a - Chapter 1 Introduction to Accounting | earning Objectives Define accounting 2 Describe the nature ane purpose of ccounting [3 Giveexamplsot ranch of ccuntng 4 State the function of accounting ina business | 5. Ditereniate between” extemal "and nema users of, |, 2azuntng information 6. Narrae the history/orgin of accounting, | 2 State the forms of business organization, 8. State types of business according to their activities Definition of accounting Acounting isa process of identifying, recording and ‘communicating economic information that is useful in making fecunomic decisions Esters fe dtton of counting Uji ine cuca ae ae test snd linia whcher £2 tase ‘soot pent or nena ee sa scons nl nomi eta ee ha dfacaun"Nercnimh rer ane neel a meee “Ante coe (‘cna eet) art sic th once cq, one ites, Scoala chop nates nae tess clameting 2 Recording ~ The accountant recognizes (i.e, records) the ‘entifed “accountable' events” ‘This process is. called “jpurnalizing.” then Aster the suntan process Is called ig ne Ths BI I “ao ral ‘nner poor cfs of jon in accounting a of informa i mevanic Ho > Acoust ae ae cere accounting period, . of cath processed. in the ti nearing Epos rocessed in the Sette open te! tn She is pote ures it iS tem is ule ‘communicated to accounting °Y ig bierntion 6 Omen fovestd users. Accounting STOTT reports, thi ereated users thous | ements. al sta esefom of which isthe nana ature of accounting Treating 1 2 pro ‘aman about econom! ‘making ecmomic decison. the basic purpose of providing eer iw intended to be us ic activities that oe toate te me eens eo ses ee eee ee sees oe ame re Finandol infomation is also quantitative ‘monetary amounts are normally exptae ato aly caved into wo, coun oreo” te cc satiate Seale an yes Ae te an i a spon 1 eres ES ety vette > as nes wre tte ot directly volved in "ef emal users include: ioe (eg. stockholders who s pvestors (68s ae the business) ive in manasi"s ss saa Creditors (€-8- ies ) s gureau of canes ’SEC) ee ntenme Expect ee a Seay ster enbn) ae agencies (€.8 ers internal Revenue "ypes of accounting information classified a "General purpose accounting information ~ is information designed to met the common neds of most lalement users. I Is provides by financial acountng and is prepared primarily fo external user, 2. Special purpose accounting. information ~ is information designed to meet the spc nds of particular statement users. It is provided by managonent accounting or other branches of accounting and is prepared primarily for inter Examples of decisions and types of information needed to ‘make those decisions Example of a decision to make 1 Eitemaluser | > Exiting str (investor) Whethertohold | statements ofthe orsell business o ai in Snvestmentin analyzing the stocks. value ofthe > Potential incest: |’ company. Whetherornot | (General purpose tobuyshares of | information) stocks . 2 Extemaluser | > Lender Whether [> Audited financial (ender oF ‘ornot toextend | statements of the supplier) loan toa business to aid in alee analyzing the > Supplier Whether | company's ornottoextend | ability to pay its crsition debts (Cane business Purpose Information)3 eral ser Pe [a Tnternal user (Manager) Examples in which accounting is > How much fsneeded capil tomanofacture 2 neve produc? used in investment and Analysis ofthe ‘eltect of sales volume an salen prices to ‘amings Speci purpose Information) Budget repo (Special purpose Information) credit decisions [External userof | Decision Accounting information | information T Investor [+ ShallTinvestin | The financial thisbusiness? Is | performance ofthe thisa profitable | business undertaking? 2 Gwditor [+ Shallllend [+ The ability of the money to this business to . business? Does | generate revenue this business have the ability toppay back my. Joan? impr len ang is acs ew on bow accounting came tobe, ee eter eae el ee the dawn of civilization when mankind began to engage in trade, ee ee reer enone cea ean cee nee ee ee Se ee ee ee eee ee alee ee oa eae ae etd eater heme ep ces LAD ee pee es eee ee Ges Sop ne. ese ar eee ee nner cece eee “ai eee ns nk November 10, 1494 in Venice, Re a Roe al ao a ee ihe onacannon tart Fae eirane common needs of external users, Primarily that cater tothe a ared Te Senn ad eiting investors > RRS accounting is governed bY, He Pilpin Financial Rooring Standards (PFRSS. The scope of this book isthe fundamentals of financial accounting and reporting. Financial accounting vs. Financial reporting . ‘The terms “finial accounting” and” financial reporting” are often used interchangeably. Although, both focus on general purpose financiolstalements, financial reporting endeavors to Promote principles that are also useful to “other financial reporting.” ‘Other financial reporting” comprises information provided outside the financial statements that assists in the Interpretation of a complete set of financial statements or Improves users ability to make effcient economic decisions. Financial statements Financial report > Fiona stalemens are te structured rep nvity’s financial postion and remuls ‘They are the end product of the a the means by which information gat ‘periodically communicated to sere, > A Sinacil report includes the financial ‘nhmatin provided ouside the the interpretation of a ements Financial report “halement of financial T Statement financial poston position Statement of poftorloss | 2. Statement ef profit or loss anal ther comprohensive and other comprchensive income Income Statement of changes 8. Statement of changes in expity equity Statement ofcash flows | 4. Statement of ash flows ‘Additonal statement of Sinancal poston 6 Additional tatement of financial pation, 2. Other information Financial reporting isthe provision of financial information about an entity that is useful to extemal uses, primarily the investors, lenders, and other creditors, in making investment and credit decisions, Primary objective of financial reporting To provide information about an entty’s* conomic resources (ssets), claims to those resources (abilities and equity), and changes in those resources (income, expenses and other changes) Secondary objective of financial reporting To provide informatio useful in assessing the entity's management stewuiship (how efficiently and effectively the entity's management has discharged its responsibilities to use the enity’s economic resources),Oupie 0 Sa a ami er pent fc tee! cll SAIN py wf est N08) = Involves the accumulation and jon for use by internal users. An, js management advisory lnagonent_ cons 2» Metomcan frmain 1 Geko of management accounting ne clats sendces #0 lenis 0 Mates of i cs business polices, ganization se spall csty, dntibution. and. many cher phases of business conduct and operations. Financial Account — Management Accou Focuses on the information | > Focuses onthe information needs of intemal users end of external uses Government accounting = refers to the accounting, for the ‘government and its instrumentalities, focusing attention on the custody of public funds, the purpose or purposes to which those funds are committed, and the responsibility and accountability ofthe individuals entrusted with those funds. Auditing ~ involves the inspection of an entity’s financial Statements or business processes to ascertain their correspondence withan established criteria, Tax accounting ~ is the preparation of rendering of tax advice, such as the de ‘consequences of certain proposed business impact on range of topics which may be related to one or more of ‘other branches of accounting the economy as a whole, OF ‘market envionment. Examples ae provide below: “decisions. Accounting research includes a bro financial statements [Accounting research topic | Related branch of ac + Impet of fair value» Finandal accounting measurement onthe Inventory management and Intel -contrls and [> _modem technology. _| + Becoming a certlied public |» accontan. £2 Summa: ‘Branch of | Type of accounting Asseoetin, | lsevict weet T Financial] >_ General record ‘Accounting seeping iy maintenance of Jourals and Ledgers,Beni ac ame eens ea onrare | ee Framing [> Tame |” tren s students, eke Dusiness owners, accounting profesional in thee Continuing, Professional Development (CPD), and other interested partes. ecounting Required by research papers Ibsiness owners, icles and similar |” professional publications ‘organizations, and other interested parts, Forms of Business Organizations ‘Abusinesis an activity where goods o services are exchanged for money. A person who i engaged in busines is ca eterno bsinesan. ‘i Businesses in the Philippines are or ; nts ippines are organized in 1_Saleor singe roprictrship-isa business that is own ie inal. isthe most common and sin busines ganization. The business owner fc ‘A sole proprietor OF Trad and ndustey (OT) eS th the D 15 atin Astin 2. Partnership ~ is a business that is owned by fo oF more individuals who entered into a contract to carry on the ‘business and divide among themselves the earnings therefrom, The busines owners are call partners: j ‘A partnership i registered with the Securities and Exchange Commission (SEC) Carguaton ~ «corporation i lo owned. by moe than one individual. However nlite » partnership, a corporation Created by opin of ne ther hana contac OwnessiP {corporation i represented by hres of sacks The Owe TE {allstars oscars i "A corporation i an arf Bogor» fra perso meaning inthe eyes he aw corporation ike Separate fom ts owners, Thee corporation on town, have ts own properties, neu t wn pelea ; or example when you buy goods fom a corporate tvsness you are actully ansacting with the comoration aa otis ne 0 sick rom consaming the goods, You wine the corpoion and roteowners ' prtership also has a judi personally, However, unlike for corporation the panes ae viewed as agents of the partes. Meaning he panes trantack on bh of the presi : For example you transit witha pariner ofa bus you are anscing withthe partnership throughi + cogent te mel ere sae re he Pape Corte Coe 2 eons pert» Pere an Pree a ee pact mic a gnhae ra a ee TS co ree eer eae Se pe tame wha ee ier Seg eae Sets ne Rs oe See ee Ser eae 2 oe ees cea rere ee eae ‘costs through patronage refunds. Patronage refund pertains to pe ee ee oa ae Taphaeraabieeetet Been oh mrt fer an verona psd a EF shard of reacin can aera pas one ee Teor feesednicat Hove cane a Seabetnisbyinwepeonis Oneindividual | > (ele proprietor 2 Parinership [> Morethanone | > (Ge, partner) > 3 Corporation [> Morethan one [> (he, stockholder) > T Gooperative [> Mow thanone [> (Ge, members) an eee street Dota Sole Proprietorship bite Forma ‘Advantages © Yow are the bos and you ep al the profits © Decision makings simple because you have[© Rataively conlly 00 sre ewer formal business because there Toner extent of government regulation and relatively ower taxes Partnership Aon tis more difficult to raise | Tat pecuse you rely Sey aver paend ces lars ell | france the busines + You are personally able | forthe debts and Spgndone of the busines © Batter business decisions can be made becase “two beads are beter than one” "> Making business decisions may give rise to conflict, among the partners. © You share the business sk and the responsibility of running the business with your parter() 7 You don't keep all the profits because you need to share them with your partners). © Compared to comporations and cooperatives, a Pattnershp is easier to form. ‘beans oly a contractual ‘agreement between the partners is needed. = ‘sole proprietorship, Sovemment regulation ‘compared to corporations. Greater capil compared | > Limited lie, in the sense that a partnership can be @ [ie partner canbe Torputership debs up the peronal sels Corporation ‘ aedaigs Disadeantage T Adiotholder whoisnota [Your say” on conporste eases Mas depends om the Sree neers umber ef hares you Own Ginetarierived from | Those who own more imanngilesponiiiies | shares ae the bosses ae ny thesockolder tat | enjoy a lager share of the feveleced ss menbutzce | coperalets pros fable daecateel {howe they hire or appt ieested witaneeeial fepoieg Tas canbe amadvanoge becuse a pil vases doer ot patter ‘orporstion tear income. © Limited bil ofthe | Acorporation is more cwmerabecause Aifcalt ant more costly to Stcktldersare lable for | form because there ane: corponte debs only upto | more formal bu the amount they have Fetienens. invetc = Soe oa Greater event of ‘ssingaddtonal funds | government tecauseacoporationcan | regula L_aedarestoawidge [ee iSingur aceteap | We te deere ae poms wntryiertm | egenebelre you can a epi end then een get your share in the tho are most qualified for ean alee rs the task, © A cooperative is generally | > A cooperative is susceptible + Dale Tora sale sexsi or ri Preah where Busnes Para areal ditibted Pithe owners) ina ‘Siperation you have to Saker the board of Tr ented toonly one vole regards of his ther Shareholdings However, Seeertert thee shareholdings ae ened to lager share in profit (nt supa) | Than By employed professional mnagers. am a member, one sot! policy in ‘cooperative influential ‘embers tend to dominate the election process. The [© Unlimited life, in the sense Although a corporation has egal life of 50 years this ‘canbe renewed for an Indefinite number of renewals * Unie ina corporation, waco" cooperative affirsis no affected by the "umber of hares Thats becareg Ise alive each member ‘exempt from paying taxes. Thisis the main advantage ‘ofa cooperative and the ‘most common reason why ‘cooperatives are organized Moreover a cooperative may receive assistance from the goverment to corruption. Due tots ‘management siructure and lackot profit motive, the | elected officersmay be inlined to act on theie ‘personal interests © Compared toa corporation, cooperative is easier and. less costly to form because ‘there are fewer formal business requirements ‘appropriate a portion ofits “The Cooperative Code places some restrictions on. the distribution of a ‘ooperative's profit to its ‘members. More ‘specifically, the Code equles a cooperative toMerchandising busi A merchandising Ind els goods without changing the 1g business) is one that buys > (ot trai see physical form. sere ingwave stores, pharmacies, onfine Stores, Sasa ores, te.) b. Distributors and dealers (i rs dealers, te) ie wholesalers, vegetable dealers, Manufacturing business A manufacturing business is one that buys raw materials and processes them into final products, Unlike a merchandising siness, a manufacturing business changes the’ physical form of the goods it has purchased ina procction process. For example, a business that buys and sells eggs is a merchandising business, On the other hand, a business that buys eggs and uses the eggs as ingredient in making cakes for sale isa ‘manufacturing business, Examples of manufacturing businesses include: ir manufacturers (Toyota, tau, Volkswagen, etc) Zehlon companies (Apple Samaung Sony ete) ond processing companies (San Miguel Pigg Fat Peesing companies (San Miguel Pure Food Facories (doting factories, wares factories, ete) animal feeds fac Sob se led yi ‘ sri busin none type of activit Ta Ingedions cok a meal faa 8 Sik necro ‘evertheless, a hybrid by provide dining services thus, they are more of a servicetyPe: ‘Advantages and Disadvantages of the Different Types of Service Business, ‘You don't need to worry about nventory, swarebasing and lsribution costs because you dnt have any Fnventory. You only have some minimal supplies necessity in providing your [Disadvantages "% You may nothave a flexible personal time because you need to be directly invalved in providing a service toa ‘customer. You can stock inventory but not service, spend overtime to produce goods, stock them, and then, ‘ake a break However, if you area doctor, you are on «all, and have tobe the one to personally examine » patient. ‘manufacturer, you can Until your busines is big enough tobe able to hire the professionals to do the work for you, you wil reed to render the services Maa ay |Tae | “You may oly Cpl use ha Bape med yourself fo render a service: f you factaer you qalwe serials: red tbuy aw materia find machinery to produce your product [© You are perceived as an expert in your chosen field People respect you. You can also have fansl@ “Service businesses normal afer frst (rom decline demand during times of Sconomic dificult. This iy becouse most services are ceived as lures father pera than necesaltes for survival For example, a guy with Tow funds would refrain from having a haircut and uses his funds for food instead, A smart gal with low funds would cut back her expenditures on spa and pedicure, Your busines success depends on your credibility. Personally, you must have a gooid reputation. You need to be always discreet in the things you say and the way ood the customer can just return the goods and hhave them replaced. However ifyouarea barber and commits an error, you can't jus replace your customers hai! Merchandising Business Advantages | Compared ta manufacturing fm, you may need a much lower start-up capital because you don’t nee to acquire machineries to produce your goods, © You can take advantage of Price uctuations For example, when goods are ‘onsale, you can acquire them ata discounted price and resell them a much higher price. You cant do this ina sevice business [Disadvantages] "You need tohave a retail store to display your goods and the store must bein a strategic location fr itto trac more customers, 9 essen managing | cont Thisisbeeuse he Costol our goods hod primarlon thc purchane pec which you dona eat ‘Ina manufacturing Dusiness, you can cut down ‘employing more skilful Personnel, and so much one, [more |is because “what you buy what you sll Ina service oF ‘manulacturing business, you need to continually improve your products t0 maintain thi salabiity In | amerctaasng business ita certain product isnot selling wel, you can just Stop buying it and find an altemative product, another brand maybe Tis much easertosterta | ‘merchandising business because you don't ned to have an expertise ora special sil service business) and you don't eed tohave invented a "ew product or have | ‘onceptalized an imovative idea for an existing product, Nabaracaestnes business), exp rack of nvenny fetes, most especialy when you are sling | qumerous and varied it with fast enover ae ke forexample if your trsines is hardware ol ‘ap ima wider marke and ‘an produce in large quanites Manufacturing Business. ‘Advantages Disadvantages | [You avea high growih [7 You need high star-up Potential because youcan | capital toacquire machineries to employ people, and to acquire a big, space for your production. fora grocery store. Also, you ‘an incut additional ess clue to spollages theft, breakages, damages, and obsolescence 7 You have the opportunity to establish brand that, ‘ould lst longer than your lifetime. This is the ulkimote 7 Concepiualizing a viable rmanulacturing business dificult This is why more entrepreneurs would rather ‘Sel-satisfaction is low because you did not produce the products you sold, ream of most engage in merchandising entrepreneurs, Younced tobe | © Stfsatsacion high Knowing that consumers are happy and satisfied with tangible product you have produced brings you ride and joy. continuously innovative and abreast of changes in technology. Ifanother company comes up with a better and cheaper produc, your product will automatically lose demand, "© You may not need tohavea strategically leat retail ore to display your Products because you can sell tet to wholesalers ‘rather thant end consumers © You can have a beter |__ingplicy becnse mae juction can decease | ® You ray on raw mana] ‘Warehousing and logistics ‘costs canbe high, You nevd to manage them Proper to ensure that theynealled [your unit eos (often pn besa the ent Pees oly 1 (Pion = Therefore, you nnd tell suit forore thon | Pica am pot However, you produce 10,000 units your unit cost would be mach lower because the rent will be allocated to more units te, 0 (P100,000+ 10,000 units) You can now sell each unitat a much lower ace 7 Greta smn cont i dndagef edie ata sory ‘Managing a manuf at i more aceouning work is needed. That is why ae available when they apg ded, This is because a ee oe tere oo eee pete aoe | a ecng aoe For example, when cooking, ce, ll the ingredients you reed must be available, You tannot cook the rice now nd just ada the water later fe, eet accounting (Chapter 1 Summary: Accounting is 2 process of identifying, recording and information that is useful in making eee conaiedetoon + Gay “aconrtble events” are recorded in th bos OF sccounte Account ert re owe tht afc the atts, eat gly he cel Which products o serves are sling well and which are ot? > Isthe business spending too much on expenses? Does the bosiness need to cut done costs? > Is the Busines generating enough cash from its operating, setiviis? External users may need to know the following > For creditors: Is the business generating. enough cash ‘edd to pay its maturing labilites? > For investors: Is the business earning enough profits 0 ensure future growth? > Forthe government: Is the business paying the right taxes? ‘Thus, instead of waiting until the life ofthe business ends bore profit is determined, the life ofthe business is divided into series of equal short periods called reporting periods (or accounting periods) ‘A reporting period is usally 12 months, although it can bbe longer or shorter. A 1-month accounting period is ether a calendar yer peri afl yer peri > A calendar year period stats on January 1 and ends on. December 3i of the same year. > A fiscal year peri also covers 12 months but stats on a date other than January 1, eg, July 1, 2019 to June 30, 200, ‘An accounting period that is shorter than 12 months is ‘alle an “interim period” An interim period can be a monty a {uarer(@ months) or semiannual period (6 mort), se concept asst abi ted in terms Of 8 om expenses pe peso in the. Philipping hich is the Be 3 ver of the peso is regarded gg mit ~ Under t Stable monetary 0 eat i‘ the purchasing power ofthe pes Mable Therefore, changes if {due to inflation ae ignored. ept guides the accountang yt ~ This concept B 2 eat cnt - The ome ae plicable only to material items if its omission op men tem is comidered. mer ald ndvence economic decisions. Matera sil fudge an is based on the size and ature ofan item being judged. For example, material items are communicated to Uses inva more detailed manner as compared to immaterial items, Another example is that big companies often round-off amounts in their financial reports. An account with a balange of P323,487,679,21.21 may be reported as 323,488 with an indication of the level of rounding-off as (in /000,0005), lions." Since the company’ is big (nature), the of P67962121 (size) is considered immaterial ngroff this amount would not affect the decision making ofthe users. store to buy some stuff worth P9999, which yor Ie should be noted thoy2 cxtain amount Accounting principles do'not specify & that is camsidened material ~ this i « matter of profesional facts and drcumstances jnjgmont and depends on the rouraing the enity (eg, what is material to you might be immaterial to others, and vice=-vers). of CCos-beneit (Cost constraint) = Under this concep, the ost ing and commuricating information should not exe the benefits tobe derived from the informaticn’s use ult disclosur principle This concept is related both the Concepts of materiality and cost-benefit. Under the ill ‘Aslosure principe, information communicated to users reflect ‘series of jdgmental trade-offs that strive fr: 3 *Sutfcient detail o disclose matters that make a difference tousers, yet ». Sufficient condensation to make the information understandable, keeping in mind the costs of preparing and using ‘ Consistency concept ~ This concept requires a business apply accounting policies consistently, and p information consistently, from one period to a means that ike transactions must be accounted Ea Summary Base Accounting Comer ent concept 1 Separate 2 istorcleost concert em assumption 7 Time Period 4 Sabie monetary unit 1 Materaity concept 10. Cost benefit 11 full disclosure principe onsistency concept nti cepts 1 Fe te rg err ma eee Nee ee ieee pe aces 2 pial ee ere av ee pee oe Kae van eo ones ‘expense, (Matching concept) vo eiecer rao ee io at at ct oe ae vorrei aed Tease es (im navi DOOAcne ed Prins 3 Ai end of the year, you prepored the rand saterents cot your busines fo determine, among oars, whee he busnet Nas ‘ume prof (Tne period) [ore Adhen preparing the anil tatements, you dicovered tat the busine hat $10 (a), You wl rare ths to Piling peo tng the cuet exchange rate The amount the: you wil report the nance! Matement the andted sour. Stable monetary nt) ‘vo, you have found out that the regu sang pice of 3 new ptng machine Increaed fem P100,000 {0 P120,000. You wil \hrove mis oration Stabe monetary wn ad report the pati ‘Rohini agtton ert of 80,000 in the nana sttements | (etiterica! cost). This 's because you don't intend or expect to dose eur basins: the foreseeable tne (Gag Conc) During the yer. the busine Bought rs bin for PEO. You pec 10 ue tht over several years. However, because you deemed the cota immaterial you wl eof this as an expense rather than ont. (Mato) Moreover, when you prepared the finn satersents, you cide fo cide the com of the tah bin fr 8 "Micalancous Expenses account together with other immaterial expenses. You don't expec ust of the Mandal statements to bene rom reporting the Immaterial cos separately. (Cost-beneft ‘You will make’ 2 bref dexcrption of the “Micllaneous Expenses" acount In the notes 16 franca salement,slficent for {ab to understand the ate ofthis ecount (Fel eonure) ‘You then adopied an accounting policy ef expensing curight 8 acquistons of equipment costing P5.000 and below. You wl ‘spy ths poly constantly nthe ure periods. (Consitengy) ecounting standards Accounting concepts and principles are either explicit or implicit Explicit concepts and principles are those that are specifically ‘mentioned inthe Conceptual Frnwrk for Fnencal Reporting and in the Philippine Finmcial Reporting. Skndands (PERS). Implicit ‘omerpts and. principles are those that are not specifically ‘mentioned in the foregoing but are customaly used because of their general and longtime acceptance within the accountancy practice. Hower pine Financial Reporting 2 ee ning principles (GAAP). Piippine Financia Re Standards (PFRSS) ace Snir 1 Reporting Sta ‘Fae Phpine Financial Reporting ard tert adopted by the i ofthe flowing: Council FRSC)-They consist ofthe a e Mhlippine Financial Reporting Standards (PFRS®), Philippine Accounting Standards (PASS); and rncial Reporting Standards Interpretations my od er erp ee es ey sil te Ph ‘standard-setting body in the Philippines. aie ‘The PFRSs are