Module 1 - Introduction to Finance Concepts

1 Module 1 – Concept and Introduction to Finance
PROGRAM OUTCOMES
By the time of graduation, the students of the program shall be able to:
1. Articulate and discuss the latest developments in the specific field of practice.
2. Effectively communicate orally and in writing using both English and Filipino
3. Work effectively and independently in multi-disciplinary and multi-cultural teams.
4. Act in recognition of professional, social, and ethical responsibility.
5. Preserve and promote "Filipino historical and cultural heritage".
6. Perform the basic functions of management such as planning, organizing, staffing, directing and
controlling.
7. Apply the basic concepts that underlie each of the functional areas of business (marketing, finance, human
resource management, production and operations management, information technology, and strategic
management) and employ these concepts in various business situations.
8. Select the proper decision making tools to critically, analytically and creatively solve problems and drive
results.
9. Express oneself clearly and communicate effectively with stakeholders both in oral and written forms.
10. Apply information and communication technology (ICT) skills as required by the business environment.
11. Work effectively with other stakeholders and manage conflict in the workplace.
12. Plan and implement business related activities.
13. Demonstrate corporate citizenship and social responsibility.
14. Exercise high personal moral and ethical standards.
15. Analyse the business environment for strategic direction.
16. Prepare operational plans.
17. Innovate business ideas based on emerging industry.
18. Manage a strategic business unit for economic sustainability.
19. Conduct business research.
20. To participate in various types of employment, development activities, and public discourse particularly in
response to the needs of the communities one serves.
COURSE TITLE :
BM 2- Introduction to Business, Finance and Philippine Financial System
COURSE DESCRIPTION
This course will cover an introduction to financial management. It will focus on what business firms should do
to achieve their financial goal, which is to optimize owner’s wealth. Specifically the course will include
discussion of the finance function, the operating environment of finance, key concepts such as time value of
money, risk and return, tools of financial analysis and planning, utilization of funds and acquisition of funds.
COURSE OUTCOMES (CMO)
In this course, you should be able to:

1. Comprehend the concept and development of money.
2. Explain domestic financial markets and institutions and how firms obtain funds in the financial
markets and at what cost.
3. Apply basic valuation concepts.
4. Describe what determines the value of a firm’s securities and how management can influence these
values.
5. Measure a firm’s risk; explain what determines this risk, and how this affects the value of a firm.
6. Analyze a firm’s performance to determine its strengths and weaknesses, and be able to use
financial analysis to improve performance.
7. Forecast a firm’s financial needs.
INTRODUCTION
Man’s civilization has advanced by leaps and bounds, creating the need for money. In the
early years of civilization there was no need for money. People simply exchange what they had for
what they wanted. This exchange is termed as barter. Nowadays, money is important. If one has
money, he can buy a house, a car, a big piece of land, or even a farm. He can put up his own
business so that he can be his own boss. As the saying goes, money talks.
According to Webster; finance may be defined as a noun and as a verb. As a noun, finance
means management of money, the monetary support for an enterprise, or the money resources of a
government, company, or person. As a verb, finance means to provide capital for person or
enterprise.
Finance plays a very important part in people’s and business enterprises’ lives. No
organization and no household can live or exist without finance. People need funds. Organizations
needs fund.
In this module will discuss the evolution of money, starting barter in the early years to the use
of different forms of money-from shells to metals, until coinage came into being followed by paper
money. In the Philippines, we use coins and bills or paper money. Some countries use polymer or
plastic money. In time, credit card and other forms of plastic cards were introduced. Nowadays,
there are people who prefer to use credit cards rather than pay in cash, which may cause trouble if
not properly managed.
Barter exchange exist today just like barer in the olden times, but with organized systems
and procedures. Business and individuals with slow-moving merchandise can get rid of such goods
by listing them in the exchange, which transactions are done online, provided that they are a
member of the said exchange.
Further in this module will introduce finance and how important it is in business. The different
types of finance, business organizations, and their formation will be discussed as well.
This module is divided into two lessons, namely:

Lesson 1 The Concept and Development of Money
Lesson 2 Introduction to Finance
MODULE LEARNING OUTCOMES

In this module, you should be able to:
1. discuss the concept of money and the origin of the word money;
2. explain barter and how it works and discuss the applicability of barter in today’s world;
3. define finance and rationalize the importance of finance in the business world; and
4. explain the difference between the different classes of stock.
Lesson 1:
The Concept and Development of Money
SPECIFIC LEARNING OUTCOMES
In this lesson you should be able to:

1. define money and discuss the concept of legal tender;
2. explain the system of coinage as an important stage in the history and development of money;
3. differentiate the different types of money and apply their utility in modern-day finance;
4. analyze the role of credit card in today’s economy and discuss the pros and cons of using it;
5. discuss the different plastic cards/plastic money being used in today’s world; and
6. Elaborate on the functions of money and how it serves men.
PRE-ASSESSMENT
Identification
1. Medium of exchange, standard of value legal tender.
2. Exchange of goods for other foods.
3. Shell of mollusk which is first used is first a s money in China.
4. Clamshell which is first used as money in the Americas by the Indians.
5. An ingot of metal
6. Converting metals into coins

7. Place of coinage
8. As monopoly for coinage
9. Fee charges by the government for converting metals into coins including the profit made by the
government
10. Fee charge where the people bring their coins for minting.
LESSON MAP
Introduction to Finance
Finance in the Business World
Financial Management
Types of Business Finance
Figure 1 Describe Introduction to Finance
CORE CONTENTS
ENGAGE
Exploring the 9 Major Types of Financial Institution

In today's financial services marketplace, a financial institution exists to provide a wide variety of
deposit, lending and investment products to individuals, businesses or both. While some financial institutions
focus on providing services and accounts for the general public, others are more likely to serve only certain
consumers with more specialized offerings.
To know which financial institution is most appropriate for serving a specific need, it is important to
understand the difference between the types of institutions and the purposes they serve.
KEY TAKEAWAYS
There are 9 major types of financial institution that provide a variety of services from mortgage loans
to investment vehicles.
As financialization continues to permeate our lives, it is increasingly likely that you will have an
account or product offered by several of these types.
Here we take a look at these, from central banks to neighborhood banks and everything in between.
Central Banks
Central banks are the financial institutions responsible for the oversight and management of all other
banks. In the United States, the central bank is the Federal Reserve Bank, which is responsible for
conducting monetary policy and supervision and regulation of financial institutions.
Individual consumers do not have direct contact with a central bank; instead, large financial
institutions work directly with the Federal Reserve Bank to provide products and services to the general
public.
The major categories of financial institutions include central banks, retail and commercial banks,
internet banks, credit unions, savings, and loans associations, investment banks, investment companies,
brokerage firms, insurance companies, and mortgage companies.
Retail and Commercial Banks

Traditionally, retail banks offered products to individual consumers while commercial banks worked
directly with businesses. Currently, the majority of large banks offer deposit accounts, lending and limited
financial advice to both demographics.
Products offered at retail and commercial banks include checking and savings accounts, certificates
of deposit (CDs), personal and mortgage loans, credit cards, and business banking accounts.
Internet Banks
A newer entrant to the financial institution market is internet banks, which work similarly to retail
banks. Internet banks offer the same products and services as conventional banks, but they do so through
online platforms instead of brick and mortar locations. (For related reading, see: The Pros and Cons of
Internet Banks.)
Credit Unions
Credit unions serve a specific demographic per their field of membership, such as teachers or
members of the military. While products offered resemble retail bank offerings, credit unions are owned by
their members and operate for their benefit.3
Savings and Loan Associations

Financial institutions that are mutually held and provide no more than 20% of total lending to
businesses fall under the category of savings and loan associations. Individual consumers use savings and
loan associations for deposit accounts, personal loans, and mortgage lending.
Investment Banks and Companies

Investment banks do not take deposits; instead, they help individuals, businesses and governments
raise capital through the issuance of securities. Investment companies, more commonly known as mutual
fund companies, pool funds from individual and institutional investors to provide them access to the broader
securities market.
Brokerage Firms
Brokerage firms assist individuals and institutions in buying and selling securities among available
investors. Customers of brokerage firms can place trades of stocks, bonds, mutual funds, exchange-traded
funds (ETFs), and some alternative investments.6
Insurance Companies
Financial institutions that help individuals transfer risk of loss are known as insurance companies.
Individuals and businesses use insurance companies to protect against financial loss due to death, disability,
accidents, property damage, and other misfortunes.
Mortgage Companies
Financial institutions that originate or fund mortgage loans are mortgage companies. While most
mortgage companies serve the individual consumer market, some specialize in lending options for
commercial real estate only.
Activity 1
Base on the context above answers the following questions.
1. Discuss the role of central bank in our economy.
2. Describe the major types of financial institution.
EXPLORE: READING CONCEPTS
DEFINITION OF FINANCE
 “Finance” is derived from the Latin word finer, meaning “to end” or “to pay”. When a person pays his
bill, the financial matter is ended.
A family needs financing to survive; so do companies. Finance and financial decisions are part of our
daily lives. Economic activities like business transaction, personal investment, or even simple borrowing
entail or have financial implications. Even the government needs to be financed for a country to survive.
Government deficits in most countries have been a perennial problem. How finance small- and medium-scale
industries to boost the economy and encourage business is a particular faced by the Philippine government.
Budgeting government spending has been a challenge to most countries. Securing additional capital to
finance expansion is a problem besetting competing companies. Moreover, a very simple survival problem
for most families is how to provide for the family due to inflation, with expenses generally higher than their
income.
 Shetty et al. (1995) viewed finance as the operational or practical side of economics, the practical
science of the production and distribution of wealth. Production is acquisition while distribution is
utilization. Whereas, Webster’s defines economics as the science of production and distribution of
wealth. According to Saldana (1997), finance is the efficient allocation of scarce resources. Therefore,
we can say that finance is the efficient acquisition, distribution/allocation, and utilization of scare
money/fund resources.
 Saldana (1997) added that finance, as a discipline, is concerned with identifying evaluating, and
managing sources and use of cash in order to increase the value of the business enterprise to its
present owners. Saldana limited his definition to cash so we can replace it with funds, because if we
acquire an asset on account, it is credit that we use to acquire the asset and not cash. Credit,
therefore, provide fund. By replacing “cash” with “funds”, we can define finance as a discipline
concerned with dignifying, evaluating, and managing sources and use of funds in order to increase
the value of the business enterprise to its present owners.
 Medina (2007) defined finance as the study of the acquisition and investment and investment of cash
for the purpose of enhancing value and wealth.
From the foregoing definitions, we can summarize the tasks that finance entails. Finance, therefore, is
the function of:
1. allocating available funds;
2. acquiring needed funds ; and
3. Utilizing these funds to achieve set goals.
Allocation means determining where to use funds currently available to the firm.
Acquisition means obtaining funds from the right sources at the right time.
Utilization means using the funds. This definition will apply to person and entities (private enterprises
and the government) whether they are aiming for profit (increasing wealth) or not (non-profit organization).
 Funds are needed to finance operations of people and organizations.
CLASSIFICATION OF FINANCE
Finance can be classified into different types, the most common of which are:
A. As to Form of Negotiation
Direct Finance
M. Hajimichalakis and K. Hajimichalakis (1995) distinguished direct finance from indirect

finance. Their idea is that finance involves the flow of funds. To whom and from whom the funds flow
differentiates direct finance from indirect finance.
o Direct finance is finance involve in direct borrowing, A company going to a bank to obtain a
loan is directly finance. Similarly, friend borrowing money from another is direct finance. A
corporation selling shares to its incorporators is direct fiancé.
According to the Hadjimichalakis (1995), what distinguishes direct finance from indirect fiancé
is the security issued. In direct fiancé, the security acquires (called direct security) by the surplus
(lender) is the security issued by the deficit unit (borrower). A direct security is a financial instrument a
deficit unit issues and sells to a surplus unit with or without the help of a market specialist like the
financial intermediaries.
If an individual or a company goes to a bank and borrows money, he will be asked to issue a
promissory note. The promissory note is a direct security issued by the deficit unit, the same security
received by the saving or surplus unit. There is one security involved the direct security, which in this
case is the promissory note.
o Direct finance involves lending to ultimate borrowers. A person may obtain a loan from
another person to serve his needs. You may borrow money from your brother, your aunt, or
your neighbor. A person may borrow from a bank to buy a car or a house. A business may
borrow from a bank to finance expansion or buy equipment or machinery.
o Securities, like stocks and bonds than are directly sold to the buyer/investor (saving or surplus
unit) by the issuers/borrowers (deficit units), are generally referred to as primary securities
as they arise from a direct finance transaction.
o The companies issuing these securities are, in effect, the users of fund or borrowers (deficit
units) and the buyers of these securities are, in effect, the provider of funds (surplus units), as
owners in case of stock, and as creditors in case of bonds. In foregoing examples of direct
finance, the borrower or deficit unit borrows directly from the lender or surplus unit. The
market where direct finance happens is termed direct market.
o From the foregoing discussion, we see that the security issued by the primary borrower to the
primary lender in direct finance can be termed direct security or primary security and the
transaction happen in the direct market.
Indirect Finance
o Indirect finance involves financial intermediaries in the real sense of the word. This means that
financial intermediaries act as middlemen when they buy securities for resale or simply
facilities the sale from the original issuers to the final buyers. In some cases, they buy for their
own account, i.e. they own as asset the securities they buy; they do not resell the securities. In
this instance, it is direct finance. However, in most case, financial intermediaries act as
middlemen and in these instances, indirect finance is involved.
o Financial intermediaries buy securities for resale to other investors or saving units. This
transaction is an indirect finance transaction with the security being resold by the financial
intermediary termed a second security.
o When company issues bonds or stocks to increase its capital, it goes to an investment banker
(a financial intermediary), who usually underwrite (sells) the issue. Here, the transaction is n
indirect fiancé transaction. Insurance companies issue mortgage-backed securities (securities
collateralized by mortgage they own) that they sell to investors. The sale of such securities is
an example of indirect finance and the mortgage-backed securities are secondary securities.
o To summarize, the transaction that happens when deficit units borrow with the use of financial
intermediaries is called indirect finance. The securities involve are indirect securities or
secondary securities, and the transaction happens in the indirect market or in the
intermediation market.
B. As to User
Public Finance
Public deals with the revenue and expenditure patterns of the government. It is concerned
with government affairs- managing the government’s sources and uses of funds. Government
expenditures for infrastructures like building streets, schools, bridges, among others and payment of
government employees are government spending and thus public finance. When the government
issues treasury securities like Treasury bills, notes and bonds, the government is in fact borrowing
money from the public, which is also public fiancé. Like all individuals and entities, the government is
both a borrower (deficit unit) and a lender (saving u it). Public finance is concerned with government
revenues, like taxes, and government expenses, like paying salaries pf government employees.
Government spending and government borrowing are all public finance.
Private Finance
All finance, other than public finance, is private finance. Individual borrowing money from
another individual is doing private finance. A company borrowing from a financial institution is doing
private finance. A company issuing shares of stocks and/or bonds, whether to direct, like
incorporators, or financial intermediaries, is doing private finance. On spending, when individuals and
private entities (profit and non-private) spend either or for current operations or for capital
investments, like buying fixed assets or investing in certain capital projects, they are doing private
fiancé transactions. Medina (2007) stated that private finance is that which deals with the area of
general finance not classified under public finance. He divided private finance further into:
a. personal finance;
b. finance of non-profit organization; and
c. business finance
Personal Finance.
o Refers to finance conducted by individual/consumers. A family spending for their food,
clothing, shelter, recreation, education, among others is personal finance. A father giving his
son allowance, a sister borrowing money from another sister, and an aunt supporting her
niece in her studies are all examples of personal finance.
Finance of non-profit organizations

o Involves those conducted by charitable, civic, religious organizations, among others. These
organizations are not for profit, meaning they do not aim to gain profit or increase wealth. They
could be for charitable purposes like the thrift stores; for religious purposes; like the Catholic
Church; of or civic purposes like the rotary Club; among others. They spend for their
operations and buy long-term assets and invest any extra money that they have. They
construct buildings and spend for whatever activates they conduct. Everything that they do
involves finding is finance of non-profit organizations.
Business finance
o Deals with financing for business firms or for commercial use, the goal of which is to make
profit. Businesses either produce goods and services for sale or buy goods and sell the same.
Where to obtain capital for a particular company and where to use it are concerns of business
finance. When certain company buys the stock of another company because it has excess
fund, or borrow money from the bank to buy land, building, or machinery, business fiancé
comes into play. The funds are used to earn profit and increase the value of the firm and the
wealth of the owners.
FINANCE IN THE BUSINESS WORLD

Business is any lawful economic activity that involves rendering service; buying and selling goods;
converting raw materials into finished products and selling the same; borrowing and lending money; acquiring
funds and investing the same; extracting mineral resources; constructing building; road and infrastructure;
providing insurance for a sense of peace; and serving the public like public utilities, transportation, and
communication entities. In all of these activities effectively and efficiently acquiring and utilizing funds
(finance) make the difference and that is what business finance is all about.
Efficiency is all about saving time, money, or effort. It is the relationship between input and output.
One is efficient if he able to get something done or accomplished at the least cost. Efficiency is a measure
of speed and cost, It is all about getting the job done and attaining objectives. Effectiveness is doing the
right things and efficiency is doing things right. If we combine efficiency and effectiveness, we obtain
productivity, thus;
Efficiency + Effectiveness = Productivity
Almost all business exists for profit. In a free enterprise system, economic growth is dependent on
people and entities to achieve economic objectives. The growth of wealth is usually achieved through profit-
making activities. Whatever kind of business, whether service, commerce, or industry, the basic goal is the
same- to make profit to increase owners’ wealth.
In the quest of profit, entities seek financing needed to fuel the business activities that will produce
profit. A new business project requires initial capital. An expanding business needs addition capital. Capital
needed to buy assets pay liabilities, and pay expenses. All business activities involve funds. Finance is,
therefore, indispensable in the business world.
TYPES OF BUSINESS ORGANIZATIONS

Business organizations are engaged in different economic endeavors as previously discussed. They
are also owned by different types of business owners. Therefore, business organizations can be classified
as to nature or purpose and as to ownership.
A. As to Nature or Purpose
Businesses have different purposes and fields of endeavor. Among the classification of businesses as
to nature are the following:
1. Service
2. Trading
3. Manufacturing
4. Banking and Finance
5. Mining or extractive industry
6. Construction
7. Genetic industries (agriculture, forestry, and fishing/fish culture)
Service
Service organizations are engaged in rendering service. Service entities could be rendering personal
service like barber shops, tailoring, or dressmaking shops, massage clinic and spas, laundry shops, among
others. Professionals like lawyers, accountants, doctors, dentist, among others also service. Hence, law
firms, bookkeeping and accounting firms and graphic design firms do service. Choreographer’s, wedding or
event planners, caters, ballet and dance instructor, and personal trainers are all rendering service. A person
or company, may render service and become an agent for , say , an actress, an author, or a company, doing
liaison and seeking the right connections to enhance the earnings and earning potential of the person or
company he is working for. Schools and other educational; institutions are also service organizations,
hospitals and nursing homes provide service,
Trading or merchandising
Trading or merchandising firms are engaged in buying and selling merchandise. What they buy, they
sell. They buy shoes; they sell shoes; they buy furniture; they sell furniture. Sari-sari stores, appliance
stores, construction and hardware supplies stores and supermarkets are trading companies. Even persons
who do “buy and sell’ are doing trading. Book stores in Recto selling used books, this selling product and
plastic wares, those insurance products, those selling personal jewelry, and even those were those carabao
or horse-driven carts selling domestic products for household use are all doing trading or merchandising
Most retailers have manufacturer’s goods with their brand name on the goods made by the
manufacturer solely for the retailers. Costco Wholesale is a global selling, not only household food items, but
also jewelry, shoes appliances, health and fitness goods, furniture, and a lot more.
Manufacturing
Manufacturing companies are those w which buy raw materials and process the same to convert
them into finished products which they sell. A firm buys leather to make shoes ad bags. Another firm buys
wood or lumber to make furniture. Still another buys fabric to make ready-to-wear (RTW) clothes. A person
who buys chemicals and other ingredients and makes perfumes to sell is a manufacturer in his own little way.
There are a lot of companies manufacturing appliance, computers, cell phones, and other gadgets that cater
to a lot of users, particularly the youth.
Banking and Finance

Firms that use money as its main object of business (product) belong to the banking and finance
classification. Money and credit are their products. Banks, lending institutions, credit companies, pawnshops,
savings and loan associations, credit unions, and even moneylenders provide capital or lend money/grant
loans. These people and institutions are all engaged in finance. They finance those who need money, and
they sell securities and other products for purchase of those who have excess funds as investments.
Financial intermediaries also belong to this classification. They bring together those who provide funds and
those who need funds. Finance companies obtain funds by issuing commercial papers (stock and bonds) or
by borrowing from banks. They use the funds by lending to individuals and businesses.
Insurance companies may also be classified under the banking and finance category because
insurance companies collect premiums (money) which they invest that become their main source of income.
They do not only sell insurance, but also sell and buy securities, including mutual funds. Savings and
mortgages, and deal with a lot of different financial products and services.
Insurance companies in the Philippines

 Composite (life and non-life Insurance companies)
1. Asian Life and General Assurance Corporation ( Formerly: ATR Professional Life
Assurance Corporation: name changed effective 31 March 2003)
2. CLIMBS Life & General Insurance Cooperative
3. Paramount Life & General Insurance Corporation
4. Philippine American Life and General Insurance Company
 Life Insurance Companies
1. Asian Life Financial Assurance Corporation (Formerly: All Asia Life Assurance
Corporation; name changed effective 31 March 2003)
2. Banc life Insurance company, Inc.
3. Beneficial Life Insurance Company , Inc.
4. BF Life Insurance Corporation
5. BPI-Philam Life Assurance Corporation (Formerly: Ayala Life Assurance, Inc.)
 Non-Life Insurance Companies
1. AFP General Insurance Corporation
2. Allied Bankers Insurance Corporation
3. Alpha Insurance and Surely Company, Inc.
4. Asia Insurance (Philippines) Corporation (Formerly: Asia Traders Insurance

Corporation; name changed effective 23 June 2004)
5. Asia United Insurance, Inc.
Mining Companies
Mining companies extract natural resources like oil, gas, gold, copper, cement, among others. This is
the reason they belong to the extractive industry. These companies deplete these natural resources; hence,
while fixed assets are depreciated, natural resources are said to be depleted. Dividends given to mining
company stockholders may either be dividends out of earnings or return of capital called liquidating dividends
because their basic products are depleted.
Construction Companies
Construction companies build houses, building, schools, roads, bridges and other infrastructure. They
are similar to manufacturing as they start with materials likes cement, steel, gravel and sand, wood, among
others and build a totally different finished product.
Genetic Industries
Genetic industries are business involved in the production or multiplication and reproduction of certain
species of plants and animals, either for sale or for production of bio-products like wool, leather, and
medicinal herbs, among others. Such production, multiplication, or reproduction aim to create wealth ie., to
earn profit, as is the goal of all business enterprise. Included in this classification are endeavors in agriculture
of farming for growing crop; forestry and lumber ad pisciculture, where, fishes are grown in ponds, canals,
and rivers; shrimp and culture; plant nurseries, where plants are grown for sale; poultry, faming, where bird
are raised for meat and eggs; animal husbandry, where cattle are raised for milk and leather and sheep for
meat and wool; breeding farms for pigs and goats; orchard for harvesting different kinds of fruits; commercial
kernels for various nuts products including corn. In essence, even mining and quarrying are genetic
industries.
B. As to Ownership
Business can also be classified according to ownership:
1. sole or single proprietorship;
2. partnership;
3. corporation; and
4. cooperative.
In accounting, however, all business, irrespective of ownership, are considered as separate and
distinct form the owner(s). This is the business entity concept, i.e., the business is separate and distinct
from the owner(s).
SOLE OR SINGLE PROPRIETORSHIP

A sole or single proprietorship is a business unit owned and controlled by a single individual. The
owner of the proprietorship is referred to as a sole proprietor or a single proprietor. Sole proprietorships is
the simplest business entity and easiest to form or put up. Most businesses start sole proprietorships. The
business and the owner are essentially one. The owner usually manages the business and makes all
decisions. All the profits of the business accrue to him. As such, the profit of the business is taxed as the
personal income of the owner. However, following the accounting entity concept, the assets and liabilities of
the sole proprietorship are recorded separately as that of the business.
For example, if the car becomes the asset of the sole proprietorship and is recorded in the books as
such. The car is no longer a personal asset of the owner. Certainly, the car can still be used by the owner for
whatever purpose (even for personal or family use) since there is only one owner and he alone decides how
to use it. Nevertheless, his personal assets, like his house and lot, his wife’s jewelry, among others are not
recorded in the business books; only the assets of the sole proprietorship are recorded in the business
books.
Advantage of a Sole proprietorship
Sole proprietorships have the following advantages over other forms of business organization.
1. Ease of formation
Inasmuch as a sole proprietorship is owned by one owner, the business is easy to start
because only one person makes the decision to go into business. While he may ask the opinion and
suggestions of experts, the decision to go into the business is still his alone. All he needs to do is to
registered his business with his city or municipality and pay the corresponding license and other fees
related to the establishment of the business so he can start operating his business. A sari-sari store is
easy to start.
2. Needs only minimum capitalization
Being small and having only one owner, the starting capital of sole proprietorship is usually
small. A sari-sari store needs a smaller capital that a partnership starting hardware store.
Furthermore, it needs a smaller capital than a corporation. Since it is owned by only a single person,
the amount that he can provide for capitalization is usually small. In a partnership, there are two or
more partners, and they can produce more capital; than a single owner. Similarly, a corporation with
five or more stockholders can provide greater amount of capital than a single person. Also, most
financial institutions prefer to deal with corporations as the have capital, have more resources, and
are better able to meet financial obligations.
3. Sole decision maker
Inasmuch as there is only one owner, he alone makes decisions. The owner has total control
of his business. Unlike a partnership, agreement of all partners is necessary in undertaking a certain
course of action. In a corporation, the ultimate decision-making for major rests on the Board of
directors.
4. Easy to terminate
The business is easy to terminate or discontinue since it is only owned by a single person.
One the owner decides to quit, he can terminate his business. When the owner dies, the business is
theoretically terminated, although his hires can continue the business. However, his heirs or whoever
takes over the business will become the new owner. It will be a totally different business entity,
different from the one that previously existed. In addition, since sole proprietorship is small, it is easy
to terminate as there are not that much assets to sell and liabilities to pay.
Disadvantages of a Sole Proprietorship

While advantageous in most part, a sole proprietorship has also disadvantages. Among these are:
1. Unlimited liability
A sole proprietor is liable for the liabilities of the sole proprietorship to the extent of his
personal assets, i.e., the creditor of the sole proprietorship can run after the personal assets of the
owner of the liabilities of the business.
2. Limited access to capital

Small capitalization is both an advantage and a disadvantage. It is an advantage in the sense
that a business that needs small capitalization is easy to start. However, it becomes a disadvantage if
the business has a large earning potential, and the owner, being alone, cannot provide the necessary
capitalization to expand and realize the business earning potential. The sole proprietor will usually
resort to looking for a partner to increase the business capital of borrow money. However, because
borrowing money entails payment of interest; it may be hard for the business. A partner’s capital does
not earn interest, but a partner shares in the profit. A corporation can pool more people become liable
for the credit granted. Also, a bigger business like corporation is generally viewed as one with a
bigger capitalization and greater capacity to earn profit and, therefore, greater ability to pay debts.
3. Limited skills, talents, and capabilities

Inasmuch as there is only owner, he can only utilize his own skills, talents and capabilities, which
could be limited. Every person has his own skills, talents, and capabilities secondary to his educated
and experience. Failure, at times is caused by lack of knowledge and training. As the business grows,
it might need to go into areas where the sole proprietorship has no training or knowledge. At times,
sole proprietor may not be willing to seek for advice, or he has no one talk advice from. In a
partnership, there are at least two or more partners, who each has his own skills, talent and
capabilities. In a corporation, experts in their own field are usually hired as officers/managers of the
corporation.
4. Inability to attract or retain good employees
Being small, a sole proprietorship may be unable to give a good employee the salary he
deserves. The employee has his own personal goals to attain, and if he is really good, he would
rather work for a corporation than a small business like a sole proprietorship. That is why relatives are
usually the employees of the sole proprietorship. Even small corporations are, times, also beset with
the problem of finding or retaining capable employees.
5. Limited term of existence
The ease of termination of a sole proprietorship, while an advantage, is also a disadvantage.

The life of the sole proprietorship is co-terminus/corresponds with the life of the owner, unlike a
corporation, which has an unlimited life or continuity of existence because shares that represent
ownership in a corporation can be transferred/ sold. However, the survivor(s) in a sole proprietorship
which could be the wife, the son, or the daughter, can continue the business but under his own name.
6. Difficulty in measuring success
In a sole proprietorship, business funds/expenses usually mix with the persona;

funds/expenses of the owner, making it difficult to measure the actual performance and profitability of
the business. Occasionally, loss of capital is only recognized when it is already too late to save the
business.
7. Personal problems may hinder operation/success.
The business and the personal life of the owner are difficult to separate; personal problems,
especially family problems, may pull the concentration of the owner away from the business and the
business and the business may be neglected causing its demise. Personal problems may hinder
effective decision-making.
PARTNERSHIP
Partnership is an association of two or more persons who have agreed to contribute money, property,
or industry to a common fund with the intention of dividing the profits among themselves. Two or more
persons may form a partnership for the exercise of a profession. Strictly speaking, the exercise of a
profession is not a business or an enterprise for profit, but rather for service; but the law allows two or more
professionals, like lawyers, doctors, certified accountants, among others to act as partners in the practice of
their profession. Such partnerships are called general professional partnerships. The owners of a
partnership as called partners.
In a partnership, there is another concept that equally applies from the business entity concept
pertaining to the relationship of the partners to the partnership/ it is the aggregate concept, which views the
partnership as a collection of rights and responsibilities, of the individual partners, inasmuch as the individual
partners are jointly liable for all the debts and obligations of the partnership. This concept deals with the
individual personality/identity of the partners in relation of the partnership. Each partner is an agent of the
partnership. All auctions of each individual partner, so long as they are within the scope of the partnership
business, bind the partnership, making the partnership liable for whatever consequences that partner’s
actions may bring about.
Nature of a Partnership
A partnership is easier to form than a corporation. It allows the pooling of resources Partnerships
have been employed not only for small operations, but also for large-scale operations. It may be a small
selling goods or services at a single location, or it may be a larger enterprise selling goods or services at
different locations for some common purpose(s).
Partnerships may be composed of two partners only or dozens of partners. It is contractual in nature
because it is formed through a contract between or among the partners. The partnership can be formed by
either an oral contract/agreement or by a written contract/agreement. A written contract is not required for a
partnership. All that is needed is that the partners agreed to form the partnership and are amendable to the
terms of the agreement.
Essential Requisites of a Partnership

There are five essential requisites of the partnership form of organization. These are:
1. a contract of partnership which may be oral or written, expressed or implied subject to the rules
contained in Article 1771 to 1773 of the New Civil code;
2. two or more persons who have the legal capacity to enter into the contract of partnership;
3. valuable contribution to a common fund which may consist of money, property, or industry;
4. an intention to divide the profits between or among the partners; and
5. lawful purpose (s).
Characteristics of a Partnership
There are seven basic characteristics of a partnership. These are:
1. mutual agency;
2. voluntary association;
3. based on contract;
4. limited life;
5. unlimited liability;
6. division of profit; and
7. co-ownership of contribution assets.
Mutual Agency
Every partner is an agent of the partnership of the partnership of which he is a partner binds
the partnership. This means that the acts of each partner, provided that they are within that they are
within the scope of the business of the partnership, bind the partnership or make the partnership
liable to third parties.
Voluntary Association
Partnerships are voluntary association in so far as no person can be forced against his will to
become a partner to a partnership. This is because a partner is responsible for the business acts of
his partners when the acts are within the scope of the business of the partnership; also, a general
partner is unlimitedly liable for the partnership debts. Consequently, it is only fair that a person be
permitted to select the people he wishes to join with in a partnership. Trust and confidence are the
key elements in a contract of partnership
Based on contract
Partnership excludes from its concept all other associations which do not have their origin in a
contract. To form a partnership, all that is required is that two or more competent people agree to
become partners. Unlike a corporation, a partnership arises from contract and not statute or operation
of law. The partners’ agreement, be it oral or in writing, becomes a contract that binds all the partners.
If in writing, the contract is generally referred to as the Articles of Co-partnership.
Limited Life
Inasmuch as the partnership is a relationship that originates from a contract between or
among individuals, any change in the relationship terminates the contract and dissolves the
partnership. The partnership is dissolved by:
1. the death of withdrawal of a partner;
2. the insolvency of a partner;
3. the incapacity of a partner;
4. the termination of the project or purpose for which the partnership has been formed;
5. the termination of the period specified in the contract or agreement of partnership; or
6. the admission of a new partner.
This does not, however, mean that the business will cease its operation; it may, or it may not.
If the remaining partners decide to continue the business, they may do so by forming a new
partnership through a new partnership agreement. They may even invite new partners into the
business. If, on the other hand, the remaining partners decide to liquidate the business, the business
ceases operation.
Unlimited Liability
A partnership is said to have unlimited liability in so far as the liability of a general and
industrial partner is concerned. The liability of a general partner and that of an industrial partner
extends beyond his interest in the partnership, i.e. up to the extent of his personal assets. In the
Philippines, all partners, including industrial partners, but excluding limited shall be liable pro rate with
all their property and after partnership assets have been exhausted. In other words, creditors can run
after the personal assets of the partners (except limited partners) after all the partnership assets have
been exhausted for the settlement of their claims on the partnership. This is like the unlimited inability
of the sole proprietor. Limited partners are, however, exempt from this personal liability because their
liability only extends up to this interest (investment plus any profit due them) in the partnership.
Division of Profits or Losses

The basic intention of partners in forming the partnership is to divide the profits/losses
between or among themselves. Such division is in accordance with their agreement, or in the
absence of such stipulation in the contract, on the basis of their capital contribution. Division of profits
or losses, in the absence of an agreement, shall be in accordance with the partners’ capital balances.
Co-ownership of contribution Asset

Any asset contribution by any partner to a partnership becomes the common property of all
partners. Ownership of contributed asset is transferred from the partner who owns the asset to the
partnership, which now owns the asset. Therefore, all the partners become co-owners of the asset
contributed.
Advantage of a Partnership
Advantage of partnerships includes the following:
1. Ease of formation. Mere agreement between or among the partners, even if is oral (need not be
writtem0 can create a partnership. Also, it does not require the elaborate steps needed in the
formation of a corporation.
2. Allows pooling of financial resources. Unlike sole proprietorships, partnerships can pool resources
and raise more capital for the business.
3. Allows pooling of skills, expertise, and experience of partners that may contribute to successful
business operation.
4. Less government control, supervision, and intervention than corporation.
Disadvantage of a Partnership
Disadvantage of partnerships include the following:
1. Limited Life. A partnership is dissolve when a partner dies, withdraws, becomes insolvent or
bankrupt, becomes incapacitated, or when a new partner or partners are admitted into the
partnership, It is less stable than a corporation.
At times, it is even less stable than sole proprietorships due to the different characteristics, ideas,
decisions, among others, of the other partners.
2. Dissolution is the termination of the life of the partnership but that does not mean that the
partnership will cease operation. It may lead to liquidation (the cessation of operations) or not,
because remaining partners may decide to continue operation. In liquidation, the assets will be
sold, liabilities will be paid, and the remaining cash or other assets will be divided between or
among partners. The partnership will totally cease to operate and exist.
3. Unlimited liability. General and industrial partners are answerable for partnership debts to the
extent of their personal assets. Limited partners only have limited liabilities.
4. Mutual agency. All partners may be held liable for the actions of any of the other partners, so
long as their actions are within the scope of the business operations of the partnership.
Organizing a Partnership
To organize a partnership, persons desiring to become partners draw up a contract either
orally or in writing, which will govern the formation, operation, and dissolution of the partnership.
A partnership may be constituted in any form, except:

1. Where the capital of the partnership is three thousand pesos or more, in which case the
contract of partnership shall appear in a public instrument which must be recorded in the
Office of the Securities and Exchange commission (SEC);
2. Where immovable or real rights are contributed into the partnership, in which case a public
instrument shall be necessary; and
3. A limited partnership, which must be registered with the Securities and Exchnage commission.
Registration with the SEC

Registration with the SEC will involve the following steps:
1. Filing of business name with the SEC for verification. This is to ensure that no two businesses
have exactly the same name.
2. Submission of the following to the SEC:
a. Article of Co-Partnership
b. Verification slip for the business name
c. Written undertaking to change business name if required
d. Tax Identification number of each partner and/or that of the partnership
e. Registration data sheet for partnership duly accomplishes in six copies
f. Other documents that may be required
3. Pay the registration/filing and miscellaneous fees.
4. Forward documents to the SEC Commissioner for signature.
Contents of the Articles of Co-Partnership

The Articles of Co-Partnership must contain, among others, the following:
1. Name, nature, purpose, and location of the business
2. Names of the partners, indicating whether they are general partners or limited partners and
their corresponding and citizenship
3. Amount of cash, a description and the agreed value of any property to be originally contributed
by each partner, and any additional contribution that may be made by partners
4. Term or duration of the partnership; date the partnership should commence or end
5. Duties, rights, and powers of each partner
6. Manner of dividing profits or losses among the partners
7. Conditions under which the partners may withdraw money or other assets for personal use
8. Provision as to whether salaries and/or interest on partners’ capitals shall be allowed or not
9. Manner of keeping the books of accounts, the length of the account ting period and the date it
should commence or end
10. Provision pertinent of dissolution
11. Provisions pertinent to liquidation
12. other special provisions and stipulations
Types of Partnerships as to Liability of Partners

There are several types of partnerships as to scope of business operations, as to object of the
partnership, as to duration, and as to legality of existence. This will be taken up in the course,
Partnership and Corporation Accounting. For our purpose, however, it is important to differentiate the
two types of partnership as to liability of partners. These are:
1. General Partnership
A general partnership (as to liability) is one in which all of the partners are general partners,
i.e., no partners are limited partners. Therefore, all of the partners are personality liable for
partnership debts. The creditors of the partnership can run after the personal assets of all of the
partners after all of the partnership assets have been exhausted.
2. Limited Partnership
A limited partnership is one in which there is at least one, but not all, limited partner. There
should be at least one general partner to assume unlimited liability.
Types of Partners
A. As to Liability
There are two types of partners as to liability. These are:

1. General Partner
A general partner is one who has unlimited liability, i.e. his liability extends to his personal
assets after partnership debts had been partially paid by the partnership in case of partnership
bankruptcy. The creditors of the partnership can run after the personal assets of the general partners.
General partners can be partners in a general partnership or in a limited partnership, where they are
joined by the limited partner.
2. Limited Partner
A limited partner has limited liability, i.e. his liability extends only up to his interest in the
partnership. Interest in the partnership means his capital investment and any profit due him. The
creditors of the partnership cannot run after the personal assets of the partners in case of partnership
bankruptcy.
B. As to Investment in the Partnership

1. Capitalist Partner
A partner who contributes money and/or assets other than cash like building, bond, or
equipment is termed as a capitalist partner.
2. Industrial Partner
A partner who contributes knowledge or personal service is termed as is termed as an industrial

partner.
3. Capitalist-Industrial Partner
A partner who contributes cash and/or other assets and knowledge or personal service is termed
as a capitalist-industrial partner.
CORPORATION
Corporation is an artificial body or being (as differentiated from a natural person), organizations in
accordance with the provision of law in which ownership is divided into shares of stocks.
The Corporation Code of the Philippines defines corporation as an artificial being created by
operation of law, having the right of succession and the power, attributes, and properties expressly
authorized by law or incident to its existence. Five or more persons are required to organize a corporation.
They are called incorporators. The owners of a corporation, which include the incorporators, are called
shareholders or stockholders because investments in a corporation are evidence of stock certificate. The
stock certificates are the written evidence representing ownership in a corporation. On the other hand, the
shares of stock owned by the owners/shareholders/stockholders are the intangible rights of ownership in the
corporation. In our modern times, they are also referred to as stakeholders because they put their
money/investment at stake, i.e. subject to risks.
Characteristics of a Corporation
The corporation has the following distinct characteristics:
1. Separate legal existence.

This means that a corporation is a legal or juridical entity separate and distinct from its owners
and as such may take, hold, and convey property; enter into contracts; sue and be sued; and
exercise other powers and privileges which may have been conferred on it by law. As a separate
legal entity, the corporation acts in its own name, independent of its stockholders or owners. It is
an artificial being.
2. Created by operation of law.

This means that a corporation, unlike a partnership, cannot be formed by mere agreement of
partners. It requires the special authority given by the government. For this reason, stockholders
have to seek approval from and file Articles of Incorporations with the Securities and Exchange
Commission (SEC) in the case of the Philippines, and the state in which they are formed in the
case of the United States of America.
3. Transferable units of ownership.

Ownership of a corporation is divided into transferable units called shares of stock as
evidence by stock certificates. As such, the owners of the corporation are called stockholders or
shareholders. Inasmuch as the corporation has the right of succession, the stockholders may sell
their shares to others. The stockholder selling his shares endorsees or signs the back of the stock
certificate to transfer ownership to the buying party. Such transfer of ownership does not affect the
activities or existence of the corporation, unlike in a partnership. In a partnership, any change in
the ownership of partnership interest dissolves the partnerships.
4. Limited liability of stockholders.

The stockholders of a corporation are liable to corporate creditors only up to the extent of
shares subscribed by them. The creditors of a corporation may not run after the personal assets
of the stockholders.
5. Continuity of existence.
In consonance with the attribute of a corporation called right of succession a evidence by the
transferability of shares, the corporation has the capacity for continued or perpetual existence. It
has an unlimited life. Initially, the life of corporation may not exceed 50 years, but the Articles of
Incorporation may be subsequently amended to not more than50 additional years at a time. This
explains why there are corporations which are more than hundred years old.
6. Centralized management by the Board of Directors.

The possibility of large numbers of stockholders gives rise to the need to vest the
management of the corporation on the board of directors elected by the stockholders from among
themselves.
Advantage of a Corporation
The advantages of a corporation are mostly secondary to its characteristics, some of which are:
1. legal capacity of shareholders;

2. limited liability of shareholders;
3. transferability of shares;
4. continuity of life of the corporation
5. greater ability to acquire funding; and
6. greater ability to acquire talents, skills, and expertise.
As the corporation is authorized to have as many stockholders as those willing to subscribe to

its authorize capital stock, it has access to greater source of funding.
As an artificial being, it can borrow larger sums of money from various lending institutions. It
is also authorized to issue/sell bonds which are nothing but promissory note, there is only one
lender/creditor and one borrower/debtor. Bonds, like promissory notes, are certificate of indebtedness
issued to several investors/creditors. Issuing or selling gives the corporation the ability to borrow
larger amounts of money needed for its operations. In addition, corporations are able to hire experts
in their own fields that can contribute to the success of the corporation.
Parties to a Corporation
There are different individual or parties who may compose a corporation or play important roles in
the formation and organization of a corporation. They are:
1. Corporators are those who compose the corporation whether they are stockholders (for a stock
operation) or members (for a non-stock corporation). They include incorporators, stockholders, or
members. Not all corporators are incorporators, but all incorporators are corporators.
2. Incorporators are often referred to as the “founders” of the corporation. They are the corporators
mentioned in the Articles of Incorporators as the funders who originally organized the corporation.
They executed and signed the Articles of Incorporation. There should be at least five, but not
more than fifteen incorporators. They need to be all natural person. Artificial beings like
corporations and partnerships cannot be incorporators, but can be stockholder or shareholders.
They need to own at least one share of stocks, and majority of them should be residents and
citizens of the Philippines. All incorporators are corporators.
3. Stockholder/shareholders are owners of shares of stocks in a stock corporation. They may be

natural or artificial person (other corporation or partnerships) but only natural persons can be
incorporators. Companies cannot be incorporators, but they can be stockholders. Annually, the
stockholders hold a meeting to elect a new set of members of the Board of directors. A
stockholder may be a director or officer of two or more corporations.
4. Members are corporators of a non-stock corporation.
5. Promoters promote or find potential incorporators or shareholders who may be interested in the
formation of the corporation. Generally, the incorporators act as promoters. However, not all
promoters become incorporators if their only interest is to be paid for the promotion they do for the
corporation. They prepare the prospectus to invite investors to join the corporation, and they
sometimes also work to obtain the charter or approval of the Articles of Incorporation with the
SEC. Promoters are persons who undertake to form and organize a corporation by bringing
together the incorporators or the persons interested in the enterprise. They procure subscription to
the capital of the corporation and set in motion the machinery which leads to the incorporation of
the corporation itself.
6. The Board of Directors shall not be less than five nor more than fifteen members. The BOD is
responsible for the formulation of the overall policies for the corporation and for the exercise of
corporate powers. The BOD elects the Chairman of the Board and the corporate officers.
The BOD elects corporate officers or officials of the corporation which could be composed
of the president; vice president in charge of key areas such as marketing or sales, manufacturing
or production, finance , accounting, administration, among others; corporate secretary; treasurer;
among others. These officers may be stockho0lders or not and are considered as employees of
the corporation. They are paid by salary. These officers are entrusted with the implementation of
all policies and rules of the corporation and the active management of the day-to-day operations
of the company. A corporate officer may occupy the same position or other positions in another
corporation, even if the corporation is for the same purposes as that of which he is also an officer,
unless it is specifically prohibited in the Articles of Incorporation of by-laws as follows:
o The President of the corporation must be a director (member of the BOD) but cannot be the
president and treasurer or president and secretary of at the same time. The President is the
only officer required by law to be a director. All the other officers need not be a member of the
Board.
o The Corporate Secretary must be a resident and citizen of the Philippines. He need not be a
member of the board, unless required by the corporate by-laws. He is generally entrusted to
keep the complete record of the minutes of all meetings of the Board. He is likewise
responsible to make proper entries of the votes, resolutions, and proceedings of the
shareholders and directors in all their meeting. He is the one who prepare Board Resolutions.
o The Corporate Treasurer may or may not be a director. He is the one entrusted to receive and
keep the money of the corporation and to disburse them as he may be authorized.
Incorporation and Organization of a Corporation

There are three steps in the organization of a corporation. These are: (1) promotion, (2)
incorporation, and (3) formal organization and commencement of business operations.
1. Promotion
The formation and organization of a corporation are brought about generally at the instance
and through the efforts of promoters. Promotion refers to the bringing together of the incorporators
and persons interested in forming a corporation and procuring subscriptions or capital for the
corporation.
2. Incorporation
Incorporation is the process of formally organizing the corporation. The steps involved are:
a. registration of business name with the SEC. This is to ensure that there is no other firm using the
same name;
b. drafting and execution of the Articles of Incorporation by the incorporators. The Articles of
Incorporation is sometimes called the charter. The same should be dully executed and
acknowledge by a notary public.
c. execution of sworn affidavits and Bank Deposit Certificate. The person chosen as temporary
treasurer must execute an affidavit regarding the capital subscribed and paid up. At least twenty-
five (25%) of he authorized capital stock as stated in the Articles of Incorporation must be
subscribed, and at least twenty-five percent (25%) of the total subscription must be paid up. This
is, sometimes, known as the 25-25 rule. In no case shall the paid-up capital be less than five
thousand pesos (P5, 000). A sworn statement of assets and liabilities of the corporation shall
likewise be submitted by the treasures;
d. filing of the article of Incorporation with the Securities and Exchange Commission, together with
the Treasure’s Affidavit, regarding the subscribed and paid-up capital in conformity with the
requirement above (2), and the proposed corporation’s assets and liabilities and certificates of
deposit by a bank for the cash paid for the subscription of stock. The proposed corporation shall
pay the corresponding filing and publication fees; and
e. issuance by the Securities and Exchange Commission of the Certificate of Incorporation.
Issuance of the certificate marks the birth of the corporation, i.e., the corporation then acquires its
own juridical personality. It then becomes an artificial being. The Certificate of Incorporation is like
the Certificate of Birth of a natural person.
3. Formal Organization and Commencement of Business Operations
Formal organization and commencement of business operation consist of the following steps:
a. Adoption of By-Laws. At the first organizational meeting of the stockholders, the stockholders
formulate the by-laws of the corporation. By-laws refer to the rules and regulations adopted by
the corporation for its internal government and for the government of its officers and stockholders
or members. By-laws shall be filled with the Securities and Exchange Commission within one
month after the Certificate of Incorporation has been issued by the commission.
b. Election of the Board of Directors. At the same first organizational meeting of the stockholders
where the by-laws are adopted, the stockholders elect their Board of Directors. Our Corporation
Code maintains that the corporate power of all corporations formed under the Code shall be
exercise , all business conducted, and all property of such corporation controlled and held by the
Board of Trustees to be elected from among the stockholders or members of such corporations.
The Board consists of not less than five or more than fifteen members.
c. Election of Officers. The election of the corporate officers such as the president treasures
secretary, and other officers, as may be provided for in the by-laws, is entrusted to the Board of
trustees. While the Board formulates the broad policies of the corporation and directs the conduct
of its business operations, the task of actual magnet and carrying on the details of business
operations are delegated to the officers over whom the Board exercise supervision.
d. Commencement of business operations. Commencement of business operations should be made
within two years from the date of its incorporation as per Section 22 of the Corporation ode of the
Philippines. If it does not, its corporate powers will cease and the corporation shall be deemed
dissolved. Commencement of business operation means the corporation begins to undertake its
regular business activities. If the corporation has commenced its business operations, but
subsequently becomes continuously inoperative for a period of at least five (5) years, the same
shall be a ground for the suspension or revocation of its Certificate of Incorporation, i.e., it shall be
deemed dissolved.
The Article of Incorporation
The Articles of Incorporation must substantially contain the following matter required by
Section 14 of the Corporation Code of the Philippines:
1. Name of the corporation

2. Specific purpose or purpose for which the corporation is formed
3. Location or principal of business which should be in the Philippines
4. Term of which the corporation is to exist, not exceeding fifty years
5. Names, nationalities, and residence of the incorporators
6. Names, nationalities, and residence of the persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with the Code.
7. In case of stock corporations, the amount f its authorized capital stock, the number of shares into
which it is divided, and the par value of each share (in case of par value shares)
8. In case of stock corporations, the names, nationalities, and residences of the original subscribers
and the amount subscribes and paid by each on his subscription
9. In case of stock corporation whose shares are no par value shares, the authorized capital stock
amount and the number of shares into which share capital is divided
10. In case of non-stock corporation, the amount of its capital, the names, nationalities, and
residences of the contributor sad the amount contributed by each
11. Such other matters as are not inconsistent with a law and which the incorporators may deem
necessary and convenient.
The By-Laws
By-laws refer to the rules of action adopted by the corporation for its internal government of its
officers, stockholders, and members. Section 47 of the Corporation Code suggests the inclusion of
the following matters in the by-laws of a corporation:
1. Time , place, and manner of calling and conducting regular or special meetings odf directors or
trustees
2. Time and manner of calling and conducting or special meeting of stockholders or members
3. Required quorum in meetings of stockholders or members and the manner of voting thereto
4. Form for proxies of stockholders and members and the manner of voting them
5. Qualifications, duties, and compensation of directors, trustees, officers, and employees
6. Time for holding the annual election of directors or trustees and the mode or manner of giving
notice thereof
7. Manner of election or appointment and the term of office of all officers other than directors or
trustees
8. Penalties for violation of the by-laws
9. In case of stock corporations, the manner of issuing certificates
10. Such other matters may be necessary for the proper or convenient transaction of its corporate
business and affairs
As mentioned, the by-laws should be adopted by and filed with the Securities and Exchange
Commission within one month from the date if incorporation. Failure to do so endangers the existence
of the corporation because of the possible revocation of its registration.
Classification of Corporation
The corporation Code of the Philippines implies two types of corporations according to nature.
1. Public Corporations
These are corporations formed or organized for the government of a portion of the state, i.e.,
for political or public purpose connected with the administration of government. They are also called
municipal corporations or local governments. Examples are barangay or barrios, cities, municipalities,
and provinces.
2. Private Corporations
These are corporations formed other than for the government of a portion of the state. They are
formed for private purpose, benefits, or end. Private corporations are generally classified as:
A. As to Purpose
1. For profit (civil)
2. Non-profit
3. Charitable
a. Ecclesiastical/Religious
b. Eleemosynary/Public Charity
4. Foundation
The first three classifications are self-explanatory. The fourth is expounded as follows:
A foundation (also charitable foundation) is a non-profit organization that donates funds and
gives support to other organizations, or provides the source of funding for its own charitable purposes,
like projects for the youth and the community. Foundations may be set up by companies or by individuals,
also known as private foundation, which is typically endowed by an individual or family.
Contents of the document for establishment of a foundation generally included its purpose, the
activities it will engaged in, details on supervision and management of the foundation, accounting
systems and book to be used by the foundation provisions for the dissolution, tax status of its donors both
private and corporate, and the tax status of the foundation.
Foundation has no shareholders, although they may have a board, an assembly, and voting
members. A foundation may hold assets in its own name for the purpose set out in its constitutive
documents, and its administration and operation are carried out in accordance with its statues or Articles
of Association. It has a distinct identity, independent of its founder, following the business entity concept
in accounting.
Foundations in the Philippines included the following:
o ABS-CBN Foundation, Inc., -outreach programs for children, their families, the environment,
and the community
o Bagong Kulturang Pinoy, Inc, -develops reading culture among children in poverty –stricken
areas
o Being Human Foundation – improves lives through the creation of self-governing entities
Other private corporations are:
a. Quasi-public corporations are private corporations, which, in addition to their private aim,
render public service such as transportation, light, water, telephone, and telegraph
corporations.
b. Government-owned or controlled corporations are private corporations created or organized
by the government, or of which the government is the majority stockholder.
c. Wasting assets corporations are those engaged in the extraction of mineral or natural
resources like gold mining companies, cement companies timber (now currently banned),
among others.
B. As to How Membership Is Represented

The Corporation Code of the Philippines, Section 3, classifies corporations under this basis as:
1. Stock Corporation
These are corporations of which membership is represented by shares of stock, i.e., they
issue stock and are authorized to distribute to the holders of such dividends or allotments of the
surplus profits on the basis of the shares held.
Stock corporations can also be classified as to admission of members. These are:

a. Open corporations. These are corporations which stocks are available for purchase by
the general public. They are open to any person who may wish to become a stockholder or
member thereof.
b. Closed corporations. These are corporations, ownership of which is limited to selected

persons or members of a family, i.e. shares are not available for purchase by the general
public.
2. Non-stock corporations
These are corporations other than stock corporations. They do not issue stock and are not
created for profit but for the public good and welfare. Most religious, social, literary, scientific, civic,
and charitable corporations are non-stock corporation.
C. As to the State of Incorporations
1. Domestic Corporation
A corporation is considered domestic in the state/country from which it obtains its charter. A
corporation incorporated under Philippine law is considered domestic as far as Philippines is
concerned. It is considered foreign in other countries.
2. Foreign Corporations
A corporation is considered foreign in all countries other than the one from which it obtains its
charter. A corporation is considered domestic in the Philippines but foreign in any other country.
Similarly, any corporation incorporated in any other country, except the Philippines, shall be
considered foreign in the Philippines. A corporation incorporated in the U.S., Japan, or china is foreign
in the Philippines.
As far as the Philippines is concerned in this matter, a foreign corporation may be either of the
following:
a. Resident Foreign Corporation

This is a foreign corporation which establishes a branch or office in the Philippines and
operates in the Philippines
b. Non-resident Foreign corporation

This is a foreign corporation deriving income from the Philippines in the form of rent,
interest, and dividend without establishing an office or branch in the Philippines.
3. Multinational Corporation
Multinational corporations extend their operations in other countries. Coca-Cola
Corporation, McDonalds, General Motors Corporation, Google, Microsoft, and Apple are some
of the examples.
D. As to Number of Persons composing the Corporation

1. Corporation sole
There is only member. This is only applicable to the Church. It is the bishop or the diocese to
which the bishop belongs.
2. Corporation Aggregate
This is the common form of corporation where are several stockholders.
E. As to Legal Right to Corporation Existence

1. De jure Corporation
De jure corporation is a corporation existing in fact and in law. It is strictly organized in
conformity with the law and recognized by the government.
2. De facto Corporation
De facto corporation is a corporation in fact but not in law. This means that it operates as
Corporation but may have not been legally organized.
F. As to Relation of Other Corporations

1. Parent or Holding Corporation
This is the original corporation from which another corporation, called subsidiary or sister
company emanates. It owns majority of the shares of the subsidiary or sister company and has the
power or directly or indirectly elect the directors of the subsidiary or sister company.
2. Subsidiary or Sister corporation

This is the corporation whose shares of stock are owned in majority by the parent or holding
company. Subsidiary companies usually pay management fees to the parent company, aside from
the dividends that the parent company receives as dividends on the stock of the subsidiary company
that the parent or holding company owns.
Corporate Capital
Ownership in a corporation is represented by its capital stock. Capital stock is divided into
units to facilitate the transfer of ownership and distribution of profits. Each of the units of capital stock
is referred to as the share of stock. A stockholder acquires an interest in the corporation by buying
shares of stock, and his proportionate interest in the assets and profits of the corporation are
determined by the number of shares of stock he owns. Inasmuch as the share of stock represents a
right or interest, it is intangible. To evidence such right, the corporation issues stock certificate. Stock
certificate is the tangible evidence of an intangible right of ownership in a corporation represented by
the share of stock.
Classes of Share /Kinds of Stock

Shares of stock may be classified into:
1. Value on the stock certificate
a. Par value shares
b. No-par value shares
(1) With stated value
(2) Without stated value
2. Rights of dividends
a. Common shares
b. Preferred shares
(1) as to assets
(2) as to dividends
(a) cumulative
(b) non-cumulative
(c) participating
(d) non-participating
Par value shares are shares of which the specific money is shown on the face of the stock
certificate and fixed in the articles of Incorporation. The primary purpose of par value is to fix the
minimum issue price of the shares. While par value shares may be n the par value) issued at a
premium (higher than the par value), they may not be sold at a discount.
No-par value shares are shares without any money value appearing on the face of the stock
certificate. The Corporation Code provides that no-par value shares may not be issued for less than
five pesos per share (P5.00)
No-par value shares may be assigned a stated value in the Articles of Incorporation or in a
Board of Resolution made by the Board of director if authorize, or by a majority of the stockholders at
a meeting called for that purpose. The assignment of stated value for no-par value shares defeats the
purpose of no-par value shares. True no-par values shares do not have a stated value.
IF a corporation issues only one class, it is called common stock and e ach share haw equal
rights. In case when there is more than one class of stock, common stock is stock which entitles the
holder to an equal pro rate division of profit without any preference or advantage over any other
stockholder or class of stockholder. Sometimes, common stock is referred to as ordinary shares.
Common stock have what is terms as “residual” interest in the corporation because it receives its
interest after preferred shareholders are given theirs.
To attract investors, corporations may issue more than one class of stock, one with
preferential rights over another class. Such shares with preferential rights are called preferred
shares or preference shares.
Shares preferred as to assets upon liquidation mean that such shares shall be given
preference over common shares in the distribution of the assets of the corporation in case of
liquidation.
Preferred shares as to dividends refers to shares with preferential rights to shares in the
earnings of the corporation, i.e. the owners thereof of are entitled to received dividends before
payment of any dividend to the common stock is made. The dividend preference may be on a
cumulative or non-cumulative basis and/or on a participating of non-participating basis.
The authority to declare dividends rests with the Board of Directors. Payment of dividends
cannot be made if the Board of Directors has not declared the same. All dividends not declared by the
Board of Directors in a given period are called passed dividends. Unpaid passed dividends are called
dividend in arrears.
Cumulative preferred shares are entitled to receive all passed dividends in arrears. Non-
cumulative preferred shares are not entitled to pass dividends. They receive only dividend which are
currently declared.
Participating preferred shares are entitled not only to stipulated dividends, but they also
share with the common stock in the dividends that may remain after the common shares have
received dividends at the same rate as the preferred.
Non-participating preferred shares are entitled to a fixed amount or rate of divided only.
Organization Expense
Expenditures incurred in organizing a corporation, such as SEC fees, legal fees, taxes and fee
paid to the city or municipal government, attorney’s fees for drafting the Articles of Incorporation and
by-laws and other related service, and promotional costs are no longer charge to an intangible asset
account and mortised yearly, theoretically over a period of fifty years or in practice over a period of
five years as allowed before. Under the Philippine Accounting Standards (PAS) 38, pre-operating
expenses/organization expenses (formerly organization cost) do not fall under the definition of an
intangible asset. As such, it should no longer be reported as a deferred asset (organization cost)
subject to amortization. Theoretically, they are now immediately expensed as period costs. However,
the BIR, for tax purpose, still continues to regard them as amortizable, i.e., they have to be amortized.
COOPERATIVE
Cooperatives are organizations established by individuals, called, to provide themselves with

good and services, or to produce and dispose of the products of their labor. These individuals have
voluntary joined together to achieve a common goal through the cooperative created. Farmers
producing rice may form their own cooperative. Similarly, farmers producing coconut can do so.
Employees can form cooperative and sell rice, sugar, milk, and other grocery items to their members.
They can also form credit unions so that members can borrow money from them in times of need in
proportion to their saving with the cooperative. The more a member buys from the employee
cooperative or borrows from the credit union, the more patronage refund the members will get. The
patronage refund is the profit of the cooperative or credit union that is given back to the members in
proportion to the amount of business they do with the cooperative or credit union.
Unlike corporations where voting is based on the number of voting shares owned by the
stockholder, voting in cooperatives is strictly on a one-man-one vote basis. Also where dividends are
distributed to stockholders to represent their shares in the profits of the corporation. Patronage
refunds are given to members of cooperatives, not in relations to their investment, but in relation to
the amount of business the member does with his cooperative. Cooperatives are registered with
Cooperative Development Authority (CDA) which [promulgates rules and regulations to govern the
promotion, organization, registration, and supervision of all types of cooperatives.
EXPLAIN: DISCUSSING CONCEPTS Deep
1. Explain barter and how it works.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
2. Is barter still applicable in today’s modern world? Discuss.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
3. Define money.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
4. Is check money? Discuss.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
5. Which of the different types of money (coin, paper money, plastic money, “plastic money” or the
different credit/debit cards) is the most advantageous? Why?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
6. Discuss the origin of the word “money”.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
7. Discuss the benefits of the Warehouse receipt system.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
8. Discuss how barter exchange works.

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
TOPIC SUMMARY
In this lesson, you learned that:

 Finance is the efficient acquisition, allocation n, and utilization of funds.
 Finance’s functions entail the:
a. Allocation of available funds;
b. Acquisition of needed funds’ and
c. Utilization of funds to achieve set goals
 Finance can be classified as to:
a. Form of negotiation
(1) Direct finance – involves direct borrowing, direct negotiation between borrower and
lender.
(2) Indirect finance- involves the use of financial intermediaries (financial institutions acting
as middlemen), hence, also called financial intermediation.
b. User
(1) Public finance- involves the government; deals with sources and uses of funds of the
government.
(2) Private finance –involves individuals and entities.
(a) Personal finance – concerned with individuals and households.
(b) Finance of non-profit organizations- concerned with charitable organizations which
are not concerned with profit-making
(c) Business finance –concerned with entities and individuals engaged in business.
 Productivity is efficiency plus effectiveness. Efficiency is accomplishing something at the least
cost. Effectiveness is getting things done and attaining objectives.
 Business organization are classified as to:
a. Nature/purpose
(1) Service – rendering service as catered in barber shops, spa and massage clinics
dental/medical. Laundry shops, among others.
(2) Trading/merchandising – buying and selling goods like sari-sari store, hardware stores,
construction supply stores, department, among others.
(3) Manufacturing- converting raw materials into finished products like in shoes and bags
manufacturing, furniture manufacturing, chicharon or native delicacies manufacturing.
They buy lumber to be converted into furniture’s, leather into bags and shoes, among
others.
(4) Banking and finance- deals with institutions involved in lending and borrowing. These
are banks. Pawnshops, moneylenders, insurance companies and pre-need
companies, credit card companies, among others.
(5) Mining/ extractive industries- extract natural resources like the gold mining companies,
gravel and sand quarrying, among others.
(6) Construction companies’ i– engaged in road building, house building, construction of
different buildings like schools, hospitals, commercial apartments, among others.
(7) Genetic industries – involved in the production, multiplication, and reproduction of
certain species of plants and animals like agriculture, fishing, animal husbandry,
poultry farming, and plant nurseries, among others.
b. Ownership
(1) Sole proprietorship – owned by only one person.
(2) Partnership- association of two or more partners who agreed to contribute money,
property, or industry to a common fund for the purpose of dividing the profits among
themselves.
(3) Corporation- an artificial being created by operation of law, having the right of
succession and the powers, attributes, and expressly authorized by law or incident to
its existence.
(4) Cooperative –organization established by members to provide themselves with goods
and services or to produce and dispose of the products of their labor.
 Advantage of a sole proprietorship include:
a. Ease of formation
b. Minimum capitalization
c. Sole decision maker; and
d. Ease of termination
 Disadvantage of a sole proprietorship include:
a. Unlimited liability;
b. Limited access to capital
c. Limited skills, talents, and capabilities;
d. Inability to attract or retain good employees;
e. Limited term of existence
f. Difficulty in measuring success; and
g. Personal problems may hinder operation/success

 Essential Requisites of a Partnerships
a. Contract of partnership
b. Two or more persons with legal capacity to enter into a contract
c. Valuable contribution(money, property, or industry) to a common fund
d. Intention to divide the profits between or among the partners
e. Lawful purpose(s)
 Characteristics of a Partnership
a. Mutual agency –every partner is an agent of the partnership; their actions, so long as it is
within the scope of the partnership, bind the partnership.
b. Voluntary association -, being a partner is voluntary. Each partner is entitled to choose his
partners.
c. Based on contract- there must be an agreement which can be oral or written that will bind
the partnership.
d. Limited life – the partnership is dissolved/ terminated once a partner withdraws, dies
becomes bankrupt, becomes legally incapacitated, or a new (s) is admitted into a
partnership.
e. Unlimited liability- a general partner (always required in any partnership) and an industrial
partner are liable for partnership debts up to the extent of their personal assets after
partnership resources have been exhausted.
f. Divisions of profits/losses – profit and losses are divided between/among partners in
accordance with their agreement, or in the absence of such an agreement, in accordance
with their capital balances.
g. Co-ownership of contribution assets- partners become co-owners in assets contributed by
any partner to the partnership.
 Advantage of a partnership included:
a. ease of formation;
b. allows pooling of financial resources;
c. allows pooling of skills, expertise, and experience of partners; and
d. less government control, supervision, and intervention than corporations.
 Disadvantage of a partnership include:
a. limited life;
b. unlimited liability; and
c. Mutual agency.
 Disadvantage of a partnership
a. limited life;
b. unlimited liability; and
c. mutual agency
 The written agreement articles of t of partnership often filed with the Securities and Exchange
Commission is called the Articles of Co-Partnership
 Types of partnership as to liability of partners are:
1. General partnership – all partners are general partners; and

2. limited partnership – there is at least limited partner (could be more and at least one
general partner
 Types of partners as to liability are:
a. General partner – liable for partnership debts up to the extent of their personal assets; and
b. Limited partner – liable for partnership debts only up to the extent of their interest
(investment and profits in the partnership. Creditor cannot run after their personal assets.
 Types of partners as to investment in the partnership are:
a. capitalist partner – a partner who contributes money and/or non-cash assets in the
partnership;
b. industrial partner- a partner who contributes skill or industry in the partnership; and
c. Capitalist-industrial partner- a partner who contributes cash plus and /or other assets and
industry or skill in the partnership.
 Characteristics of a corporation include:
a. separate legal existence;
b. created by operation of law;
c. transferable units of ownerships;
d. limited liability of stockholders;
e. continuity of existence; and
REFERENCES
 Mariano, Norma L. Ph.D., Elements of Finance, Rex Book Store, 2014.

 Author: Varun Mehta Retrieve from: https://www.lsbf.org.uk/blog/news/importance-of-financial-
management/.Retrieve on July 28,2020
 https://www.investopedia.com/ask/answers/061615/what-are-major-categories- financial-institutions-
and-what-are-their-primary-roles.asp

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1 Module 1 – Concept and Introduction to Finance

2 Module 1 – Concept and Introduction to Finance

BM 2- Introduction to Business, Finance and Philippine Financial System

COURSE OUTCOMES (CMO)

In this course, you should be able to:

This module is divided into two lessons, namely:

MODULE LEARNING OUTCOMES

SPECIFIC LEARNING OUTCOMES

In this lesson you should be able to:

6. Converting metals into coins

Finance in the Business World

Types of Business Finance

Figure 1 Describe Introduction to Finance

Exploring the 9 Major Types of Financial Institution

Retail and Commercial Banks

Savings and Loan Associations

Investment Banks and Companies

EXPLORE: READING CONCEPTS

 Funds are needed to finance operations of people and organizations.

M. Hajimichalakis and K. Hajimichalakis (1995) distinguished direct finance from indirect

Finance of non-profit organizations

FINANCE IN THE BUSINESS WORLD

Efficiency + Effectiveness = Productivity

TYPES OF BUSINESS ORGANIZATIONS

Banking and Finance

Insurance companies in the Philippines

4. Asia Insurance (Philippines) Corporation (Formerly: Asia Traders Insurance

SOLE OR SINGLE PROPRIETORSHIP

2. Needs only minimum capitalization

3. Sole decision maker

Disadvantages of a Sole Proprietorship

2. Limited access to capital

3. Limited skills, talents, and capabilities

4. Inability to attract or retain good employees

5. Limited term of existence

The ease of termination of a sole proprietorship, while an advantage, is also a disadvantage.

6. Difficulty in measuring success

In a sole proprietorship, business funds/expenses usually mix with the persona;

7. Personal problems may hinder operation/success.

Essential Requisites of a Partnership

Division of Profits or Losses

Co-ownership of contribution Asset

A partnership may be constituted in any form, except:

Registration with the SEC

Contents of the Articles of Co-Partnership

Types of Partnerships as to Liability of Partners

There are two types of partners as to liability. These are:

B. As to Investment in the Partnership

A partner who contributes knowledge or personal service is termed as is termed as an industrial

1. Separate legal existence.

2. Created by operation of law.

3. Transferable units of ownership.

4. Limited liability of stockholders.

6. Centralized management by the Board of Directors.

1. legal capacity of shareholders;

As the corporation is authorized to have as many stockholders as those willing to subscribe to

3. Stockholder/shareholders are owners of shares of stocks in a stock corporation. They may be

4. Members are corporators of a non-stock corporation.

Incorporation and Organization of a Corporation

3. Formal Organization and Commencement of Business Operations

The Article of Incorporation

1. Name of the corporation

Foundations in the Philippines included the following: