ENTREPRENEURIAL BEHAVIOR

CHAPTER 1: THE ENTREPRENEURIAL PROCESS

Overview:
Entrepreneurship is referred to as the creation and the process of innovating different goods and services
for the people, society, and for the environment. The process of entrepreneurship helps businesses to become
independent and perceived more opportunities when it comes to utilizing resources. As a start, entrepreneurship
is a process that involves employing all the skills, ideas, functions, activities, and actions in order to identify and
evaluate opportunities. This chapter will introduce the complex process of venture creation embodied in
entrepreneurship.

Course Materials:

 What is an entrepreneur?
o An individual who undertakes the risk associated with creating, organizing, and owning a
business.
o Skills needed by successful entrepreneurs:
 Communication skills
 Human relation skills
 Math skills
 Problem-solving skills
 Decision-making skills
 Technical skills
 Basic business skills

 What is Entrepreneurship?
o Entrepreneurship is the process of starting and running one’s own business. This
involves a considerable amount of risk.

 5 Steps of the Entrepreneurial Process

1. Discovery
 The stage in which the entrepreneur generates ideas, recognizes opportunities,
and studies the market.
 Entrepreneurs consider the following: Hobbies or Skills, Consumer Needs and
Wants, Conduct Surveys and Questionnaires, and Study Demographics.
2. Concept Development
 Entrepreneurs prepare the following in this step:
i. Develop a Business Plan
ii. A detailed proposal describing the business idea
iii. Choose Location for the Business
iv. Is the business online or does it have a physical location for customers
to visit to purchase products, services or combinations?
3. Resourcing
 The stage in which the entrepreneur identifies and acquires the financial,
human, and capital resources needed for the venture startup, etc.
 Entrepreneurs contemplate the following:
i. Identify Potential Investors
ii. Apply for loans, grants and financial assistance
iii. Hire employees
4. Actualization
 The stage in which the entrepreneur operates the business and utilizes
resources to achieve its goals / objectives
 Entrepreneurs prepare for the following:
i. Grand Opening of the Business
ii. Day to Day Operations of the Business
5. Harvesting
 The stage in which the entrepreneur decides on venture’s future growth,
development, or demise.
 Entrepreneurs consider the following:
i. Future Plans for the Business:
ii. Expansion to additional locations
iii. Company to change structure
 Starting a Business
1. Develop a Business Plan
 A Business Plan is a detailed proposal that describes a new business.
 Business Plans are:
i. Presented to potential investors and lenders
ii. Most business plans are 30+ pages
 Business Plans are used to:
i. Obtain Financing
ii. Banks and Potential Lenders require a business plan
iii. Helps organize and analyze data critical to new business.
iv. Provides a start-up proposal
v. Provides and outline to follow when starting the business.
 Components of a Business Plan
i. Executive Summary: Brief one-to-two-page description of the key
points of each section of the business plan
ii. Product/Service Plan: Presents Product or Service being offered and the
unique features of the Product or Service
 Management Team Plan: Qualifications of the Entrepreneur and qualifications
of any Partners who may be involved in the business venture
 Industry/Market Analysis: Analyzes the: Customers / Competition / Industry /
Demographic / Geographic and Economic data
 Operational Plan: Includes all processes involved in producing and/or delivering
the product or service to the customer
 Organizational Plan: Management philosophy of the business, Key management
personnel, and Key employment policies.
 Marketing Plan: Describes how the business will make its customers aware of
its products/ services.
 Growth Plan: Presents plan for future expansion of the business
 Financial Plan: Includes financial statements that will help forecast the future
financial health of the business

2. Acquire Finances
 Identify Potential Investors
 Examples:
i. Family and Friends
ii. Other Businesses
iii. Employees
iv. Contact Financial Agencies for loans, grants and financial assistance:
v. Small Business Administration
vi. Banks / Credit Unions
vii. Insurance Companies

3. Meet Legal Requirements

 Additional Legal Requirements for some businesses:
i. Permits, Certifications or Licenses: an official document giving someone
authorization to run their business under the extension of the direction
of the Local, State and Federal Laws.
ii. Contracts: a written or spoken agreement, especially one concerning
employment, sales, or tenancy that is intended to be enforceable by
law.
iii. Zoning Laws: specify the areas in which residential, industrial,
recreational or commercial activities may take place.
iv. Taxes: An enforced contribution of funds to state revenue, levied by the
government on workers' income and business profits or added to the
cost of some goods, services, and transactions.
v. Trademarks: Protects a business’ name / logo.
vi. Patents: Protects the invention of products or processes from theft.
vii. Copyrights: Protects Creative Works: Literary, Musical, Dramatic,
Artistic works.
Principles of Management and Organization
LESSON 1: AN INTRODUCTION TO MANAGEMENT AND ORGANIZATION

MANAGEMENT FUNCTIONS
Planning
Planning is the process of anticipating future events and conditions and determining courses of action for
achieving organizational objectives. It is the one step in running a small business that is most commonly skipped, but it is
the one thing that can keep a business on track and keep it there. Planning helps a business realize its vision, get things
done, show when things cannot get done and why they may not have been done right, avoid costly mistakes, and
determine the resources that will be needed to get things done.

Organizing
Organizing consists of grouping people and assigning activities so that job tasks and the mission can be properly
carried out. Establishing a management hierarchy is the foundation for carrying out the organizing function.
Contrary to what some people may believe, the principle of organizing is not dead. Rather, it is clearly
important “to both the organization and its workers because both the effectiveness of organizations and worker
satisfaction require that there be clear and decisive direction from leadership; clarity of responsibilities, authorities, and
accountabilities; authority that is commensurate with responsibility and accountability; unified command (each
employee has one boss); a clear approval process; and, rules governing acceptable employee behavior.
Except for a small business run solely by its owner, every small business needs a management hierarchy—no
matter how small. Each person in the business should know who is responsible for what, have the authority to carry out
his or her responsibilities, and not get conflicting instructions from different bosses. The absence of these things can
have debilitating consequences for the employees in particular and the business in general.

Traditional Management Principles - process involving utilization of people and other resources in order to achieve
organizational goals

 Types of Departmentalization
1. Functional Departmentalization
 An arrangement that defines a department by the function it performs.
Ex. basic departments of an organization
2. Geographic Departmentalization
Ex. Supervisors
 Manila area
 Makati area
 Quezon City area
Arrangement of departments according to geographic areas or territories
3. Product Departmentalization
 Arrangement of departments according to goods and services they offer to the market.
Ex. Real Estate Development, Telecommunications Department, Food and beverage
Department

Staffing
The staffing function involves selecting, placing, training, developing, compensating, and evaluating (the
performance appraisal employees. Small businesses need to be staffed with competent people who can do the work that
is necessary to make the business a success. It would also be extremely helpful if these people could be retained.

Directing
Directing is the managerial function that initiates action: issuing directives, assignments, and instructions; building an
effective group of subordinates who are motivated to do what must be done; explaining procedures; issuing orders; and
making sure that mistakes are corrected. Directing is part of the job for every small business owner or manager.  

Leading and motivating work together in the directing function. Leading is the process of influencing people to work
toward a common goal [and] motivating is the process of providing reasons for people to work in the best interests of an
organization. Different situations call for different leadership styles. In a very influential research study, Kurt Lewin
established three major leadership styles: autocratic, democratic, and laissez-faire. Although good leaders will use all
three styles depending on the situation, with one style normally dominant, bad leaders tend to stick with only one style.

 Leadership Styles
1. Participative - allows subordinates to participate in decision-making
2. Democratic - encourages consultation of subordinates to arrive in decision-making
3. Autocratic - assures a paternalistic role which forces subordinates to rely on the leads
4. Laissez-Faire - depends completely on subordinates to make own decisions
5. Charismatic - possesses charm to influence his subordinates
6. Transformational - uses persuasion to bring changes to the organization
7. Servant Leadership - focuses on serving the organization
8. Strategic - focuses on strategy and the environment
9. Transactional - focuses on the task and its output
10. Visionary - focuses on the future of the organization
11. Situational - focuses on addressing the situation or circumstances
 A. Autocratic Leadership occurs when a leader makes decisions without involving others; the leader tells the
employees what is to be done and how it should be accomplished. However, this style works when all the
information needed for a decision is present, there is little time to make a decision, the decision would not
change as a result of the participation of others, the employees are well motivated, and the motivation of the
people who will carry out subsequent actions would not be affected by whether they are involved in the
decision or not. This leadership style should not be used very often.

B. Democratic Leadership involves other people in the decision making—for example, subordinates, peers,
superiors, and other stakeholders—but the leader makes the final decision. Rather than being a sign of
weakness, this participative form of leadership is a sign of strength because it demonstrates respect for the
opinions of others. The extent of participation will vary depending on the leader’s strengths, preferences,
beliefs, and the decision to be made, but it can be as extreme as fully delegating a decision to the team. This
leadership style works well when the leader has only part of the information and the employees have the other
part. The participation is a win-win situation, where the benefits are mutual. Others usually appreciate this
leadership style, but it can be problematic if there is a wide range of opinions and no clear path for making an
equitable, final decision.

C. Laissez-faire Leadership (or delegative or free-reign leadership) minimizes the leader’s involvement in decision
making. Employees are allowed to make decisions, but the leader still has responsibility for the decisions that
are made. The leader’s role is that of a contact person who provides helpful guidance to accomplish
objectives. This style works best when employees are self-motivated and competent in making their own
decisions, and there is no need for central coordination; it presumes full trust and confidence in the people
below the leader in the hierarchy.

Don’t Be This Kind of Leader or Manager

Here are some examples of Common Leadership Styles that should be avoided.

1) Post-hoc Management. As judge and jury, management is always right and never to blame. This
approach ensures security in the leader’s job. This style is very common in small companies where there
are few formal systems and a general autocratic leadership style.

2) Micromanagement. Alive and well in businesses of all sizes, this style assumes that the subordinate is
incapable of doing the job, so close instruction is provided, and everything is checked. Subordinates are
often criticized and seldom praised; nothing is ever good enough. It is really the opposite of leadership.

3) Seagull Management. This humorous term is used to describe a management style whereby a person
flies in, poops on you, and then flies away. “Leadership Styles. When present, such people like to give
criticism and direction in equal quantities—with no real understanding of what the job entails. Before
anyone can object or ask what the manager really wants, he or she is off to an important meeting.
Everyone is actively discouraged from saying anything, and eye contact is avoided. “

4) Mushroom Management. This manager plants you knee-deep (or worse) in the smelly stuff and keeps
you in the dark. Mushroom managers tend to be more concerned about their own careers and images.
Anyone who is seen as a threat may be deliberately held back. These managers have their favorites on
whom they lavish attention and give the best jobs. Everyone else is swept away and given the unpopular
work. Oftentimes, mushroom managers are incompetent and do not know any better. We have all seen
at least one manager of this type.

5) Kipper management. This is the manager who is, like a fish, two-faced because employees can see only
one face at a time. To senior managers, this person is typically a model employee who puts business first
and himself last. To subordinates, however, the reverse is often the case. The subordinates will work hard
to get things done in time, but they are blamed when things go wrong—even if it is not their fault. The
kipper will be a friend when things need to get done and then stab the subordinates in the back when
glory or reward is to be gained. We have all seen this kind of manager, perhaps even worked for one.

Controlling
Controlling is about keeping an eye on things. It is “the process of evaluating and regulating ongoing activities to
ensure that goals are achieved. Controlling provides feedback for future planning activities and aims to modify
behavior and performance when deviations from plans are discovered.

1. Setting performance standards is the first step. Standards let employees know what to expect in
terms of time, quality, quantity, and so forth.
2. Measuring Performance, where the actual performance or results are determined.
3. Comparing Performance is step three. This is when the actual performance is compared to the
standard. The fourth and last step, taking corrective action, involves making whatever actions are
necessary to get things back on track. The controlling functions should be circular in motion, so
all the steps will be repeated periodically until the goal is achieved.
THE CONTROLLING FUNCTION
Methods of Control

1. Bureaucratic Control - top to down control where managers influence employee behavior by
awarding or punishing employees for compliance or non-compliance with organizational policies,
rules, procedure.
2. Objective Control - use of observable measures of employee behavior or output to assess
performance and influence behaviour.
3. Normative Control - influencing performance and behavior based on norms, standards, or
practice
4. Concertive Control - influencing performance and behavior based on beliefs that are shaped and
negotiated by work groups
5. Self-Control - Managers and workers control their own behavior.

Levels of Management
As a small business grows, it should be concerned about the levels or the layers of management. Also
referred to as the management hierarchy, there are typically three levels of management: top or executive, middle,
and first-line or supervisory. To meet a company’s goals, there should be coordination of all three levels.

The Management Hierarchy

1. Top Management, also referred to as the executive level, guides and controls the overall fortunes of a business.
This level includes such positions as the president or CEO, the chief financial officer, the chief marketing officer,
and executive vice presidents. Top managers devote most of their time to developing the mission, long-range
plans, and strategy of a business—thus setting its direction. They are often asked to represent the business in
events at educational institutions, community activities, dealings with the government, and seminars and
sometimes as a spokesperson for the business in advertisements. It has been estimated that top managers
spend 55 percent of their time planning.

2. Middle Management is probably the largest group of managers. This level includes such positions as regional
manager, plant manager, division head, branch manager, marketing manager, and project director. Middle
managers, a conduit between top management and first-line management, focus on specific operations,
products, or customer groups within a business. They have responsibility for developing detailed plans and
procedures to implement a firm’s strategic plans.

3. First-line or supervisory management is the group that works directly with the people who produce and sell
the goods and/or the services of a business; they implement the plans of middle management. They coordinate
and supervise the activities of operating employees, spending most of their time working with and motivating
their employees, answering questions, and solving day-to-day problems. Examples of first-line positions include
supervisor, section chief, office manager, foreman, and team leader.

In many small businesses, people often wear multiple hats. This happens with management as well. One person may
wear hats at each management level, and this can be confusing for both the person wearing the different hats and other
employees. It is common for the small business owner to do mostly first-level management work, with middle or top
management performed only in response to a problem or a crisis, and top-level strategic work rarely performed. This is
not a good situation. If the small business is large enough to have three levels of management, it is important that there
be clear distinctions among them—and among the people who are in those positions. The small business owner should
be top management only. This will eliminate confusion about responsibilities and accountabilities.

 Management skills is the ability to carry out the process of reaching organizational goals by working with and
through people and other organizational resources. Possessing management skill is generally considered a
requirement for success. An effective manager is the manager who is able to master four basic types of skills:
technical, conceptual, interpersonal, and decision making.
 Technical skills are the manager’s ability to understand and use the techniques, knowledge, and tools and
equipment of a specific discipline or department. These skills are mostly related to working with processes or
physical objects. Engineering, accounting, and computer programming are examples of technical
skills. Technical skills are particularly important for first-line managers and are much less important at the top
management level. The need for technical skills by the small business owner will depend on the nature and the
size of the business.
 Conceptual skills determine a manager’s ability to see the organization as a unified whole and to understand
how each part of the overall organization interacts with other parts These skills are of greatest importance to
top management because it is this level that must develop long-range plans for the future direction of a
business. Conceptual skills are not of much relevance to the first-line manager but are of great importance to
the middle manager. All small business owners need such skills.
 Interpersonal skills include the ability to communicate with, motivate, and lead employees to complete
assigned activities. hopefully building cooperation within the manager’s team. Managers without these skills
will have a tough time succeeding. Interpersonal skills are of greatest importance to middle managers and are
somewhat less important for first-line managers. They are of least importance to top management, but they
are still very important. They are critical for all small business owners.
 Decision making is the ability to identify a problem or an opportunity, creatively develop alternative solutions,
select an alternative, delegate authority to implement a solution, and evaluate the solution.
MANAGEMENT DECISION MAKING

A Framework for Ethical Decision Making - Small business decisions should be ethical decisions. Making ethical
decisions requires that the decision maker(s) be sensitive to ethical issues. In addition, it is helpful to have a
method for making ethical decisions that, when practiced regularly, becomes so familiar that it is automatic.

The Markkula Center for Applied Ethics recommends the following framework for exploring ethical dilemmas and
identifying ethical courses of action. However, in many if not most instances, a small business owner or manager
and an employee will usually know instinctively whether a particular decision is unethical.

1. Recognize an Ethical Issue

 Could this decision or situation be damaging to someone or some group? Does this decision involve a
choice between a good and a bad alternative or perhaps between two “goods” or between two “bads”?
 Is this issue about more than what is legal or most efficient? If so, how?

2. Get the Facts

 What are the relevant facts of the case? What facts are not known? Can I learn more about the situation?
Do I know enough to make a decision?
 What individuals and groups have an important stake in the outcome? Are some concerns more
important? Why?
 What are the options for acting? Have all the relevant persons and groups been consulted? Have I
identified creative options?

3. Evaluate Alternative Actions

 Which option will produce the best and do the least harm?
 Which option best respects the rights of all who have a stake?
 Which option treats people equally or proportionately?
 Which option best serves the community as a whole, not just some members?
 Which option leads me to act as the sort of person I want to be?

4. Make a Decision and Test It

 Considering all these approaches, which option best addresses the situation?
 If I told someone I respect—or told a television audience—which option I have chosen, what would they
say?

5. Act and Reflect on the Outcome

 How can my decision be implemented with the greatest care and attention to the concerns of all
stakeholders?
 How did my decision turn out, and what have I learned from this specific situation? 

KEY TAKEAWAYS

 Management principles are important to all small businesses.

 Management decisions will impact the success of a business, the health of its work environment, its
growth if growth is an objective, and customer value and satisfaction.
 Management is about achieving organizational objectives through people.
 The most common reason attributed to small business failure is failure on the part of management.
 On any given day, a typical small business owner or manager will be engaged in some mix of planning,
organizing, staffing, directing, and controlling.
 Different situations call for different leadership styles. The three major styles are autocratic, democratic,
and laissez-faire. Bad leaders typically stick with one style.
 The management hierarchy is typically composed of three levels: top or executive, middle, and first-line or
supervisory. If a small business is large enough to have these three levels, it is important that there be a
clear distinction between them.
 Management skills are required for success. Technical, conceptual, interpersonal, and decision-making
skills will be of differing importance depending on the management level.
FUNDAMENTALS OF ACCOUNTING 1

LESSON 1

INTRODUCTION
 Accounting is defined as the language of business. It is a means of communicating financial information to
interested parties such as the internal and external users of financial information.
 Accounting was defined as 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.
 Accounting Standards Council (ASC) defines accounting as a service activity which function is to provide
quantitative information, primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions, in making reasoned choices among alternative courses of action. It identifies,
records, and processes business activities to come up with financial reports that are measured in monetary
terms to show the financial condition of the business.
 Accounting is defined by CIMA Official Learning System as the classification and recording of monetary
transactions, the presentation and interpretation of the results of those transactions in order to assess
performance over a period of time and the financial position at a given time and the monetary projection of
future activities arising from the alternative planned courses.

FUNCTIONS OF ACCOUNTING
o Accounting encompasses several functions.

(1) The first function is to identify the different business activities relevant to the operation of an organization. These
activities are the transactions and events that occur from day to day.

(2) The second function is the recording of these business activities either manually or electronically. The recording of
routine transactions from day to day is called bookkeeping. Recording of transactions and events is usually done on a
chronological order or according to date of occurrence.

Bookkeeping can be described as the recording of monetary transactions, appropriately classified, in

the financial records of an entity, by either manual means or otherwise. These monetary transactions are recorded in
chronological order or according to date of occurrence, in the books of accounts. An account is maintained for each item
and this account shows the summary of transactions in a given period, enabling the management to track the increases
and decreases of each item. Periodically, a summary of all accounts with their balances is prepared. This is known as the
trial balance.

(3) After recording, financial reports are prepared, analyzed and interpreted to different users of accounting information
depending on their economic needs. These reports are measured in monetary terms. Examples of financial reports are:
1) Income Statement which shows the results of the business operation;
2) Balance Sheet or Statement of Financial Position which shows the financial condition of the business;
3) Statement of Cash Flows which shows the sources and uses of the organization's funds;
4) Statement of Changes in Owner's Equity; and
5) Notes to Financial Statements which focuses on the narrative report financial statements.

BRANCHES OF ACCOUNTING
o The branches of accounting are not limited to the following:

(1) Financial Accounting is concerned primarily with the preparation of general-purpose financial statements. It
is focused on recording of business transactions and the main aim is to prepare financial statements to communicate the
results of operation and the financial condition of the enterprise to both external and internal users. Its process is
governed by the standards set by the Philippine Financial Reporting Standards Council, the group that established a set
of understandable and enforceable accounting standards to be used in general purpose financial statements and other
financial reporting.

(2) Management Accounting is a branch of accounting that is focused on providing the management with
accounting information relevant to the activities of the different managers in the enterprise. The managers are the
people who develop strategies for achieving the goals of the enterprise. They need information for decision making,
planning directing, and controlling an enterprise's operations. The accounting reports prepared for managers are not
governed by the Philippine Accounting Standards set for financial accounting.

(3) Tax Accounting is a branch of accounting that is focused on the preparation of income tax returns and
providing advises to clients on matters related to tax issues.

(4) Cost Accounting is focused on gathering cost information that is useful in determining the product or service
costs, to help the management in setting prices, for the purpose of planning, controlling activities, improving quality and
efficiency of operation. The cost information gathered by the cost accountant also help the management in deciding
whether to maintain, to reduce or to increase the selling price of a product or service in order to have fair competition in
the market.
THE ACCOUNTING PROFESSION
Accountants may choose to specialize in a specific field. The accounting profession is divided into four
areas: (1) Public Accounting: (2) Private Accounting; (3) Government Accounting and (4) Accounting Education. To
be able to practice in any of the fields, one must pass the CPA Licensure Examination administered by the
Philippine Regulation Commission.

 Public Accounting. In public accounting, an accountant may practice as an individual practitioner or as a

partner of an accounting firm and are qualified to render any of the following professional services for a
fee:
Auditing. The function of a certified public accountant under this sector is to audit or verify financial
transactions and accounting records; prepare, sign or certify audit reports, balance sheets and other financial,
accounting and related schedules and reports which are to be used for publication or for credit purposes. The
auditor examines the financial statements of the company and expresses an opinion regarding the fairness of
the financial statements and their adherence to Philippine Standards in Auditing (PSA).

Taxation. The scope of the accountant's work in this sector is preparing income tax returns and serves
also as adviser to management in matters relating to taxation. He or she may also represent the client before
government agencies on tax and other matters related to accounting.

Management Consultancy. Management accountants provide management advisory services in

almost all areas like accounting decision making, budgeting, business policies, accounting procedures and other
matters involving finance.

 Private Accounting. Some accountants work in a commerce and industry as financial accountant, cost
accountant and internal auditor. The scope of activities of private accountants is very wide. Some are
financial accountants who primarily records transactions and events, prepare financial statements, and
provide timely reports to management. The others may be employed as cost accountant who is in charge
of gathering cost information about the business operation or management accountant who focuses on
gathering information for the management to measure the efficiency and effectiveness of the system and
procedures. Some work as internal auditors who review the accounting and operating procedures
prescribed by the firm. Accountants in private accounting are guided by the standards set by the
Accounting Standards Council as outlined in the Philippine Accounting Standards (PSAs) and Philippine
Financial Reporting Standards (PFRS).

 Government Accounting. Accountants are not only working with private companies or accounting firms.
Government agencies like Polytechnic University of the Philippines (PUP) and other state universities and
colleges, Commission on Audit (COA), Bureau of Internal Revenue (BIR) Bureau of Customs, National
Home Mortgage and other government agencies need the services of accountants. They may be
employed as Revenue Officer, Budget Commissioner, Audit Examiner, Budget Analyst, Financial Services
Specialist or National Treasurer. Accountants in government agencies are guided by the New Government
Accounting Standards (NGAS).

 Education. Educators play a very important role in the development of future professionals like
accountants. The Commission on Higher Education issued the following guidance on the qualification of
faculty who will teach accounting and managerial finances:
a) Registered Professional Accountants in the Philippines with current PRC Identification
Cards.
b) Holders of a master s degree in business, accountancy, business education, or
educational management or its equivalent;
c) Must be an accredited accounting teacher

LESSON 2

INTRODUCTION
In the accounting profession, an accredited nationwide professional association is created to provide
members with resources, information and leadership to enable the certified public accountants in the Philippines
to deliver valuable services to the benefit of the public, employers and clients. This association is divided into four
different specializations.

ORGANIZATIONS IMPORTANT TO THE ACCOUNTING PROFESSION

Philippines Institute of Certified Public Accountant (PICPA) is the national professional accountancy body
of the Philippines. Explorers with an accounting background first formed the PICPA in November 1929. Under
PICPA, there are four associations of certified public accountants in their respective field of specialization. They
are:
a. Associations of Certified Public Accountants in Education (ACPAE). This is an association of CPAs who
belong to the academe. Accounting educators contribute to the accounting profession through effective
teaching and influencing many students to pursue careers in accounting.
b. Associations of Certified Public Accountants in Commerce and Industry (ACPACI). This is an association of
CPAS who are employees of private companies.
 c. Government Associations of Certified Public Accountants (GACPA). This is an association of CPAs who
work in government agencies. Government agencies like private business enterprises use accounting
information in allocating their resources and in controlling their operations.
d. Association of Certified Public Accountants in Public Practice (ACPAPP). This is an association of CPAs who
work with accounting firms as external or independent auditors.

Professional Regulation Commission (PRC)

This government agency is tasked to promulgate rules and regulations regarding practice of a profession including
administration of licensure examination for Certified Public Accountants, Engineers, Doctors, Nurse and other
professions.
Board of Accountancy (BOA)
The Board of Accountancy is under the umbrella of PRC, who is in charge of regulating the accounting profession
by setting up rules of conduct and standards for the practice of accountancy.

USERS OF ACCOUNTING DATA

1) Internal Users are those who make decisions directly affecting the internal operations of the business.
These are:

Managers. The managers are directly involved in operation of the business. They need accounting
data to improve the efficiency and effectiveness of the organization. For example, the production
manager needs to know accounting data to determine whether the company is operating within the
operational budget and whether the standards set by the management are met to ensure quality of
output. The marketing manager needs financial data on the costs of production to be able to set
selling prices, to monitor the attitude of the consumers, their taste and concerns to help the
management come up with decision whether to continue producing or to improve the existing
product, or to develop a new product.

Employees. Employees use financial data to assess whether they are receiving the right compensation
and to check if they can bargain employment for higher remuneration, retirement benefits and
opportunities.

Officers. The company executives are interested to know if the company is doing well in its operation
so they can plan for possible expansion or branching out to widen its geographical and demographical
market.

Internal Auditors. The role of internal auditors is to protect and safeguard the resources of the
company against fraud or irregularities. They need financial data to ensure that financial reports
submitted to the different users are reliable, to promote efficiency and to encourage adherence to
prescribed managerial policies necessary to enhance and create better, strategy for its operation.

2) External Users are individuals or enterprises that have financial interest in the business but they are not
involved in the day-to-day activities of the organization.
These are:
Business Contacts. This group includes suppliers and other trade creditors. They need accounting data
to assess the financial credibility of a business before making transactions with them. Suppliers may
extend credit to the company for purchases made and of course they want to be sure that the
company will be able to pay their accounts as they fall due.

Lenders. The lenders are those who extend financial assistance to the business in the form of loans.
This group provides secured or unsecured, long or short-term loan finance. They are banks, financing
institutions or private individuals. They are interested in information that enables them to determine
whether their loans, and the interest attaching to them, will be paid when due. One way for them to
assess the borrower's financial capability, the borrower's projected income and its financial position
are thoroughly assessed before loans are granted.

Customers. The customers are interested to know if the business can supply the needed demand and
to continue to provide similar services in the future or whether the company is true to their
commitment to fulfill warranty obligations.

Investors. This includes both existing and potential owners of equity interest in companies. They need
information concerning the performance of the company measured in terms of its profitability and
the extent to which those profits are to be distributed to owners. They are also interested in the
social/economic policies of the company so that they may decide if they wish to be associated with
such an organization. (CIMA)

Analysts/advisers. This group includes a range of advisers to inventors, employees and the general
public. The needs of these users will be similar to those of their clients. The difference is, perhaps,
that in some instances, the members of this group will be more technically qualified to understand
accounting reports. (CIMA)
 Governments and their agencies. Examples of government agencies that need financial reports are (1)
Bureau of Internal Revenue (BIR), to determine if the business is paying the right amount of tax; (2)
Securities and Exchange Commission (SEC), requiring all businesses to report their financial
statements for public use in order to secure the business interest of every user; and other regulatory
bodies that have legal authority over the activities of the business. These agencies need information
to regulate the activities of enterprises, determine taxation policies and as the basis for national
income and national statistics.

Independent Auditors. The independent auditors or external auditors examine the financial reports to
determine whether the reports are prepared in accordance with Philippine Accounting Standards and
Philippine Financial Reporting Standards and to determine whether the financial statements are fairly
presented.

Public. Business enterprises provide substantial assistance to the general public in many ways like,
employment and they contribute also to the enhancement of local economy. The financial
statements prepared by the management give information to the public about the trends and
developments of the enterprise.

TYPES OF BUSINESS
There are three types of businesses, (1) service business, (2) merchandising or trading business, and (3)
manufacturing business.

Service
This type of business provides services to customers. Most common examples of service businesses are:
utility companies like Manila Waters, MERALCO; telecommunication companies like Philippine Long Distance
Company, Globe Philippines and Smart; transportation companies like Philippine Airlines, Victory Liner, Manila
Light Rail Transit hotels and restaurants, hospitals, educational institutions and entertainment businesses.

Merchandising
The traders or merchandisers purchased goods and sell them to customers without changing their form.
Examples of merchandising businesses are: General Merchandiser like SM Supermarket and Department Stores,
consumer electronics stores like Abenson, furniture stores like Blims Furniture, and many more.

Manufacturing
Manufacturing companies buy raw materials and convert them into a finished product. Examples are: Car
manufacturers like Toyota, Inc., makers of stereos, components and televisions like Sony Philippines, producer of
beverages like Coca-Cola, maker of computers like Fujitsu, maker of athletic shoes and other sports apparel like
Nike, manufacturer of personal products like Colgate Palmolive Philippines, maker of breads and other pastries like
Red Ribbon Bakeshop and many more.

FORMS OF BUSINESS ORGANIZATION

Business organizations may be categorized as profit-making organizations or not-tor profit organizations.
Profit making organizations include a sole-proprietorship, partnership and corporation.

Sole Proprietorship.
This type of organization is owned and operated by the owner. It is very easy to organize and it requires
very low capital. There is no special legal requirement on its formation. The sole proprietorship is a business entity
separate from the personal affairs of the owner. But the business itself and its owner are not regarded as separate
entities, meaning the owner is personally liable for the obligations of the business. Examples of a sole
proprietorship type are hardware stores, laundry shops, eateries, beauty parlors, and repair shops and other
businesses owned and managed by the proprietor.

Partnership.
This is formed by two or more individuals who are called partners. It is very easy to organize but it
requires a larger amount of capital. As in sole proprietorship, the partners are also liable for the debts of the
business. The agreement of the partners usually shows how the profit or loss is being divided among the partners.
Examples of this form of organization includes accounting firms organized by CPAs, law firms organized by lawyers
and medical firms organized by physicians.

Corporation.
This is a business owned by stockholders. It has a legal personality separate and distinct from the owners
and it can conduct business in its own name. The ownership is divided into shares of stocks. In return, the
stockholders received their share from the corporation's net income in the form of dividends. Examples of this
form are San Miguel Corporation, Globe Telecom Corp., Toyota Philippines, Inc. and many more.
LESSON 3
 
INTRODUCTION   
The financial statements are key outputs of accountants that help users in making relevant economic
decisions. For these statements to contribute greatly to the users’ decisions, all qualitative characteristics shall be
reasonably present. These characteristics will be further identified in this lesson.  

ACCOUNTING CONCEPTS AND PRINCIPLES 

Underlying Assumptions 
Accrual Basis. Financial statements are prepared on the accrual basis of accounting and not as cash or its
equivalent is received or paid. Under this assumption, the effects of transactions and other in the events
are recognized when they occurred and they are recorded in the accounting records and reported in the
financial statements of the periods to when they relate. 

Going Concern. Financial statements are normally prepared on the assumption that an enterprise is a
going concern and will continue in operation for an indefinite period. It is assumed therefore that the
enterprise has neither the intention nor the need to liquidate its operations.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS 

Qualitative characteristics are the attributes that make the information provided in financial statements
useful to users. The qualitative characteristics are: 

Understandability. The information provided in the financial statements must be easily understood by the users.
For this purpose, the users are assumed to have a reasonable knowledge of business and economic activities and
they have the willingness to study the information with reasonable diligence.
 
Relevance. The information contained in the financial statements must be relevant to the needs of the users.
Information has the quality of relevance when it influences the economic decisions of users. 

Materiality. Information is material if its omission or misstatement could influence the economic decision of users
taken on the basis of the financial statements.

Reliability. Information has the quality of reliability when it is free from material error and bias and be depended
upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to
represent. For information to be reliable, they must represent faithfully the transactions and other economic
activities that it purports to represent. 

Faithful Representation. For information to be reliable, it must represent faithfully the transactions and other
events it purports to represent. 

Substance Over Form. If the information contained in the financial statements represent faithfully the economic
activities of the enterprise, it is necessary that they are accounted for and presented in accordance with their
substance rather than in their legal form.

Prudence or Conservatism. Prudence is the inclusion of a degree of caution in the exercise of the judgments
needed in making the estimates required under conditions of uncertainty, such that assets or revenue are not
overstated and liabilities or expenses are not understated.  However, the exercise of prudence does not allow the
excessive provisions for losses, deliberate understatement of assets or income or the deliberate overstatement of
liabilities or expenses. 

Completeness. The information in the financial statements must be complete within the bound’s materiality and
cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its
relevance. 

Comparability. Users must be able to compare the financial statements of an enterprise in order to evaluate the
economic trends in the industry and in order to evaluate the performance of the different enterprise in the same
industry. Comparability also measures the effect of like transactions whether carried in a consistent manner
throughout an enterprise over time and in a consistent way for different enterprise.  

Timeliness. Even if the information is very reliable if reporting is delayed, then that information will have little use
or no use at all to the users who have to make interim decisions. Information may lose its relevance if not timely
reported. 

Neutrality. The information contained in the financial statements must he neutral, that is, free from bias. 
LESSON 4 

INTRODUCTION   
In preparation of Financial Statements, understanding the objectives and the elements are of equal importance.
The elements of a general-purpose financial statements are as follows:  assets, liabilities, equity, revenue and expenses.
These elements are general terms used in the accounting equation, which will be discussed on the next lessons.  

BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATIONS 

Objectives 
The objective of financial statements as stated in paragraph 12 of the Framework for the Preparation and
Presentation of Financial Statements is to provide information about the financial position of an enterprise, performance and
changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Although
financial statements do not provide all the information that users may need, they largely reflect the financial effects of past
events. Financial statements also show the results of the stewardship of management, or the accountability of management for
the resources entrusted to it. 

A complete set of financial statements comprises of: 

a) Statement of Financial Position or Balance Sheet 
b) Statement of Comprehensive Income or Income Statement 
c) Statement of Changes in Equity or Capital showing either: 
1. all changes in equity or capital
2. changes in equity other than those arising from transactions with equity holders acting
in their capacity as equity holders 
d) Statement of Cash Flow 
e) Notes to Financial Statements 

Notes, comprising a summary of significant accounting policies and other explanatory notes. Notes to financial statements
contain information in addition to that presented in the Statement of Financial Position, Statement. of Comprehensive Income,
Statement of Changes in Owner's Equity or Capital and Statement of Cash Flows. The notes provide narrative description of
items disclosed in those statements and information about items that do not qualify recognition in those statements. 

ELEMENTS OF FINANCIAL STATEMENTS 

Elements of Balance Sheet or Statement of Financial Position 

Assets. These are resources controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise. Assets may or may have no physical form. 

Examples of assets that have physical form are: 

a) Merchandise - goods held by the company for sale. 
b) Supplies - this may be office supplies like bond papers, pad papers, toner, paper   clips, pens or pencils,
and all other supplies used in the office. It can also be store supplies like boxes, bags, packaging tapes and
other materials used in the store and cleaning supplies like dust cloth, floor wax, soap and others. 
c) Office Equipment - like computer units, printers, check writers, Xerox machine, fax machine, air-
conditioning units, electric fans, exhaust fans and other equipment used in the office. 
d) Furniture & Fixtures - like tables, chairs, sofa and cabinets 
e) Delivery Equipment - like vans used in delivering goods to ultimate consumers.
f) Service Vehicles - these are cars used by the officers of the company.
g) Land and building 

Examples of assets that have no physical form are:

a) Accounts receivable, the right to collect from the customer; 
b) Notes Receivable - the right to collect from the customer evidenced by a written promise to pay a sum of
money on a definite period of time.  
c) Patents - which represents the know-how or exclusive right develop and sell a product. 
d) Franchise - is a privilege granted by a company to sell a product o or service under specific conditions. 
e) Copyright or intellectual right - is an exclusive privilege given to owners to publish and sell musical, literary
and artistic art work. 
f) goodwill 
g) prepaid insurance 
Recognition Criteria: Paragraph 89 of the Framework for the Preparation of Financial Statement states that an asset is
recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset
has a cost or value that can be measured reliably. 

Liabilities. Paragraph 49 of the Framework for the Preparation of Financial Statements defines a liability as a
present obligation of the enterprise arising from past events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic benefits. 
The settlement of a present obligation involving outflow of resources may take the form of: 
a) Payment of cash;  
b) Transfer of other assets; 
c) Provision for services; 
d) Replacement of the present obligation with another obligation; 
e) Conversion of the obligation to equity; and 
 f) A creditor may waive its rights to collect 

A plan to acquire an asset in the future does not create any obligation because an obligation arises only when the asset is
delivered of the firm has entered into an irrevocable agreement to acquire an asset. 

Examples of liabilities are:

a) Accounts Payable - due to suppliers of goods and other assets purchased on credit. 
b) Notes Payable - due to suppliers of goods evidenced by a written promise to pay the amount in a specified
period. 
c) Withholding tax, SSS, Philhealth, Pag-ibig payable – these are deductions from the salary of the
employees but are to be remitted to Bureau of Internal Revenue for taxes withheld, Social Security System
for SSS premium, Philhealth Agency tor Philhealth contributions and Pag-ibig Fund or pag-ibig deductions. 
d) Salaries Payable – for salaries earned by the employees but no payment yet. e) Utilities Payable- for the
cost of power, light and water incurred but not yet paid. 
e) Unearned Revenue - for the amount received from customers in payment of services not yet performed. 
f) Customers' deposit - for the amount deposited by customers for goods and services to be delivered in the
future.  
g) Mortgage Payable - for loans from financing companies secured by real properties. 
h) Chattel mortgage payable - for loans from financing companies secured by vehicles and other personal
properties. 

Recognition Criteria. A liability is recognized in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the amount at which the
settlement will take place can be measured reliably. 

Equity or Capital. Equity is defined as the residual interest in the assets of an entity that remains after deducting all its
liabilities. In a service organization (sole proprietorship or partnership), equity represents the capital contributed by the
organizers but corporate type of business, equity includes the funds invested by the shareholders, retained earnings,
reserves representing appropriations of retained earnings. 

Elements of Income Statement 

Revenue or Income. These are increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities (or a combination of both) from delivery or production of
goods, rendering of services, or other activities that constitute the enterprise's major operations.

Examples of revenues are: 

a) Sales- sales price of merchandise sold 
b) Professional fees earned – amount earned for services rendered.  
c) Interest Revenue - interest earned from bank deposits or notes receivable
d) Dividend revenue - income from investments in the form of dividend 
e) Gain on sale - Revenue rising from disposal of non-current asset if the proceeds is greater than the
carrying value. 
f) Rent Income 
g) Subscription Revenue 

Recognition Criteria: Income is recognized in the income statement when increase in future economic benefits related to
an increase in an asset or a decrease of a liability has arisen that can be measured reliably. 

Expenses. These are decreases in economic benefits during the period in the form of outflows or using up of assets or
incurrence of liabilities (or a combination of both) that result in decreases in equity, other than those relating to
distributions to equity participants. 

Examples of expenses that take the form of an outflow or depletion of assets are:
a) Cost of sales - the cost of merchandise sold in a merchandising type of business;
b) Depreciation expense - Expenses associated with the using up of fixed assets.
c) Wages and other benefits - Salaries and other compensation benefits paid to the employees;
d) Utility costs - Utility costs like power, light, water, telephone & cable costs.
e) Insurance Expense - Expired portion of insurance premium. 
f) Taxes and Licenses - It includes real estate taxes and expenses associated with the opening of the
business.
g) Repairs and Maintenance 
h) Representation expenses - This includes cost of food served to company guests and visitors. 
i) Losses - This includes losses arising from disposal of non-current assets (if proceeds from sale is lower
than the carrying value of the asset sold), losses arising from disasters such as flood and fire. 
j) Unrealized losses arising from the effects of increases in the exchange rate. 

Recognition Criteria: Expenses are recognized in the income statement when decrease in future economic benefits
related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This simply means a
simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same
transactions or other events. 
LESSON 5
INTRODUCTION   
Accounting as a language of business, the financial statements prepared and presented by accountants shall be
uniform as to its recognition and presentation. Therefore, accounting standards are needed for it to communicate to
different interested users, nationally and globally.  The basic format of Statement of Financial Position, Income
Statement and Statement of Cash Flows will be the primary lesson in this material.  

GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS 

Philippine Accounting Standard 1 (PAS) gives us the following guidelines in the presentation of financial statements: 
1) Each component of the financial statements shall be clearly identified and the following information shall be
emphasized for a proper understanding of the information presented: 
a. The name of the reporting entity; 
b. Whether the financial statements cover the individual entity or a group of entities 
2) The period covered by the financial statement shall be specified. Normally, financial statements are prepared
and presented covering a one-year period. When an entity's Statement of Financial Position date changes and
the annual financial statements are presented for a period longer or shorter than one year, an entity shall
disclose the reasons for using a longer or shorter period. 

Balance Sheet or Statement of Financial Position 

This statement shows the lists of assets, liabilities and owner's equity of a business organization as of a given
period. It is called a statement of financial position because it shows the capacity of an enterprise to meet its financial
commitments as they fall due. It reflects how effectively the management controls its resources and its ability to
generate much needed cash for payment of operating expenses, meet interest payments, and repay loans, payment to
creditors and payment to owners as a way of distributing their share of net income. It provides users with information
regarding the liquidity and solvency of the enterprise.

Liquidity refers to the availability of cash in the near future to meet financial commitments while Solvency refers to the
availability of cash in the longer term to meet financial commitments as they fall due. 

PAS 1 provides us with the following guidelines in the presentation or Statement of Financial Position. 

Assets.
 An entity shall present current and noncurrent assets, as separate classifications on the face of the Statement
of Financial Position. 
 An asset shall be classified as current when it satisfies any of the following criteria: 
a) It is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating
cycle. 
b) It is held primarily for the purpose of being traded; 
c) It is expected to be realized within twelve months after balance sheet; and 
d) It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for
at least twelve months after the balance sheet date. 

Examples of current assets are: 

 Cash on hand or in banks, Trading Securities, Merchandise Inventories, Accounts Receivable, Notes Receivable,
Office & Store supplies

Examples of non-current assets are: 

 Office equipment, Delivery equipment, Furniture and fixtures, Land, building and Land improvements 

Liabilities.
 The liabilities of an entity are presented on the Statement of Financial Position as Current or Non-Current
liabilities.
 A liability shall be classified as current when it satisfies any of the following criteria: 
a) It is expected to be settled in the entity's normal operating cycle;
b) It is held primarily for the purpose of being traded; 
c) It is due to be settled within twelve months after the date of the Statement of Financial Position; and 
d) The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date. 

Examples of current liabilities are: 

 Accounts Payable, Notes Payable, Withholding Tax Payable, SSS Payable, Philhealth Payable, Pag-ibig Payable,
Taxes Payable, Unearned revenue

Income Statement  
This statement presents a summary of the enterprise's revenue and expenses for a specific period. This shows
the performance of the enterprise as to its profitability. If total revenues exceed total expenses, the result of the
operation is reported as net income. If total expenses exceed total revenues, it is reported as net loss. Paragraph 78 of
PAS 1 states that all items of income and expenses recognized in the period shall be included in profit or loss. 

Statement of Cash Flows 

 This statement shows the cash receipts and cash payments of the enterprise during the period.  It shows where
cash came from and how it is spent. The direct method is used in this book because it provides clearer information about
the sources and uses of cash. 

PAS 7 (Cash Flow Statements) provides the following guidelines in the presentation of a Cash Flow Statement. The cash
flow statement should report cash flows during the period classified by operating, investing and financing activities using
either: 

a) The direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or 
b) The indirect method, whereby net income or loss is adjusted for the effects of transactions of a non-cash
nature, any deferrals or accruals of past of future operating cash receipts or payments, and items of income or
expense associated with investing or financing cash flows. 

Business Activities 
Business activities may be classified into: 

 Operating Activities 
a) Cash receipts from the sale of goods and the rendering of services 
b) Cash receipts from royalties, fees, commissions and other revenue; 
c) Cash payments to suppliers for goods and services; 
d) Cash payments to and on behalf of the employees; 
e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and
other policy benefits; 
f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and
investing activities; and 
g) Cash receipts and payments from contracts held for dealing or trading purposes. 

 Investing Activities 
a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
These payments include those relating to capitalized development costs and self-constructed
property, plant and equipment;
b) Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets; 
c) Cash payments to acquire equity or debt instruments of other enterprises and interests in joint
venture (other than payments for those instruments considered to be cash equivalents or those held
for dealing or trading purposes) 
d) Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint
ventures (other than receipts for those instruments considered to be cash equivalents and those held
for dealing or trading purposes); 
e) Cash advances and loans made to other parties (other than advances and loans made by a financial
institution); 
f) Cash receipts from the repayment of advances and loans made to other parties (other than advances
and loans of a financial institution.

 Financing Activities 
a) Cash proceeds from issuing shares or other equity instruments;
b) Cash payments to owners to acquire or redeem the enterprise's shares (c) Cash repayments of
amounts borrowed; 
c) Cash payments by a lessee tor the reduction of liability relating to a finance lease 

Non-cash transactions. 
Paragraph 43 of PAS 27 states that investing and financing transactions that do not require the use of cash or cash
equivalents should be excluded from a cash flow statement. Examples of non-cash transactions are: 

a. The acquisition of assets either by assuming directly related liabilities or by means of finance lease. 
b. The acquisition of an enterprise by means of an equity issue; 
c. The conversion of debt to equity.

LESSON 6

INTRODUCTION
Differentiating personal and business transactions has a huge impact in starting to formally analyze accounting
concepts. Take note that personal transactions are those that pertain to non-business activities such as buying a gift to a
family member, eating in a restaurant for a friend’s celebration, buying a car for personal use, buying a luxurious bag to
satisfy oneself, and the likes. The focus of accounting is on the financial business transactions of a company or a person.

BUSINESS TRANSACTIONS
A business transaction is any event that affects the financial position of the business and can be recorded
reliably. It involves exchange of values. There are transactions within the organization like recognizing the used portion
of supplies as expense, or with outside entities or persons like purchasing supplies either for cash or on account.

Below are examples of transactions for a newly organized Accounting Firm, a sole proprietorship.
 1. Cash investment by the owner.
2. Payment for taxes & licenses
3. Renovation & improvement of office, if rented
4. Payment for rental deposits and advances
5. Purchase of office supplies on account
6. Purchase of office supplies for cash
7. Payment of accounts payable
8. Provide services for cash
9. Purchase of equipment and furniture for cash
10. Purchase of equipment and furniture giving a 30day promissory note.
11. Payment of salaries of employees
12. Personal transaction like withdrawal of the owner
13. Provide services on account
14. Provide services for cash
15. Collection of account from a customer
16. Payment for utility bills
17. Provide services receiving a 30-day promissory note.
18. Payment for other expenses

SOURCE DOCUMENTS
Source documents are the evidence of the daily activities of a business enterprise. It helps us identify the
transactions that should be recorded in the books of accounts. The common examples of source documents of a service
type of business are:

1. Official Receipt. This document evidences the daily receipt of a business. It is an accountable form because it is
registered with the Bureau of Internal Revenue and it is a pre-numbered document. When cash is received from
customers for revenue earned or collection of accounts, an official receipt must be issued.
2. Check and Check Stub. This is the source document for all payments made. The check stub must be properly filled to
include all information needed in recording the payment.
3. Deposit Slips. These are evidence that the cash received as indicated in the official receipts issued are deposited in
the bank. This slip indicates the name of the enterprise or the name of the owner of the business enterprise (if sole
proprietorship), the account number and the amount deposited. For this slip to be valid, it must be machined
validated indicating that the amount was received by the bank.
4. Withdrawal Slip. Withdrawal slip is a document evidencing withdrawal from savings account with corresponding
passbook.
5. Bank Statement. A bank statement is issued by the bank to current or checking account depositors. This shows the
total deposits made by the depositor and checks paid by the bank at a given month. The statement also shows the
balance of the account at the end of the month.
6. Payroll. This serves as the basis of recording the salaries paid to employees.
7. Delivery Receipt. This document serves as evidence for the receipt of goods delivered to a customer.
8. Statement of Account. This is a formal notice showing the details of the amount billed to a client, or details of
accounts already due.
9. Promissory Notes. This is a written promise issued by a customer to another party engaging to pay a sum certain in
money at a fixed or determinable future period.
10. Business Letters. Any form of communication or correspondence from suppliers, customers, government regulatory
bodies and other parties.

THE ACCOUNTING PROCESS

Steps in the accounting process:

1. Documentation. Analyzing business documents which serve as the basis of recording transactions.
2. Journalizing. Recording business transactions in the journal to have chronological records of economic
activities.
3. Posting. The information in the general journal is transferred to the General Ledger to create a record of
classified accounts.
4. Preparation of trial balance. A trial balance is prepared to prove the equality of debits and credits in the
general ledger.
5. Adjusting entries. Making end of period adjustments before financial statements are prepared so that the
income and expenses in the income statement are reported at their correct amounts.
6. Worksheet. Work sheet is prepared to facilitate the preparation of financial statements.
7. Financial Statements. The basic financial statements are prepared after making the necessary adjustments.
a. Income Statement
b. Balance Sheet
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to financial statement
8. Journalizing and posting closing entries. The objective of closing entry is to transfer the revenue, expense and
drawing accounts to the capital account.
9. Post-Closing trial balance. Preparation of post-closing trial balance to ensure that the ledger remains in balance
after posting the closing-entries.