CHAPTER 1

ACCOUNTING AND BUSINESS

WHAT IS ACCOUNTING?
Accounting is the process of recording financial transactions
pertaining to a business. The accounting process includes
summarizing, analyzing and reporting these transactions to
oversight agencies, regulators and tax collection entities. The
financial statements used in accounting are a concise summary of
financial transactions over an accounting period, summarizing a
company's operations, financial position and cash flows.
OTHER DEFINITIONS
According to A. W. Johnson; “Accounting may be defined as the
collection, compilation and systematic recording of business
transactions in terms of money, the preparation of financial
reports, the analysis and interpretation of these reports and the use
of these reports for the information and guidance of management”.
According to the American Institute of Certified Public
Accountants [AICPA]; “Accounting is the art of recording,
classifying and summarizing in a significant manner and terms of
money, transactions and events, which are, in part at least, of a
financial character and interpreting the result thereof”.
According to the American Accounting Association [AAA];
“Accounting refers to the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information”.
ACCOUNTING AS LANGUAGE OF
BUSINESS
Accounting involves the systematic recognition, measurement,
reporting, and interpretation of data that are related to the financial
activities of a natural or artificial person. Processing information
in such a way that it would be useful is the primary core of
accounting.
Accounting is often called the “language of business”.
 THE DISTINCTION BETWEEN
ACCOUNTING AND BOOKKEEPING
Bookkeeping involves those mechanical and repetitive record and classifying
procedures related to the business activities of a natural or artificial person, until
the voluminous financial information is summarized and reported in the form
of financial statements.
Accounting includes: the analysis and interpretation of financial statements, the
income tax work, the design and installation of accounting system, audits, and
the preparation of forecasts, budgets, and feasibility studies.
ACCOUNTING AS THE BASIS FOR
BUSINESS DECISIONS
The primary responsibilities of management cover the following
areas:
1. Planning and organizing the activities of the business enterprise
2. Investing and financing activities
3. Controlling and assessing the performance of the business
enterprise
OBJECTIVES OF A BUSINESS
ENTERPRISE
It is commonly known that a business enterprise cannot hope to
accomplish anything else and continue to exist, unless it meets the
two basic tests of survival– operate profitably and stay solvent.
BUSINESS ARE FORMED TO
MAKE PROFIT
Usually, organizations may be grouped into two:
1. Profit- Oriented
2. Non- Profit Organizations
As it names suggests, the primary objective of organizations that
fall under the profit- oriented enterprises is to make profit, and
these organizations are usually referred to as a business enterprise.
The main activities of a business enterprise are focused on
meeting its primary objective of making profit.
On the other hand, a non- profit organization, whether governmental or private,
is established not for profit but to render services and meet the needs of the
members of the community. These said needs may be directly or indirectly
related to education, health and physical care, livelihood, cultural and social
upliftment, and spiritual and moral development.
Examples: Public Schools, Public Hospitals and Clinics, Museums, Public
Libraries and Parks, Civic Club, Churches and Religious Organizations,
Government Agencies, Non- Government Organizations (NGO’S), and other
service- oriented groups.
BUSINESS SOLVENCY
Aside from making profit, another important objective of business
enterprises is to make sure that they have immediate access to a
sufficient amount of cash that is needed to settle their business
obligations within a reasonable period of time.
A business enterprise that has sufficient cash to pay its debts as
they mature is said to be solvent. Being and staying solvent must
also be an objective of a business enterprise.
In contrast, a business enterprise that cannot meet its obligations
as they fall due is said to be insolvent. An enterprise that becomes
insolvent can be forced by its creditors to stop its operations and
later on discontinue its existence.
OTHER OBJECTIVES OF BUSINESS
Some of the secondary objectives of a business enterprise are:
1. To provide jobs to the community
2. To protect the environment
3. To create a new and better products for the consumer
4. To render useful service at a competitive price
TYPES OF BUSINESSES
 SERVICE ENTERPRISE

This type of business provide various forms of services, not tangible products,
to its customers or clients.
Examples:
1. Professionals
2. Repair shops
3. Banks
4. Brokers
5. School
 MERCHANDISING ENTERPRISE

This type of business entity is in the “buy and sell” business. A trading or
merchandising enterprise buys ready- to- use products such as:
1. Appliances
2. Vehicles
3. Toys
4. Clothing apparels
5. Supplies
It then sells these products to end-consumers at higher prices.
A business enterprise that purchase ready- to- use materials from
wholesalers or manufacturers, and then sells the same to the other
processors or manufacturers, without changing the form of the
materials bought and sold, is also classified as a merchandising
enterprise.
 MANUFACTURING ENTERPRISE

Unlike a trader or merchandiser, a manufacturer, also called a fabricator,

producer or processor, is in the normal business of producing the products that
he sells.
Example:
An apparel manufacturer buys clothing materials and sewing supplies. Then
with the skills of the designers, cutters, sewers, and finishers and with the use of
factory facilities, the manufacturer comes out with finished jeans or shirts that
can be sold to traders, merchandisers or end- consumers.
FORMS OF BUSINESS OWNERSHIP
 SINGLE PROPRIETORSHIP
A business that is owned by one person is called a single proprietorship, a sole
proprietorship, or just plainly, a proprietorship. The person who puts up the
investment in a single proprietorship is commonly referred to as the
entrepreneur, or simply the proprietor or owner.
Examples:
1. Retail stores
2. Repair shops
3. Service providers
4. Practice of profession
 PARTNERSHIP

A partnership form of business has two or more owners called partners. The
formation of a partnership requires some form of a written or oral agreement
between the partners.
A partnership may be formed for the purpose of operating a small business, or
for the practice of profession. A partnership has the advantage of being able to
gather a greater amount of resources, both in the form of assets and technical
skills as compared with that of a single proprietorship.
 CORPORATION

A business that has its ownership capitalization divided into hundreds or

thousands of transferable shares of stock is called corporations. The corporation
must have at least five owners or investors called stockholders or shareholders.
Certificates of capital stock issued by the corporation to each stockholder show
the number of shares held by each stockholder without disrupting the operations
or the existence of the corporation.
 ADVANTAGES OF CORPORATION OVER SINGLE
PROPRIETORSHIP OR A PARTNERSHIP:
1. The ease of gathering a large amount of capital investments from hundreds
or thousands of investors.
2. The easy transferability of the ownership of shares from one stockholders to
another investors.
3. The limited liability of stockholders. The stockholders are not personally
liable for the obligations of the corporation.
4. The relatively longer life and continuous existence of the business enterprise
in spite of changes in ownership.
5. There is a bigger pool from where technically trained people could be hired
to manage the corporation.
 BUSINESS ENTITY PRINCIPLE

From an Accountant’s point of view, a business enterprise is looked upon as an

entity that is separate and distinct from that of the owner. Therefore, the
personal and family affairs and transactions of the business’ owners are not
included in determining the net profit, resources, and obligations of his business
enterprise.
Single Proprietorship:
Even though there is only one owner in a single proprietorship, a new person is
born from the time the business enterprise is formed.
However, from a legal point of view, the business enterprises are not considered
as separate and distinct and distinct entities.
 BUSINESS ENTITY PRINCIPLE

Partnership:
Because of the business entity principle that is applied in accounting, a
partnership is looked upon as an entity that is separate and distinct from that of
the partners.
From a legal point of view, a partnership is not considered separate from its
partners. Consequently, the partners are personally liable for unsettled debts in
case of a partnership bankruptcy.
ACCOUNTING AS A PROFESSION
A competent accountant has numerous opportunities ahead of him,
either in the field of accounting or in other allied fields. Just like
the other professionals, an accountant may specialize in a given
discipline of accounting. In terms of career opportunities, the field
of accounting may be divided into two broad disciplines: Public
Accounting and Private Accounting.
 RESPONSIBILITIES AND
OPPORTUNITIES OF AN ACCOUNTANT
 ETHICAL AND SOCIAL
RESPONSIBILITIES OF THE
ACCOUNTANT
Some businesses take their social responsibilities seriously. They contribute to
projects that are involved in the following areas:
1. Protection and/ or preservation of the environment
2. Researches and medical studies
3. Employing the disabled members of society
4. Creating foundations that grant scholarships to deserving students
5. Sponsoring cultural, social, and religious events that will be helpful to the
residents of the community.
 ETHICS
Ethics involve distinguishing what is right from what is wrong–
what should and should not be done. The integrity of the CPA’s, as
professionals, has declined because of the recent scandals
involved the audited financial statements of the corporate giants in
the United States and in Europe, notably ENRON and WorldCom.
Because of the nature of the work of the accountants and/ or auditors, they are
in position to know both the good and bad activities and practices of the
business enterprise. As the accountant or auditor tries to meet his ethical and
social responsibilities, there are questions to be answered, such as:
1. Is the CPA obligated to reveal the business’ activities and practices?
2. What and how much information can he reveal?
3. To whom is the CPA accountable– to the management, to the stockholders,
to the employees, to the government, or to the general public?
4. How and in what form will he make his revelations?
As far as the responsibilities are concerned, the internal
accountants and auditors are in a more difficult position because
they do not have the independence that the external auditors are
enjoying. In other words, they are at the mercy of the
management.
Generally, there are no problems involved in revealing the good
activities and practices of the business enterprise. The real
problem revolves around those wrong activities and practices.
Some examples are:
1. The business is not paying the correct amount of taxes and duties.
2. The financial statements are not prepared in accordance with generally
accepted accounting principles.
3. Employees are not given their proper compensations and privileges.
4. The products of the business are hazardous to the public and the
environment.
5. Wastes coming from the factory are illegally disposed of.
6. Management is involved in fraud and other inappropriate activities.
The external auditor has its own ethical burdens to handle, such as:
1. How much fee should he collect from his clients?
2. How can he have more clients?
3. Can he advertise just like the way the other professionals advertise their
services?
4. What kinds of services can he render to the client and still maintains his
independence?
5. When should he say “yes” and “no” to the client’s demands?
The ethical and social responsibilities of the Certified Public
Accountant are among the big issues facing the accounting
profession. To be able to meet these responsibilities, the
accountant must not only exercise proper judgment but also
possess a high level of professional maturity.