MODULE 1-Accounting and Its Environment

Republic of the Philippines
ISABELA STATE UNIVERSITY

Echague Campus
COLLEGE OF BUSINESS ACCOUNTANCY AND PUBLIC ADMINISTRATION

Department of Accountancy & Management Accounting
MODULE
Financial Accounting and Reporting
Subject : ACCTY 111-Financial Accounting & Reporting

Class : Bachelor of Science in Accountancy 1
Subject Professor : Dr. Jeanette Ignacio-Gonzales, CPA
School Year : First Semester School Year 2023-2024
Isabela State University-CBAPA 2
MODULE 1: Accounting and its Environment
FINANCIAL ACCOUNTING & REPORTING-1st SEM SY 2023-2024
ACCOUNTING is considered by many as a thoroughly systematic profession which

can only be understood by accountants. The world of accounting, just like other
professions, is continuously evolving in order to cope with the changing times. The
ever-increasing need for relevant financial information in the decision-making
process relies partly on what accounting has to offer. As a result of the changing and
more complex demands of business and society, new concepts and techniques have
been developed to meet the varying needs of the business industry.
In reality, people practice accounting in the course of their daily living, whether they
be the students trying to budget their allowance, the housewives allocating the
budget for the household expenses, or the heads of the family balancing their
checkbook, or estimating their income and expenses. Accounting is always involved
in these processes.
Accounting has always been used in the business environment. It is the systematic
process of measuring and reporting relevant financial information about the activities
of an economic organization or unit. As such, it is called the “language of business.”
The development of nations towards an advance economy led to the opening of

interrelated markets. As businesses continue to expand from the international level
to the multinational level surpassing national boundaries, the world market has
become a melting pot of races transacting business. From the acquisition of raw
materials to the production of finished goods as well as from the procurement of
funds to the marketing of products, the world market is always a preferred showroom
of these events. With companies following this trend, business transactions are
becoming more complicated. Hence, on the financial aspect, more is expected from
the accountants. They will have to widen their horizon to cope with the global trend.
Along with globalization is technological development. Computers have

tremendously increased productivity, efficiency, data collection, storage, and
analysis. It has brought many changes in the field of accounting. Thus, the
accountants of the 21st century cannot just sit down and be left behind. They must
go with the flow of globalization unless they want to stagnate.
Business students must be well equipped. They are expected to meet the demands
of the industry once they graduate. As future managers, they must be able to
interpret financial information and make sound and timely decisions.
To prepare for this huge responsibility, one must be well versed in the business
language. It is for this reason that the module was written. For the students enrolled
in the business/accountancy course, this will serve as their introduction to the world
of accounting.
This module aims to give the students a solid foundation in the fundamentals of
accounting, which is an essential foundation in the higher subjects of the course.
dr.jeanetteignaciogonzales.cpa
MODULE 1
Accounting and its Environment
Introduction
The module, Accounting and its Environment, contains materials and activities
related to explaining what accounting is and its role in business including its
purposes and phases, identifying the career opportunities open to accountants and
branches of accounting & understanding why ethics is a fundamental business
concept.
In this module you are required and expected to go through a series of learning
activities in order to complete each learning outcomes/objectives. In each learning
outcomes/objectives are Task/Activity Sheets. Follow and perform the activities on
your own. If you have questions, do not hesitate to ask for assistance from your
professor. You are required to submit and compile these activities (Student
Portfolio).
Learning Objectives
After studying this module, you shoud be able to
1. Define accounting and explain its role in business.
2. Differentiate between the different forms and activities of business
organizations.
3. Discuss the importance of the purposes and phases of accounting.
4. Summarize and explain the fundamental accounting concepts and principles.
5. Discuss why ethics are important in accounting
6. Recall the branches of accounting
Learning Contents
1. Definition, purpose and nature of accounting
2. Types of business and forms of business organization
3. Fundamental accounting concepts and principles.
4. Role of Ethics in business and ethical financial reporting
5. Branches of Accounting
Some people believe accounting is boring. There, we said it. It’s a pretty safe
bet that you didn’t enrol in an accounting course because you thought it would lead
to a career in the spotlight. How often do you see Tom Cruise starring in an action
thriller about a jet-setting accountant? Exactly. However, who do you think develops
and approves the budget for his films to go into production? Who do you think
advises Mr. Cruise how to invest the salary he makes? You got it—someone just like
you, who is good with accounting concepts and knows how to handle money.
The point is: Accounting can be a lot of things you would never have imagined.
So, if an accounting career matches up with some of your interests and goals, hang
in there. We promise there is a lot more to it than crunching numbers!
The Changing Horizon

Is Accounting More Than Arithmetic?
Sure, some careers in accounting can be a little dry, but there are many more that
are dynamic and exciting. Think of any business—Sony Music, Nike, Jollibee, Metro
Bank. They all look to accountants to help run their businesses. Think of your
favorite celebrities—maybe Park Seo Joon or Hyun Bin. Most have financial
advisors. Movie producers hire accountants to track production costs. Publishers of
magazines, such as PC World and Sports Illustrated, depend on accountants to work
with national advertisers to keep things running smoothly. In this chapter you will
identify career opportunities in the accounting field.
Accounting is not just adding and subtracting. An accountant handles a broad range
of responsibilities, makes business decisions, and prepares and interprets financial
reports. These are skills that successful businesses cannot do without. If you are
good, the sky is the limit.
In a market economy, information helps decision-makers make informed choices

regarding the allocation of scarce resources under their control. When decision-
makers are able to make well-informed decisions, resources are allocated in a way
that better meets the needs and goals of those within the market.
Accounting is relevant in all walks of life, and it is absolutely essential in the world of
business. Accounting is the system that measures business activities, processes that
information into reports and communicates the results to decision-makers. For this
reason, accounting is called the language of business. The task of learning
accounting is very similar to the task of learning a new language; thus, the need for
this book which teaches the Basics of Accounting in a very conceptual manner.
No business could operate very long without knowing how much it was earning and
how much it was spending. Accounting provides the business with these information
and more. So, accountants can be called the scorekeepers of business. Without
accounting, a business couldn't function optimally; it wouldn't know where it stands
financially, whether it's making a profit or not, and it wouldn't know its financial
situation. Also, a sound understanding of this language will bring about a better
management of the financial aspects of living. Personal financial planning, education
expenses, car amortization, business loans, income taxes and investments are
based on the information system that we call accounting.
Lesson 1 Definition, importance, purpose and nature of

Accounting
DEFINITIONS OF ACCOUNTING
.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. (Statement of Financial Accounting Standards No. 1, “Basic Concepts
and Accounting Principles, Underlying Financial Statements of Business Enterprises”)
Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.
(American Accounting Association)
Accounting is the art of recording, classifying and summarizing in a significant

manner 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)
Accounting is an information system that measures, processes and

communicates financial information about an identifiable economic entity. (Statement
of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by Business
Enterprises”)
Accounting is an information system that measures, processes, and communicates

financial information about a business.
IFAC, 2021 Definition

Accounting is a technical, social and moral practice concerned with the sustainable
utilization of resources and proper accountability to stakeholders to enable
flourishing of organizations, people and nature.” (Carnegie, et. Al, 2020)
Accountants focus on the needs for financial information, whether the decision
makers are inside or outside a business or other economic entity. An economic
entity is a unit that exists independently, such as a business, hospital, or a
governmental body. Accountants supply the information decision makers need to
make “reasoned choices among alternative uses of scarce resources in the conduct
of business and economic activities.” As shown in Exhibit 1, accounting is a link
between business activities and decision makers.
• Accounting measures business activities by recording data about them for
future use.
• The data are stored until needed and then processed to become useful
information.
• The information is communicated through reports to decision makers.
• Based on information from accounting, decision makers take actions that
affect subsequent business activities.
In other words, data about business activities are the input to the accounting system,
and useful information for decision makers is the output
IMPORTANCE OF ACCOUNTING
Why is accounting so important to companies? The answer is that we live in an

information age in which accounting information impacts us all.
Accounting is an information and measurement system that identifies, records, and

communicates an organization’s business activities. Exhibit 1 shows these
accounting functions.
Exhibit 1
Accounting Functions
Our most common contact with accounting is through credit checks, checking
accounts, tax forms, and payroll. These experiences focus on recordkeeping, or
bookkeeping, which is the recording of transactions and events. This is just one part
of accounting. Accounting also includes analysis and interpretation of information.
Technology plays a major role in accounting. Technology reduces the time, effort,
and cost of recordkeeping while improving accuracy. As technology makes more
information available, the demand for accounting knowledge increases. Consulting,
planning, and other financial services are closely linked to accounting.
PURPOSE AND PHASES OF ACCOUNTING
The accounting function is part of the broader business system, and does not
operate in isolation. It handles the financial operations of the business but also
provides information and advice to other departments. Business transactions are
the economic activities of a business. Recording these historical events is a
significant function of accounting. Accounts are produced to aid management in
planning, control and decision-making and comply with regulations.
Before the effects of transactions can be recorded, they must be measured. In order
that accounting information will be useful, it must be expressed in terms of a
common financial denominator—money. Money serves as both a medium of
exchange and a measure of value.
To measure a business transaction, the accountant must decide when the

transaction occurred, what value to place on the transaction and how the
components of the transaction should be classified.
By simply measuring and recording transactions, the resulting information will be of

limited use. To be useful in making decisions, the recorded data must be classified
and summarized. Classification reduces the effects of numerous transactions into
useful groups or categories.
Summarization of financial data is achieved through the preparation of financial
statements or financial reports. These usually summarize the effects of all business
transactions that occurred during some period. After going through the preceding
phases, it is imperative that the result of the summarization phase be interpreted or
analyzed to evaluate the liquidity, profitability and solvency of the business
organization. Accounting provides the decision-makers with information to make
reasoned choices among alternative uses of scarce resources in the conduct of
business and economic activities.
Lesson 2 Forms of Business Organization

What Do Businesses Do, and How Are They Organized?
Our free enterprise system allows an entrepreneur to choose the kind of
business to operate as well as its organizational form.
FORMS OF BUSINESS ORGANIZATIONS
To start a business, a potential owner must have a sufficient amount of capital and
must choose an appropriate form of business organization.
A business assumes one of the three forms of organization. The accounting

procedures depend on which form the organization takes.
Sole Proprietorship
Sole means “single” or “one.” Proprietor means “owner.” A sole proprietorship,
therefore, is a business owned by one person. It is sometimes simply called a
proprietorship. Being a sole proprietor does not mean working alone. Based on the
operation’s size and scope, a sole proprietorship may have many managers and
employees. The oldest and most common form of business organization, the sole
proprietorship is the easiest business form to start. Little or no legal paperwork
(forms and documents) is required. The success or failure of the business depends
heavily on the efforts and talent of the owner.
Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and

accountants) businesses and retail establishments. The owner receives all profits,
absorbs all losses and is solely responsible for all debts of the business. From the
accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the
accounting records of the sole proprietorship do not include the proprietor's personal
financial records.
The advantages and disadvantages of organizing as a sole proprietorship are shown

in Figure 1-1
ADVANTAGES DISADVANTAGES
• Easy to set up • Limited expertise
• All profits go to owner • Hard to raise money
• Owner has total control • Owner has all the risks
• Few regulations to follow • Hard to attract talented
employees
Figure 1-1
Partnership
A partnership is a business owned by two or more persons, called partners, who
agree to operate the business as co-owners. A partnership is a business owned and
operated by two or more persons who bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits
among themselves. Business partners usually enter into a written, legal agreement.
This agreement specifies each partner’s investment in money or property,
responsibilities, and percent of profits and losses. Partnerships are often formed
when a business needs more capital than one person can invest. Each partner is
personally liable for any debt incurred by the partnership. Accounting considers the
partnership as a separate organization, distinct from the personal affairs of each
partner. Partnerships are not always small. For example, partnerships like the large
accounting firm KPMG may have as many as 1,600 partners and more than 18,000
employees.
Figure 1-2 lists some of partnership advantages and disadvantages.

• Easy start up • Risk of partner conflict
• Pooled skills and talents • Shared profits
• More money available • Shared risks
Figure 1-2
Corporation
A corporation is a business owned by its stockholders. It is an artificial being created
by operation of law, having the rights of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence. The stockholders
are not personally liable for the corporation’s debts. The corporation is a separate
legal entity
A corporation is a business recognized by law to have a life of its own. Unlike a sole
proprietorship and a partnership, a corporation must get permission from the
government to operate. This legal permission, called a charter, gives a corporation

certain rights and privileges. It also spells out the rules under which the corporation
is to operate. Corporations often start as sole proprietorships or partnerships. The
business owner(s) may “incorporate” to obtain money needed to expand. To raise
this money, organizers sell shares of stock to hundreds or even thousands of people.
These shareholders, or stockholders, are the corporation’s legal owners.
Figure 1-3 outlines a few advantages and disadvantages of the corporate form of
organization.
• Easier to raise money • More costs to start
• Easy to expand • More complex to organize
• Easy to transfer ownership • More regulations
• Losses limited to investment • Higher taxes
Figure 1-3
Regardless of their form as a sole proprietorship, partnership, or

corporation, all businesses share common financial characteristics and
methods for recording and reporting financial changes.
PURPOSE OF BUSINESS ORGANIZATIONS or TYPE OF ACTIVITIES

PERFORMED BY A BUSINESS ORGANIZATION
The forms of business organizations above are classified according to the ownership
structure of the business entity. Entities, however, can also be grouped by the types
of goods or services they offer. Any of these types of activities may be performed by
a business organization be it a sole proprietorship, a partnership or a corporation.
Service Businesses
A service company provides a needed service for a fee or perform services for a fee.
Service businesses include travel agencies, salons like Fantastic Sam’s, repair
shops, law firms, accounting and audit firms, stock brokerage, beauty salons,
recruitment agencies and medical centers.
Merchandising Businesses
A merchandising business buys finished products and resells them to individuals or
other businesses. Merchandising companies purchase goods that are ready for
sale and then sell these to customers. Examples are car dealers, clothing stores and
supermarkets).
Manufacturing companies
Buy raw materials, convert them into products and then sell the products to other
companies or to final consumers (e.g. paper mills, steel mills, car manufacturers and
drug manufacturers).
Lesson 3 Fundamental Accounting Concepts and

Principles
FUNDAMENTAL CONCEPTS
Several fundamental concepts underlie the accounting process.
In recording business actions, accountants should consider the following:
1. Entity Concept. The most basic concept in accounting is the entity concept.
An accounting entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a separate economic
unit. Simply put, the transactions of different entities should not be accounted
for together. Each entity should be evaluated separately.For accounting
purposes, a business organization is a separate entity, distinct not only from
its creditors and customers but also from its owners. It should have its own set
of financial records, and its records and reports should refer only to its own
affairs.
For example, Just Because Flowers Company should have a bank account
separate from the account of Molly, the owner. Molly may own a home, a car,
and other property, and she may have personal debts; but these are not the
resources or debts of Just Because Flowers. Molly may own another
business, say a stationery shop. If she does, she should have a completely
separate set of records for each business.
2. Periodicity Concept. An entity's life can be meaningfully subdivided into

equal time periods for reporting purposes. The life of a company can be
divided into time periods, such as months and years, and useful reports can
be prepared for those periods. It will be aimless to wait for the actual last day
of operations to perfectly measure the entity's profit. This concept allows the
users to obtain timely information to serve as a basis on making decisions
about future activities. For the purpose of reporting to outsiders, one year is
the usual accounting period.
3. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of

measure and that its purchasing power is relatively stable. It allows
accountants to add and subtract peso amounts as though each peso has the
same purchasing power as any other peso at any time. This is the basis for
ignoring the effects of inflation in the accounting records.
4. Going Concern. Financial statements are normally prepared on the

assumption that the reporting entity is a going concern and will continue in
operation for the foreseeable future. Accounting information presumes that
the business will continue operating instead of being closed or sold. This
means, for example, that property is reported at cost instead of liquidation

value. Hence, it is assumed that the entity has neither the intention nor the
need to enter liquidation or to cease trading. This assumption underlies the
depreciation of assets over their useful lives.
CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE
To ensure that financial statements are understandable to their users, a set of

generally accepted accounting principles (GAAP) has been developed to provide
guidelines for financial accounting. “Generally accepted accounting principles
encompass the conventions, rules, and procedures necessary to define accepted
accounting practice at a particular time.” In other words, GAAP arises from wide
agreement on the theory and practice of accounting at a particular time. These
“principles” evolve to meet the needs of decision makers, and they change as
circumstances change or as better methods are developed.
Accounting principles are established by humans. Unlike the principles of physics,

chemistry, and the other natural sciences, accounting principles were not deduced
from basic axioms, nor can they be verified by observation and experiment. Instead,
they have evolved. This evolutionary process is going on constantly; accounting
principles are not eternal truths. The general acceptance of an accounting principle
usually depends on how well it meets three criteria: relevance, objectivity and
feasibility.
A principle has relevance to the extent that it results in information that is meaningful
and useful to those who need to know something about a certain organization.
A principle has objectivity to the extent that the resulting information is not
influenced by the personal bias or judgment of those who furnish it. Objectivity
connotes reliability and trustworthiness. It also connotes verifiability, which means
that there is some way of finding out whether the information is correct.
A principle has feasibility to the extent that it can be implemented without undue
complexity or cost. These criteria often conflict with one another. In some cases, the
most relevant solution may be the least objective and the least feasible.
BASIC PRINCIPLES
In order to generate information that is useful to the users of financial statements,
accountants rely upon the following principles:
1. Objectivity Principle. Accounting records and statements are based on the

most reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by
independent observers. Ideally, accounting records are based on information
that flows from activities documented by objective evidence. Without this
principle, accounting records would be based on whims and opinions and is

therefore subject to disputes.
2. Historical Cost. This principle states that acquired assets should be recorded
at their actual cost and not at what management thinks they are worth as at
reporting date.
The cost principle (or historical cost principle) dictates that companies record
assets at their cost. This is true not only at the time the asset is purchased,
but also over the time the asset is held. For example, if Ayala Land purchases
land for ₽30,000,000 the company initially reports it in its accounting records
at ₽30,000,000. But what does Ayala Land do if, by the end of the next year,
the land has increased in value to ₽40,000,000? Under the cost principle it
continues to report the land at ₽30,000,000.
3. Revenue Recognition Principle. Revenue is to be recognized in the

accounting period when goods are delivered or services are rendered or
performed.
Revenue is recognized (1) when goods or services are provided to customers

and (2) at the amount expected to be received from the customer. Revenue
(sales) is the amount received from selling products and services. The
amount received is usually in cash, but it also can be a customer’s promise to
pay at a future date, called credit sales. (To recognize means to record it.)
4. Expense Recognition Principle. Expenses should be recognized in the

accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services. A
company records the expenses it incurred to generate the revenue reported.
An example is rent costs of office space.
5. Adequate Disclosure. Requires that all relevant information that would affect
the user's understanding and assessment of the accounting entity be
disclosed in the financial statements. A company reports the details behind
financial statements that would impact users’ decisions. Those disclosures
are often in notes to the statements.
6. Materiality. Financial reporting is only concerned with information that is

significant enough to affect evaluations and decisions. Materiality depends on
the size and nature of the item judged in the particular circumstances of its
omission. In deciding whether an item or an aggregate of items is material,
the nature and size of the item are evaluated together. Depending on the
circumstances, either the nature or the size of the item could be determining
factor.
7. Consistency Principle. The firms should use the same accounting method
from period to period to achieve comparability over time within a single
enterprise. However changes are permitted if justifiable and disclosed in the
financial statements.
Lesson 4 Role of Ethics in business and Ethical Financial

Reporting
ROLE OF ETHICS IN BUSINESS
Ethics is concerned with right and wrong and how conduct should be judged to be
good or bad. It is about how we should live our lives and, in particular, how we
should behave towards other people. It is therefore relevant to all forms of human
activity.
Business ethics tells what is right or wrong in a business situation, while professional
ethics tells the same thing regarding a profession. Ethical conflicts can arise,
however, when what might be best for the company is wrong morally or
professionally.
Sometimes professional or personal ethics may conflict with business ethics. From
the business standpoint, staffs are paid to further their employer's interests. But the
staff also has professional and personal ethics to uphold. Here are some difficult
sample situations:
• To remain competitive, a company decided to use cheaper lumber in the
ladders it sells; although this may, in some instances, cause injury.
• A staff is asked to take part in an underground investigation of the personal
life of an employee.
• A superior directs a subordinate not to hire a qualified individual because he is
"not his (superior's) type".
• A human resource manager must lay off a staff that desperately needs the
income and the staff is without any good alternative job option.
• Having privileged or insider information which can surely help the trusted staff
earn a significant amount of money from the stock market.
ETHICAL FINANCIAL REPORTING
For information to be useful, it must be trusted. This demands ethics in accounting.

Ethics are beliefs that separate right from wrong. They are accepted standards of
good and bad behavior. Accountants face ethical choices as they prepare financial
reports. These choices can affect the salaries and bonuses paid to workers. They
even can affect the success of products and services. Misleading information can
lead to a bad decision that harms workers and the business.
There is an old saying: Good ethics are good business.
Ethics is a code of conduct that applies to everyday life. It addresses the question of
whether actions are right or wrong. Actions—whether ethical or unethical, right or
wrong—are the product of individual decisions. Thus, when an organization uses
false advertising, cheats customers, pollutes the environment, or treats employees
unfairly, the management and other employees have made a conscious decision to
act in this manner.
Ethics is especially important in preparing financial reports because users of these

reports must depend on the good faith of the people involved in their preparation.
Users have no other assurance that the reports are accurate and fully disclose all
relevant facts.
The intentional preparation of misleading financial statements is called fraudulent

financial reporting. It can result from:
✓ Distortion of records (e.g., the manipulation of inventory records)
✓ Falsified transactions (e.g., fictitious sales)
✓ Misapplication of various accounting principles
There are a number of motives for fraudulent reporting—for instance, to cover up

financial weakness to obtain a higher price when a company is sold; to meet the
expectations of investors, owners, and financial analysts; or to obtain a loan. The
incentive can also be personal gain, such as additional compensation, promotion, or
avoidance of penalties for poor performance.
Whatever the motive for fraudulent financial reporting, it can have dire
consequences, as the accounting scandals at Enron Corporation and WorldCom
in 2001 and 2002, respectively, attest. Unethical financial reporting and accounting
practices at those two major corporations caused thousands of people to lose their
jobs, their investment incomes, and their pensions. They also resulted in prison
sentences and fines for the corporate executives who were involved. In response to
these scandals, the Sarbanes-Oxley Act of 2002 regulates financial reporting of
public companies and their auditors. This legislation requires chief executives and
chief financial officers of all publicly traded companies to swear that, based on their
knowledge, their quarterly statements and annual reports filed with the Securities
and Exchange Commission (SEC) are accurate and complete. Violation can result in
criminal penalties. Management expresses its duty to ensure that financial reports
are not false or misleading in the management report that appears in the company’s
annual report.
For example, in its management report, Target Corporation makes the following statement:
Management is responsible for the consistency, integrity, and presentation of the
information in the Annual Report.
However, it is accountants, not management, who physically prepare and audit

financial reports. They must apply accounting concepts in such a way as to present a
fair view of a company’s operations and financial position and to avoid misleading
the readers of their reports. Accountants have a responsibility—not only to the
profession but also to employers, clients, and society as a whole—to ensure that
their reports provide accurate, reliable information. The historically high regard for
the accounting profession is evidence that most accountants have upheld the ethics
of the profession.
Committing fraud is certainly an illegal act usually perpetrated by senior

management. It shows that the people involved in these acts had a serious lack of
ethical awareness and ethical conscience. New laws, regulations and standards
were passed to address the problems. Ethics and corporate governance suddenly
became the big thing. Business schools immediately faced the challenges squarely
by revising and including business ethics and governance in their curriculum.
Sarbanes-Oxley Act
In the United States of America, the Sarbanes-Oxley Act (or SOX), passed on July
30, 2002 is the most far-reaching attempt to protect investors since President
Franklin Delano Roosevelt's 1933 Securities Act following the Great Depression. The
law applies to all companies that are required to file periodic reports with the US
SEC. This Act is significant because of its international dimension. Around 1,500
non-US companies, including many of the world's largest, list their shares in the US.
SOX is a legislation which resulted from the widespread disillusionment about

corporate integrity. The law shifts responsibility for financial probity and accuracy to
the board's audit committee. It also requires appointment of independent directors,
increased financial statement disclosures, an internal code of ethics, among others.
Code of Corporate Governance

On April 5, 2002, the Securities and Exchange Commission of the Philippines issued
Memorandum Circular No. 2 otherwise known as the Code of Corporate
Governance. The Code of Ethics for Professional Accountants in the Philippines was
recently adopted from the revised Code of Ethics for Professional Accountants
developed by International Federation of Accountants (IFAC) and will be effective
June 30, 2020. These events usher in a new era in the relationship among business,
government, the investing public and other users of financial information.
Lesson 5 Branches of Accounting

The main branches of accounting and their brief descriptions are discussed as
follows:
1) AUDITING
Auditing is the accountancy profession’s most significant serve to the public. An
external audit is the independent examination that ensures the fairness and reliability
of the reports that management submits to users outside the business entity. The
result of the examinations is embodied in the independent auditor’s report. Once
the required financial statements have been prepared by management, they have to
be evaluated in order to ensure that they do not present a distorted picture.
External auditors are appointed from outside the organization. The external auditor’s
job is to protect the interests of the users of the financial statements. By contrast,
internal auditors are employees of the company. They are appointed by, and answer
to, the company’s management though they work independently of the accounting
and other departments. They ensure the accuracy of business records, uncover
internal control problems and identify operational difficulties.
2) BOOKKEEPING
Bookeeping is a mechanical task involving the collection of basic financial data. The
data are first entered in the accounting records or the books of accounts and then
extracted, classified and summarized in the form of income statement, balance sheet
and cash flows statement. This process normally takes place once a month.
The bookkeeping procedures usually end when the basic data have been entered in
the books of accounts and the accuracy of each entry has been tested. At that
stage, the accounting function takes over. Accounting tends to be used as a generic
term covering almost anything to do with the collection and use of basic financial
data.
Bookkeeping is a routine operation, while accounting requires the ability to examine

a problem using both financial and non-financial data.
3) COST BOOKEEPING, COSTING AND COST ACCOUNTING

Cost bookkeeping is the process that involves the recording of cost data in books of
accounts. It is, therefore, similar to bookkeeping except that data are recorded in
very much great detail. Cost accounting makes used of those data once they have
been extracted from the cost books in providing information for managerial planning
and control. The difference between bookkeeping per se and cost accounting is
largely one of the degree of detail. A cost accouting system contains a great deal
more data, and this once the data are summarized there is much more information
available to the management of the company. Cost accounting deals with the
collection, allocation and control of the cost of producing specific goods and
services. This accumulation and explanation of actual and prospective cost data is
important to control current operations and to plan for the future. Cost accounting
now forms one of the main sub-branches of management accounting.
4) FINANCIAL ACCOUNTING
Financial accounting is focused on the recording of business transactions and the
periodic preparation of reports on financial position and results of operations.
Financial accounting is the more specific term applied to the preparation and
subsequent publication of highly summarized financial information. The information
supplied is usually for the benefit of the owners of an entity, but it can also be used
by management for planning and control purposes. It will also be of interest to other
parties, e.g. employees and creditors.
5) FINANCIAL MANAGEMENT
Financial management is a relatively new branch of accounting that has grown
rapidly over the last 30 years. Financial managers are responsible for setting
financial objectives , making plans based on those objectives, obtaining the finance
needed to achieve the plans, and generally safeguarding all the financial resources
of the entity.
6) MANAGEMENT ACCOUNTING
Management accounting incorporates cost accounting data and adapts them for
specific decisions which management may be called upon to make. A management
accounting system incorporates all types of financial and non-financial information
from a wide range of sources.
7) TAXATION
Tax accounting includes the preparation of tax returns and the consideration of the
tax consequences of proposed business transactions or alternative courses of
action. As typically known, accountants involved in tax work are responsible for
computing the amount of tax payable by both business entities and individuals but
their work is really more complex.
Accountants with this specialization aim to comply with existing tax statues but are
also in constant legal search for ways to minimize tax payments. It is not necessary
for either companies or individuals to pay more tax than is lawfully due. If tax
experts attempt to reduce their clients’ tax laibilites strictly in accordance with the
law, this known as “tax avoidance”. Tax avoidance is a perfectly legitimate exercise,
but tax evasion (the non-declaration of sources of income on which tax might be
due) is a very serious offense.
8) GOVERNMENT ACCOUNTING
It is concerned with the identification of the sources and uses of resources consistent
with the provisions of city, municipal, provincial or national laws. The government
collects and spends huge amount of public funds annually so it is necessary that
there is proper custody and disposition of these funds.
References
• Ballada,W., Ballada,S. (2019). Basic Financial Accounting and Reporting.
Philippines: DomDane Publishers
• Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals). Philippines:
Bandolin Enterprise
• Needle, B. & Powers, M. 2014 (12th Edition)-Ebook. Principles of Financial
Accounting, Cengage Learning
• Weygandt, Kimmel & Kieso. 2015 (19th Edition)-Ebook. Accounting Principles. John
Wiley & Sons.
Learning Activities/Tasks
AFTER YOU READ
Check Your Understanding
NAME: SCORE:
SECTION: DATE:
Activity 1: Discussion/Self-Evaluation Questions (use Short Bond Paper)

1. What is accounting?
2. Why is accounting often referred to as the language of business?
3. To you mind, why is business ethics important?Cite some ethical dilemmas.
4. What are the three forms of business organizatio?Define each briefly
5. What are the types of business? Distinguish them.
6. What does the term generally accepted accounting principle.
7. Discuss the criteria for general acceptance of an accounting principle.
8. What is materiality?
9. What is the periodicity concept? Why is it important for business entities to
provide periodic information?
10. What are the branches of accounting?
Activity 2: TRUE OR FALSE

Instructions: Write TRUE if the statement is correct and write FALSE if the statement
is incorrect.
__________1. A business transaction is the occurrence of an event or a condition
that must be recorded.
__________2. The terms bookkeeping and accounting are synonymous.
__________3. The liability of corporate stockholders is limited to the amount of their
investment.
__________4. A partnership is always owned by two individuals.
__________5. The personal liability of a partner is limited to the amount of his
investment.
__________6. Accounting is often characterized as the “language of business”.
__________7. For accounting purposes, a business and its owner are considered
one and the same.
__________8. The entity concept states that the transactions of different entities
should not be accounted for together.
__________9. An audit is the independent examination that ensures fairness and
reliability of the reports that management submits to users outside the business
entity.
__________10. The Philippine accountant considers peso as the common unit of
measure for all business transactions.
Activity 3: Identifying Types of activities that may be performed by a business

organization
Instructions: Indicate whether each of the following businesses is a service business
(SB), a merchandising business (MEB), or a manufacturing business (MAB).
_________________________1. David Salon
_________________________2. Accounting & Tax Consulting
_________________________3. De Vera Hospital
_________________________4. Avis Rent A Car System
_________________________5. Ford Motor Company
_________________________6. MetroBank
_________________________7. Ace Hardware Stores
_________________________8. Savemore Stores
_________________________9. Furniture Shop
_________________________10. Sari-Sari Store
Activity 4: Categorizing Forms of Business Organizations

Instructions Match the letter next to each form of business with the appropriate items
in the following list of advantages and disadvantages. You may use a letter more
than once.
A. Sole Proprietorship B. Partnership C. Corporation
_____1. Easier to raise money

_____2. Limited expertise
_____3. Higher start-up costs
_____4. Owner has total control
_____5. Shared profits
_____6. Higher taxes
_____7. Fewer regulations to follow
_____8. Easy transfer of ownership
_____9. Risk of conflict between owners
_____10. Easy to expand

MODULE 1-Accounting and Its Environment

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Republic of the Philippines

ISABELA STATE UNIVERSITY

COLLEGE OF BUSINESS ACCOUNTANCY AND PUBLIC ADMINISTRATION

Subject : ACCTY 111-Financial Accounting & Reporting

ACCOUNTING is considered by many as a thoroughly systematic profession which

The development of nations towards an advance economy led to the opening of

Along with globalization is technological development. Computers have

The Changing Horizon

In a market economy, information helps decision-makers make informed choices

Lesson 1 Definition, importance, purpose and nature of

Accounting is the process of identifying, measuring and communicating economic

Accounting is the art of recording, classifying and summarizing in a significant

Accounting is an information system that measures, processes and

Accounting is an information system that measures, processes, and communicates

IFAC, 2021 Definition

Why is accounting so important to companies? The answer is that we live in an

Accounting is an information and measurement system that identifies, records, and

PURPOSE AND PHASES OF ACCOUNTING

To measure a business transaction, the accountant must decide when the

By simply measuring and recording transactions, the resulting information will be of

Lesson 2 Forms of Business Organization

FORMS OF BUSINESS ORGANIZATIONS

A business assumes one of the three forms of organization. The accounting

Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and

The advantages and disadvantages of organizing as a sole proprietorship are shown

Figure 1-2 lists some of partnership advantages and disadvantages.

government to operate. This legal permission, called a charter, gives a corporation

Regardless of their form as a sole proprietorship, partnership, or

PURPOSE OF BUSINESS ORGANIZATIONS or TYPE OF ACTIVITIES

Lesson 3 Fundamental Accounting Concepts and

2. Periodicity Concept. An entity's life can be meaningfully subdivided into

3. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of

4. Going Concern. Financial statements are normally prepared on the

means, for example, that property is reported at cost instead of liquidation

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

To ensure that financial statements are understandable to their users, a set of

Accounting principles are established by humans. Unlike the principles of physics,

1. Objectivity Principle. Accounting records and statements are based on the

principle, accounting records would be based on whims and opinions and is

3. Revenue Recognition Principle. Revenue is to be recognized in the

Revenue is recognized (1) when goods or services are provided to customers

4. Expense Recognition Principle. Expenses should be recognized in the

6. Materiality. Financial reporting is only concerned with information that is

Lesson 4 Role of Ethics in business and Ethical Financial

ETHICAL FINANCIAL REPORTING

For information to be useful, it must be trusted. This demands ethics in accounting.

There is an old saying: Good ethics are good business.

Ethics is especially important in preparing financial reports because users of these

The intentional preparation of misleading financial statements is called fraudulent

There are a number of motives for fraudulent reporting—for instance, to cover up

However, it is accountants, not management, who physically prepare and audit

Committing fraud is certainly an illegal act usually perpetrated by senior

SOX is a legislation which resulted from the widespread disillusionment about

Code of Corporate Governance

Lesson 5 Branches of Accounting

Bookkeeping is a routine operation, while accounting requires the ability to examine

3) COST BOOKEEPING, COSTING AND COST ACCOUNTING

Activity 1: Discussion/Self-Evaluation Questions (use Short Bond Paper)

Activity 2: TRUE OR FALSE

Activity 3: Identifying Types of activities that may be performed by a business

Activity 4: Categorizing Forms of Business Organizations

_____1. Easier to raise money

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