THE FINANCIAL ENVIRONMENT

BUSINESS FIRM/ORGANIZATION
 is an entity designed to organize raw materials, labor, and machines with the goal of producing goods and/or
services. Every society, no matter what type of economy it has, relies on business firms to organize resources and
transform them into products.
SOLE PROPRIETORSHIP
 A sole proprietorship is a type of business structure where a single individual owns and operates the business. In this
type of business, the owner has complete control over the operations and profits of the business, but they also
assume full responsibility for any liabilities or debts incurred by the business.
ADVANTAGES
 Ease of entry and exit
 Full ownership and control
 Tax savings
 Few government regulations
DISADVANTAGES
 Unlimited Liability
 Limitations in raising capital
 Lack of continuity

PARTNERSHIP
 A partnership is a type of business structure in which two or more individuals or entities jointly own and operate the
business. Each partner contributes to the business in terms of capital, skills, and labor, and shares in the profits and
losses of the business.
ADVANTAGES
 Ease of formation
 Additional sources of capital
 Management base
 Tax implication

DISADVANTAGES
 Unlimited Liability
 Lack of continuity
 Difficulty of transferring ownership
 Limitations in raising capital
CORPORATION
 A corporation is a legal entity that is separate from its owners, also known as shareholders. A corporation is formed
by filing articles of incorporation with the state in which it is based. Once a corporation is formed, it becomes its own
legal entity, separate from the people who own it. One of the key benefits of incorporating a business is that the
shareholders have limited liability for the debts and obligations of the corporation. This means that the personal
assets of the shareholders are not at risk if the corporation incurs debts or is sued.

ADVANTAGES
 Limited liability
 Unlimited life
 Ease in transferring ownership
 Ability to raise capital

DISADVANTAGES
 Time and cost of formation
 Regulation
 Taxes

WHAT IS THE ACCOUNTING EQUATION?

 ASSETS + LIABILITIES OWNER'S EQUITY

WHAT IS AN ACCOUNT?
 Transactions and events will cause changes in the assets, liabilities, equity, income and expense of the business.
Account titles or simply put, Accounts, are used to monitor changes in these elements.

WHAT IS AN ASSET?
 Economic resources owned by the business entity.

CURRENT ASSETS:
1. CASH ON HAND
 money and or checks held by the business. 2. Cash in bank-money in the bank accounts of the business.
 Note: The accounts cash on hand, cash in bank and cash equivalents may be alternatively named, grouped and
classified as "Cash and cash equivalent:
3. PETTY CASH FUND
 money on hand which the business sets aside for paying recurring minor expenditures.
4. CASH EQUIVALENTS
 short term highly liquid investments of the business in the debt securities (bonds or notes) of other companies. Cash
equivalents are debt securities which are readily convertible to cash.
Investments in bonds - A bond is a certificate of obligation issued by a corporation. An investment in bond is a bond
purchased by the business to earn interest income or gain appreciation in value. Investment in bonds is also called
investments in debt securities.
5. SHORT TERM INVESTMENTS
 Investment in stocks - stocks certificate of a corporation that is purchased by the business to earn dividends income
or gains in the appreciation in value of the stocks.
6. TRADE AND OTHER RECEIVABLES
 include the amounts collectible from any of the following accounts.
 a. NOTES RECEIVABLE-amounts owed by customers or clients of the business evidenced by a promissory note which
may or may not pay interest.
b. ACCOUNTS RECEIVABLE - Amounts owed by customers or client of the business from the sales of goods or services
on an open account (credit) arrangement.
c. INTEREST RECEIVABLES-amount of interest collectible on promissory notes received from customers and clients.
d. ADVANCES TO EMPLOYEES - certain amount of money loaned to employees payable in cash through salary
deductions.
e. ACCRUED INCOME-income that is earned by the business but is not yet collected.

7. INVENTORIES
 represents the unsold goods at the end of the accounting period.
 This is applicable only in the merchandising business.
8. PREPAID EXPENSES
 expense of future accounting period which the business paid in advance.
 Supplies- includes goods which are intended to be used in the daily operation of the business.
9. CONTRA ASSES ACCOUNTS
 are accounts deducted from the related asset accounts.
 Allowance for bad debts -losses due to uncollectible accounts. This is deducted from the accounts receivable
account to get the net realizable value. This is in line with the financial statements' qualitative characteristics of
conservatism wherein no profits would be anticipated but all probable or estimable losses should be provided.

NON-CURRENT ASSETS:
1, PROPERTY ,PLANT AND EQUIPMENT
 these are tangibles assets, with physical attributes.
a. LAND -lot owned by the business, it includes occupied lots such those where a building stand.
b. BUILDING-the structure of permanent improvement that houses the business. c. Machinery - includes heavy
mechanical apparatus which generally has engines and are usually fixed to the ground.
d. EQUIPMENT includes light to mid-weight apparatus typewriters, computers, vehicles, trucks which are movable.
e. FURNITURE and FICTURE includes cabinets, shelves, tables, chairs, windowpanes, and similar embellishment inside
the premises of the business. Furniture is movable while Fixtures are those that are attached or fixed to a ceiling, floor or
the wall.
2. INTANGIBLE ASSETS
 identifiable non-monetary items without physical existence like franchise, patents, trademark, and rights
3.LONG TERM INVESTMENTS
 more than 12 months duration of investment.
4. BIOLOGICAL ASSESTS
 living plants or animals owned by the business particularly when it engages in biological activities such as agriculture
aquaculture or animal husbandry.
WHAT IS A LIABILITY?
 Economic Obligations of the company/business.
 The part of the asset that is owned by the creditors/ lenders

WHAT IS EQUITY?
 It is the residual interest of the business.
 Net worth
 Residual from the word "residue"
 What is owned by the owner of the business.

BOOKKEEPING DEFINITION OF TERMS

BOOKKEEPING
 The process of recording business transactions in a systematic and chronological manner. It is systematic because it
follows procedures and principles. It is chronological because the transactions are recorded in order of the date of
occurrence.
BOOKKEEPER
 The person who is in-charge to record, maintain and update business records from all sorts of financial transactions
using account title. The bookkeeper uses the Book of Accounts to record the business transactions.
BOOK OF ACCOUNTS
 The book of accounts is composed of the Journal and Ledger.
JOURNAL
 Referred to as the book of original entry
LEDGER
 Referred to as the book of final entry.
GENERAL JOURNAL
 is the most basic journal which provides columns for date, account titles and explanations, folio or references and a
separate column for debit and credit entries.
GENERAL LEDGER
 a group of all accounts that can be found in the chart of accounts. These accounts will be reflected in the trial balance
as a summary of all financial activities that have taken place as recorded in the general journal and subsidiary
ledgers
DEBIT
 The left-hand side entry also known in accounting as "Value Received." When cash or non-cash items are received,
the said cash or non-cash items must be recorded in the debit column. This means that the debit balance has
increased.
CREDIT
 The right-hand side entry also known in accounting as "Value Parted With." When cash or non-cash items are given,
the said cash or non-cash items must be recorded in the credit column. This means that the credit balance has
increased.

THE RULES OF DEBIT AND CREDIT

 In the process of journalizing business transactions, the rules of Debit and Credit are essential to ensure accurate
recording and sound decision making. Debit is abbreviated as DR while CR for Credit. Further, it is deemed a
requirement that the bookkeeper should be able to master the normal balance of each account title being used in the
process of recording.
The following steps will be undertaken in determining account balances for every account title such as cash, account
receivable, etc.:

1. Add all the debit side to generate total debit

2. Add all the credit side to generate total credit.
3. Subtract total debit to the total credit.
4. Determine the balance of each account

Sample General Journal Transaction and Entry:

On June 25, 2020, ABC Laundry Co. rendered laundry services to JJV Hotel in Makati for P5,000. The customer paid in cash.

LIABILITIES

Classification of Current Liabilities

Improvements to International Accounting Standards 1 (December 2003) classify liability as a current liability when:

1. it is expected to be settled in the entity's normal operating cycle;

2. it is held primarily for the purpose of being traded;
3. it is due to be settled within twelve months after the balance sheet date; or
4. the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance
sheet date.

Trade and Other Payables

 include payables from any of the following accounts:

1. ACCOUNTS PAYABLE
 includes debts arising from the purchase of an asset or the acquisition of services on account.
2. NOTES PAYABLE
 includes debts arising from the purchase of an asset or the acquisition of services on account evidenced by a
promissory note.
3. LOAN PAYABLE
 is a liability to pay the bank or other financing institution arising from funds borrowed by the business from these
institutions payable within twelve months or shorter.
 (Note: If the loan is payable beyond twelve months, then it is classified under non-current liabilities.)
4. UTILITIES PAYABLE
 is an obligation to pay utility companies for services received from them. Examples of this are telephone services to
PLDT, electricity to Meralco, and water services to Maynilad.
5. UNEARNED REVENUES
 represent obligations of the business arising from advance payments received before goods or services are provided
to the customer. This will be settled when certain goods or services are delivered or rendered.
6. ACCRUED LIABILITIES
 include amounts owed to others for expenses already incurred but are not yet paid. Examples of these are salaries
payable, utilities payable, taxes payable, and interest payable.

Classification of Non-Current Liabilities

Non-current liabilities are long term liabilities or obligations which are payable for a period longer than one year. Examples of
non-current liabilities are as follows:

1. MORTGAGE PAYABLE
 is a long-term debt of the business with security or collateral in the form of real properties. In case the business fails
to pay the obligation, the creditor can foreclose or cause the mortgaged asset to be sold and use the proceeds of the
sale to settle the obligation.
2. BONDS PAYABLE
 is a certificate of indebtedness under the seal of a corporation, specifying the terms of repayment and the rate of
interest to be charged.

OWNER'S EQUITY

CAPITAL
 is an account bearing the name of the owner representing the original and additional investment of the owner of the
business increased by the amount of net income earned during the year. It is decreased by the cash or other assets
withdrawn by the owner as well as the net loss incurred during the year.
DRAWING
 represents the withdrawals made by the owner of the business in cash or other assets.
INCOME SUMMARY
 is a temporary account used at the end of the accounting period to close income and expense accounts. The balance
of this account shows the net income or net loss for the period before it is closed to the capital account. This will be
taken up in Chapter 6 during the discussion of closing entries.