Chapter 1

THE BASIC
ACCOUNTING
ENVIRONMENT
Introduction to Accounting and Business
 What is a Business?

• Is an economic unit
• It control resources
• Engages in buying and selling of
goods and services
 How Do we measure the success
of the business?

• Measured in terms of profit

• Increased in funds
• Money, machines, men and
materials are use efficiently at the
least possible cost.
Sources of Capital of the Business

• Main source
-Owner

• Other sources
-Creditors (financing institutions, relatives or friends)
There are three types of
business organizations

 Proprietorship
 Partnership
 Corporation
 Advantages
A proprietorship • Ease and low cost in
is owned by one organizing
individual. • All profit goes to the
owner

Disadvantage
• Limited source of
financial resources
• Unlimited liability
 Advantages
A partnership is • More financial
owned by two or resources than a
more individuals. proprietorship.
• Additional
management skills.
• Division of labor
Disadvantage
• Unlimited liability.
• Limited life
• Mutual agency
 Advantage
A corporation is • The ability to obtain
organized as a large amounts of
separate legal entity resources by issuing
from the owners. stocks.
• Limited liability
• Unlimited life- 50
yrs
Disadvantage
• Subject to rigid
government control
• Costly to organize
 Types of Business
Operations
Service

Product
Enchanted Kingdom Entertainment
Phil. Air Lines Transportation
Shangrila Hotel Hospitality and lodging
Smart/Globe Telecommunication
 Types of Business
Operations
Merchandising

Product
Savemore General merchandise
Watson Medicine and beauty products
Abenson Consumer electronics
Uniqlo Apparel
Amazon Internet books, music, video
retailer
Types of Business Operations
Manufacturing

Product
Toyota Cars, trucks, vans
Purefoods Processed food
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Samsung Appliances, mobile phones
 Business Stakeholders

A business stakeholder is a person or

entity having an interest in the
economic performance of the business.
 Business Stakeholders

• Owner or Investor
• Manager
• Lender/Creditor
• Supplier
• Government
• Employee
• Customer
 What is 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 decisions.
 HISTORY OF ACCOUNTING
• Earliest Accounting System
-200BC Babylonia, Greece, Egypt
-3500BC Assyria

• First Accounting Book

-is written by Cotrugli

• Father of Accounting
-Fr. Luca Pacioli wrote the Summa Aritmetica, Geometria,
Proportioni et Proportinalita in 1494.
-Particularis de Computis et Scripturis (Details of Calculation and
Recording) a section of Summa which made Pacioli famous.
-this is where the modern accounting system evolved
 HISTORY OF ACCOUNTING

• 15th Century
-Italian Merchants entrusted their properties to their servants/employees who were
required to prepare reports:
-daily activities
-properties owned
-debts owed
-Creditor and debtor

• 16th Century
-Trading in foreign ports started
-Profit and loss report was prepared after a trip or voyage
 Continuation of History of
Accounting

• 19 th
Century
-massive development of trade & industry
-from simple to a more complex structure of a business
-mergers, combinations, consolidations
-from manual data processing to electronic data
processing
 Continuation of History of
Accounting

• Bookkeeping was introduced to the Phil. by the Spaniards

• Tenedor de Libro- bookkeeper
• Early part of 20 Century –proliferation of American
th

Companies
• 1923-first CPA licensure exam
• 1929-establishment of PICPA
“Accounting is the language of
business”
COMPANY

ACCOUNTING
INFORMATION

STAKEHOLDERS
 CHANNELS OF ACCOUNTING INFORMATION FLOW

Management

Managerial
Reports

Certain
BIR/Taxing Tax
Reporting process
Special
Returns Reports Regulatory
Agencies
Agencies
Financial
reports
Audited

Suppliers Lenders Investors Employees Customers Regulatory

board
 Accounting Information System
• It involves an orderly way of accumulating and
reporting business transactions through a process of:
-analyzing
-measuring
-recording
-classifying
-summarizing

And from which reports are generated for

proper communication to decision makers.
Components of an AIS
• People
• Documents
• Records
• Methods
• Equipment
 What is a business
transaction?

A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
 4 Phases of AIS
Classifying Reporting and
Data Analyzing,
gathering Measuring, Storing interpreting
Recording Summarizing

Phase 1 Phase 2 Phase 3 Phase 4

Decision
Makers
 FUNDAMENTAL SYSTEM
PRINCIPLES

• Control Principle (internal control)

• Cost-benefit principle
• Relevance Principle
• Compatibility Principle
• Flexibility Principle
 Financial Statements
• Income statement—A summary of the revenue and
expenses for a specific period of time.
• Statement of owner’s equity—A summary of the changes
in the owner’s equity that have occurred during a specific
period of time.
• Statement of Financial Position—A list of the assets,
liabilities, and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the cash receipts
and disbursements for a specific period of time.
Accounting reports, called
financial statements,
provide summarized
information to the owner.
 Dan Motors Repair Shop
Income Statement
For the Month Ended November 30, 2020
Fees earned P7 500 00
Operating expenses:
Wages expense P2 125 00
Rent expense 800 00
Supplies expense 700 00
Utilities expense 450 00
Depreciation expense 375 00
Total operating expenses 4 450 00
Net income P3 050 00
 Dan Motors Repair Shop
Statement of Owner’s Equity
For the Month Ended November 30, 2020
Dan David, capital, November 1, 2020 P 0
Investment on November 1 P25 000 00
Net income for November 3 050 00
P28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Dan David, capital, November 30, 2020 P26 050 00
 Dan Motors Repair Shop
Statement of Financial Position
November 30, 2020
Assets Liabilities
Cash P 5 900 00 Accounts Payable P 400 00
Supplies 550 00 Owner’s Equity
Furniture & Equip-
ment 20 000 00 Dan David, cap. 26 050 00
Total liabilities and
Total assets P26 450 00 owner’s equity P26 450 00

This Statement of Financial position is

presented using the account form
 When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form is
being used.
 Dan Motors Repair Shop
Statement of Cash Flows
For the Month Ended November 30, 2020
Cash flows from operating activities:
Cash received from customers P 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00 )
Cash flows from financing activities:
Cash received as owner’s investment P25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
NetShould
cash flow andCash
match Nov.on
30,the
2020 cash bal.
balance sheet P 5 900 00
Chapter 1

The End