UNIT 1: INTRODUCTION TO ACCOUNTING

1.1 Introduction to Accounting

1.1.1 Definition, nature, scope
Definition
• the process by which financial information about a business is classified, recorded, summarized, interpreted, and
communicated to owners, managers, and other interested parties (Price et al., 2021)
• the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and
events which are, in part at least of financial character, and interpreting the results thereof (AICPA)
Nature
• an art
• a service primarily engaged in providing financial information to interested users in making economic decisions
Scope
• deals with financial information and transactions

Generally Accepted Accounting Principles (GAAP):

Monetary / Money measurement / Monetary unit
• assumes that only transactions that can be expressed in monetary terms are recorded
• assumes that the peso is used to record transactions and that it is relatively free from value fluctuations
- inflation and currency changes

1.1.2 Branches
Branches
Financial Accounting provides general-purpose financial reports to various external users
Auditing External audit – provided by an independent third party that reviews a company’s
financial statements to assess their fairness and adherence to accounting principles
Internal audit – provided by internal auditors that evaluate the company's policies
and procedures to identify and weakness, mismanagement, waste, or fraud
Cost Accounting accounting and classifying costs and expenses to determine total cost of
a product/service
Managerial Accounting provides internal financial reports, mainly the managers, for decision-making
Government Accounting prepares financial reports for the government and its agencies
Tax Accounting prepares tax returns and ensures tax compliance
Accounting Education accounting for the academe and research
Accounting Information System a system that a business uses to collect, store, manage, process, retrieve, and report
its financial data that are used by various internal users
Forensic Accounting focuses on legal affairs such as inquiry into fraud, legal cases, disputes and claims
resolution

Areas (Price et al., 2021)

Public Accounting providing accounting services for other companies
• Auditing – deals with the review of financial statements to assess their fairness and adherence to accounting
principles (The word 'fair' in Accounting means that a transaction is accounted for in accordance with accepted
accounting rules.)
• Tax Accounting – deals with
o Tax compliance – preparation and audit of tax returns
o Tax planning – giving advice to clients on how to structure their financial affairs in order to reduce tax
liability
• Management advisory services – deals with helping clients to improve their information system
and business performance
Private accounting working for a single business entity in a specific industry
Governmental accounting keeping financial records and preparing financial reports for
the national government, its various departments, and local government units
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1.2 Brief history of accounting – Refer to video posted in Canvas

1.3 Users of accounting information

1.3.1 Primary users (Conceptual Framework 1.5)
• Investors (Individuals, Businesses, Banks, Insurance companies)
o Existing investors – monitor business performance to check return on their investments
o Potential investors – monitor business performance to assess risk and reward of future investments
• Lenders and other creditors
o Lenders – ensure that the business is capable of repaying a loan and determine the terms of the loan
o Suppliers / Creditors – assess the ability of the business to pay its bills for extending credit and
setting credit terms and credit limit

1.3.2 Other users

• Internal users
o Owner/s – monitor business performance to check return on their investment
o Managers – evaluate the results of their operations to plan and make decisions for the future
o Employees – ensure that the business can pay salaries and other benefits
• External users
o Tax authorities – collect taxes (E.g., employee tax, sales tax, property tax, business tax, etc.)
o Regulatory agencies – oversee the financial information provided by public companies
(E.g., The Securities and Exchange Commission (SEC) enforces security laws and protects against
infractions like insider trading, accounting fraud, and companies which provide misleading information
about their financial condition)
o Customers – check to see if they can rely on continued service or supply of goods
o Employee unions – negotiate salary increases, benefits, and profit-sharing
o Trade associations – provide summary reports to assess the business and the industry
o Financial intermediaries
▪ Financial analysts – provide summary reports to assess the business and the industry for
investment purposes
▪ Stock brokers – assess returns of current and future stock investments
▪ Mutual fund companies – monitor business performance to assess risk and reward of current and
future investments
▪ Credit-rating agencies – provide summary reports to assess the credit-worthiness of public
companies (ability to make timely payments of principal and interests)

1.4 Forms of business organization

1.4.1 As to ownership (See next page for details)
• Sole proprietorship
• Partnership – By the contract of 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
(Article 1767, Civil Code of the Philippines)
• Corporation – A corporation is 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
(Section 2, Revised Corporation Code of the Philippines).

1.4.2 As to activity
• Service – a business that provides service
• Merchandising / Trading – a business that buys and sells goods
• Manufacturing – a business that converts raw materials to finished goods

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Forms of business organization as to ownership
Sole proprietorship Partnership Corporation
Definition A business entity owned by A business entity owned by A separate legal entity* that
an individual trading alone two or more individuals, has a legal right to own
in his/her own name, or called partners, who enter property and conduct
under a recognized business into a contract called the business in its own name
name, who solely takes all partnership agreement*, to
business profits and solely conduct business (or
assumes all business losses practice a profession**) and
(unlimited liability) divide profits among
themselves
Number of owner/s One Two or more One or more
Business life Ends when the owner Ends by Can continue indefinitely
-passes away -the termination of the and ends only when
-unable to carry on definite term or particular -business goes bankrupt
business operation undertaking of the -when the stockholders**
-decides to close partnership vote to liquidate
the business -the express will of any
partner, acting in good faith A corporation shall have
-the death, insolvency, civil perpetual existence unless
interdiction of any partner its articles of incorporation
-decree of court provides otherwise.
(Article 1830, Civil Code of the (Section 11, Revised Corporation
Philippines) Code of the Philippines)
Responsibility Owner is solely liable Partners are responsible Stockholders are not
for business debts for all business debts individually and jointly for responsible for the business
the business debts debts; their liability is
limited to the amount of
their individual investment
(limited liability)
* The partnership agreement covers provisions such as:
• Capital invested
• Profit & loss sharing
• Interest on capital – an agreed rate of interest given to a partner for capital invested
• Interest on drawings – an agreed rate of interest charged to a partner for drawings made
• Salary and bonus for partners working in the partnership
• Interest given to a partner who extends loan to the partnership
• Responsibilities of the partners in managing the business

**Regulated professions cannot be established as a corporation because this will go against public policy by giving
practicing professionals a way to avoid personal liability. E.g., Accountants, Architects, Doctors, Engineers, Lawyers

*Separate legal entity means that

• the business can sue and be sued in itself
• the business can carry out transactions in the business name
• the business needs to pay company tax (corporate tax)

**Owners are called stockholders (shareholders) since ownership is divided into number of stocks (shares) and is
evidenced by holding a stock certificate. Stockholders may be directors so they will receive a directors’ remuneration.

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GAAP:
Entity / Business entity / Economic entity / Separate entity
• assumes that a business unit is separate and distinct from its owner/s
• requires that business’s accounting records should always be kept separate from the owner’s personal
accounting records

Generally accepted accounting principles (GAAP) refer to a common set of rules, procedures, practices and standards
followed in the preparation and presentation of financial statements issued by the Financial Accounting Standards Board
(FASB). GAAP are rules that accountants follow in recording business transactions and preparing financial statements.

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REFERENCES
• IFRS Foundation (2018, March). Conceptual Framework for Financial Reporting.
• Price, J., Haddock, M., & Farina, M., (2021). College Accounting, 16th edition. McGraw-Hill Education.
• Robinson, Sheila & Wood, Frank. (2010) Edexcel IGCSE, Pearson Company.
• Spiceland, Sepe, Thomas, Tan, Low, Low (2019), Intermediate Accounting Global Edition (2nd Edition), McGraw- Hill Education (Asia).
• Electronic Sources:
o Republic Act No. 386 An act to ordain and institute the Civil Code of the Philippines. [On-line] Available
https://www.officialgazette.gov.ph/1949/06/18/republic-act-no-386/
o Republic Act No. 11232 An act providing for the Revised Corporation Code of the Philippines [On-line] Available
https://www.officialgazette.gov.ph/downloads/2019/02feb/20190220-RA-11232-RRD.pdf

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