Fundamentals of Accountancy,

Business and Management

Accounting
• It 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 reasoned choices, among alternative courses of action.
• Aside from being an information system, Accounting is known to be the
language of business.
• Accounting is also defined as the art of recording, classifying, and
summarizing.
Friar Luca Pacioli
• He is known to be the Father of Double-entry Bookkeeping
• Summa de Arithmetica, Geometria, Proportioni et Proportionalita is a
book written by Pacioli that summarizes the existing mathematical
knowledge during his time.
Specialized Accounting Fields
A. Public Accounting
- These are accountants who render services for a fee.
- CPAs (Certified Public Accountants) are public accountants who
have met the required education, experience and have
passed the CPA licensure examination.

1. Auditing – involves the independent examination of financial

statements.
2. Tax Services – CPAs who specialize in tax accounting.
3. Management Advisory Services – providing services to clients on
matters relating on managing a business.
B. Private Accounting
- Accountants employed by business firms or by a not-for-profit
organization.
C. Government Accounting
- Accountants who are employed in any governmental units such as BIR,
SEC, NBI and Bangko Sentral ng Pilipinas.
D. Accounting Education
- Accountants who are employed as instructors, professors, or
researchers. CPAs can engage in this field.
Forms of Business Organizations
A. Sole Proprietorship
- It is a business owned by only an individual called the Proprietor.

B. Partnership
- Association of two or more persons who bind themselves to contribute
for capital with the intention of dividing the profits among themselves.
- Article of Co-partnership is a formal agreement where the partners
draw and sign into.

C. Corporation
- It is an artificial being created by operation of law having the rights of
succession and the powers and attributes expressly authorized by law or
incident to its existence.
- This form of business gets its capital from issuing Shares of Stocks.
Types of Businesses
A. Service Business
- This business entity renders services to customers or clients for a
fee.

B. Merchandising Business/ Trading

- This business entity buys goods or commodities and sells them at
a profit.

C. Manufacturing Business
- This business entity makes finished goods from raw materials or
unassembled parts.
Generally Accepted Accounting Principles
(GAAP)
The GAAP defines what are the accepted accounting principles that
must be followed in financial reporting.

A. Business Entity Concept

This business entity is treated as separate and distinct from its
owners and from other business units.

B. Going Concern/ Continuity Assumption

This assumes that unless there is evidence to the contrary, the
business entity will continue to operate for an indefinite period.

C. Time Period Assumption

This indefinite life of the business must be divided into time
periods for the purpose of preparing financial statements.
 • Monthly Basis
• Quarterly Basis
• Semi-annual Basis
• Annually
 Calendar Year
 Fiscal Year
D. Unit of Measurement Assumption
Accounting should measure and report the results of the business
economic activities in terms of a monetary unit such as Philippine Peso.

E. Accrual Basis
Accounting requires that revenue or income should be recognized when
earned regardless of when collection is received; and expense should be
recognized when incurred regardless of when payment is made.

F. Matching Principle
This principle relates to the expense recognition principle which requires
that cost and expenses incurred in generating the revenue should be properly
matched against the related revenue in determining the net income or net
loss for the period.
The Basic Financial Statements of
Business Organization

Financial Statements
It is the end product of the accounting process. These are the
means by which financial information about an economic entity is
communicated to the users of financial information.

Interim Statements
These are also financial statements prepared for period less
than a year.
A. Statement of Comprehensive Income
• This is also known as the Income Statement. It shows the summary of the company’s
revenue and expense for a given period. The result of the business operation is reported
in this financial statement.
B. Statement of Financial Position
• This is also known as the Balance Sheet. It shows the list of a company’s assets, liabilities,
and owner’s equity as of a specific date. It also shows the condition of an enterprise as of
a particular date.
C. Statement of Changes in Owner’s Equity
• This is also known as the Capital Statement. It is the summary of changes in the owner’s
equity that have occurred within the accounting period.
D. Statement of Cash Flows
• This provides information about the cash receipts and cash payments of an entity within
the accounting period. Reported in this, are the sources of cash and the uses or
disbursements made by the company.
E. Notes to the Financial Statements
• This statement presents the significant accounting policies and other related explanatory
notes that have affected the preparation of the financial statements.
Qualitative Characteristics of Useful
Financial Information

A. Fundamental qualitative characteristics

• Relevance. Relevant financial information is capable of making a

difference in the decisions made by users, if it has predictive value,
confirmatory value, or both. The predictive value and confirmatory
value of financial information are interrelated.

• Faithful representation. Financial information must not only be relevant,

it must also represent faithfully phenomena it purports to represent.
This fundamental characteristic seeks to maximize the underlying
characteristics of completeness, neutrality and freedom from error.
B. Enhancing qualitative characteristics

• Comparability. Comparability enables users to identify and understand

similarities in, and differences among, items.

• Verifiability. Verifiability helps to assure users that information

represents faithfully the economic phenomena it purports to represent.
It means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement that a
particular depiction is a faithful representation.

• Timeliness. Timeliness means that information is available to decision-

makers in time to be capable of influencing their decisions.

• Understandability. Classifying, characterizing and presenting information

clearly and concisely makes it understandable. Financial reports are
prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyze the information with
diligence..
The Users of Financial Information
Managerial Accounting
The area of accounting that is focused on the accumulation and
preparation of financial reports for the use of management.
(Internal users)
• Management
• Owner’s of the Firm
• Employees

Financial Accounting
The area of accounting that is focused on developing and
reporting financial information intended for the external users.
• Creditors and Suppliers
• Investors
• Government and other Agencies
• Customers
• Financial Analysts and Advisors
• Trade Associations
The Elements of Financial Statements
1. Assets
• These are the resources controlled by the enterprise.
• E.g., Cash, Accounts Receivables, Notes Receivables, Merchandise
Inventory, Office Supplies, Prepaid Expenses, Furniture and
Fixtures, Intangible Assets, Franchise, Copyright, Patent,
Trademarks and etc.

2. Liabilities
• These are the present obligations of an enterprise.
• E.g., Accounts Payable, Notes Payable, Mortgage Payable, Salaries
Payable, Interest Payable, Utilities Payable, Unearned Revenue
and etc.

3. Capital
• It represents the equity or claim of the owner on the asset of the
business.
• Owner’s Capital; Owner’s Withdrawal
4. Revenues
• It is the gross inflow of the economic benefits.
• E.g., Sales, Service Revenue, Professional Fees, Rent Income,
Interest Income, Fees Earned and etc.

5. Expenses
• It is the gross outflow of economic benefits and the costs incurred
to generate revenues.
• E.g., Salaries and Wages Expense, Rent Expense, Advertising
Expense, Insurance Expense, Utilities Expense, Supplies Expense
and etc.
Normal Balances of Accounts

ASSETS DEBIT
LIABILITIES CREDIT
CAPITAL CREDIT
DRAWING DEBIT
REVENUES CREDIT
EXPENSES DEBIT
The Accounting Equation

Asset = Liabilities + Capital

Expanded:

Asset = Liabilities + Capital+ (Revenue – Expense)

Baguino et. al., Principles of Accounting. Philippines: A.A.
Books Inc, 2014. Print.