Handout # 1 Introduction to Accounting and Business

LEARNING OUTCOMES
After reading this handout you would be able to:
a. Describe and define business together with its motive and role in the society.
b. Describe the nature of a business, its form of organization and type of operation.
c. Define accounting and explain its relevance to stakeholders.
d. Describe the role of accounting in business.
e. Enumerate the users of financial information.

Business – is an activity where goods or services are exchanged for money. A person who is
engaged in business is called an entrepreneur or businessman.
● The primary reason to put up a business is to earn profit.

Forms of Businesses

1. Sole or Single Proprietorship – is a business that is owned by only one individual. It is

the most common and simplest form of a business organization. The business owner is
called a “sole proprietor.”
A sole proprietorship is registered with the Department of Trade and Industry
(DTI).

Advantages.
● Only a small amount of capital is needed.
● Operations 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. Since there is only one owner/manager, it may be

● 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.

2. Partnership – is a business that is owned by two or more individuals who entered into a
contract to carry on business and divide among themselves the earnings therefrom. The
business owners are called partners.
A partnership is registered with the Securities and Exchange commission
(SEC). Partnership must submit Articles of Partnership.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

Advantages.
● Ease in managing the business and in attracting clients because more owners are
involved.
● Management is more efficient because of division of responsibilities.
● Easier to form compared to corporations and cooperatives, because only a
contractual agreement between the partners is needed.
● Greater Capital compared to a sole proprietorship.

Disadvantages
● No indefinite life since disagreements could easily arise because of many owners
involved.
● Unlimited liability.
● Profits are shared by the partners.
● A partnership (other than a general professional partnership) is taxed like a
corporation

3. Corporations – are also owned by more than one individual. However, unlike
partnership, a corporation is created by operation of law rather than a contract.
Ownership in a corporation is represented by shares of stocks. The owners are called
stockholders or shareholders.
A corporation is an artificial being or a judicial person, meaning in the eyes of
law, a corporation is like a person separate from its owners. Therefore, a corporation can
transact on its own, have its own properties, incur its own obligations, and sue or be sued.
A corporation is registered with the Securities and Exchange Commission
(SEC). A corporation must submit the Articles of Incorporations and Bylaws

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.
● Can exist for an indefinite period of time with a legal life of fifty years, which can
be renewed by SEC for another fifty years.
● More stable than a partnership 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 in corporate debts since these can only
be paid out of corporate funds.
● It is subject 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.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

4. Cooperative - is also owned by more than one individual. However, a cooperative is

formed in accordance with the provisions of The Philippine Cooperative Code of 2008.
The owners of cooperatives are called members.
A cooperative is registered with the Cooperative Development Authority
(CDA). Articles of Cooperation are one of the requirements to register.

Advantages.
● Members with larger shareholdings are entitled to larger share in profits.
● Generally, exempt from paying taxes and may receive assistance from the
government.
● Easier and less costly to form than a corporation because there are fewer formal
business requirements.
● Limited liability the members are liable for cooperative debts only up to the
amount they have invested.
● Unlimited Life, although it has a legal life of 50 years and can be renewed for an
indefinite number of renewals.

Disadvantages
● Prone to poor management and susceptible to corruption.
● One-member, one-vote policy, influential members tend to dominate the
election process.
● The Cooperative Code places some restrictions on the distribution of the
cooperative's profit to its members. More specifically, the Code requires a
cooperative to appropriate a portion of its annual profit to some funds.
● Compared to corporations, it is more difficult for cooperatives to sustain
growth.
● There are restrictions on the transfer of a member’s shares.

TYPES OF BUSINESS OPERATION

1. Service business - is one that offers services as its main product rather than physical
goods. A service business may offer professional skills, expertise, advice, lending
service and similar services.
2. Merchandising business (or trading business) is one that buys and sells goods without
changing their physical form.
3. Manufacturing Business is one who buys raw materials and processes these into
finished goods and then sells these to customers.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

TYPES OF BUSINESS ACTIVITIES

⮚ Financing Activities - are the methods an organization uses to obtain financial resources
from financial markets and how it manages these resources.

⮚ Investing Activities - involve the selection and management including disposal and
replacement of long-term resources that will be used to develop, produce, and sell goods
and services.

⮚ Operating Activities - involve the use of resources to design, produce, distribute and
market goods and services.
MANAGING THE BUSINESS
Management - may be defined simply as getting things done using resources and directing
people as efficiently as possible to be able to accomplish the goals of the business.

Three objectives of a manager:

a) That resources are being used productively,
b) Customer are satisfied with the product or service, and
c) Business is generating adequate profit

Four processes of management:

1. Planning - starts with determining the goals of the business and lining up activities to
accomplish these goals.
2. Organizing - involves creating divisions, appointing managers, hiring and defining the roles
or duties of each one (managers and staff).
3. Directing - means overseeing the daily operation of carrying out the planned activities
4. Controlling - means guarding and guiding people to ensure tasks and activities are done
according to plans and some standard of performance.

Definition of Accounting

Accounting is a service activity.

The accounting function is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic decisions.
(Accounting Standard Council - ASC)

Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
(American Institute of Certified Public Accountant - AICPA)

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

Accounting is the process of identifying, measuring and communicating economic information

to permit informed judgement and decision by users of the information.
(American Accounting Association - AAA)

History of Accounting

Prehistoric times perhaps more than 10,000 years ago methods of record keeping, and
account-ting have been invented.

As early as 8,500 B.C., accounting has already existed. Archeologists have found clay tokens as
old as 8,500 B.C. in Mesopotamia which were usually cones, disks, spheres and pellets. Which
was later replaced by clay tablets.
Other civilizations keeping accounting records – Babylonia (4500 B.C.), Egypt (2250 B.C.), China
and Greece.

Middle Ages (13th and 15th centuries)

1211 A.D. - one of the systems in accounting was kept by a Florentine banker. However, the
system was primitive as the concept of equality for entries was absent.
1340 A.D. Genoa – double entry record first came out
Fra Luca Pacioli, Franciscan monk and mathematician (1494) – formulated the first systematic
record keeping dealing with the “double entry recording system” which was included
in his book entitled “Summa Arithmetica Geometrica Proportioni and
Proportionista,” published November 10, 1494 in Venice.
- Considered as “Father of Modern Accounting”

Nature of Accounting
Accounting is a process with the basic purpose of providing information about economic
activities intended to be useful in making economic decisions.

Types of information provided by accounting

1. Quantitative information – information expressed in numbers, quantities or units.

2. Qualitative information – information expressed in words or descriptive form which is found
in the notes to financial statements
3. Financial information – information expressed in money.
Accounting as science and art
1. As a social science, accounting is a body of knowledge which has been systematically
gathered, classified and organized.
2. As a practical art, accounting requires the use of creative skills and judgement.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

Accounting as an information system

A system is one that consists of an input, a process and an output. In the accounting
system, the inputs are the accountable events; the processes are recording, classifying and
summarizing; and the output is the report that is communicated to the users.

Bookkeeping and Accounting

⮚ Bookkeeping refers to the process of recording the accounts or transactions of an entity.

Bookkeeping normally ends with the preparation of trial balance.
⮚ Accounting, on the other hand, covers the whole process of identifying, recording, and
communicating information to interested users.

Accounting as “Language of Business”

USERS OF FINANCIAL INFORMATION

Stakeholders - is a person or entity who has a “stake” or interest in the business.

Types of Stakeholders or users of financial information:

⮚ Internal Users

❖ Owner or Investor - the one who puts in capital (such as money or property) in
a business endeavor. (profitability and stability)
❖ Manager - the one who is responsible for running the business. (planning and
operating profitably)

⮚ External Users

❖ Lender or Creditor - the one that lends finances to the business. (paying
ability, liquidity and credit worthiness)
❖ Supplier - the one who offers goods or merchandise to the business on cash
basis or in credit terms. (paying ability, liquidity and credit worthiness)
❖ Government - assess the truthfulness of the business in paying taxes through
its tax agent, the Bureau of Internal Revenue.
❖ Customer - assesses the company’s ability to continuously supply the goods
they need at the right price and right quality.
❖ Potential Investor - person who might invest or put in his capital to the
business.
❖ Employee – they are interested in the company’s ability to give benefits and
adequate salary.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
Handout # 1 Introduction to Accounting and Business

TWO MAJOR AREAS OF ACCOUNTING

Financial Accounting Managerial Accounting

Users of reports External Users Internal Users

Pictures the business, less Pictures the business

Types of report detailed report (General individually or in division,
Purpose) detailed report (Special
Purpose)
Historical, quantitative, Current or forecast,
Types of information monetary, and verifiable quantitative or qualitative,
monetary or non-monetary
Monthly, semi-annually, As per needed by the
Timing of report annually management
Must be in accordance with
Standard of report Generally Accepted No standard
Accounting Principle

Other Branches of Accounting

● Government Accounting - refers to the accounting for the government and its
instrumentalities, focusing attention on the custody of public funds, the purpose or
purposes to which those funds are committed, and the responsibility and accountability
of the individuals entrusted with those funds.
● Auditing – involves the inspection of an entity’s financial statements or business
processes to ascertain their correspondence with an established criteria.
● Tax accounting – is the preparation of tax returns and rendering of tax advice such as
the determination of tax consequences of certain proposed business endeavors.
● Cost accounting - is the systematic recording and analysis of the costs of materials, labor,
and overhead incident to the production of goods or rendering business endeavors.
● Accounting education - refers to teaching accounting and accounting related subjects in
an organized learning environment.
● Accounting research - pertains to careful analysis of economic events and other
variables to understand their impact on decisions.

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
 Handout # 1 Introduction to Accounting and Business

Exercises

I. True or False

1 Accounting is a process of identifying, recording and communicating economic information that is

useful in making economic decisions.
2 Only accountable events are recorded in the books of accounts.
Accountable events are those affect the assets, liabilities, equity, income and expenses of a
3 business
4 Sociological and psychological matters are within the scope of accounting
5 Accounting is described as practical art. This is because it is a body of knowledge which has been
systematically gathered, classified and organized.
6 All business transactions are recorded in the accounting records, without exemption.
7 General purpose financial statements are those statements that cater to the common needs of a
wide range of internal users.
8 The government is exempt from preparing its own financial statements.
9 Users of financial statements who are not directly involved in managing the reporting entity are
considered external users of the entity's financial statements.
10 Management accounting involves the accumulation and communication of information for use by
external users.

II. Multiple Choice

1 This branch of accounting must follow the Generally Accepted Accounting Principles.
a. Management Accounting c. Cost Accounting
b. Financial Accounting d. Tax Accounting
2 If a business transactions was/ recorded on the journal books, then we can assume that
a. it is an accountable event c. it increases assets
b. it is favorable transaction d. all of these
3 Accounting communicates with the users of information through the use of financial information.
Which of the following is the best description?
a. Accounting is practical art c. Accounting Is the "language of Business"
b. Accounting is an information system d. Accounting is only for accountants only
4 In this phase of the accounting process, accounting information is disseminated to
interested parties.
a. recording c. identifying
b. communicating d. dissementing
5 These users need financial information about reporting entities for the purpose of knowing the return on
their investments.
a. employees c. government agencies
b. shareholders d. creditors

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel
 Handout # 1 Introduction to Accounting and Business

6 This branch of accounting enhances and lends credibility to the financial statements.
a. Tax accounting c. Accounting Education
b. Auditing d. Daddy Accounting
7 These users of financial information want to know if the business could sustain the product quality.
a. Lenders and creditors c. Investors
b. Customer d. Owners
8 It is the branch of accounting that focuses on the preparation of general purpose financial statements
a. Management Accounting c. General Accounting
b. Financial Accounting d. Tax Accounting
9 Papa's decision on whether to extend you a loan is a decision made by a(an).
a. external user c. wise man
b. internal user d. kuripot man
10 Personal reputation and credibility are most important in this type of business.
a. Service c. Manufacturing
b. Merchandising d. Religion

References: Fundamentals of Accounting by Zeus Vernon Millan and Accounting Process 2018 edition by Zenaida Manuel