LESSON 3:

USERS OF
ACCOUNTING
INFORMATION
 INTERNAL USERS
 they make decisions on behalf
of the organization
INTERNAL USERS
1. Managers/Management
 they plan, organize, and run a business
A. Top-level Management
 They use the information to oversee the
performance of the whole organization and set its
strategic direction
Examples: Chief Executive Officer (CEO), Chief
Financial Officer (CFO), Chief Operating Officer (COO)
 INTERNAL USERS

B. Middle-level Management
 They ensure that their unit performances are
aligned with the organization’s objectives
Examples: Department heads, branch managers,
and junior executives
 INTERNAL USERS

C. Lower-level management
 They oversee the day-to-day operations and
direct employees in the performance of tasks
Examples: Supervisors and team leaders
INTERNAL USERS

2. Employees/Labor Unions
 they assess the company’s profitability and
suitability, and their consequence on future salary
and job security.
INTERNAL USERS
3. Owners
 they provide the capital to the business.
 Accounting information help them decide
whether they should withdraw or increase their
investments.
 they are interested to know the returns on their
investment.
 EXTERNAL USERS
 they make their decisions based
on the company’s financial
information
 EXTERNAL USERS
1. Potential Investors
 they need information to help them decide
whether they should invest in the business
2. Creditors and Potential Creditors
 they assess the credit worthiness and the
capability of the business to pay its obligation
including the related interests on maturity date
EXTERNAL USERS

3. Customers
 they assess the financial position of their
suppliers which is necessary for them to maintain
a stable source of supply in the long term.
 they are interested to know whether the business
will continue to honor its product warranties.
 EXTERNAL USERS
4. Suppliers
 they use financial statements of their customers
to determine whether the debts owed to them will
be paid when due or whether the customer has
enough funds or resources to pay the goods to be
delivered or the services to be rendered.
 EXTERNAL USERS
5. Tax Authorities
 they use financial reports to determine the
credibility of the tax returns on behalf of the
company.
 they are interested to know if the business paid
the correct amount of taxes.
 EXTERNAL USERS
6. Regulatory Bodies
 they want to ensure that the company’s disclosure
of accounting information is in accordance with
the rules and regulations set in order to protect the
interest of the stakeholder who rely on such
information.
 Examples: Securities and Exchange Commission
(SEC), Bangko Sentral ng Pilipinas (BSP)
 EXTERNAL USERS

6. Public
 they use the financial information to know how
the business affects the economy, possible
prospects for employment, and/or for educational
and research purposes.
DIRECT VS. INDIRECT
USERS
 DIRECT USERS
 they have direct interest over the company.
 they use financial information to protect
their own stake in the entity.
 they include owners, management (directors
and officers), employees, tax authorities,
suppliers, creditors, and customers.
 INDIRECT USERS
 they represent the direct users.
 they use financial information to provide
advice to and protect the interest of direct users.
 they include regulatory agencies or
registration authorities, financial analysts and
advisors, stock exchange, lawyers, reporting
agencies, trade associations, and labor unions.
 LESSON 4:
FORMS OF BUSINESS
ORGANIZATION AND TYPES
OF BUSINESS ACCORDING
TO ACTIVITIES
TYPES OF BUSINESS
ACCORDING TO
OWNERSHIP
 SOLE PROPRIETORSHIP
 A business that is owned by only one
individual for the practice of trade or
profession or other purpose.
 It is common to small business entities
like grocery store, repair shop, and beauty
parlor
 SOLE PROPRIETORSHIP
Advantages:
• Full control of operations
• Easy to start, easy to dissolve
• All profits go directly to the owner
• Less regulations
• The government taxes the owner and not the
business
 SOLE PROPRIETORSHIP
Disadvantages:
• Unlimited liability – the owner is legally obliged
to pay all business debts
• Limited life – the business ceases to operate if the
owner dies, becomes physically or mentally
incapacitated, or is imprisoned
• Difficulty in raising capital
 PARTNERSHIP
 A business that is owned by two or more
individuals pooling their resources
together as common fund.
 The written agreement between or
among partners is called articles of co-
partnership.
 PARTNERSHIP
Advantages:
• Increased potentials from two or more
different strengths
• Easy to form with proper agreements on its
formation
• Less regulations compared to corporations
 PARTNERSHIP
Disadvantages:
• Unlimited liability of one or all owners
• Limited life – the business ceases to operate if one
of the partners dies, becomes physically or
mentally incapacitated, or is imprisoned
• High possibility of dispute and conflicts between
partners
 CORPORATION
 A business required to have five to fifteen
incorporators.
 Corporation Code of the Philippines Section
2, “an artificial being created by operation of
law, having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident to its existence.”
 CORPORATION
 The owners have limited liability and
limited involvement from the operations.
 The board of directors, who are elected
by the owners themselves, will take control
of the corporation’s activities.
 CORPORATION
 A profit corporation issues to its owners
or shareholders shares of stocks which are
evidenced by stock certificates
 A non-profit corporation does not issue
share of stocks. Its owners are called
members
 CORPORATION
 The existence of the corporation is
evidenced by articles of incorporation and
by-laws that are duly approved by SEC.
 The Articles of Incorporation detail the
powers and limitations bestowed by the
government
 CORPORATION
 By-laws contain provisions for internal
administration of the corporation.
 CORPORATION
Advantages:
• More sources of funds
• Easy to transfer ownership
• Liability of owners is limited
• Unlimited commercial life
 CORPORATION
Disadvantages:
• More regulations to be followed
• Profit is taxed at the corporate tax rate
• Costly to incorporate
• Shareholders are taxed again when profits are
distributed to them
 COOPERATIVE
 A business that is owned by a group of
individuals who also serve as benefactors
to the business endeavor.
 It usually requires at least fifteen
members to function.
 COOPERATIVE
 Board of directors and officers are elected
to manage the business operation.
 Members can become part of the
cooperative by purchasing shares.
 It can be either incorporated or
unincorporated
 COOPERATIVE
 By-laws contain rules and regulations
governing the operation of a cooperative.
 COOPERATIVE
Advantages:
• Unlimited life. The change members does
not dissolve the business.
• Democratic organization. Social equality
of members is the most important
component of cooperatives. It ensures that
it serves its members’ needs.
 COOPERATIVE
Disadvantages:
• Difficulty in obtaining capital through
investors. “One-member-one-vote”
• Lack of membership and participation. The
cooperative may not fully function if members
do not involve themselves in the routine
business operation.
TYPES OF BUSINESS
ACCORDING TO
ACTIVITIES
 SERVICE BUSINESS
 It focuses on providing intangible
products such as offering professional
skills, proposals, and expertise.
 Examples: accounting firm, law firms,
schools, medical clinic, and repair shop
 SERVICE BUSINESS
Advantages:
• No need for inventory
• Skilled expert
• Customization
 SERVICE BUSINESS
Disadvantages:
• Services are harder to value.
• More likely to have less demand
during economic crisis.
MERCHANDISING BUSINESS
 It is commonly known as “buy and sell”
business.
 Examples: Grocery stores, hardware
stores, and, department stores
MERCHANDISING BUSINESS
Advantages:
• More opportunity to attract
customers.
• More flexible to changes.
 MERCHANDISING BUSINESS
Disadvantages:
• Profits are usually highly dependent on prices set
by suppliers
• Need for inventory count.
• Some merchandise may be perishable
• Might require employees with different functions
• Might need to spend on some occasional
improvements within the store
MANUFACTURING BUSINESS
 Materials are brought to create a new
product.
 Examples: food factories and car
manufacturing companies
MANUFACTURING BUSINESS
Advantages:
• There is a continuous demand for
manufactured goods
• The creation of a manufactured
product often leads to higher job
satisfaction.
 MANUFACTURING BUSINESS
Disadvantages:
• Because of the scope of activities,
manufacturing firms are often more labor and
capital intensive
• The cost of the manufactured products
usually depends on the price and availability
of the raw materials.