Chapter 3

Accounting: The language of business

Why is accounting considered the language of business?

Why is accounting a bridge of communication?

The financial statements prepared by the accountant serves as the bridge for the owners
separate from the business as well as for various users who are interested in investing in the business.

(Business entity concept-the owner is separate from his business. Accounting presents communicates ,
reports to the owners, employees, investors and many more.)

What are the different accounting periods of reporting financial statements?

When do accountants prepare financial statements?

Since It is assumed that the business will run for an indefinite period of time (going concern).
The business owner must not wait until the business is done operating in order for him to know if the
business was profitable or not. The life of a business is divided into equal parts namely: 1 month-
monthly basis, 3 months-Quarterly basis, 6 month-semi-annual basis, 12 months-yearly/annual basis.
The length of the accounting period will vary, depending on the owner to know the financial
position/information of his business. Usually businesses adopt a 1 year accounting period.

These are the different periods for reporting:

Calendar year-Accounting period will begin on January 1 and end on December 31, most
common accounting period, is chosen by most businesses because it is nearest to april 15 to file
their income tax returns.

Has 4 quarters, 1 quarter= 3 months, start from :

Jan 1-March31 , April 1-June 30, July 1- September 30, October 1- December 31

Fiscal year- The accounting period will begin 1st day of any month except January, and end the
last day of the month. Example, July 1 st start-June 31st end.

Natural business year- A 12 month period, wherein the business will end at the lowest point of
activity in its year.

(Going concern- The business is assumed to run for an indefinite period of time, periodicity concepts-
the life of a business is divided into equal periods.
What kind of information is needed for various users? What is the qualitative objective of a financial
report?

What are the qualities that a financial statement should possess?

Understandability- The financial information found within the reports should be easy to
understand by the users, since the users will be using the information to study the business an
make sound economic decisions based on the information. Information no matter how complex,
if it is relevant in order for the users to make economic decisions should not be excluded when
put on the financial statement.

(Prepared in a way that can be understood by the user)

Reliability- Must be free from error, that would lead to misstatement, must be fairly presented
without bias.

(free from error, free from bias)

These are the PFRSC’S framework/reference in order for reports to be reliable:

a) Faithful representation- The reports should be sufficient in reporting the actual event
that took place as objectively as possible
b) Neutrality- The reports should be free from bias, swaying ones reports of ruining one
party in favor of the other is not allowed.
c) Conservatism-Also called the prudence convention , states that the accountant should
anticipate the worst when reporting the financial statements, he must not overstate the
assets or income when it is still not set, who knows , whether in the accounts receivable,
the business cannot collect more than half of the amount of money that is owed to
them.
(Choose the transaction that can have the least effect on the accounting equation)
d) Completeness- The financial statements should have all the information stated (full
disclosure) so as for it to not be misleading. Must also contain detailed notes in
explaining the reports.
e) ? Substance over form-

Relevance- The financial information presented on the report should help the users make
informed economic decisions which are important to him as of that period. Just like how the
balance sheet measures what a business owns/owes at a given point in time, and the income
statement shows how profitable the businesses operations are at a given point in time.

a) Materiality- It depends on the judgement and common sense of an accountant to deem

b) Predictive value- Enables the user to make predictions about future events.
c) Feedback value- Confirm past predictions or correct earlier predictions.
d) Timeliness- Must be available at all times of need

Comparability- The information should be comparable to that of other companies who have the
same line of business by comparing similarities and differences.

Consistency- A method or practice should be used from period to period else otherwise.
Though it might not confer with comparability sometimes, it implants reliability in reporting

What are the types of accounting information?

Financial accounting- Concerns itself with financial obligations and resources, prepares general
purpose financial reports or positions.

Auditing- Is to know whether accounting procedures are being followed strictly throughout the
year as well as measuring the efficiency of operations.

Internal auditing- Usually performed by the employees within a company.

External auditing- Usually performed by independent professional accountants.

Management accounting- Primarily concern with improving the accounting system to help
management and owners run a business.

Tax accounting- Concerns itself with the preparation of taxes in the correct amount which are
due and payable to the government.

Financial management- Sets up financial planning objectives that will benefit the entity.

Cost accounting- Concerned with cost allocation , control of products goods and services.

Government accounting- Concerning accounting activities with the government.

Who are the users of the financial statements?

Investors- The information helps them determine whether or not they should buy, hold or sell
stock

Employees- In order for them to know the stability and profitability of an entity.

Lenders- Should they lend them money , is the business able to pay back their loans with
interest in due time?

Suppliers and creditors-

Customers- How long will the enterprise continue on doing business.

Government agencies- determine taxation for a business

Public-
What are the various forms of business organization? and differentiate one another

What are the natures of businesses?

A business maybe classified in the way they offer, sell, or produce goods and services.

Service- Business gets its income when they render services to their clients, ex: lawyers, doctors.
Dentists etc.

Merchandising- Buying and selling finish form goods for a profit.

Manufacturing- Buying raw materials and turning them into products to be sold on the market
for a profit.

Agriculture- Planting and selling crops for a profit.

Hybrid companies- Can be a combination of any of the 4 mentioned above.

What are the forms of business organizations and their capitalist structures?

Single or sole proprietorship- The funds used as capital are owned by one person only, that
means, when the business succeeds or goes bankrupt the owner will bear it all including paying
off debt that is unpaid, then the separate entity concept will cease to be of use and the owner
and business will become one when the business goes bankrupt. The owner does not get a
salary or remunerations his business but he can however withdraw his investments from the
capital. The capital account is called the owners equity.

Partnership- The funds use as capital are owned by two or more people called partners.
Wherein they come into an agreement with one another on deciding who should be able to
invest in the business, as well as dividing the profit amongst themselves. The Articles of Co-
partnership govern how a partnership acts as well as registering with the SEC in regards to their
partnership. The capital used within the partnership is called partners equity.

Corporation- The biggest and most complicated form of a business organization. Is founded
primarily between 5 to not more than 15 people. Called incorporators .Each of which contribute
a portion of their wealth to comprise the capital needed for the business to render its
operations, the corporation registers with the SEC and acts within accordance with the Articles
of incorporation. In order for a corporation to quickly raise capital or funds needed to continue
its operations, it must issue out shares to either private investors such as hedge funds or to the
public, a share is a part of the company of which you own. The value of each individual share
may vary depending on how much the business is gaining in profits, or how much its IPO is , the
term for this is called the value per share. Shares can be bought , sold or traded for. Though the
life span of a corporation is 50 years , one can extend its expectancy when one amends the
articles of incorporation, meaning , though , corporations have 50 years of life expectancy, the
number of times it is able to renew those years is indefinite. The capital account in a corporation
is called shareholders equity.

? Cooperatives- Operates the same as with corporations, but unlike corporations, it has to
register with the Cooperative Development Authority ,as well as confer with the Articles of
cooperation. Unlike in corporations, your vote in the cooperative is not party to that of the
number of shares you have in the cooperative, you only get 1 person 1 vote. Cooperatives also
hold meetings in where they discuss , financial positions, elect new members for their board, as
well as receive individual cash dividends representing their share.

? These are the cooperatives profits after deducting the necessary requirements.

10%- for general reserve fund

10%- for cooperative education and training fund

7%- for optional fund

3%- for community and development fund

? 70% of the balance is for interest on share capital and patronage fund.
Good afternoon sir Servidad , I have been meaning to get your insight regarding my own
understanding on these topics , in hopes of clarifying what I did and did not understand in my own
reading.

1. When we collect the amount or a portion of the amount in the accounts receivable will it
automatically be allocated to the cash title of the assets element? If not , where will it be
allocated to ?
2. When we say owners equity , will it include the purchase of equipment ?: For example : when
one initially invests 200k cash as well as 100k in equipment , on the owners equity element ,
would both initial cash and equipment investment be the initial value of the owners equity,
or will the cash title only apply to this concept ?
3. When we say income and revenue are they both the same or not ? to my understanding ,
income is the consistent rate of economic benefit that you’ll receive from your assets, while
revenue on the other hand , is what you collect.
4. The difference between revenue and gain is that , while revenue comes from the normal
operations of ones business (e.g rendering services, selling products) gains on the other hand,
when we say gain , it is acquired from any type of transaction that is not part of the business
model of the entity (e.g selling equipment)
5. Why is expenses debited while on the other hand revenue is credited ? dba unta na bali sir ?
since expenses mu take away mn cya og revenue then revenue is mu add cya og value sa
assets ?
Thank you Sir and Godbless