NAGA COLLEGE FOUNDATION, INC.

M.T. Villanueva Avenue, Naga City

College of Accountancy and Finance
Financial Accounting and Reporting

Lecture Handout No. 1

Introduction to Accounting

OVERVIEW:
Accounting is an important aspect in business, as it deals with an organization’s finances.
Accounting is said to be the “language of business” and we will determine the reason why it is
called as such through our discussion. Throughout the discussion, let us understand the function
and the importance of accounting in business organizations.

Oftentimes, accounting is connected to mathematics. Maybe, some of you have been

recommended to this course because you are good in math. However, accounting is more than
just numbers. It is indeed true that it involves mathematics, but it also dealt with comprehension
and analysis.

Now, let us discuss what accounting really is.

LEARNING OUTCOMES:
At the end of this topic, students are expected to:
a. Understand the definition and purpose of accounting
b. Understand the differences among the types and forms of business organizations
c. Identify the accounting information and how it is used by the users of financial statements
d. Identify the branches and fields of accounting

DISCUSSION:
Before we proceed with the discussion, ask yourselves these questions first. What do you think
of accounting? Since accounting is an integral part of a business. Let us define business first.

BUSINESS
Business is a lawful economic activity that uses economic resources or inputs to provide goods
or services to customers in exchange for money or other goods and services. A business uses its
resources: money, materials, machineries, manpower to provide products or services.

The primary goal of a business is to MAXIMIZE its PROFIT through the aid of the different
department such as sales, marketing, human resource, accounting, etc.

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TYPES OF BUSINESS
There are three types of business most commonly known: SERVICE, MERCHANSDISING AND
MANUFACTURING. However, due to changes and adaptation of businesses in latest trends, an
addition has been made.

Below is a table summarizing the definition and examples of these types of businesses.

TYPE DEFINITION EXAMPLES

1. Service Entities that provide intangible products
(no physical form). These entities offer
professional skills, expertise, advice, and
the likes.
*Professional - Accountants,
Lawyers, Physicians
*Non-professional – laundry
shops, beauty salons, repair
shops

2. Entities involving purchase of goods that Retailers or Wholesalers

Merchandising are ready for sale and subsequently will be *Grocery Stores,
sold to the customers which is also known Convenience Stores, and re-
as “buy and sell” businesses. sellers

3. Entities involving purchase of raw Microsoft Corp.

Manufacturing materials and then processing it in their Chevron Corp
factories in order to produce a new Ford Motor Co.
product and then subsequently sold to the Apple Inc.
customers. The difference from
merchandising is that manufacturing buys
RAW materials and process it to become
salable, whereas, merchandising buys
product that is already salable.

4. Hybrid This is the business that has more than Starbucks wherein they
one type of business (e.g. partly process coffee beverages but
merchandising, partly manufacturing). at the same time selling
already salable products such
as tumblers, bottled drinks,
and mugs.

What is the difference among service, merchandising and manufacturing?

Service deals with providing service to customers while remaining two provides products to its
customers. Even though they both provide goods, merchandising and manufacturing business
are different in the creation of their product. Merchandising is more of a buy-and-sell business.
They sell the product as is, without making or modifying it. Manufacturing, on the other hand
supervises the creation of the product, from converting it from raw materials to finished products.
We will better understand these types as we go through the discussion of the topics under our
subject. Accounting for service business will be discussed from prelim to semi-finals, while
accounting for merchandising and manufacturing business will be discussed in finals.

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FORMS OF BUSINESS ORGANIZATIONS
Aside from types, business has also different form as to how it is organized. Just like its types,
forms of business organization have three commonly known forms: SOLE PROPIETORSHIP,
PARTNERSHIP and CORPOARATION. An addition of two has been made for since these forms
are becoming prominent nowadays.
Below is a table summarizing the distinctions among the first three forms of business organization.
Type SOLE PARTNERSHIP CORPORATION
PROPRIETORSHIP
1. Owners Owner / Proprietor Partners Shareholders
2. Number of One (1) Two or more Two or more,
Persons maximum of 15

One for OPC

3. Manner of Initiative of the owner Mere agreement of By operation of law
Creation partners
4. Cost of Creation Least Costly Costly Most costly
or Formation
5. Commencement Upon submission of Upon execution of Issuance of
of Juridical required documents to Articles of Partnership Certificate of
Personality Government agencies Incorporation to SEC
6. Management Owner Every partner is an Board of Directors
Agent of the
Partnership,
otherwise Managing
Partner
7. Extend of Unlimited, up to Unlimited, up to Up to the extent of
Liability personal assets of the personal assets of the interest or investment
owner partners (except of the shareholders
limited partner)
8. Terms of Any period until not Any period of time Not Exceeding 50
Existence declared as bankrupt stipulated by the years, subject to
partners extension

The remaining two forms of business organizations are the following:

4. Limited Liability Company (LLC)
• usually practiced in USA which is a hybrid form of business wherein it has both the
characteristics of partnership and corporation at the same time.

5. Cooperative
• business organization owned by group of individuals called “members” which is operated for
their mutual benefit. Examples: utility cooperatives (CASURECO), cooperative banking,
credit unions, and housing cooperatives.

For this subject, we will focus on accounting for sole proprietorship. Accounting for partnerships
and corporation will be discussed in higher accounting subjects.

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Micro, Small and Medium Enterprises (MSME)

This is defined as “any business activity/ enterprise engaged in industry, agri-business/services,

whether single proprietorship, cooperative, partnership, or corporation whose total assets,
inclusive of those arising from loans but exclusive of the land on which the particular business
entity’s office, plant and equipment are situated, must have value under the following categories:”

Category Business Qualifications

Type
1. By Asset Size Micro Up to P3,000,000
Small P3,000,000 to P15,000,000
Medium P15,000,001 to
P100,000,000
Large Above P100,000,000

2. No. of Employees Micro 1 to 9

Small 10 to 99
Medium 100 to 199
Large Above 200

ACCOUNTING
DEFINITION:
According to the Accounting Standard Council (ASC),
“Accounting a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in making economic
decisions.”
This definition is the well-known definition of accounting for it does not only provide the meaning
of accounting but also its purpose. Let us explain its definition.

• Service Activity – accounting is service. Accountant provides its customer or employer this
service.

• Provide quantitative information, financial in nature – accounting provides information

that are measurable and are oftentimes expressed in terms of money
a) Quantitative Information – information expressed in numbers, quantities, or units
b) Qualitative Information – information expressed in words or descriptive form.
These are found in the notes to financial statements as well as on the face of the
other components of financial statements.
c) Financial Information – information expressed in money. Financial information is
also quantitative information because monetary amounts are normally expressed
in numbers.

• Economic entities – these are what we discussed earlier: the types and forms of
businesses.

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 • Intended to be useful in making economic decisions – this is the primary purpose of
accounting. The information derived through accounting is being used by the different users
to aid them in making sound economic decisions.

According to the American Institute of Certified Public Accountants (AICPA)

“The art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least of financial character, and interpreting the
results thereof.”

According to the American Accounting Association (AAA)

“It is the process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information.”

• Accounting is an ART – it is considered an art because it requires the use of skills, practical
knowledge, experience, and creative judgment.

• Accounting is a SCIENCE – it is body of knowledge which has been systematically gathered,

classified and organized.

• Concerned with transactions and events having financial character – the economic
activities in the business are business transactions only. Other than business transactions
(e.g. personal transactions) will not be recorded in the business. This phase of accounting
involves Identifying – meaning we determine here either the event or transaction is business
one or not.

• Business transactions are expressed in terms of money – this phase of accounting

involves measuring. It means that after we identify that the event is a valid transaction, the
transaction should can be measured or has monetary (peso) value.

• Involves interconnected phases

1. Identifying – analyzing each business transaction and identifies whether the

transaction is an “accountable event” or “non-accountable event.”

Why do we need to differentiate “accountable” from “non-accountable event”?

This is because only “accountable events” are recorded in the books of accounts.
“Non-accountable events” are not recorded in the books of accounts. Accountable
events are those that affect the assets, liabilities, equity, income or expenses of a
business.

2. Recording (journalizing) – which involves the routine and mechanical process of

writing down the business transactions in chronological order (from oldest date to
latest).

3. Classifying (posting) – which involves sorting or grouping similar items into their
respective type of accounts.

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 4. Summarizing – at the end of each accounting period, the accountant summarizes the
information processed in the accounting system in order to produce meaningful results
we called financial statements.

• Interpreting the Results – Interpreting is the phase of accounting which involves the
“analytical and interpretative works”. It is in this phase where the financial statements are
being analyzed and communicated to the users so that it helps in making economic decision

• Accounting as an Information System – a system is one that consists of an input, a process

and an output. The inputs are the identifiable accountable events; the process are recording,
classifying and summarizing; and the output is the accounting report that is communicated to
the users.

PURPOSE
Accounting is also defined as “Language of Business” which means that its end product (financial
statements) is a means of communicating information about the business to different users.

Again, accounting provides information to users that serves as basis in their decision making. For
example, the owner needs the financial statement to assess whether the business is earning profit
or not. The financial statement will also tell the capacity of the business: can the business branch-
out? do the business have enough cash to purchase additional equipment?

Economic Entity – Separate identifiable organization which makes use of resources to achieve
its goals and objectives.
a) Business Entity – operating primarily to generate profit
b) Non-profit Entity – carrying charitable and not-for-profit organization

ACCOUNTING VS. BOOKKEEPING

➢ Bookkeeping refers to the process of recording the accounts or transactions of an entity.

It normally ends with the preparation of the trial balance. Unlike accounting, bookkeeping
does not require the interpretation of the significance of the information processed.

➢ Accounting on the other hand, covers the whole process of identifying, recording, and
communicating information to interested users.

ACCOUNTING INFORMATION
Accounting information are those needed by the users in making economic decisions. These are
derived from the Financial Statements. Users make their decision based on the information on
these statements. Commonly, they seek for the following information:

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 1. Result of Operations – this indicates the performance of the business whether the entity
has a profit or loss in certain period of time (month, year, etc.). This can be seen in the
reports: Statement of Comprehensive Income or Income Statement. In this report, profit
or loss can be determined by deducting the expenses from the revenue.

2. Financial Position – this indicates the resources and the obligations of the entity. This
can be seen in the reports: Statement of Financial Position or Balance Sheet. In this
report, we will observe the accounting equation that Assets is equal to the sum of
Liabilities and Capital (A = L + C). The following terms can be analyzed from this report:
a) Solvency – refers to the entity’s ability to pay obligations when they become
due.
b) Liquidity – pertains to its ability to meet short-term obligations

3. Cash Flows – this involves the report: Statement of Cash Flows. In this report, it shows
all transactions involving cash (inflows and outflows) from different activities of the entity
such as operating, investing, and financing. A separate report is being made for cash
since this is the most used resources of the entity, hence, should be analyzed.

USERS OF FINANCIAL STATEMENTS:

Financial statements are often called general purpose financial statements because they are
being used by a wide-range of users. These users are classified into two components: Internal
and External Users.

How can we know if a user is an external or internal user?

Directly involved
in managing the
business?

Yes No

Internal User External User

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Below is the summary of the users of financial statements and what information they are
most concerned with.

KIND SPECIFIC USERS INFORMARTION NEEDS

1. Internal Management This refers to the owners and managers
(primary) who are responsible for making economic
decisions in the operations of the
business.
2. External Investors / Stockholders Profitability. Concerned about the risk of
(Other) the investment and whether there will be
returns on it.
Lenders Solvency. Concerned whether the
business can pay its principal obligation
and interest.
Creditors or Suppliers Liquidity, Solvency. Concerned whether
the company can pay its payables on time.
Employees Stability and Profitability. They are
interested to the company’s ability to pay
their salaries and wages
Customers Stability and Continuance of Existence
Government Compliance. They are interested to the
company’s ability to comply to the
regulation and to pay its taxes.
General Public For research purposes like trend analysis

CERTIFIED PUBLIC ACCOUNTANT (CPA)

Most of you enrolled in this program because you want to be a Certified Public Accountant (CPA).
Now, what is a CPA and what future awaits you if you became one?
A CPA is a person who holds a valid Certificate of Registration and a valid Professional
Identification Card issued by the Professional Regulation Commission (PRC) upon
recommendation of Board of Accountancy (BoA) to those who have satisfactorily complied with
all the legal and procedural requirements for such issuance, including in appropriate cases,
having passed the licensure examination.
Values and Ethics
1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional behavior
6. Technical Standards

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FIELDS OF ACCOUNTING

FIELDS OF ACCOUNTING

PUBLIC GOVERNMENT ACADEME PRIVATE

*External Auditing *Financial Accounting

*Tax Services *Managerial Accounting
*Management *Cost Accounting
Services *Internal Auditing
*Review *Tax Accounting
Engagements *Fiduciary Accounting
*Forensic *International Accounting
Accounting *Not-for-profit Accounting
*Socio-economic
Accounting
*Accounting Information
Systems
*Budgeting

REFERENCES:
• Fundamental Accounting Concepts by Lorence Aster Pellejera, MBA, CPA
• Financial Accounting and Reporting (Fundamentsals) by Zeus Vernon B. Millan
• Basic Financial Accounting and Reporting by Win Ballada

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