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Course Code: EC1

INITAO COLLEGE Course Title: Intermediate Accounting and
Jampason, Initao, Misamis Oriental Business Application
1st Semester, S.Y. 2023 - 2024 Unit: 3 (Lecture)
Facebook Group: EC1_BSBA1-Initao College 2023

MODULE 5: September 11 – September 15, 2023

Topic: Desired Learning Outcome:

Users of Accounting Information  Define external and internal users and give
examples
 Describe the type of information needed by each
user

ANALYSIS

What are the uses of accounting information?

All accounting information is financial. Businesses also collect nonfinancial information. For example, a
company maintains records on its employees including the number of people employed, their names,
addresses, job titles and evaluations of their performance.

A business may also collect and analyze information about customers such as their buying preferences or
past order histories.

A manufacturer may collect data on the amount of time a production machine is used and its output. However,
this nonfinancial information is not maintained by accountants. The fact that we account for information that
can be expressed in terms of money is referred to as the monetary unit assumption.

Accounting provides financial information to two groups of users: internal users and external users. Therefore,
accounting is divided into two areas: managerial accounting and financial accounting.

• Managerial accounting accumulates and analyses financial information for internal users for planning,
decision making, and control.

• Financial accounting accumulates and analyses financial information for external users who are interested in
the performance and financial position of the business.

Financial
Managerial
infromation for
Accounting
internal users
Accounting
Financial
Financial
information for
Accounting
external users

Internal Users of Accounting

Internal users are the primary users of accounting. Following are the 3 types of internal users and their
information needs:

Owners: Owners need to assess how well their business is performing. Financial statements provide
information to owners about the profitability of the overall business as well as individual products and
geographic segments. Owners are also interested in knowing how risky their business is. Accounting
information helps owners in assessing the level of stability in business over the years and to what extent have
changes in economic factors affected the bottom line of the business. Such information helps owners to
decide if they should invest any further in the business or if they should use their financial resources
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elsewhere in more promising business ventures.

Managers: Managers need accounting information to plan, monitor and make business decisions. Managers
need to allocate the financial, human and capital resources towards competing needs of the business through
the budgeting process. Preparing and monitoring budgets effectively requires reliable accounting data relating
to the various activities, processes, products, services, segments and departments of the business.
Management requires accounting information to monitor the performance of business by comparison against
past performance, competitor analysis, key performance indicators and industry benchmarks. Managers rely
on accounting data to form their business decisions such as investment, financing and pricing decisions. In
case of investment decisions for example, managers would require the return on investment calculation of a
proposed project supported by reliable estimates of the costs and revenues.

Employees: For the employees operating in the finance department, using accounting information is usually
part of their job description. This includes for example preparing and reviewing various financial reports such
as financial statements. Employees are interested in knowing how well a company is performing as it could
have implications for their job security and income. Many employees review accounting information in the
annual report just to get a better understanding of the company’s business. In recent years, the increase in
number of shares and share options schemes for employees particularly in startups has fostered a greater
level of interest in accounting information by employees. Moreover, potential employees are also interested to
learn about the financial health of the organization they aspire to join in the future.

External Users of Accounting

External users are the secondary users of accounting. Following are the 8 types of external users and their
information needs:

Investors: Investors need to know how well their investment is performing. Investors primarily rely on the
financial statements published by companies to assess the profitability, valuation and risk of their investment.
Investors use accounting information to determine whether an investment is a good fit for their portfolio and
whether they should hold, increase or decrease their investment.

Lenders: Lenders use accounting information of borrowers to assess their credit worthiness, i.e. their ability
to pay back any loan. Lenders offer loans and other credit facilities on terms that are based on the assessment
of financial health of borrowers. Good financial health is indicated by the borrower’s ability to pay its liabilities
on time, high profitability, substantial securable assets and liquidity. Poor liquidity, low profitability, lack of
assets that can be secured and an inability to pay liabilities on time demonstrate poor financial health of
borrowers. On a lighter note, borrowers can only get a loan from lenders if they can prove that they don’t need
the money.

Suppliers: Just like lenders, suppliers need accounting information to assess the credit-worthiness of its
customers before offering goods and services on credit. Some suppliers only have a handful of customers.
These customers could be very large businesses themselves. Suppliers need accounting information of its key
customers to assess whether their business is in good health which is necessary for sustainable business
growth.

Customers: Most consumers don’t care about the financial information of its suppliers. Industrial consumers
however need accounting information about its suppliers in order to assess whether they have the required
resources that are necessary for a steady supply of goods or services in the future. Continuity in supply of
quality inputs is essential for any business.

Tax Authorities: Tax authorities determine whether a business declared the correct amount of tax in its tax
returns. Occasionally, tax authorities conduct audits of the tax returns filed by businesses in order to verify the
information with the underlying accounting records. Tax authorities also cross reference accounting
information of suppliers and consumers in order to identify potential tax evaders.

Government: Government ensures that a company's disclosure of accounting information is in accordance

with the regulations that are in place to protect the interest of various stakeholders who rely on such
information in forming their decisions. Government defines and monitors accounting thresholds such as sales
revenue and net profit to determine the size of each business for the purpose of ensuring that it complies with
the relevant employee, consumer and safety regulations.
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Auditors: External auditors examine the financial statements and the underlying accounting record of
businesses in order to form an audit opinion. Investors and other stakeholders rely on the independent opinion
of external auditors on the accuracy of financial statements.

Public: General public may also be interested in accounting information of a company. These could include
journalists, analysts, academics, activists and individuals with an interest in economic developments.

REFERENCES:

11 Users of Accounting Information. (n.d.). Retrieved from Accounitng-Simplified.com: https://accounting-

simplified.com/financial/introduction/users-of-accounting-information.html

https://accountingproficient.com/financial-accounting/users-accounting-information-internal-external-users/

Course Code: EC1

INITAO COLLEGE Course Title: Intermediate Accounting and
Jampason, Initao, Misamis Oriental Business Application
1st Semester, S.Y. 2023 - 2024 Unit: 3 (Lecture)
Facebook Group: EC1_BSBA1-Initao College 2023

MODULE 6: September 18 – September 22, 2023

Topics: Desired Learning Outcome:

 Forms of Business Organization  Identify and give examples of the various

 Types of Business According to Activities forms of business organizations and the
types of business according to activities
 Differentiate the various forms of business
organizations
 Describe the operating cycle of each type of
business
ANALYSIS

A business entity is an organization that uses economic resources to provide goods or services to customers
in exchange for money or other goods and services. It is an organization that converts inputs or resources
such as material, labor, and overhead into outputs which are usually either goods or services.

Business organizations come in different types and in different forms of ownership.

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship - A business structure owned by an individual who has full control/authority of its
own and owns all the assets;
- Personally owes and answers all liabilities or suffers all losses but enjoys all the profits to the
exclusion of others;
- A sole proprietorship must apply for a Business Name and be registered with the Department of
Trade and Industry (DTI).

2. Partnership - 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 (Civil Code of the Philippines);
- Treated as juridical person, having a separate legal personality from that of its members;
- May either be general partnerships or limited partnerships.

3. Corporation - artificial beings 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.
Corporations are juridical persons with personality separate and distinct from that of its stockholders.
It consists of at least five (5) to fifteen (15) incorporators each of who must hold at least one share and
must be registered with the SEC.
- The minimum paid up capital required is not less than five thousand pesos (Php 5,000.00).
- Can either be stock or non-stock company regardless of nationality.
- If 60% Filipino and 40% foreign-owned, is considered a Filipino corporation. If more than 40% foreign-
owned, it is considered a domestic foreign-owned corporation.
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a. Stock Corporation - a corporation with a capital stock divided into shares and authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits on the basis
of such shares.
b. Non-Stock Corporation - a corporation organized principally for public purposes such as
charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and chambers
- No part of its income is distributable as dividends to its members, trustees, or officers.
- Any profit which a non- stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which
the corporation was organized.

4. Cooperatives - Article 3 of Republic Act 9520 defined cooperative as:

An autonomous and duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic and cultural needs and aspirations by making
equitable contributions to the capital required, patronizing their products and services, and accepting a
fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative
principles.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES:

1. Service Companies – are 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.
(Examples are accounting firms, law firms, salons, restaurants, barber shops, laundry shops, etc.)

2. Merchandising Companies – sell tangible* products. This type of business buys finished or almost finished
goods from their suppliers and resell the same to customers. (*tangible means something that we can see with
our eyes such as chairs, necklace, cellphone, laptop, etc.) Merchandising companies primarily earn revenues
from the sale of the goods of merchandise, also known as sales revenue or sales.

3. Manufacturing Companies – or simply manufacturers, they buy materials, convert them into products, and
then sell the products to other companies or to the final consumers. (Example is the Mega Sardines: they buy
fish, empty cans and tomato sauce; then process them and make canned sardines as finished products.)

Operating Cycle of Service Companies Operating Cycle of Merchandising Companies

Cash
on
hand

Receives Pays
payment employees
from and other
customers expenses

Performs
services

Operating Cycle of Manufacturing Companies

Receives
payment Cash on
from hand
customers

Pays for
inputs
Sell
(materials,
inventory
labor,
overhead)
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Converts
Stores
inputs
finished
into
goods as
finished
inventory
goods