The Accounting Environment

and Accounting Framework

MODULE GOALS/LEARNING
OBJECTIVES:
At the end of the session, the learners will be able to:
1. Explain the importance of accounting to business.
2. Identify the activities and users associated with accounting and
explain why they need accounting information.
3. Define business.
4. Describe the forms of business organizations and types of
operations.
5. Identify the financial reports and the financial information
contained therein.
Accounting is part of your life!
• As a student, you actually
encounter accounting in your Food and
daily routine not knowing that school
you are doing some accounting supplies
task.
Transpor-
tation fare

Allowance
from your
parents
Whenever you board a public utility vehicle, be it a jeepney or a bus
you pay for fare. All fares received by the driver represent his
REVENUES. He has to spend for gasoline, vehicle repairs, food and a fee
called boundary which is paid to the operator or owner of the vehicle.
These would be his EXPENSES. The excess of his total revenues over the
expenses will be his take home pay called PROFIT or NET INCOME.
Accounting does this for you:

 Tracks down business activities,

 Analyzes, calculates (or measures and records these activities , and
then
 Prepares a progress report

These three steps are the first part of accounting process called
Bookkeeping.
History of Accounting
The earliest bookkeeping records were used to keep track of pyramids
and palaces being constructed especially in Babylonia (present-day
Iraq) and Egypt. A record was kept of the number of slaves who worked
for the King and Pharaohs. They also recorded the materials used and
the number of days it took for the work to be finished. A registry of
record of people living in a town or city was also kept which became
the basis for collecting taxes by the governor of a town or province.
History of Accounting (cont.)
The first accounting book was written by Cotrugli in Naples and the
modern double entry bookkeeping system could be traced from the
book prepared in 1494 by an Italian mathematician, fr. Luca Pacioli,
entitled Summa de Arithmetica.

In the Philippines, bookkeeping was introduced by the Spaniards and

the bookkeeper was called Tenedor de Libro. But even before the
Spaniards came, trade was already flourishing between the Philippines
and the other Asian countries and records of goods being bartered
were kept by the traders.
Accounting and Business
All businesses have one thing in common: they need financial information before
making decisions. The accountant provides the information by preparing the
following financial statements:

1. Statement of Financial Position is a progress report showing a list of assets and

liabilities
2. Income Statement is a performance report of revenues against costs and
expenses
3. Statement of Cash Flows is a cash report showing where the money came from
and where the money was used.
4. Statement of Owner’s Net Worth is a progress report showing changes in your
wealth.
Business, its motive and role in society
A business is an economic units that engages in buying and selling of
goods or services. A major concern of a business is how best its
resources: machines, raw materials, labor skills, number of men to
employ. In a business endeavor, success is possible when money,
machines, men and materials are used efficiently at the least possible
cost. Most often success is measured in terms of profit and increase in
funds.
Minimizing Business Risk
Any money making venture is risky. The higher profit you desire, the
more risky the venture is. Risk is the element of uncertainty in an
outcome.

An endeavor like a business has always an element of uncertainty – it is

not certain that the operation of the business will turn out well, nor is it
certain that the owner will recover what was invested nor is it certain
that the creditors will be paid. But there are ways of reducing risks such
as:
But there are ways of reducing risks such as:

1. Careful planning and control by the manager

2. Making a business plan and carefully assessing the business you
want to put up
3. Having adequate knowledge about the product or service and
4. Choosing the right form of business and the right type of operation.
Forms of Business
1. Sole Proprietorship

This is a business set up and managed by one person. Most small

businesses such as beauty parlors, dress shops, barbershops, and
bakers are sole proprietor-owned.
Advantages
• Only a small amount of capital is
needed
• Its operation can be managed
easily by the proprietor.
• The owner or proprietor gets all
the profits.
• Ease in formation since only a
minimum requirement to legally
operate is needed.
Disadvantages
• Difficult to expand the business and
sell different products or services
because of low capital and only one
owner-manager.
• It has no indefinite life. Owner may
just one day want to close it or
become incapacitated or die.
• Owner has unlimited liability. It means
that if the business is unable to pay its
debt, the bank or creditor can attach
the owner’s personal properties.
Forms of Business
2. Partnership

This is business owned by two or more persons called partners who

contribute money, property and talent into common fund for the
purpose of sharing profit among themselves. Most often the partners
are also the managers. Professionals such as lawyers, accountants,
engineers, and doctors usually put up a partnership or consultancy
firm.
Advantages
• Ease in managing the business
and in attracting clients because
of more owners involved.
• Management is more efficient
because of division of
responsibilities among partners.
Disadvantages
• No indefinite life since
disagreement could easily arise
because of many owners
involved.
• Partners, like sole proprietors,
have unlimited liability.
Forms of Business
3. Corporation

A business organized as a separate legal entity from the owners. It

means that it can conduct business by itself – enter into contracts, buys
and sells properties and stocks. An investor simply buys shares of stocks
in a corporation and become a shareholder. It is managed by a Board of
Directors elected by the shareholders from among themselves.
Advantages
• More capital can be raised because of the
large number of shareholders.
• Can afford to hire experts who can efficiently
manage and operate the business.
• More stable than a partnership because it is
not affected by the withdrawal of a
shareholder. A shareholder who wants to
withdraw from the corporation simply sells
the shares owned to others or can even sell
the shares back to the corporation.
• Higher amounts of profit may be obtained
because of its large amount of resources
used.
Disadvantages
• A shareholder, unlike a sole proprietor
or a partner, has no unlimited liability.
There is therefore a higher risk
involved on a corporate debts since
these can only be paid out of
corporate funds.
• It is subjects to more legal and tax
requirements.
• Abuse of power by the Board of
Directors could certainly affect the
welfare of the corporation and its
shareholders.
Types of Business Operation
• Service Business
• Merchandising Business
• Manufacturing Business
Types of Business Activities

Operating Financing Investing

Managing the Business
Management involves four processes: planning, organizing, directing
and controlling.

a. Planning starts with determining the goals of the business and

lining with activities to accomplish these goals.

b. Organizing involves creating divisions, appointing managers, hiring

and defining the roles of duties of each one (managers and staff).
c. Directing means overseeing the daily operations of carrying out the
planned activities – managers must act, decide, agree, argue, question
approve, solve.

d. Controlling means guarding and guiding people to ensure tasks and

activities are done according to plans and some standard of
performance. Controlling prevents commission of error or if detected
then error must be corrected and the product or service reworked.
Accounting as a Business Language
Accounting is defined as a service activity whose function is to prepare
financial reports about the business. It is difficult for users to make
financial decision that will provide relevant information that are not
supported by facts. These facts are contained in the accounting reports.
Accounting may also be defined as a process of recording, classifying,
and summarizing transactions and events which are financial in nature
and interpreting the results thereof.
Users of Financial Information

Owner or Investor

Manager

Lender or Creditor

Government

Supplier

Employee

Customer
Financial Reports

Statement Statement
of Owner’s of Financial
Equity Position
Statement
of Cash
flow
Income
Statement
Income Statement
Income statement reports the financial performance of the business
and is also called profit or loss statement or statement of earnings. It
lists down the income (revenues and gains) earned as well as the
expenses incurred by the business. A favorable operation called profit
or net income results when income exceeds expense.
Statement of Financial Position
Statement of Financial Position (formerly called the balance sheet)
shows how healthy or robust the enterprise is when it shows a listing of
the accumulated resources (cash and properties) owned and a listing of
the accumulated liabilities (debts or obligations to pay) owned by the
enterprise. After deducting the liabilities from the assets, the net asset
show the net value or net worth of the firm which belongs to the
owner. Hence, it is also called the owner’s equity.
Statement of Owner’s Equity
Statement of Owner’s Equity is another report prepared by the
accountant which explains the activities for a period of time that
caused the owner’s equity to change. There are four activities affecting
owner’s equity: investment, withdrawal or recovery of capital, profit
or loss.
Statement of Cash flow
The Statement of Cash Flows shows what caused the change in the
cash. This statement shows three kinds of activities: financing
(investment of the owner and cash loan), investing (acquisition and
sale of properties) and operating (revenues and expenses).
Career Opportunities in Accounting

Public Accounting

Industry Accounting

Government and
Not for Profit
Accounting

Research and
Education
Accounting Areas
• Basic Accounting or Bookkeeping
• Financial Accounting
• Cost Accounting
• Management Accounting
• Auditing
• Government and Non – Profit Accounting
• Tax Accounting
Professional Regulatory Bodies
The practice of the accounting profession, among others, is governed by
regulatory bodies such as PICPA, BOA and PRC. The financial reports prepared are
also affected by the rulings and promulgations issued out by the SEC, BSP, and BIR.

• Professional Regulation Commission (PRC)

• Board of Accountancy (BOA)
• Philippine Institute of Certified Public Accountants (PICPA)
• Securities and Exchange Commission (SEC)
• Bangko Sentral ng Pilipinas (BSP)
• Bureau of Internal Revenue (BIR)
Framework of Accounting
The framework is a pervasive structure which sets the boundaries of
the accounting practice with its basic rules, objectives and
assumptions. The framework provides formation of accounting
standards which prescribe the nature of financial reporting. The
framework serves as a guide to:

a. Financial Reporting Standard Council (FRSC) in developing future

and reviewing existing Financial Reporting Standards
Conceptual Framework

THE ACCOUNTING FRAMEWORK

FINANCIAL REPORTING STANDARDS

QUALITATIVE OPERATING
OBJECTIVES CHARACTERISTICS
ELEMENTS GUIDELINES

GENRAL PURPOSE FINANCIAL STATEMENTS

• Pronouncement on the financial reporting standards are under the
authority of PICPA thru its Financial Reporting Standard Council (FRSC)
and the Philippine Interpretation Committee (PIC). Once standardized,
these became part of the PFRS.
• If a conflict should arise between Financial Reporting Standard and a
concept within the accounting framework, the standard shall prevail.
• Is there a difference between a standard and a concept? A standard is
specific, example a standard for measuring and recognizing cash.
While a concept is more or less a general rule such as rule for asset
recognition.
Framework deals with the following:

1. Objective of financial statements

2. Qualitative characteristics of financial information
3. Definition, measurement and recognition of the elements of the
financial statements
4. Concepts of capital and capital maintenance
Thank you 