Introduction to Accounting

Definitions of Accounting
Accounting has evolved in response to the social and economic information
needs of society.
In a market economy, information helps decision-makers make informed choices
regarding the allocation of scarce resources under their control.
Accounting is a system that measures business activities, processes information
into reports, and communicates the results to decision-makers.
Accounting qualifies business communication. For this reason, accounting is
called the language of business.
Several definitions of accounting have been provided by authoritative bodies
around the world.

Accounting is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities that is intended to be useful
in making economic decisions. (Accounting Standards Council,1983)
Accounting is an information system that measures, processes and
communicates information about an economic entity. (Financial Accounting
Standards Board,1978)
Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by users of
the information. (American Accounting Association, 1966)
Accounting is 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 a financial character, and interpreting the results thereof. (American
Institute of Certified Public Accountants, 1953)
 Accounting Financial American American Institute
Standards Council Accounting Accounting of
Standards Board Association Certified Public
Accountants

Accounting is a Accounting is an Accounting is the Accounting is the

service activity. Its information process of art of
function is to system that identifying, recording,
provide measures, measuring and classifying and
quantitative processes and communicating summarizing in a
information, communicates economic significant manner
primarily information about information to and in
financial in nature, an economic permit terms of money,
about economic entity. informed transactions and
entities that is judgements events
intended to be and decisions by which are, in part at
useful users of the least,
in making economic information. of a financial
decisions. character,
and interpreting the
results thereof.

Users of Information

● Decision-makers need information. The more important the decision is, the
greater is the need for reliable information.
● There are two basic types of accounting information users: external and internal.

External Users

• External users are individuals and others that have current or potential financial
interest in the reporting entity but are not involved in the daily operations of the entity.

• The information needs of these users are diverse so that only the primary or the
general-purpose financial statements are provided.

• These users may include owners, stockholders, creditors, customers, suppliers,

government agencies, potential investors, brokers, trade association and the general
public.
• The information needs of this type of users are served by the branch of accounting
called financial accounting.

Internal Users

• Internal users include the board of directors, CEO, CFO, vice presidents, internal
auditors, business unit managers, plant managers and supervisors.

• These employees have different specific goals that are designed to help the entity
attain its overall strategies and mission.

• Management accounting serves the information needs of this group.

Forms of Business Organizations

• In the Philippines, a business may be organized as a:

1. Sole proprietorship

2. Partnership

3. Corporation

Sole Proprietorship

• This business organization has a single owner called the proprietor who generally is
also the manager.

• Sole proprietorships tend to be small service-type.

• The owner receives all profits, absorbs all losses and is solely responsible for all debts
of the business.
Advantages:

1. Easy to set up and discontinue.

2. Requires a small amount of capital to start.

3. Profits accrue to the owner.

4. Total control on the part of the owner.

Disadvantages:

1. Unlimited personal liability.

2. Limited management skills.

3. Limited access to capital.

4. Lacks continuity in case of death or incapacity of the

owner.

Partnership

• In a 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 profit among
themselves. Two or more persons may also form a partnership for the exercise of a
common profession. (Civil Code of the Philippines, Article 1767)

• The partnership has a juridical personality separate and distinct from that of each of
the partners.

• Partnerships resemble sole proprietorships, except that there are two or more owners
of the business.
Characteristics:

1. Mutual contribution – of money, property, or industry to a

common fund

2. Division of profits and losses

3. Co-ownership of contributed assets

4. Mutual agency

5. Limited life

6. Unlimited liability

7. Income taxes – taxed as a corporation

Advantages and Disadvantages of a Partnership

Advantages vs. proprietorships

1. Brings greater financial capability to the business.

2. Combines special skills, expertise and experience of the partners.

3. Offers relative freedom and flexibility of action in decision-making.

4. Risks are shared.

Advantages vs. corporations

1. Easier and less expensive to organize.

2. More personal and informal.

Disadvantages

1. Profits are shared.

2. Easily dissolved and thus unstable compared to a
corporation.
3. Mutual agency and unlimited liability may create personal
obligations to partners.
4. Less effective than a corporation in raising large amounts
of capital.

Corporation

• A corporation is an artificial being created by operation of law, having the right of

succession and the power, attributes and properties expressly authorized by law or
incident to its existence. (Revised Corporation Code of the Philippines, Sec. 2)

Attributes of a Corporation

1. A corporation is an artificial being with a personality separate and apart from its
individual shareholders or Members.

2. It is created by operation of law.

3. It enjoys the right of succession.

4. It has the powers, attributes and properties expressly authorized by law or incident to
its existence.

Advantages of a Corporation

1. The corporation has the legal capacity to act as a legal entity.

2. Shareholders have limited liability.

3. It has continuity of existence.

4. Shares of stock can be transferred without the consent of the other shareholders.

5. Its management is centralized in the board of directors.

6. Shareholders are not general agents of the business.

7. Greater ability to acquire funds.

Disadvantages of a Corporation

1. A corporation is relatively complicated in formation and management.

2. There is a greater degree of government control and supervision.

3. It requires a relatively high cost of formation and operation.

4. It is subject to heavier taxation than other forms of business organizations.

5. Minority stockholders are subservient to the wishes of the majority.

6. In large corporations, management and control have been separated from ownership.

7. Transferability of shares permits the uniting of incompatible and conflicting elements

in one venture.

Cooperatives

A cooperative is
• 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 undertaking

• In accordance with a universally accepted cooperative principles.

• Cooperatives in the Philippines are supervised by the Cooperative Development

Authority, an agency directly under the Office of the President.
Objectives and Goals of a Cooperative

The primary objective of every cooperative is to help improve the quality of life of its
members. Toward this end, the cooperative shall aim to:

1. Provide goods and services to its members to enable them to attain increased
income, savings, investments, productivity, and purchasing power, and promote among
themselves equitable distribution of net surplus through maximum utilization of
economies of scale, cost-sharing and risk sharing;

2. Provide optimum social and economic benefits to its members;

3. Teach them efficient ways of doing things in a cooperative manner;

4. Propagate cooperative practices and new ideas in business and management;

5. Allow the lower income and less privileged groups to increase their ownership in the
wealth of the nation; and

6. Cooperate with the government, other cooperatives and people-oriented

organizations to further the attainment of any of the foregoing objectives.

Cooperative Principles

• One of the ways cooperatives differ from other business structures is their adherence
to cooperative principles and values that reflect social, political, and business concerns.

• The seven principles used by the International Cooperative Alliance today are
generally accepted by cooperatives worldwide.

1. Voluntary and open membership

2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training, and information
6. Cooperation among cooperatives
7. Concern for community
1. Voluntary and open membership

• Cooperatives are voluntary organizations, open to all persons able to use their
services and willing to accept the responsibilities of membership, without
gender, social, racial, political or religious discrimination.

2. Democratic member control

• Cooperatives are democratic organizations controlled by their members, who actively

participate in setting their policies and making decisions. Men and women serving as
elected representatives are accountable to the membership. In primary cooperatives
members have equal voting rights (one member, one vote) and cooperatives at other
levels are also organised in a democratic manner.

3. Member economic participation

• Members contribute equitably to, and democratically control, the capital of their
cooperative. At least part of that capital is usually the common property of the
cooperative. Members usually receive limited compensation, if any, on capital
subscribed as a condition of membership.

• Members allocate surpluses for any or all of the following purposes: developing their
cooperative, possibly by setting up reserves, part of which at least would be indivisible;
benefiting members in proportion to their transactions with the cooperative; and
supporting other activities approved by the membership.

4. Autonomy and independence

• Cooperatives are autonomous, self-help organizations controlled by their members. If

they enter into agreements with other organizations, including governments, or raise
capital from external sources, they do so on terms that ensure democratic control by
their members and maintain their cooperative autonomy.

5. Education, training, and information

• Cooperatives provide education and training for their members, elected

representatives, managers, and employees so they can contribute effectively to the
development of their co-operatives. They inform the general public - particularly young
people and opinion leaders - about the nature and benefits of co- operation.
6. Cooperation among cooperatives

• Cooperatives serve their members most effectively and strengthen the cooperative
movement by working together through local, national, regional and international
structures.

7. Concern for community

• Cooperatives work for the sustainable development of their communities through

policies approved by their members.

Advantages of a Cooperative

1. Unlimited life
2. Equality of members
3. Tax benefits
4. Limited liability
5. Greater ability to attract capital
6. Afford greater business volume with the resulting benefit
of bigger profits which will be shared by more people

Disadvantages of a Cooperative

1. Shared control
2. One member, one vote