Accounting and Its

Environment
Learning Objectives
• Define accounting
• Discuss fundamental business model
• Enumerate the types of business
• Explain the three forms of business organizations
• Discuss activities of business organization
• Explain the purpose and phases of accounting
• Explain the fundamental concepts and basic principles
Definition of Accounting
Accounting is 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.
Accounting is an information system that measures,
processes and communicates financial information about an
economic entity.
Definition of Accounting
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information.
Accounting is 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 a
financial character, and interpreting the results thereof.
Fundamental Business Model
Types of Business
Type Activity Structure Examples
Services Selling people’s time Hiring skilled staff and selling Software development,
their time Accounting, Legal
Trader Buying and selling Buying a range of raw materials and Wholesales, Retailer
manufactured goods and consolidating
products them, making them available for sale in
locations near to their customers or online
for delivery
Manufacture Designing products, Taking raw materials and using Vehicle Assembly,
aggregating components equipment and staff to convert Construction,
and assembling finished them into finished goods Engineering, Electricity,
products Chemicals, Media
Raw materials Growing or extracting raw Buying blocks of land and using Farming, Mining, Oil
materials them to provide raw materials
Types of Business
Type Activity Structure Examples
Infrastructure Selling the utilization Buying and operating assets; Transport, Hotels, Telecoms,
of infrastructure selling occupancy often in Sports facilities, Property
combination with services management
Financial Receiving deposits, Accepting cash from depositors and Bank, Investment house
lending and investing paying them interest; using the money
money to provide loans to borrowers,
charging them fees and a higher rate
of interest than the depositors receive
Insurance Pooling premiums of Collecting cash from many customers; Insurance
many to meet claims investing the money to pay the losses
of a few experienced by a few customers. By
understanding the risk accepted and
the likelihood of a claim, more
premium income can be earned than
claims paid
Forms of Business Organizations
Sole Proprietorship. This business organization has a single owner called the
proprietor who generally is also the manager.
Partnership. A partnership is a business owned and operated by two or more
persons who bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.
Corporation. A corporation is a business owned by its shareholders. It is an
artificial being created by operation of law, having the rights of succession and
the powers, attributes and properties expressly authorized by law or incident to
its existence.
Micro, Small and Medium Enterprises
Micro enterprises are those with assets, before financing, of
P 3M or less and employ not more than nine workers.
Small enterprises are those with assets, before financing, of
above P 3M to P 15M and employ 10 to 99 workers.
Medium enterprises have assets, before financing, of above
P 15M and employ to P 100M and employ 100 to 199
workers.
Activities in Business Organizations
Financing Activities. Financing activities are the methods an organization uses to
obtain financial resources from financial markets and how it manages these
resources.
Investing Activities. Investing activities involve the selection and management
including disposal and replacement of long-term resources that will be used to
develop, produce, and sell goods and services.
Operating Activities. Operating activities involve the use of resources to design,
produce, distribute, and market goods and services.
Purpose and Phases of Accounting
 Measuring and Recording
 Classifying
 Summarizing
 Interpreting or analyzing
Fundamental Concepts
 Entity Concept. An accounting entity is an organization or a
section of an organization that stands apart from other
organizations and individuals as a separate economic unit.
Simply put, the transactions of different entities should not
be accounted for together. Each entity should be evaluated
separately.
Fundamental Concepts
 Periodicity Concept. An entity’s life can be meaningfully
subdivided into equal time periods for reporting purposes.
For the purpose of reporting to outsiders, one year is the
usual accounting period.
Fundamental Concepts
 Stable Monetary Unit Concept. The Philippine peso is a
reasonable unit of measure and that its purchasing power is
relatively stable. It allows accountants to add and substract
peso amounts as though each peso has the same
purchasing power as any other peso at any time. This is the
basis for ignoring the effects of inflation in the accounting
records.
Fundamental Concepts
 Going Concern. Financial statements are normally
prepared on the assumption that the reporting entity is a
going concern and will continue in operation for the
foreseeable future.
Criteria for General Acceptance of an
Accounting Principle
The general acceptance of an accounting principle usually depends
on how well it meets three criteria:
 Relevance
 Objectivity
 Feasibility
Basic Principles
 Objectivity Principle. Accounting records and statements are based
on the most reliable data available so that they will be as accurate
and as useful as possible. Reliable data are verified when they can be
confirmed by independent observers. Ideally, accounting records are
based on information that flows from activities documented by
objective evidence. Without this principle, accounting records would
be based on whims and opinions and is therefore subject to
disputes.
Basic Principles
 Historical Cost. This principle states that acquired assets should be
recorded at their actual cost and not at what management thinks they are
worth as at reporting date.
 Revenue Recognition Principle. Revenue is to be recognized in the
accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services.
 Expense Recognition Principle. Expense should be recognized in the
accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services.
Basic Principles
 Adequate Disclosure. Requires that all relevant information that
would affect the user’s understanding and assessment of the
accounting entity be disclosed in the financial statements.
 Materiality. Financial reporting is only concerned with information
that is significant enough to affect evaluations and decisions.
Materiality depends on the size and nature of the item judged in the
particular circumstances of its omission.
Basic Principles
Consistency Principle. The firms should use the same accounting
method from period to period to achieve comparability over time
within a single enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.
Per revised PAS 1 (Presentation of Financial Statements), the presentation and classification of
items in the financial statements should be retained from one period to the next unless:
• it is apparent, following a significant change in the nature of the entity’s operations or a review of its
financial statement presentation, that another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of accounting principles in PAS 8
(Accounting Policies, Changes in Accounting Estimates and Errors); or
• a PFRS requires a change in presentation
Reference
Basic Financial Accounting and Reporting by Win Lu Ballada, CPA, MBA and Susan Ballada, CPA