TYPES OF BUSINESS

ACCORDING TO
ACTIVITIES
Learning Objectives
1. Review the types of business according to
activities
2. Describe a service entity and give examples
3. Describe a merchandising entity and give
examples
4. Describe a manufacturing entity and give
examples.
 Thetypes of business organization differ on the
presentation of the equity side but the
accounting for assets and liabilities are
essentially the same.
 Typesof business operations, differs in terms of
the presentation of the statement of
comprehensive income (income statement) and
the content statement of financial position
(balance sheet).
3 Types of Business Organizations

1. Service Business
2. Merchandising Business
3. Manufacturing Business
Service Business
 Thistype of business offers professional skills,
advice and consultations

 (barbershops, beauty parlors, repair shops,

banks, accounting and law firms)
Merchandising Business
 This type of business buys at wholesale and later
sells the product at retail.
 Theymake profit by selling the merchandise or
products at prices that are higher than their
purchase costs.
 This type of business is also known as “buy and
sell”
 (bookstores, sari-sari stores, hardware stores)
Manufacturing Business
 This type of business buys raw
materials and uses them in
making a new product, therefore
combining raw materials, labour
and expenses into a product for
sale later on.
 (shoemanufacturing businesses,
car manufacturing plants)
 There are businesses that may be classified
under more than one type of business.
A bakery, for example, combines raw materials in
making loaves of bread (manufacturing), sells hot
pandesal (merchandising), and caters customer’s
orders in small coffee table servings of
ensaymada and hot coffee (service)
Activity 1
Identify if it is a service, merchandising, manufacturing
business or hybrid.
1. Provides services to customers
2. Sells goods to customers
3. Raw materials are available
4. Goods to be sold are purchased from a supplier
5. Goods to be sold are produced by the company itself
6. Supplies are used, no goods to be sold
7. Bakery
8. Barbershop
9. Cellphones store
10. Abenson Appliances
Activity 2
A. Think of 5 companies/stores who do service,
merchandising and manufacturing
 ACCOUNTING
CONCEPTS AND
PRINCIPLES
Learning Objectives
1. Enumerate the principles of accounting
2. Differentiate each principle
3. Apply the accounting principle in a business
setting.
Petness Firs Petshop
Juan dela Cruz opened his pet shop business
called Petness First Petshop. He opened a bank
account for his business and deposited P500,000.
the business earned P50,000 but he had doubts
with the recorded expense of P60,000. he is not
sure if he should include the following items as
expenses:
Salary Expense P20,000
Rent Expense 10,000
Utilities expense (at home) 15,000
Utilities expenses (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000
 Salary Expense - should be included since it is
related to the operations of the business
 Rent Expense - should be included since
the rent is for the business
 Utilities expense (at home) - should not be
included since it is a personal expense
 Utilities expenses (at the store) - should be
included since it is an expense of the business
 Insurance expense - should be included since
the insurance is for the business
 Withdrawals - should not be included since
the withdrawal is for personal use.
1. Business Entity Principle – a business enterprise
is separate and distinct from its owner or investor.
Examples:
 If the owner has a barbershop, the cash of the
barbershop should be reported separately from
personal cash.
 The owner had a business meeting with a
prospective client. The expenses that come with that
meeting should be part of the company’s expenses.
If the owner paid for gas for his personal use, it
should not be included as part of the company’s
expenses.
2. Going Concern Principle - business is expected
to continue indefinitely.
Examples:
 When preparing financial statements, you should
assume that the entity will continue indefinitely.

3. Time Period Principle – financial statements are

to be divided into specific time intervals.
Examples:
 Philippine companies are required to report financial
statements annually.
 The salary expenses from January to December
2015 should only be reported in 2015.
4. Monetary Unit Principle - amounts are stated into a
single monetary unit.
Examples:
 Jollibee should report financial statements in pesos even if
they have a store in the US.
 IHOP should report financial statements in dollars even if
they have a branch here in the Philippines.

5. Objectivity Principle - financial statements must be

prepared with supporting evidences.
Examples:
 When the customer paid Jollibee for their order, Jollibee
should have a copy of the receipt to represent as evidence.
 When a company incurred a transportation expense, a
voucher should be prepared as evidence.
6. Cost Principle – accounts should be recorded initially at cost.
Examples:
 When Jollibee buys a cash register, it should record the cash
register at its price when they bought it.
 When a company purchases a laptop, it should be recorded at the
price it was purchased.

7. Accrual Accounting Principle - revenue should be recognized

when earned regardless of collection and expenses should be
recognized when incurred regardless of payment.
On the other hand, the cash basis principle in which revenue is
recorded when collected and expenses should be recorded when paid.
Cash basis is not generally accepted principle today.
Examples:
 When a barber finishes performing his services, he should record it
as revenue. When the barbershop receives an electricity bill, it
should record it as an expense even if it is unpaid.
8. Matching Principle - cost should be matched with
the revenue generated.
Examples:
 When you provide tutorial services to a customer
and there is a transportation costs incurred related
to the tutorial services, it should be recorded as an
expense for that period.

9. Disclosure Principle - all relevant and material

information should be reported.
Examples:
 The company should report all relevant information.
10. Conservatism Principle – also known as prudence. In
case of doubt, assets and income should not be
overstated while liabilities and expenses should not be
understated.
Examples:
 In case of doubt, expenses should be recorded at a
higher amount. Revenue should be recorded at a lower
amount.
11. Materiality Principle – in case of assets that are
immaterial to make a difference in the financial
statements, the company should instead record it as
an expense.
Examples:
 A school purchased an eraser with an estimated useful
life of three years. Since an eraser is immaterial relative
to assets, it should be recorded as an expense.