Accounting

TOPIC 1:
INTRODUCTION TO
ACCOUNTING
ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

LEARNING OBJECTIVES:
1. Define accounting.
2. Describe the nature and purpose of accounting.
3. Give examples of branches of accounting.
4. State the function of accounting in a business.
5. Differentiate between external and internal users of accounting
information.
6. Narrate the history/origin of accounting.
7. State the forms of business organization.
8. State the types of business according to their activities.
DEFINITION OF ACCOUNTING
• Accounting is a service activity.

• The accounting function is to provide quantitative
information, primarily financial in nature, about economic
entities that is intended to be useful in making economic
decision.
(Source: Accounting Standards Council)

• Accounting is the art of recording, classifying, 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.
(Source: The Committee of Accounting Terminology of the American

Institute of Certified Public Accountants)

• Accounting is a process of identifying, measuring and

communicating economic information to permit informed
judgment and decision by users of the information.
(Source: The American Accounting Association in its Statement of

Basic Accounting Theory)

• Important points in the definition:

1. Accounting is about quantitative information.
2. The information is likely to be financial in nature.
3. The information should be useful in decision making.

• Components:
1. Identifying as the analytical component.
2. Measuring as the technical component.
3. Communicating as formal component.

ESSENTIAL ELEMENTS OF THE
1. Identifying
• The recognition or nonrecognition of business activities
as “accountable” events.
• This is because only “accountable events” are
recorded in the books of accounts.
• An event is “accountable” when it has an effect on
assets, liabilities and equity.
2. Measuring
• The assigning of peso amounts to the accountable
economic transactions and events.
• If accounting information is to be useful, it must be
expressed in terms of a common financial denominator.
• The measurement bases are historical costs, current
costs, realizable cost, and present value.
3. Communicating
• The process of preparing and distributing accounting
reports to potential users of accounting information.
• The communicating process is the reason why accounting
has been called the “language of business”.
• Implicit in the communication process are the recording,
classifying and summarizing aspects of accounting.
NATURE OF ACCOUNTING
• Accounting is a process with the basic purpose of

providing information about economic activities
intended to be useful in making economic
decisions.

TYPES OF INFORMATION
PROVIDED BY ACCOUNTING
1. Quantitative information
2. Qualitative information
3. Financial information

FUNCTIONS OF ACCOUNTING IN BUSINESS
1. To provide external users with information that is

useful in making investment and credit decisions;
and
2. To provide internal users with information that is
useful in managing the business.

BRIEF HISTORY OF ACCOUNTING
• Accounting can be traced as far back as the prehistoric
times, perhaps more than 10,000 years ago.
• Archaeologists have found clay tokens as old as 8500 B.C.
in Mesopotamia which were usually cones, disks, spheres
and pellets. These tokens correspond to commodities like
sheep, clothing or bread. They were used in the Middle
West in keeping records. After some time, the tokens were
replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing.
(Source: http://EzineArticles.com/456988)
BRIEF HISTORY OF ACCOUNTING
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the
“double entry recording system” was formulated by Fra Luca
Pacioli, a Franciscan monk and mathematician. The “double
entry recording system” was included in Pacioli’s book titled
“Summa di Arithmetica Geometria Proportioni and
Proportionista,” published on November 10, 1494 in Venice.
• The concept of “double entry recording” is being used to this day.
Thus, Fra Luca Pacioli is considered as the father of modern
accounting.

COMMON BRANCHES OF ACCOUNTING




USERS OF ACCOUNTING INFORMATION
1. Internal users – those who are directly involved in managing

the business. Examples:
• Business owners who are directly involved in managing the
business
• Board of directors
• Managerial personnel

USERS OF ACCOUNTING INFORMATION
2. External users – those who are not directly involved in

managing the business. Examples:
• Existing and potential investors (e.g., stockholders who are
not directly involved in managing the business)
• Lenders (e.g., banks) and Creditors (e.g., suppliers)
• Non-managerial employees
• Public

FORMS OF BUSINESS ORGANIZATIONS
Form of business
Ownership Formation/ registration
organization
1. Sole proprietor ➢ One individual ➢ Registered with the DTI
(i.e., sole proprietor)
2. Partnership ➢ More than one ➢ Formed by contractual
(i.e., partners) agreement.
➢ Registered with the SEC.
3. Corporation ➢ More than one ➢ Formed by operation of law
(i.e., stockholders) ➢ Registered with the SEC
4. Cooperative ➢ More than one ➢ Formed in accordance with
(i.e., members) the Cooperative Code.
➢ Registered with the CDA.
ADVANTAGES AND DISADVANTAGES
SOLE PROPRIETORSHIP
Advantages Disadvantages
You are the boss and you keep all the You assume all the risk of loss.
profits.
Decision making is simple because you You take all responsibility and rely
have complete control over the business. mostly on yourself in making decisions.
Relatively easier and costly to form It is more difficult to raise capital
because there are fewer formal business because you rely mostly on your personal
requirements. assets and loans to initially finance the
business.
Lower extent of government regulation You are personally liable for the debts
and relatively lower taxes. and obligations of the business.
PARTNERSHIP
Better business decisions can be made Making business decisions may give rise
because “two heads are better than to conflict among the partners.
one”.
You share the business risk and the You don’t keep all the profits because
responsibility of running the business you need to share them with your
with your partners. partners.
Compared to corporations and Limited life, in the sense that a
cooperatives, a partnership is easier to partnership can be easily dissolved by
form because only a contractual the withdrawal, retirement, death, or
agreement between the partners is insanity of one of the partners.
needed.
PARTNERSHIP (continuation)
Greater capital compared to a sole Lesser capital compared to a
proprietorship. corporation.
Relatively lower extent of government A partnership (other than a general
regulation compared to corporations. professional partnership) is taxed like a
corporation.
Unlimited liability. The partner can be
held liable for partnership debts up to
their personal assets.

CORPORATION
A stockholder who is not a member of the Your “say” on corporate affairs
corporation’s board of directors is relieved from depends on the number of shares
managerial responsibilities. Only the stockholders you own. Those who own more
are elected as members of the board of directors shares are the bosses and enjoy a
and those they hire or appoint are tasked with larger share of the corporation’s
managerial responsibilities. This can be an profits.
advantage because regular investor does not need
to work for the corporation to earn income.
Limited liability of the owners because A corporation is more difficult and
stockholders are reliable for corporate debts only more costly form because there
up to the amount they have invested. are more formal business
requirements.
CORPORATION (continuation)
Greater capital ease in raising additional funds Greater extent of government
because a corporation can issue shares to a wide regulation and higher taxes.
extent of investors.
If the corporation is listed, you can easily transfer Unlike for a sole proprietorship or
your shares to other investors by selling them in a partnership where business
the stock market. Many investors earn profit this profits are easily distributed to
way – by buying shares at a cheap price, wait for the owner(s), in a corporation,
prices to go up and sell them. This activity is you have to wait for the board of
referred to as stock trading. directors to declare dividends
before you get your share in the
profits of the corporation.
CORPORATION (continuation)
Unlimited life, in the sense that the withdrawal,
retirement, death or insanity of one of the
stockholders does not dissolve the corporation.
Although a corporation has a legal life of 50 years,

this can be renewed for an indefinite number of
renewals.

COOPERATIVE
Unlike in a corporation, your “say” on A cooperative is prone to poor
cooperative affairs is not affected by the management. Cooperatives are, more
number of shares you own. This is often than not, managed by members
because in a cooperative, each member who were elected as board of directors
is entitled to one vote regardless of his rather than by employed professional
or her shareholding. However, members managers. Since there is a ‘one-member,
with larger shareholdings are entitled to one-vote’ policy in a cooperative,
larger amount of profit (net surplus) influential members tend to dominate
the election process. The result is that
those who get elected may not be the
ones who are most qualitied for the task.
COOPERATIVE (continuation)
A cooperative is generally exempt from A cooperative is susceptible to
paying taxes. This is the main advantage corruption. Due to its management
of a cooperative and the most common structure and lack of proper motive, the
reason why cooperatives are organized. elected officer may be inclined to act
Moreover, a cooperative may receive their personal interests.
assistance from the government.

Compared to a corporation, a The Cooperative Code places some
cooperative is easier and less costly to restrictions on the distribution of a
form because there are fewer formal cooperative’s profit to its members. More
business requirements. specifically, the Code requires cooperative to
appropriate a portion of its annual profit to
some funds. Only the remaining portion can
be distributed to the members.
Furthermore, when the cooperative is dissolved,

the amount accumulated in a fund called the
“reserve fund” shall not be returned to the
members, but rather donated to another
cooperative or to the community.
Limited liability – the members are liable Compared to a corporation, it is more
for cooperative debts only up to the difficult for a cooperative to sustain
amount they have invested. growth. This is in part because of the lack
of profit motive and lack of management
expertise.
Unlimited life, in the sense that the Unlike in a corporation where the
withdrawal, retirement, death or insanity if stockholder can freely transfer his shares,
one of the members does not dissolve the in a cooperative, there are restrictions on
cooperative. the transfer of a member’s shares. For
Although a cooperative has a legal life of example, the approval of the board of
50 years, this can be renewed for an directors must first be obtained before a
indefinite
ACCTG 101number of renewals.
– ADVANCED ACCOUNTING FOR BSBA
member can transfer his or her shares.
TYPES OF BUSINESS
ACCORDING TO ACTIVITIES
1. Service business
2. Merchandising (Trading)
3. Manufacturing

SERVICE BUSINESS
ADVANTAGES DISADVANTAGES
You don’t need to worry about inventory You may not have a flexible personal time
costs, warehousing and distribution costs because you need to be directly involved in
because you don’t have any inventory. You providing a service to a customer. You can
only have some minimal supplies necessary stock inventory but not service. Until your
in providing your services. business is big enough to be able to hire
other professionals to do the work for you,
you will need to render the services yourself.
You may only need a small capital because Service businesses normally suffer first from
what you are selling is your skills set and decline in demand during times of economic
you only need yourself to render a service. difficulty. This is because most services are
If you are a manufacture, you need to buy perceived as luxuries rather than necessities
raw materials and machinery to produce for survival.
your product.
SERVICE BUSINESS (CONT.)
You are perceived as an expert in your Your business’ success depends on your
chosen field. credibility.
Since a service business is founded on good
reputation, it is more costly to commit an
error in a service business compared to a
merchandising business.

MERCHANDISING BUSINESS
Compared to a manufacturing firm, you You need to have a retail store to display
may need much lower start-up capital your goods and the store must be in
because you don’t need to acquire strategic location for it to attract more
machineries to produce your goods. customers.
You can take advantage of price Less flexibility in managing costs. This is
fluctuations. For example, when goods because the cost of your goods is based
are on sale, you can acquire them at a primarily on their purchase price, which
discounted price and resell them at a you do not control.
much higher price. You can’t do this in a
service business.

MERCHANDISING BUSINESS (CONT.)
Lower cost of quality. This is because “what Keeping track of inventory is tedious,
you buy is what you sell.” most especially when you are selling
numerous and varied items with fast
turnover rate. Also, you can incur
additional costs due to spoilages, theft,
breakage, damages, and obsolescence.
It is much easier to start a merchandising Self-satisfaction is low because you
business because you don’t need to have an did not produce the products you sold.
expertise or a special skill (service business)
and you don’t need to have invented a new
product or have conceptualized an innovative
idea for an existing product (manufacturing
business).
MANUFACTURING BUSINESS
You have a high growth potential. You need a high start-up capital.
You have the opportunity to establish a Conceptualizing a viable manufacturing
brand that could last longer than your business is difficult.
lifetime.
Self-satisfaction is high. You need to be continuously innovative
and abreast of changes in technology.
You may not need to have a Warehousing and logistic costs can be
strategically located retail store to high.
display your products.

MANUFACTURING BUSINESS
You can have a better pricing policy You rely on raw materials.
because mass production can decrease
your unit cost (often called ‘economies
of scale’)
Grater flexibility in managing costs. Managing a manufacturing business can
be difficult because production processes
are often complicated and there is
always some room for improvement.

Accounting

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TOPIC 1:

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

• Accounting is a service activity.

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

• Accounting is the art of recording, classifying, summarizing

(Source: The Committee of Accounting Terminology of the American

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

• Accounting is a process of identifying, measuring and

(Source: The American Accounting Association in its Statement of

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

• Important points in the definition:

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

• Accounting is a process with the basic purpose of

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

1. To provide external users with information that is

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

1. Internal users – those who are directly involved in managing

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

2. External users – those who are not directly involved in

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

Although a corporation has a legal life of 50 years,

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

Furthermore, when the cooperative is dissolved,

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

ACCTG 101 – ADVANCED ACCOUNTING FOR BSBA

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