Accounting in Business

Accounting is a service activity. Its function is to provide information, primarily financial in nature,
about economic entities, that is intended to be useful in making economic decision. -Accounting
Standards 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 Accountants (AICPA)

PHASES/FUNCTIONS of Accounting: recording, classifying, summarizing and interpreting.

Financial Statements

1. BS/SFP: A,L,OE
2. IS/SCI: R/I,C/E
3. CFS: INV, DRAW, REV, EXP
4. SCOE: INV, DRAW, REV, EXP
5. Notes: Disclosure

System/Process + Financial + Decision-Usefulness

Phases of Accounting

Identification and analysis of accountable transaction and events > recording, classifying, and
summarizing financial information > communicating and interpreting the results.

Users and use of Accounting Information

External Users: Not directly involved. These are secondary users of financial information who are parties
outside the company. They may not be directly involved in the company’s operations, but their decisions
may significantly affect the business entity.

 Lenders or creditors
 Shareholders or creditors
 External or independent auditors
 Employees
 Regulators
 Suppliers and customers
 Public

Internal Users: Those who make decisions that affect the internal operations of the company. They are
the primary users of financial information who are inside the reporting entity and are directly involved in
managing the company’s daily operations. They are the decision makers who make the strategic and
operational decisions for the company.
 Directly manage and operate the organization(Managerial Accounting)

Users of Accounting Information

 Provides information about the entity
 Assist users to make informed judgements and decisions
 Shows stewardship of management
Users and the use of Accounting Information

User of Financial Information Purpose

Investors Whether to buy, sell or hold(being used by
stockholding. Not applicable in ordinary
corporation)
Lenders Whether the credit they extended including the
interest will be paid when due
Suppliers and other trade creditors Whether the amounts due to them will be paid
when due
Government Allocation or resources, national statistics and tax
rules and regulations
Employees Stability of the business and ability to provide
remunerations
Customers Continuity of the business specifically if they have
long term dependence on it
Public Trends and development, contribution to
society/community

Generally Accepted Accounting Principles (GAAP)

Philippine Financial Reporting Standards (PRFS)- not in our own making. Adapted to the
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) GAAP IN THE PH

Accounting Standards Council (ASC)- Philippine Accounting Standards (PAS)

Financial Reporting Standards Council (FRSC)- Philippine Financial Reporting Standards (PRFS)
Standing Interpretation Committee (SIC)- Philippine Interpretations Committee (PIC)

General Principles and Assumptions

 General Principles - basic assumptions, concepts and guidelines for preparing financial
statements. General principles stem from long used accounting practices
 Specific Principles- detailed rules in reporting business transactions and events. Arise more
often from the rulings of authoritative groups.

Accounting Principles

Measurement (Cost) Principle- Price recorded at the time you purchased a product. The cost of the time
and acquisition.
Revenue Recognition Principle- Revenue is recognized when earned.
Expense Recognition Principle- (Matching) expenses are recognized when incurred.
Full disclosure Principle- disclose all provide necessary information.
Accounting Assumptions

Going concern (Underlying Principle)- assume that you are starting a business that it will continue
forever (Future). You don’t think it will close or it will end.
Business Entity- transactions of the business is separate with the transaction of the owner. Separate
Entity.
Stable Monetary Unit- must be stable and dependable and only expresses with money(currency).
Record in both currency (e.g. yen to peso)
Time Period- per year (fiscal yr., calendar yr., etc.) may be different. Can be annual, quarterly, etc.

Constraints
Materiality- significant, huge, big. Something that will have an impact on financial statement.
immaterial*- insignificant, irrelevant, unimportant.
Cost-Benefit- how much is the cost, how much is the benefit. Benefit should be higher than cost.

Types of Business Entities According to Structure

Sole Proprietorship- It is a business owned and managed by only one person for the practice of trade or
profession.

Partnership (registered at SSE)- This is a business organization owned and managed by two or more
people who agree to contribute money, property, or industry to a common fund for the purpose of
earning a profit.
*General Professional Partnership- association of persons exercising a common profession
*Ordinary Partnership

Corporation (registered at SSE)- This is a business organization required to have five to fifteen
incorporators. Incorporators refer to those who originally formed the corporation. This business
organization is managed by an elected board of directors. The investors are called stockholders and the
unit of ownership is called share of stock.
- Minimum of 5 (old corporation code)
- One-Person Corporation (OPC) (Revised corporation code)

Types of Business Entities according to activity

Service Business- It is a business which focuses on providing intangible products, such as offering
professional skills, proposals, and expertise.

Merchandising Business (retail)- This is a business commonly known as “buy and sell” business.
Products are bought from manufacturers or other merchandisers and are sold as is at an amount higher
than its purchase price.

Manufacturing Business- This is a type of business organization wherein materials are bought to create
a new product. It involves the purchasing and converting of raw materials into finished goods.
Accounting Concepts and Principles
Entity Concept- The business enterprise is separate and distinct from its owners and from other
business enterprises.

Periodicity-Providing financial accounting information about the economic activities of an enterprise for
specified time periods. For reporting purposes, one year is usually considered as one accounting period.

• Calendar Year – A twelve-month period that starts on January 1 and ends on December
31

• Fiscal Year – A twelve-month period that starts on any month of the year other than
January and ends twelve months after the starting period. A natural business year is any
twelve-month period that ends when business activities are at their lowest point.

Going Concern- The concept which assumes that the business enterprise will continue to operate
indefinitely.

Objectivity- States that all business transactions that will be entered in the accounting records must be
duly supported by verifiable evidence.

Historical Cost- This means that all properties and services acquired by the business must be recorded at
their original acquisition cost.

Accrual Principle- States that income should be recognized when it is earned and expense should be
recognized when it is incurred.

Adequate Disclosure- States that all material facts that will significantly affect the financial statements
must be indicated.

Materiality- Means that financial reporting is only concerned with information significant enough to
affect decisions. It refers to relative importance of an item or event.

Consistency- Approaches used in reporting must be uniformly employed from period to period to allow
comparison of results between time periods. Any changes must be clearly explained.
Financial statements tell us how a business is performing and where it stands. They are the final output
of the accounting process. These financial statements are based on the most basic principle of
accounting, the accounting equation. In relation to double-entry bookkeeping, ensuring equal debit
effect and credit effect is fundamental to the universal acceptance of the basic accounting equation.
Because of this, the basic accounting equation should be balance at all times.

Basic Accounting Equation

DEBIT=CREDIT
Assets=Liabilities + Owner’s Equity

Assets- These are economic resources owned or controlled by the business that can be used to provide a
future economic benefit. In other words, assets are items that a company uses to generate future
revenues or maintain its operations. The Assets’ normal balance is DEBIT.

Liabilities- These are the obligations of an entity to transfer assets or provide services to other entities in
the future as a result of a past transactions or events. It includes debts, obligations to pay, and claims of
the creditors on the assets of the business. The Liabilities’ normal balance is CREDIT.

Capital / Owner’s Equity- These represents the owner’s residual interest in the assets of an entity that
remains after the liabilities are deducted. It is also known as Net Assets. The Owner’s Equity’s normal
balance is CREDIT.

Types of Major Accounts

• T account – a T-Account is simply a large “T” drawn under an account name. Results of
transactions are recorded by placing the peso amount on one side of the “T” or the other. The
placement of the peso amount on either the left side or right side of the “T” is very significant.

• Chart of Accounts – It is a list of all accounts used by the company. It does not show any peso
amounts. It is simply a reference list that shows the account name and corresponding account
number if numbers are used. For most businesses, the chart of accounts arranges all accounts
according to five major classifications. They are classified as follows:

• Classification of Accounts
1. Assets -These are economic resources owned or controlled by the business that can be used
to provide a future economic benefit. In other words, assets are items that a company uses to
generate future revenues or maintain its operations. The Assets’ normal balance is DEBIT. Assets
are classified into two namely, Current and Non-Current Assets.
• Current Assets
-Expected to be realized in, or is intended for sale or consumption in the entity’s normal
operating cycle.
-Held primarily for the purpose of being traded.
-Expected to be realized within twelve months of the balance sheet date.

• Examples of Current Assets:

Cash
Accounts Receivable
Notes Receivable
Inventories
Unused Supplies
Prepaid Rent

Non-Current Assets – Assets other than current assets

• Examples of Non-Current Assets:

Equipment
Furniture and Fixtures
Building
Land

Contra-Asset Accounts – these are accounts deducted from the related asset accounts.

• Examples of Contra-Asset Accounts:

Accumulated Depreciation
Allowance for Bad Debts

2. Liabilities- These are the obligations of an entity to transfer assets or provide services to other
entities in the future as a result of a past transactions or events. It includes debts, obligations to
pay, and claims of the creditors on the assets of the business. The Liabilities’ normal balance is
CREDIT. Liabilities are classified into two namely, Current and Non-Current Liabilities.

Current Liabilities
-Expected to be settled in the entity’s normal operating cycle;
-Held primarily for the purpose of being traded;
-Expected to be realized within twelve months of the balance sheet date; or
-The entity does not have unconditional right to defer settlement of the liability for at least
twelve months after the balance sheet date.

• Examples of Current Liabilities:

Accounts Payable
Notes Payable
Utilities Payable
Unearned Revenues
Accrued Liabilities
 Non-Current Liabilities – long term liabilities or obligations which are payable for a period
longer than one year.

• Examples of Non-Current Liabilities:

Mortgage Payable
Bonds Payable

3.Owner’s Equity / Capital- These represents the owner’s residual interest in the assets of an
entity that remains after the liabilities are deducted. It is also known as Net Assets. The Owner’s
Equity’s normal balance is CREDIT. It is an account bearing the name of the owner representing
the original and additional investment of the owner of the business increased by the amount of
net income earned during the year.it is decreased by the cash or other assets withdrawn by the
owner as well as the net loss incurred during the year.

Examples of Owner’s Equity Accounts:

Dela Cruz, Capital
Dela Cruz, Drawing

4. Revenues- These increases owner’s equity. Revenues could be recorded directly on the credit
side of the owner’s capital account. However, readers might be confused as to the nature or
origin of the income transactions, hence, the revenues are given separate account titles. The
Revenues’ normal balance is CREDIT.

Examples of Revenue Accounts:

Service Revenue
Interest Income
Sales
Professional Income

5. Expenses- These decreases owner’s equity. Expenses could be recorded directly on the debit
side of the owner’s capital account. However, readers might be confused as to the nature or
origin of the expense transactions, hence, the expenses are given separate account titles. The
Expenses’ normal balance is DEBIT.

• Examples of Expenses Accounts:

Utilities Expense
Salaries Expense
Wages Expense
Taxes and Licenses
Cost of Sales
Supplies Expense
Doubtful Accounts Expense
Depreciation Expense