Basic Features of Accounting

1. Accounting is a science
- Science is a systematized body of knowledge; establishing the relationship of
cause and effect; based on fundamental principles.
2. Accounting is an art
- “Art” refers to the way of performing something.
- It is a behavioral knowledge involving certain creativity and skill.
- It requires perfect knowledge, interest, and experience to do work efficiently.
- It teaches us to do work in the best possible way.
3. Accounting is an information system
- It is used to identify and measure economic activities, process the information
into financial reports, and communicate these reports to different users of
accounting information.
4. Accounting is a profession
- A profession is a career that involves acquiring a specialized formal education
before rendering any service.
- Accountants have the primary responsibility in the organization for managing,
updating, correcting, and reporting the organization’s accounts.
5. Accounting is a language
- Referred to as “the language of business” because it helps users understand
what is happening inside of the business.
- Business activities are expressed, interpreted, and communicated in the financial
statements.

History of Accounting
- Egyptians refer to accountants as the ‘eye and ear’ of the king.
- Romans used memorandum or ‘day book’ to record receipts and payments.
- A book named “Arthashastra” was written by Chandragupta Minister Kautilya in India 23
centuries ago where the book describes how accounting records can be maintained.
- In 1494, and Italian Mathematician named Fra Luca Bartolomeo de Pacioli (Luca
Pacioli), wrote the book Summa de arithmetica, geometria, proportioni et proportionalita
(The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality)
where one of the sections of the book entitled “Particularis de computis et scripturis”
(About accounts and other writings) described the double-entry bookkeeping.
- Luca Pacioli – ‘father of accounting’
- The double-entry of bookkeeping is also known as the Venetian method.
The Accounting Process - #22, 24,25, 26,39

Accounting Process - #22, 24,25, 26,39

1. Identifying: It is the process of recognition or non-recognition of business activities as
accountable events. It is the process of determining whether a transaction has
accounting relevance.
2. Recording: A process in which business related transactions, in monetary terms, are
recorded in an orderly manner in the books of original entry; soon after their occurrence
in the journals and subsidiary ledgers. The accounting term for recording at this stage is
journalizing.
3. Classifying: It is concerned with grouping together similar types of business
transactions in one place. i.e. journals. The transactions recorded in the journals are
classified and posted onto ledgers. The accounting term for recording at this stage is
posting.
4. Summarizing: The classified information is presented in a form that is understandable
and useful to users of accounting information. A trial balance is prepared to ascertain the
accuracy of the accounts. Then the financial statement is prepared. i.e. Balance Sheet
and Statement of Profit and Loss Account.
5. Analyzing: It establishes the relationship between the items in the statement of financial
position and statement of comprehensive income. The purpose of analyzing is to identify
the financial strength and weakness of the business. It provides the basis for
interpretation.
6. Interpreting: It is concerned with explaining the meaning and significance of the
relationship established by the analysis. By interpreting, it can tell whether the
profitability is good or bad. Interpretation should be useful to users, so as to enable them
to make rational decisions.
7. Communicating: The results obtained from the summarized, analyzed, and interpreted
information are communicated to the interested parties.
Nature of Accounting - #3
Accounting: The Language of Business

- It is a tool used to communicate financial information to various parties interested in the

financial status of an economic entity.
- An economic entity is an organization that uses resources to achieve its goals and
objectives.
- Also referred to as business entity

Two Types of Economic/Business Entity

For-profit entity – mainly operates to generate income or profit.

Nonprofit entity – carries out charitable operations that do not necessarily generate income.

Core Values of Accountants (AICPA)

● Competence
Refers to one’s ability to “perform high quality work in a capable, efficient, and appropriate
manner."
● Continuing Education and Lifelong Learning
Accountants must always value continuing education.
Learning to acquire new skills and knowledge improves one’s competence.
● Objectivity
Accountants are entrusted with information and their responsibility is to deal with this
information without personal bias and ensure that this will be free from distortions.
● Integrity
Integrity is conducting oneself with honesty and professional ethics.
Honesty and professionalism are two of the important traits that builds one’s integrity.
● Attuned to Broad Business Issues
must be “in tune with the overall realities of the business”.
Must have deeper understanding of the business environment in the local and global settings.

Major Branches of Accounting

1. Financial Accounting
- Financial accounting is primarily concerned with the recording, preparation, and
presentation of business transactions in the form of financial statements to
provide business owners a picture of the operation results and the financial
position of the business in a certain period of time.
- Results of business operations
● Operation results
- whether there has been profit or loss

● Financial Position
- how well a business has performed
 2. Cost Accounting
- Cost accounting deals with the measurement and recording of all the costs
incurred in a business to help management in controlling the business
organization’s expenses.
- Costs incurred in the business

3. Management Accounting
- The objective of management accounting is to provide reports and information
about business transactions to internal users.
- Accounting data gathered from financial and cost accounting are utilized in
management accounting to help managers and/or owners make decisions for the
betterment of the business.
- Decision making for managers and owners

● Management accounting involves:

- Cost Analysis
- Financial Analysis
- Evaluation of Business Decision
- Budgeting and Forecasting
- and other similar areas

Other Fields or Areas of Accounting

1. Tax Accounting
- Tax accounting is a special type of accounting that focuses on taxes rather than
on financial statements.

● Two objectives of Tax Accounting:

- To ensure that the business complies with the tax laws.
- To minimize the business’ tax liabilities through legal means.

2. Government Accounting
- concerned with the systematic collecting, recording, summarizing, analyzing, and
interpreting of financial transactions related to the expenditures and revenues of
government institutions.
- The objective of government accounting is to disclose how public funds are being
generated and spent for the welfare of the general public.

3. Auditing
- Financial records are carefully examined to determine the accuracy and fairness
of these records.
- Users of the data that were gathered from audited financial statements are
assured that the information they are using are free from misstatements due to
error or fraud.
Two Types of Auditing:
● External Auditing
- refers to the examination of financial records and statements to give out an
opinion as to the compliance of a business organization’s accounting process
with generally accepted accounting principles (GAAP) and validity and fairness of
presentation of its financial statements.
- External auditing is usually done by an independent party.

● Internal Auditing
- refers to the evaluation of the adequacy and efficiency of the internal control
structure of a company by examining its policies and procedures, segregation of
duties, and other controls conducted and implemented by management.

4. Accounting Education
- Accounting education employs accountants as educators and researchers.
- Accountants in this field improve and develop accounting curriculum for colleges,
universities, and other educational institutions to prepare students for the current
and future challenges in the profession.

5. Fiduciary Accounting
- Fiduciary accounting involves the evaluation and handling of accounts that are
managed by an individual who has been entrusted with the guardianship and
custody of a business, possession, or property owned by another individual.

● Receivership
- Refers to the removal of control of the business or property from its owner(s).
- The control and administration of the business is placed under a receiver.
- A receiver is an independent party appointed by a court or the company’s
creditors to receive, administer, and preserve a business that is the subject of a
court case.
● Trust Accounting
- Involves the administration and management of funds by a trustee (a bank or a
trust company) for the benefit of individuals called beneficiaries.
● Estate Accounting
- Refers to the preparation and management of financial accounts by a person
administering the properties of an individual who has passed away.

6. Forensic Accounting
- From the word forensic, which means “to investigate” or “to analyze.”
- Involves the investigation and analysis of numbers and financial data and records
that are usually presented in court discussions.
 7. Accounting Research
- A type of academic research which focuses on the study of the effects of
economic events on accounting processes and how information gathered in this
research affects economic events in return.
Accounting research includes the following areas of study:
- decision making on the implementation of new accounting or auditing standards
- presentation of unusual economic operations and transactions in the financial records
- study on how new tax laws can affect information users, such as employers and clients
- determination of how capital market is affected by the accounting profession

Advantages of Computerized Accounting

- Speed
- Accuracy
- Efficiency
- Accounting Document Production
- Up-to-date Information
- Availability of Information
- Staff Motivation
- Reduced Frustration

USERS OF ACCOUNTING INFORMATION

- It is important to keep in mind that the primary objective of accounting is to provide
information that is useful to parties inside and outside the business or corporation.
- These parties are called users.
- Financial information is utilized by users to make judgments or wise decisions regarding
the business operations.

Users of financial information in a company can be categorized into two:

1. EXTERNAL USERS
- External users are people outside of the company.
- They do not work in the company and are not directly involved in its operations.
- They are only interested in the information generated by financial records in the
accounting procedures of a company.

● Creditors
- are the persons who supply goods on credit or lenders of money such as banks.
- interested in accounting information because it enables them to determine the
credit worthiness of the business and its ability to meet its financial obligations.

● Investors
- Stockholders of the company.
- They are interested in the financial information to help them make decisions on
what to do with their investments (shares of stock) i.e. hold, sell, or buy more.
● Government
- The government keeps a close watch on the firms which yield a good amount of
profits.
- Governments are interested in the financial statements for the purpose of
taxation.
- Taxes are computed based on the results of operations
and other tax bases.

● Consumers
- These groups are interested in getting the goods at a reduced price.
- Therefore, they wish to know the establishment of a proper accounting control,
which in turn will reduce the cost of production, in turn, less price to be paid by
the consumers.

● Customers
- Individuals or business organizations that has a long-term involvement or
contract with the
- Customers become interested in the company’s ability to continue its existence
and maintain the stability of its operation.

● Research Scholars
- Accounting information, being a mirror of the financial performance of a business
organization, is of immense value to the research scholar who wants to make a
study on the financial operations of a particular firm.
- Researchers are also interested in accounting for
interpretation

● Regulatory Authorities
- Various Government departments like Securities and Exchange Commission,
Registrar of Companies, Commission on Audit, etc. require information to be filed
with them.
- By examining the accounting information, they ensure that it is
in accordance with the rules and regulations and that it protects
the interests of the stakeholders who rely on such information.

● General Public
- Anyone outside the company such as students, analysts, consumer
organizations, media, welfare organizations, and public at large are interested in
the financial information in order to appraise the efficiency and social role of the
enterprises in different sectors of the economy.
 2. INTERNAL USERS
- Internal users of accounting information are those persons or groups which are
within the organization.

● Owners
- The owners invest or provide capital for the organization.
- They are interested in knowing the condition of the business if the capital is
employed properly or not.
- Owners keep an eye on the returns from their investment.

● Management
- The managers of a company are employed by the owners to run the business.
- They are interested in knowing the position of the firm;
- to find whether the business carried on under their guidance is profitable or not;
evaluate the performance of the organization

● Employees
- Employees of an organization are employed by the management to perform
tasks needed to support the running of the business.
- Employees are interested in the accounting information to find out the financial
condition of the business to determine their job security.

ACCOUNTING INFORMATION SYSTEM

- Every business organization must have an accounting information system which will
generate reliable financial information needed by the decision-makers in a timely
manner.
- The design and operation of a system must consider the anticipated users of the
information and the types of decisions they are expected to make.
- The design of the system to meet the entity’s information requirement depends on the
firm’s size, nature of operations, volume of transaction data, organizational structure,
form of business and extent of government regulation.
- An accounting information system is the combination of personnel, records and
procedures that a business uses to meet its need for financial information.
The best accounting information system should achieve the following objectives:
- To process the information efficiently at a low cost.
- To obtain reports on a timely basis.
- To ensure a high degree of accuracy.
- To minimize the possibility of theft or fraud.
TYPES OF FINANCIAL STATEMENTS
1. Statement of Comprehensive Income
- This shows the financial performance of the business for a certain period.
- It tells how much a business has earned or lost.
2. Statement of Retained Earnings
- This tells how much of the company’s net income, which is showed on the
balance sheet, is reinvested in the business.
3. Statement of Financial Position
- This tells what the company has (assets), the company owes (liabilities), and
what the owners/stockholders own (owner’s equity).
- Informs the users of the financial condition of the business at a given date (end of
accounting period).
4. Statement of Cash Flows
- This indicates the firm’s receipts and disbursements of cash which are classified
according to the company’s major activities,
namely:
(1) operating,
(2) investing, and
(3) financing.

FORMS OF BUSINESS ORGANIZATIONS (lesson 4)

- Businesses are organizations commonly made to earn profit.
- Throughout its life, a company deals with multiple groups of individuals to achieve its end
goal of profit generation.
- Nonetheless, there are organizations established not for the pursuit of profit.
- These are not-for-profit organizations which include charitable institutions, public
hospitals, educational

1. SOLE PROPRIETORSHIP
- also known as a sole trader
- owned by one person and operates for their benefit
- the owner may operate the business alone or with other people.

● Advantages
- Easiest and least expensive form of ownership to organize.
- Sole proprietors are in complete control, and within the parameters of the law,
may make decisions as they see fit.
- Profits from the business flow-through directly to the owner's personal tax return.
- The business is easy to dissolve if desired.

● Disadvantages
- Sole proprietors have unlimited liability and are legally responsible for all debts
against the business. Their business and personal assets are at risk.
 - May be at a disadvantage in raising funds and are often limited to using funds
from personal savings or consumer loans.
- May have a hard time attracting high-caliber employees, or those that are
motivated by the opportunity to own part of the business.
- Some employee benefits such as owner’s medical insurance premiums are
directly deductible from business income (only partially as an adjustment to
income).

2. PARTNERSHIP
- A partnership is a contract whereby two or more persons bind themselves to
contribute money,property, or industry to a common fund, with the intention of
dividing the profits among themselves.
- Two or more persons may also form a partnership for the exercise of profession.
- Two or more persons are needed to form a partnership.
- Money is not the only resource that a person can contribute in a partnership.
- A partnership must be established for the purpose of obtaining profit.
- Partnerships are the common form of business organizations used by companies
who generate profits by the practice of a profession.

● GENERAL FEATURES OF A PARTNERSHIP

- Separate legal existence
- Mutual agency
- Unlimited liability
- Limited life
- Co-ownership of partnership property
- Partnership agreement

GENERAL PARTNERSHIP
- Partners divide responsibility for management and liability, as well as the shares of profit
or loss according to their internal agreement.
- Equal shares are assumed unless a written agreement that states differently.

LIMITED PARTNERSHIP AND PARTNERSHIP WITH LIMITED LIABILITY

- “Limited” means that most of the partners have limited (to the extent of their investment)
as well as limited input regarding management decisions, which generally encourage
investors for short-term projects or for investing in capital assets.
- This form of ownership is not often used for operating retail or service businesses.
- Forming a limited partnership is more complex and formal than that of general
partnership.

JOINT VENTURE
- Acts like a general partnership, but is clearly for a limited period of time or a single
project.
- If the partners in a joint venture repeat the activity, they will be recognized as an ongoing
partnership and will have to file as such, and distribute accumulated partnership assets
upon dissolution of the entity.

● Advantages
- Partnerships are relatively easy to establish; however, time should be invested in
developing the partnership agreement.
- With more than one owner, the ability to raise funds may be increased.
- The profits from the business flow directly through the partners’ personal tax
return.
- Prospective employees may be attracted to the business if given the incentive to
become a partner.
- The business usually will benefit from partners who have complementary skills.

● Disadvantages
- Partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- Some employee benefits are not deductible from business income on tax returns.
- The partnership may have limited life; it may end upon the withdrawal or death of
a partner.

3. CORPORATION
- Our law defines a corporation as: “an artificial being created by operation of law,
having the right of succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence.”
- This definition emphasizes four things about a corporation.

➔ A corporation is an artificial being.

- It means that it is an entity separate and distinct from its owners.
➔ A corporation is created by operation of law.
- Individuals cannot form a corporation by themselves. The law must play a role in
the formation of a corporation.
➔ A corporation has the right of succession.
- Ownership rights can be passed to other persons through sale, donation, or any
other mode of transfer.
➔ The law is the source of the powers and attributes of a corporation.
- Being the source, the law can likewise restrict the authority of corporations in
performing acts.

● GENERAL FEATURES OF A CORPORATION

- Separate legal
- existence
- Limited liability
 - Transferable
- ownership rights
- Virtually unlimited
- life
- Corporation management
- Government Regulations
- Double Taxation
- Dividends

● Advantages
- Shareholders have limited liability for the corporation’s debts or judgments
against the corporation.
- Generally, shareholders can only be held accountable for their investment in the
stock of the company.
- Corporations can raise additional funds through the sale of stocks.
- A corporation may deduct the cost of benefits it provide to officers and
employees.
- Large pool of human capital

● Disadvantages
- The process of incorporation requires more time and money than any other forms
of organization.
- Corporations are monitored by the government and some local agencies, and, as
a result, may have more paperwork to comply with regulations.
- Incorporating may result in higher overall taxes.

4. Cooperative
- According to the Cooperative Code of the Philippines: “a cooperative is a duly
registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end,
making equitable contributions to the capital required and accepting fair share of
the risks and benefits of the undertaking in accordance with the universally
accepted cooperative principles.”
TYPES OF BUSINESS ACCORDING TO ACTIVITIES
1. SERVICE BUSINESS
- Firms that generally use their employees to provide intangible products or
services to customers.
- These services include professional skills, advice, expertise, and other related
products.
- The primary source of revenues of services companies are the performance of
service, often referred to as service revenues.

2. MERCHANDISING BUSINESS
- Sells tangible products
- Buys finished or almost finished goods from their suppliers and resells the same
to customers.
- Primarily earn revenues from the sale of the goods or merchandise, also known
as sales revenue or sales.
- Two types of merchandising business:
- Wholesaler and Retailer
3. MANUFACTURING BUSINESS
- Create their own products.
- They use raw materials, components, or parts which are processed using
machines, computers, and labor to produce finished goods.
- Typically employ large-scale production which is done in manufacturing plants.
- They earn revenues primarily from the sale of manufactured products.