity at the end of the period of time. The balance sheet is sometimes called
the statement of financial position since it shows the values of the net worth of the entity. You can find
entity net worth by removing liabilities from total assets. It is different from the income statement since
the balance sheet reports the account's balance at the reporting date while the income statement
reports the account’s transactions during the reporting period. If the user of financial statements wants
to know the entity’s financial position, then the balance sheet is the statement the user should looking
for.

STATEMENT OF CHANGE IN EQUITY

A statement of change in equity is one of the financial statements that show the shareholder
contribution, and movement in equity. and equity balance at the end of the accounting period.
Information that shows these statements include classification of share capital, total share capital,
retain earning, dividend payment, and other related state reserves. Please note that the statement of
change of equity is the result of the income statement and balance sheet. Basically, if the income
statement and balance sheet are correctly prepared, the statement of change in equity would be
corrected too.

STATEMENT OF CASH FLOW

The statement of cash flow is one of the financial statements that show the movement of the
entity’s cash during the period. This statement helps users understand the cash movement in the entity.
There are three sections in this statement. They are cash flow from the operation, cash flow from
investing, and cash flow from financing activities. For example, cash flow from operating activities helps
users know how much cash an entity generates from the operation. In general, the information will be
shown based on the method of cash flow that the entity prepares. It includes direct and indirect
methods.

NOTED TO FINANCIAL STATEMENTS

Note to Financial Statements is the important statement that most people forget about.
This is the mandatory requirement by IFRS that an entity has to disclose all information that
matters to financial statements and help users to have a better understanding. Note or
sometimes call disclosure detail the financial information related to the specific accounts. For
example, in the balance sheet, you will see the balance of fixed assets. But detailed information of
those fixed assets is included not in the statement of financial position. If the users want to learn
more about those fixed assets, they need to go to note to those fixed assets.

4. Elements of Accounting

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The basics of accounting involve three fundamental elements; assets, liabilities and equity.
These elements make up the basis for financial reports such as balance sheets, ledgers, and other
means accountants use to maintain financial records for businesses, corporations and individuals. In
accounting, it is vital that the equity that makes up the assets and the liabilities all balance
mathematically.

ASSETS

An asset is a resource that a corporation, organization, or person owns and utilizes to maintain
the functionality and operation of a business or lifestyle. Some assets such as your company's cash,
office supplies and inventory are considered current assets since they are converted to cash or used up
within a year. Long-term assets include your company's long-term investments, property and
equipment, since you either use or hold these assets for a longer period than a year.

LIABILITIES

In accounting terms, liabilities refer to debts or obligations that a business or an individual owes.
A liability is not necessarily considered a negative function, in these terms, since obligations to creditors
are a necessary function of business and personal life. Businesses need to pay for inventory,
equipment, and real estate, and credit is the life blood for such activities.
Like assets, you categorize liabilities as current or long term. If your company takes out an
account with a supplier to buy on credit and pay it back within a year, then that debt is current. A
mortgage you take out to pay for your office building, however, would be a long-term liability since it will
take several years to repay that obligation.

EQUITY

Capital (or equity) is what is left to the owners after all liabilities are paid using the company's
assets. In short, capital is equal to assets minus liabilities. In corporations, it is known as stockholders'
equity. Equity in business increases when your company either generates revenue or investors add
cash as an investment in business growth. Taking on additional debts and expenses will lower your
owner's equity. Individuals can gain equity through adding money through personal savings, gifts, or
investment growth. A decrease in equity occurs when a businesses or individual withdraws funds from
accounts or makes regular or large purchases. The measure of an owner’s equity is constantly
changing as assets and/or liabilities rise and fall and, in accounting, it is vital to make sure all balance
out properly.

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