Fundamentals of Accountancy, Business, and Management 2

1
Introduction to Accounting

Module 001 Introduction to Accounting

This chapter is a review of what you have learned in your Fundamentals of

Accounting 1 in order to prepare you in applying the basic knowledge you
gained previously.
At the end of this module, you will be able to:
1. To be able to define accounting and describe its branches.
2. To explain the varied accounting concepts and principles.
3. To differentiate the forms of business organization and identify the
advantages and disadvantages of each.
Since Accounting is the “language of business”, every individual who aspires
to be a businessman, accountant, or manager, must understand these basic
concepts including the different forms and type of businesses.

What is accounting?
Accounting, as defined by the Committee on Terminology, American Institute
of Accountants (AICPA), is an art of recording, classifying, summarizing in a
significant manner and in terms of money, transactions and events, which are
in part, at least, of financial character and interpreting the results thereof.

Accounting vs. Bookkeeping

Accounting, also known as double-entry bookkeeping, is almost the same as
Bookkeeping. However, bookkeeping is a skill that allows for the recording,
classifying, and summarizing of business transactions, while accounting –
aside from those activities mentioned – also covers the interpretation of the
said transactions. These 4 activities: recording, classifying, summarizing, and
interpreting, are what we call the four phases of accounting.

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Branches of Accounting

Financial Accounting
Financial accounting involves recording and classifying business
transactions, and preparing and presenting financial statements to be used
by internal and external users. Strict compliance with Generally Accepted
Accounting Principles (GAAP) is observed in the preparation of financial
statements. Processing of Historical Data is the primary concerned of
Financial Accounting.

Management Accounting
Managerial or management accounting focuses on providing information for
use by internal users, the management. It involves financial analysis, cost
analysis, budgeting and forecasting, evaluation of business decisions, and
similar areas. This Branch deals with the needs of the management rather
than strict compliance with GAAP.

Government Accounting
Government Accounting encompasses the process of analyzing, classifying,
summarizing and communicating all transactions involved in the receipts
and disbursement of all government funds and properties, and interpreting
the results thereof.

Auditing
Auditing is the process of examining an entity’s accounting records, as well as
physical inspection of its assets. It is performed by a CertifiedPublic
Accountant (CPA) whom can express an opinion on the fairness of the
entity’s financial statements.

Cost Accounting
Cost Accounting is considered as a subset of management accounting. It
refers to the recording, presentation, and analysis of manufacturing costs.
Manufacturing businesses use cost accounting since they have the most
complicated costing process.

Academe
Accounting education or academe includes accountants who pursue as
instructors, researchers, authors and reviewers.
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Introduction to Accounting

Basic Accounting Principles

What are the Generally Accepted Accounting Principles (GAAP)

GAAP is composed of the accounting principles, standards and procedures
that an enterprise should follow in preparing financial statements. It is
generally accepted by members of the accounting profession by agreement
based on experience, reason, custom, usage and practical necessity. It is like a
law that must be adhered to improve the clarity of the communication of a
financial data.

Entity principle
When we say business entity, we refer to the specific business enterprise,
sole proprietorship, partnership or corporation. In this principle, it is
assumed that the business owners or managers are separate from the
business enterprise. Therefore, the transactions of the owners should not be
combined with the transactions of the enterprise. This is for fair presentation
of financial statements.
Example:
If Mr. ABC invests money to put up a Repair Shop, it will no longer be his
personal money but a fund to be used by the Repair Shop for its operation.

Matching principle
This principle requires that those costs and expenses incurred in earning
revenue should be recorded and reported in the same period. This means that
revenues and expenses that result directly from the same transactions and
events should be recognized within one accounting period.
Example:
If the earnings of the repair shop of Mr. ABC from the sale of goods are
reported in the financial statements for 2016, the sales commissions of the
salesman and other expenses related to that sale should also be reported in
the same year.

Accrual basis of Accounting

It means that the income is recognized when they are earned regardless of
when they are received; and the expense is recognized when they are
incurred regardless of when they are paid. In accrual basis of accounting, we
recognize the effects of transactions and other events from the time they
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 happen and not when cash or its equivalents is received or paid. Recording
and reporting is done at the time they happen.
Example:
If Mr. ABC repaired an air-conditioning (AC) unit on June 5 but was only paid
on June 8, under the accrual basis, income should be recognized on June 5,
the date the income was earned for the repair of the AC, and not on June 8
when the cash is collected by Mr. ABC.

Stable monetary unit

This principle has two aspects, the quantifiability and stability of peso. The
quantifiability aspect means that we must record the assets, liabilities,
capital, income, and expense in terms of unit of measure which is the peso in
the Philippines. In stability of the peso, we assume that the purchasing power
of the peso is stable and constant therefore, we may ignore its instability
since it is not significant.

Periodicity (Time period concept)

This principle requires that life of the enterprise be subdivided into time
periods or accounting periods which may be a calendar year or fiscal year. A
calendar year is a twelve-month period which starts from 01 January and
ends on 31 December, while a fiscal year is any twelve-month period starting
from any month other than 01 January.

Going concern
Taking into consideration the normal business operation, it is presumed that
business will continue to operate indefinitely. Meaning, preparation of
financial statements is based on the assumption that a business will continue
to operate in time. This is the reason why assets are recorded at cost and
market values are not considered.
Example:
Mr. ABC has several machineries which are used in operating his repair shop.
Said machineries will be reported in the financial statements under the going
concern basis, as part of its assets. Since we assume that Mr. ABC’s repair
shop will continue to operate, these machineries will continue to provide him
economic benefits. If Mr. ABC ceases operation, the machineries will no
longer have any value, hence, would not be treated as assets.
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Introduction to Accounting

<Figure 1. Businesses in the private sector are exposed on Financial, Management and Cost Accounting. However,
all institutions, including the government and schools, are subject to audit.>

Forms of Business Organizations

We need to understand that since Accounting is the language of business, we
need to know the different forms and types of business.

Sole or single proprietorship

This is a type of business which is owned by only one person. Usually a sole
proprietor (owner of the business), is also the manager or boss of his own
business.
Advantages: Disadvantages:
 Formation is easy because  The sole proprietor has to shoulder all
fewer documents are needed in the risks and losses.
opening this type of business
compared to a partnership or  The sole proprietor has no one to get
corporation. advice from or opinion regarding
business operations.
 It is easy to operate since most
of this type of business is small.  The sole proprietor has unlimited
liability for any debt of the business
 It is easy to manage since the which may extend up to his personal
owner makes the decision properties.
himself.
 The sole proprietor has limited ability
 Lesser tax to pay unlike other to raise funds for his business as it
types of businesses. grows.
 The proprietor alone enjoys the
profits gained by the business.

Partnership
By the contract of partnership, two or more people join together to
contribute money, property or industry for purposes of dividing the profits
(or loss) among themselves.

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 Advantages: Disadvantages:
 Formation is easier than that of  Limited life. When a partner
the corporation because of withdraws due to incapacitation,
minimal regulatory bankruptcy, death, or the addition of a
requirements. new partner, the partnership is
dissolved.
 Management is divided among
partners, thus less burden to  Unlimited liability of partners. The
each of the partners. partner’s liability extends up to their
personal properties in case of
 More capital can be
insolvency.
contributed by the partners.
 Joint liability. Each of the partners can
 It is exempted from paying
bind the partnership to contracts
corporate income taxes.
which make all partners jointly liable.

Corporation
It is composed of five to fifteen people. It is organized by operation of the law and
considered the most complex form of a business organization.

Advantages: Disadvantages:
 There is a board of directors who  It is costly to form and manage a
makes decisions for the corporation. corporation.
 It has the capacity to raise more  The government has greater scrutiny,
capital. regulation, control and supervision
over the corporation.
 It can exist for a period not more than
50 years, subject to renewal.  It is more complex to manage a
corporation compared to partnership
 It has limited liability. This means
and sole proprietorship.
creditors cannot go after their
personal property in case of  It has limited powers as stated in the
bankruptcy. Corporation Code.
 It is subject to higher income tax.
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Introduction to Accounting

Types of Business According to Activities

Businesses usually undertake three activities: investing, financing and

operating. Operating activities refer to the undertakings of the business that
generate additional resources for the firm. Operating activities involve using
the firm’s resources to generate goods and services for sale at a profit.
There are three types of business operations: service, merchandising, and
manufacturing. As a refresher from the first module, let us expound further
on these.

Service
A service business is involved in selling services. This is a business that
generates income by providing services instead of selling physical products.
A doctor or a teacher practicing their professions, a day-care center, or a big
accounting firms like SGV & Co and Ernst & Young are all engaged in service
businesses.
Advantages:
 No Production Facilities
 Absence of inventory
Disadvantages:
 Maintain Human Capital
 Difficulty to standardize services

Merchandising
A business that buys inventory that it will resell in retail or wholesale,
generally for a higher price than they were purchased, is a merchandising
business. A merchandising business ranges from a fruit-stand store to an on-
line retailer like Lazada or OLX, or a bookstore like National Bookstore or
Fully-Booked.
Advantages:
 Less conversion, time and effort
 Visible Products
Disadvantages:
 Inventory Management

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Manufacturing
A manufacturing business usually does activities that converts raw materials
into finished products, and sells this to other firms or to individuals. This
type of business incurs overhead costs aside from the wages and materials
used in the production of goods. Examples include: San Miguel Corporation,
Ayala Land, and Samsung.
Advantages:
 Visible Products
 Quality Control
Disadvantages:
 High manufacturing costs
 Quality control cost
 Need of facilities in production
 Inventory Management

<Figure 2.The main difference on the income between a Service and Merchandising business is that revenue of
service business comes from fees on rendered services while the income of a merchandising business comes from
sales of the products>

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Introduction to Accounting

Glossary

Financial Character: transactions which are financial in nature, such as payment and
purchases in cash.
Budgetary control: the management of a business’s budget.
Commercial accounting: also known as private accounting, is the accounting used by
private businesses. This also includes financial, management, and cost accounting.
GAAP (Generally Accepted Accounting Principles): are principlescomposed of the
accounting principles, standards and procedures that an enterprise should follow in
preparing financial statements. It is generally accepted by members of the accounting
profession by agreement based on experience, reason, custom, usage, and practical
necessity. It is like a law that must be adhered to improve the clarity of the
communication of financial data.

References and Supplementary Materials

Books and Journals
Jimenez, C.E., Palo, R.R, & Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., & Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and
Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

Accounting Basics; http://www.investopedia.com/university/accounting/ ; 10 April
2017

Online Instructional Videos

Introduction to Accounting Part II; https://youtu.be/vzYN8fhRNIU; 23 March 2017

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