yee fe] ACCOUNTING MULTIPLE CHOICE QUESTION: AND PROBLEM SOLVING Authors 2 01 6 Foreword by: "Editor ieeeFUNDAMENTALS OF ACCOUNTING. T CHAPTER 1 BUSINESS AND ITS ROLE TO ECONOMY AND YOU LEARNING OBJECTIVES: After reading this chapter, you should be able to: Define business and explain its significance to you and in the economy. Describe the different types of business organization, the nature of its operation and its sources of capital. Know and understand the history of accounting. Define accounting and its importance and role in the business. ‘Identify the stakeholders and the relevance. of accounting information to them. TIOA GNV AWONODA O1 3704 SLI GNVSS3NISN Identify the different financial statements and the information given by these reports. ‘nine ad the proper utilization of its resources (money, machine, manpower and materials), proper application of the methods and availability of the market, it produces goods and services for households’ consumption- all with the desire to earn profit. It is thus an economic activity for profit. Every time you get into your car and travel on a public highway and you feel this comfort of riding on roads built, well- maintained and paid for by the government; or if you are a student receiving adequate education in a well-funded school systems of your country, your own quality of life is being improved. This is because the businesses in your country play a vital role in economic development which me:FUNDAMENTALS OF ACCO! profit can be obtaineg tion of revenue, ar Eat i rn te gee tech anor wae edt ena ce all the res: h the taxes being pal irae a sossible cost ae operation, this actually triggers a chet olieae t result of its good OF "such as creation of fund for te government, ina nation’s ertyjoyment, establishment of public in rastructures provision ot fide of other several plans the government deem: and imp! essary for the general welfare of its people. ne possibl FORMS OF BUSINESS ORGANIZATION A business can be organized in several ways, and form its owners choose will affect the company. Here are possible options in establishing a business including their defini characteristics. 1. Sole Proprietorship A sole proprietorship is a business organization wherei its capital is generated by one individual licensed to operate business according to the rules and regulations prescribed bi city or municipality where the business is conducted. The licen after its due compliance Usually, its manager or ane pee Shops, bakeries, b, I-Sari store i Fi i is so easy fie it only requires small amount of capital is simple ne edt pees) The establishment of this type of busi Owner, he or she to other forms of busine. ities Aa gets all the Profits of the Buets ee entities. As SS. ,SEG FUNDAMENTALS OF ACCOUNTING One disadvantage for this type of business is its difficulty for expansion. Since the initial funds are usually provided only by the owner, it may be difficult to generate huge capital as his/ her capacity to raise capital of sole proprietorship is also limited (On top of its limitation on capital investment generation, it is often inadequate in promotion, marketing and sale of products 2. Partnership In the Civil Code of the Philippines, a partnership has been defined as “by the contract of partnership, two or more partners bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves. Two or more persons may also form a partnership for the exercise of profession.” A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to Share in the profits and losses of the business. These persons ar© Called partners and they share in the management of the business Partners share the decision making and can help each other out finen they need to. More partners mean more brains that can be picked for business ideas and for the solving of problems that the business encounters. B Zz 3 % S 2 é 5 a 2 3 iy 3 g 3 8 2 S 2 6 2 é 2 Partnerships are a popular form of business because they are easy to form (whether oral or written agreement, registered or not) ‘and it allows several individuals to combine their talents and skills in a particular business venture. In addition, partnerships provide a wider source of capital as compared to sole proprietorships which means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. This form of business organization is particularly common in the professional service, such as law, medicine, and accounting. These professions have generally not adopted the corporate form because of their commitment with the tradition of close professional association with clients and the quality of the i i pete etat y advices and servicesAOA ONY AWONO93 OL 3108 Sit any. SS3Nisna is oF ACCOUNTING FUNDAMENTA es ip is the igadvantages of partnership is us disaepartners. Obviously people w the business enouldia interests of the ing what and best in 5 in gad to misunderstanding and disputes, ly harm the business, but also the relationship of one run, who $' business are. which might not on those involved. 3. Corporation . ] Se Corporation Cade of the Phillppines Cefiies corporation ated by operation of law, having the right ficial being cre: v oe ets eel ihe powers, attributes and properties expressly of sutsod by law or incident to its existence. This mean’ that ‘has a personality separate and distinct from its owners called Sharcholders (stockholders: old name) whose right over the tuciness as expressed in the riumber of shares bought, ts evidenced by a cettificate of stock. It cannot come into existence by mere agreement of the parties as in the case of the business partnerships. Corporations are required to have grant from the government either through special incorporation law that creates the corporation or by general corporation law. The corporation cannot operate as a legal entity until its — Articles of Incorporation has been approved and the cot tion i: ‘ C 9 rporation is duly registered with the Securities and Exchange Commission. Unlike in sole proprietorship and i i Z | partnershi per managed by its owners, corporations cannot Bere saa Py cate ener, instead, they elect Board of Directors ane lers to governs and oversee the activities of the connoratenl iFUNDAMENTALS OF ACCOUNTING ersons, cannot be one of the incorporators. However, they can be Eorporators composing a corporation. The most often cited advantage of corporations is limited tiabilty. That is, in normal circumstances, a shareholder will not be jiable beyond his/her investment in the corporation. This is quite understandable since operating a business always has some risks and shareholder would want his/her personal assets to be free from creditors in case the business goes bankrupt. However there are some situations where a shareholder may become personally liable. The details of this are discussed thoroughly in the Accounting for Partnerships and Corporations be in Volume II of this book. toe As compared to sole proprietorships and partnerships, one of the greatest advantages of corporation is that itis relatively easier to get additional capital from prospective investors. Hence, it can generate huge capital investmen. With this, expert professionals can be employed resulting to an efficient management and operation of the organization's 50-year life which is still subject for renewal. Just like the first two forms of business organization, corporations also have some disadvantages. Establishing a corporation is a complex process and requires registration with the government's regulatory authorities. There are also more legal and tax requirements to be complied with the sole proprietorships and partnerships. Lastly, it is quite possible that the management or Board of Directors may act to further their own interests rather than the interest of the owners of the corporation thus adversely affecting the shareholders and the public. TIOA GN AWONODS OL 3108 SL ONY ‘ssaNisng ___ Finally all business organizations are required to have business permit, BIR certificate, Philhealth, Pag-lbig, SSS and other government registration to operate their business. NATURE OF BUSINESS OPERATION There are three (3) different natures i operated with the purpose of earning profit. oo ea Each type of business has distincti Belancis Go ecnomin Bene features. Presented isiness operations:aus OF ACCOUNTING r ; is a kind of bt | Geaealerre of business 'S ~ its customer ‘a service tYP i Wes among the types Of busin stop satongisctnools, etc: perstiOPi This is example: tually es of it are ndising Business A merchandising business mers 2 ell ithout major Mo! : put not limited, to the following) boutiques, “ Orgies ype of business operation that converts, n| rials, labor and overhead, into finished ‘ stomers. The raw materials under a process creating a new one which is totally different from the material. The cost of the finished product covers the cost of tl materials used, compensation of the persons directly invol the processing of the products and overhead expenses wh also needed to create the product. It includes, but not limite the following: Gar, Gomputer and/éléctronic manufacturers, garment factories, food processing companies and drug laboratories. ROA ANY ANONODA 01 s1OW Su anv ssanisna| SOURCES OF CAPITAL z There is no without fund. In fact, Many business failure business, eae of raisin Scome a profitable enterprise. and depend on many factore eae inancing methods will sure legal 921 factors and others,» “USM aS nature of business, econFUNDAMENTALS OF ACCOUNTING. number one option to look for money is Nort other than but Joareatt How much money do you have? How much of ida you willing to invest? Ifyou ‘don't have enough personal capital, your next option will be to sell Your business to lenders, creditors of yer for investors. This will surely depend on your proposal and will Gefnitely challenge your selling ability. HISTORY OF ACCOUNTING Itig believed that the earliest accounting system may have developed to keep account of goods or products of the merchants Gethe ancient civilizations. They also have accounting syste™® kb \acord taxes imposed by the kings and collected from the people by their tax collectors. ‘Ancient Egyptian bookkeepers maintained meticulous records of the inventory of goods Kept in royal warehouses. The accuracy of these records was assured by the swift and severe penalty that came if mistakes were ever discovered. Egyptians also Praintained records of materials, labor and overhead which were required by pharaohs during the time of constructions of pyramids TOA ONY ANONOOS OL 70H SL! GNY sganisns Other ancient societies also used accounting methods, including scribes in Mesopotamia who preserved records of commerce on clay tablets. In ancient Greece, the account books of bankers show that they changed and loaned money and helped people make cash transfers through affiliate banks in other cities. In ancient Rome, government and banking accounts grew out of records kept by the heads of families. All of these documentations cited the uses of accounting during ancient civilizations. The most important event i Wad ce uO in accounting history happened an Italian mathem: slose friend_and tutor to Leonardo i iaena See of Christopher Columbus, set down‘in writing for the first time a description of the double-ent 2 tf ry system i i eu cs) pal in much the same form, a oeooael ete le Arithmetica, Geometriay Proportione et Bist HA 20 Portionalita Yah” NAAARNERAMRTY ar.1.5 OF ACCOUNTING FUNDAMENTA\ }d Proportion). B 5 ic, Geometry an ae erything Anni ae ne “Father of Accounting” he is cons! i i 19" century a, industrial age in the ry lof the indus' anes wn aan, 9 sera of the et the emergence wars of businesses took place. pause 6 from thé Te eport the financial status © : the eR to ensure that managers realy ssid ‘i Meat hat were the owners’ orders them to do. Dy i See caaons also became more complex requirir jn trans: ; me i f DT eanreebics for reporting financial information. impt ACCOUNTING — DEFINITION AND IMPORTANCE There are many definitions being given to Accounting bi the ones that stood over time are presented below: 5 Financial Reporting Standards Council mentioned accounting is a service activity. Its main function is to provi quantitative information, primarily financialin nature, about econom entities, that are intended to be useful in making economic decision The Committee on Accountin Institute of Certified Public Accounta: of recording, cla: terms of money, Of a financial cha The key points to be co first oe Unting nsidered in the Ut quantitative info; above defini nation, ‘second, and > decisions. nation informati ACCOUNTING i SYSTEM BS cA) SCIENCE, aRT AND INFORMATION Accounting IS a soj d has been systematica body of © with a ¥ gathered, cla: >t knowledge wh 'ssified and organized.FUNDAMENTALS OF ACCOUN. itis influenced by, and interacts with economic, social and tical environments. . pepOURting isan art which requires the use of skills competence and judgment ne Accounting identifies and measures economic activities, processes information _ into financial : reports and ervnmunicates these reports to decision makers: ACCOUNTING AS THE LANGUAGE OF BUSINESS Accounting is said to be the language of business. It deals with interpreting and communicating information about a company’s past activities and forecasting future operations and conveys the information to variety of users for decision making purposes. When businesses transact on a daily basis, they keep track of these through business documents. Then, from the business documents gathered, it will be analyzed, recorded and summarized sos financial reports. The financial reports will eventually be analyzed Carefully by the users of the information called stakeholders, who maybe an individual or group of individuals and have legitimate interest in the company, and make decisions accordingly. Decisions made will definitely affect the activities of the business THE RELEVANCE OF ACCOUNTING INFORMATION STAKEHOLDERS eee As mentioned earlier, accounting's out i earlier, put are financial reports where accounting information can be derived from a which are being used by stakeholders for decision making. Under the Conceptual Framework for Financial Reporting, users of financial information or ecient stakeholders may be classified into 1, Primary users, and 2, Other users, oth ee TIOA GNW ANONOOA OL 3108 SLI GNY SSANISNS= FUNDAMENTALS OF ACCS and potential inves; existing eee theipanie v 1 finang; ey cannot require reporting en 1 : ly to them so they mainly rely on fina nation direct! re aetntor information they need. On the oh fo pro! ch of the financial information they | government, ana rae inelt include employee 4 ties that use the financ eports but are m primarily. f tential investors — The providers of i ms Seer advisers are concerned with ris inherent in, and return provided by, their investments, The need information to help them determine whether should buy, hold or sell. Shareholders are also inter information which enable them to assess the ability: enterprise to pay dividends. b. Lenders and other creditors - The potential and e: lenders and other creditors are after on the inform: which will help them determine whether their loans, inte! and other amounts owing to them will be paid when di ROA QNV ANONOO3 01 304 S11 guy ‘SS3Nisna benefits and employment Op; iti pI fi portunities. Thus. emplo: are interested in information : Profitability of the entity, re gear } ds or servi Nnelal reports of the fim nts and th, 4 eir Fe interested in & Governme, information agencies _ an entity’: 2 "Y's financial informathFUNDAMENTALS OF ACCOUNTING. for taxation and regulatory purposes. Taxes are computed based on the results of operations and other tax bases ae petected in the financial reports. They ensure that the tax being paid by the businesses are correct and they comply with taxation policies. They also make sure that companies wre complying with the promulgated rules and regulations Sot by the State to regulate the activities of the companies: Public - The enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. The aforementioned stakeholders can also be classified as internal or external users of financial information depending on how they interact with the business. FINANCIAL STATEMENTS AND ITS COMPONENT: AN INTRODUCTION Financial statements are a structured representation of the financial positions and financial performance of an entity. Its objective is to provide information about the financial position financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management's stewardshi| of the resources entrusted to it. Actually, these financial statem: 5 are the main output of the accounting process. These are ae accounting information resulting from tr i al ‘ansactio: tecorded and classified are summarized into. vpigecumented MOA ONY AWONOOS OL 3104 SLI CNV SSaNisnga MENTALS OF ACCOUN ancial stateme; de components of the fin: Presented below are the a 41 nt ‘ ; come tof changes e Sey cates ne 4 ancial Pos' ; fe Sat vaca o Be Flows (or Cash Flow Statement) é ee to Financial Statements f an entity for a given period of time whether the business is profitable or nee is Ge in ; well as the expenses incurred for aay aoa er enanented If the business is profitable, a net income or profit which means that the income earne: is than the expenses incurred by the business. Otherwise, a net loss. This net income or net loss will eventually increas decrease the net worth of the company. : sort or formal statement showing ment — This is a repor Income State Statement of Changes | Equity — This report shows the movement in the components of the equity or capital amounts0 pel time. Net worth, equity or capital is affected by 1 three activities: investment, withdrawal and net income or net lo Investments and net income increase equity while withdray net loss decrease equity. Statement of Cash Flows — This report provides information ut the cash receipts (cash inflows) and a period. It s ng activities of an enti of cash payments” mmarizes the operating, " ty. % = This report is a statement Ing the financial Position of the 'S Controlled a ash a tes and owned | Giana ine A cash properties) liabilities (debts S the financial at. WY (@ssets after ded x financial structure of the ior deducting liabilities) the Usiness — out of the tot ite UD howirepieeee ditors, “Was financed by-thesewiil ets (resource,