Chapter 1

Introduction to Accounting
Accounting is a process of identifying, recording and computing economic
information that is useful in making economic decisions
Elements of Accounting
1. Identifying – the accountant analyses each business transaction and identifies
whether the transaction is “accountable events” or “non-accountable events”.
This is because only “accountable events” are recorded in the book of
accounts. “Non-accountable events” are not recorded in the book of accounts.

“Accountable events” (or economic events) are those that affect the
assets, liabilities, equity income or expenses of business. Sociological
and psychological matters are outside the scope of accounting.
2. Recording – the accountant recognizes (i.e., records) the identified “accountable
events”. This process is called ‘journalizing’.
After journalizing, the accountant then classifies the effects of event on
the ‘accounts’. This process is called “posting”.

 Account is the basic storage of information in accounting, e.g.,

“cash”, “land”, “sales”, etc.
3. Communicating – at the end of each accounting period, the account
summarizes the information processed in the accounting system in order to
produce meaningful reports. This is important because information processed
in the accounting system is useless unless it is communicated to interested
users. Accounting information is communicated to interested users through
accounting reports, the most common form of which is the financial
statements.

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

Types of information provided by accounting

1. Quantitative information- information expressed in numbers, quantities, or
units.
2. Qualitative information- information expressed in words or descriptive form.
Qualitative information is found in the notes to financial statements as well
as on the other components of financial statements.
3. Financial information- expressed in money. Financial information is also a
quantitative information because monetary amounts are normally expressed
in numbers.
Bookkeeping and accounting
 Bookkeeping refers to the process of recording the accounts or
transactions of an entity. Bookkeeping normally ends with the
 preparation of the trial balance. Unlike accounting, bookkeeping
does not require the interpretation of the significance of the
information processed.
 Accounting, on the other hand, covers the whole process of the
identifying, recording and communicating information to interested
users.

Functions of Accounting in Business

Accounting is often referred to as the “language of business”
because it is fundamental to the communication of the financial
information.
Accounting has the following two broad functions in a
business:
1. To provide internal users with information that is useful in
making, among others, investment, and credit decisions; and
2. To provide external users with information that is useful in
managing the business.
Users of Accounting Information
Users of Accounting Information are broadly classified into two
namely:
1. Internal users- those who are directly involved in managing the
business. Examples of internal users inckude:
a. Business owners who are directly involve in managing the
business
b. Board of directors
c. Managerial personnel
2. External users- those who are not directly involved in managing
the business. Examples are:
a. Existing and potential investors (e.g., stockholders who are
not directly involved in managing the business)
b. Lenders (e.g., banks) and Creditors (e.g., suppliers)
c. Government agencies (e.g., Bureau of internal revenue
‘BIR’, securities and exchange commission ‘SEC’)
d. Non-managerial employees
e. Customers
f. Public
Types of accounting information classified as to users’ needs
1. General purpose accounting information- information
designed to meet the common needs of most statement
users. It is provided by financial accounting and is prepared
primarily for external users.
2. Special purpose accounting information- designed to meet
the specific needs of particular statement user. It is
provided by management accounting and is prepared
primarily for internal users.

Examples of decisions and types of information needed

to make those decisions.

User example of decision Example of

to make information
needed
1. External  Existing Audited
user investor: financial
(investor) Whether to statements
hold or sell of the
investment business to
in stocks. aid in
 Potential analysing
investor: the value of
Whether or the
not to buy company.
shares of
stocks
2. External  Lender: Audited
user whether or financial
(Lender or not to extend statements
Supplier) loan to a of the
business. business to
 Supplier: aid in
whether or analysing
not to extend the
credit to a company’s
business. ability to pay
its debts.
(general
purpose
information)
3. Internal  Whether or Analysis of
user not to the effects of
(manager) increase the sales volume
sale price of and sales
a product prices to
earnings.
(special
purpose
information)
4. Internal  How much Budget report.
user capital is (special purpose
(manager) needed to information)
manufacture
 a new
product?
Examples in which accounting is used in investment and credit decisions

External user of Decision Accounting information

information
1. Investor  Shall I invest in this  The financial
business? Is this a performance of the
profitable business
undertaking?
2. Creditor  Shall I lend money  The ability of the
to this business? business to
Does this business generate revenue
have the ability to and cash flows from
pay back my loan? its operations

Brief History of Accounting

Accounting can be traced as far back as the prehistoric times. Since the dawn of
civilization when mankind begin to engage in trade, perhaps more than 10,000 years
ago methods of record keeping and accounting have been invented.
As early as 8500 B.C., accounting has already existed. Archaeologists have
found clay tokens as gold as 8500 B.C. in Mesopotamia which were usually cones,
disks, spheres and pellets. These tokens correspond to commodities like sheep,
clothing or bread. They were used in the Middle West in keeping records. After some
time, the tokens were replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing.
Other ancient civilizations keeping account records are Babylonia (4500 B.C.),
Egypt (2250 B.C), China and Greece.
In the middle ages (13th and 15th centuries), trade flourished in places such as
Florence, Venice and Genoa. This has brought advancement in account keeping
methods. In 1211 A.D., one of the systems in accounting was kept by a Florentine
banker. However, the system was primitive as the concept of equality for entries was
absent. Double entry records first came out during 1340 A.D. in Genoa.
In 1494, the first systematic record keeping dealing with the “double entry
recording system” was formulated by Fra Luca Pacioli, a Franciscan monk and
mathematician. The “double entry recording system” was included in Pacioli’s book
titled “Summa di Arithmetica Geometria Proportioni and Proportionista”, published on
November 10, 1494 in Venice.
The concept of “double entry recording” is being used to this day. Thus, Fra Luca
Pacioli is considered as the father of modern accounting.
Common Branches of Accounting
1. Financial accounting- is the branch of accounting that focuses on general
purpose financial statements.
 General purpose financial statements are those statements that cater to
the common needs of external users, primarily the potential and existing
investors, and lenders and other creditors.
 Financial accounting is governed by Philippine Financial Reporting
Standards (PFRS’s)

Financial accounting vs. Financial reporting

The terms “financial accounting” and “financial reporting” are often used
interchangeably. Although, both focus on general purpose financial statements,
financial reporting endeavors to promote principles that are also useful to “other
financial reporting”.
“Other financial reporting” comprises information provided outside the financial
statements that assist in the interpretation of a complete set of financial statements
or improves user’s ability to make efficient economic decisions.

Financial statements vs. financial report

 Financial statements are the structured representation of an entity’s financial
position and results of its operations. They are the end product of the
accounting process and the means by which information gathered and process
are periodically communicated to users.
 A financial report includes the financial statements plus other informations
provided outside the financial statements that assists in the interpretation of a
complete set of financial statements or improves user’s ability to make efficient
economic decisions.

Financial statements Financial report

1. Statement of financial position 1. Statement of financial position
2. Statement of profit or loss and 2. Statement of profit or loss and
other comprehensive income other comprehensive income
3. Statement of changes in equity 3. Statement of changes in equity
4. Statement of cash flows 4. Statement of cash flow
5. Notes 5. Notes
6. Additional statement of financial 6. Additional statement of financial
position position
7. Other information
Financial reporting is the provision of financial information about an entity that is
useful to external users, primarily the investors, lenders, and other creditors, in
making investment and credit decisions.
Primary objective of financial reporting
To provide information about an entity’s* economic resources (assets), claims to those
resources (liabilities and equity), and changes in those resources (income, expenses
and other changes)
Secondary objective of financial reporting
To provide information useful in assessing the entity’s management stewardship (i.e.,
how efficiently and effectively the entity’s management has discharged its
responsibilities to use the entity’s economic resources).
(* the term “entity” refers to the “reporting entity”. A reporting entity is one that is
required, or chooses, to prepare financial statements. Other types of organizations such
as non-profit organizations, the government or even a private individual, may also
prepare financial statements. Yes, even you can prepare your own personal financial
statements. Actually government employees are required to prepare and submit their
personal financial statement called the ‘SALN’ or Statement of Assets, Liabilities and
Net worth.)

2. Management accounting- involves the accumulation and communication of

information for use by internal users. An offshoot of management accounting
is management advisory services which includes services to clients on matters
of accounting, finance, business policies, organization procedures, product cost,
distribution, and many other phases of business conduct and operations.

Financial accounting Management accounting

 Focuses on the information  Focuses on the information
needs of external users. needs of internal user.

3. Government accounting- refers to the accounting for the government and its
instrumentalities, focusing attention on the custody of public funds, the
purpose or purpose to which those funds are committed, and the responsibility
and accountability of the individuals entrusted with those funds.

4. Auditing- involves the inspection of an entity’s financial statements or business

processes to ascertain their correspondence with an established criteria.

5. Tax accounting-is the preparation of tax returns and rendering of tax advice,
such as the determination of tax consequences of certain proposed business
endeavors.

6. Cost accounting- is the systematic recording and analysis of the costs of

materials, labor, and overhead incident to the production of goods or rendering
of services.
 7. Accounting Education- refers to teaching accounting and accounting-related
subjects in an organized learning environment. It is a process of facilitating the
acquisition of knowledge and skills regarding one or more of the other branches
of accounting.

8. Accounting research- pertains to the careful analysis of economic events and

other variables to understand their impact of decisions. Accounting research
includes a broad range of topics, which may be related to one or more of the
other branches of accounting, the economy as a whole, or the marker
environment. Examples are provided below:

Accounting research topic Related branches of accounting

 Impact of pair value  Financial accounting
measurement on the financial
statements.
 Inventory management and its  Management accounting
effects on earnings.
 Internal controls and modern  Auditing
technology.
 Becoming a certified public  Accounting education
accountant.

Summary:

Branch of accounting Type of accounting Users of service

service provided
1. Financial accounting  General record-  All business use
keeping, i.e., financial
maintenance of accounting in their
journals and record-keeping.
ledgers. These records
proved information
that is also used in
the other branches
of accounting.
 Preparation of  Business prepare
general purpose general purpose FS
financial at least annually for
statements (FS) the use of lenders,
investors, or
government
regulatory bodies.
2. Management  Preparation of  Required by
accounting specifically tailored management to aid
management them in performing
reports. their management
 functions.
3. Government accounting  General record-  Required by the
keeping and government and its
preparation of agencies.
financial reports for
the government
and its agencies.
It also includes the
preparation of
budgets and
accountability
reports.
4. Auditing  Expression of an  Business with
opinion on the growth annual sales
correspondence or receipts
between exceeding
management P3,000,000 are
assertions and required to have
established criteria. their financial
statements audited
*the most common form of by an independent
an audit opinion is the Certified Public
independent auditors’ Accountant (CPA)
report which is attached to
audited financial
statements.
5. Tax accounting  Preparation of tax  All businesses
returns. required to file tax
returns.
*failure to file tax
returns results to
penalty and
imprisonment of not  Some tax payers
less than 6 years but may require the
not more than 10 professional advice
years. of a tax practitioner
regarding the
 Providing tax management of
advice. taxes.
6. Cost accounting  Analyses of costs of  Businesses use cost
products or accounting to
services. analyse the cost of
their products or
services and the
effects of those cost
in, among others,
earnings and
pricing policies
7. Accounting education  Teaching of  Required by
 accounting and business students,
related subjects. business owners,
accounting
professionals in
their Continuing
Professional
Development (CPD),
and other interested
parties.
8. Accounting research  Accounting  Required by
research papers, business owners,
article and similar professional
publications. organizations, and
other interested
parties.

Forms of Business Organizations

A business is an activity where goods and services are exchanged for money. A perso
who is engaged in business is called entrepreneur or businessman.
Businesses in the Philippines are organized in one of the following:
1. Sole or single proprietorship- a business that is owned by only one individual. It
is the most common and simplest form of a business organization. The
business owner is called “sole proprietor”.
A sole proprietorship is registered with the Department of Trade and
Industry (DTI).

2. Partnership- a business that is owned by two or more individuals who entered

into a contract to carry on the business and divide among themselves the
earning s therefrom. The business owners are called partners.
A partnership is registered in Securities and Exchange Commission
(SEC).

3. Corporation- a corporation is also owned by more than one individual. However,

unlike a partnership, corporation is created by operation of law rather than a
contract. Ownership in a corporation is represented by shares of stocks. The
owners are called stockholders or shareholders.
A corporation is an artificial being or a juridical person, meaning, in the
eyes of the law, a corporation is like a person, separate from its owners.
Therefore, a corporation can transact on its own, have its own properties, incur
its own obligations, and sue or be sued.
 For example, when you buy goods from a corporate business, you are
actually transacting with the corporation and not its owners. If you get sick
from consuming the goods, you will sue the corporation and not its owners.
A partnership also has a juridical personality. However, unlike for
corporations, the partners are viewed as agents of the partnership. Meaning,
the partners transact on behalf of the partnership.
For example, if you transact with a partner of a business, you are
transacting with the partnership through the partner; while f you transact with
a stockholder, this does not necessarily mean that you are transacting with the
corporation.
The incorporators (i.e., founders) of a corporation shall not be less than 5
but not more than 15 individuals. However, a corporation can have as many as
stockholders as its authorized capitalization permits.
A corporation is registered with the Securities and Exchange Commission
(SEC).

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

a cooperative is formed in accordance with the provision of The Philippine
Cooperative Code of 2008. The owners of the cooperative are called members.
From the root word ‘cooperate’, a cooperative is an association of
individuals who joined together to contribute capital and cooperate in order to
achieve certain goals.
For example, a group of farmers may form a cooperative to acquire
delivery trucks to be used in transporting their products to the market. In here,
the farmers voluntarily join together to achieve their common goal, which is to
address their need to get their product to the market.
Another concept of the cooperative is that members need to patronize the
cooperative’s goods or services. In the example above, the member farmer shall
hire delivery trucks from the cooperative rather than from other businesses. If
the cooperative earns profit (net plus), a farmer can recover this his costs
through patronage refunds. Patronage refund pertains to the profit that a
cooperative returns to its owners. It should be noted that a member who has
not patronized any of the services of the cooperative for an unreasonable period
of time may be removed from the cooperative upon the majority vote of the
board of directors.
A cooperative also has juridical personality similar to a corporation.
The founding members of a cooperative shall not be less than 15
individuals. However, a cooperative can have as many members as its by-laws
permit.
 A cooperative is registered with the Cooperative Development Authority
(CDA).

SUMMARY FORMS OF BUSINESS ORGANIZATIONS

Form of Business Ownership Formation/registration

Organization
1. Sole Proprietor  One individual (i.e.,  Registered with the
sole proprietor) DTI
2. Partnership  More than one (i.e.,  Formed by
partners) contractual
agreement.
 Registered with the
SEC.
3. Corporation  More than one (i.e.,  Formed by
stockholders) operation of law
 Registered by SEC.
4. Cooperative  More than one (i.e.,  Formed in
members) accordance with the
Cooperative Code.
 Registered with the
CDA.

Advantages and Disadvantages of the different forms of Business Organizations

Sole Proprietorship

Advantages Disadvantages
 You are the boss and you keep all o You assume all the risk of loss.
the profit.
 Decision making is simple o You take all responsibility and rly
because you have complete mostly on yourself in making
control over your business. decisions.
 Relatively easier and less costly to o It is more difficult to raise capital
form because there are fewer because you rely mostly on your
formal business requirements. personal assets and loans to
initially finance the business.
 Lower extent of government o You are personally liable for the
regulation and relatively lower debts and obligations of the
taxes. business.

Partnership
 Advantage Disadvantage
 Better business decisions can be o Making business decisions may
made because ‘two heads are give rise to conflict among the
better than one’. partners.
 You share the business risk and o You don’t keep all the profits
the responsibility of running the because you need to share them
business with your partner(s). with your partner(s).
 Compared to corporations and o Limited life, in the sense that a
cooperatives, a partnership is partnership can be easily
easier to form because only a dissolved by the withdrawal,
contractual agreement between retirement, death or insanity of
the partners is needed one of the partners.
 Greater capital compared to a sole o Lesser capital compared to a
proprietorship corporation.
 Relatively lower extent of o A partnership (other than a
government regulation compared general professional partnership)
to corporations. is taxed like a corporation.
o Unlimited liability. The partners
can be held liable for partnership
debts up to their personal assets.

Corporation

Advantages Disadvantages
 A stockholder who is not a o Your “say” on corporate affairs
member of the corporation’s board depends on the numbers of shares
of directors is relieved from you own. Those who own more
managerial responsibilities. Only shares are the bosses and enjoy a
the stockholders that are elected larger share of the corporation’s
as members of the board of profits.
directors and those they hire or
appoint are tasked with
managerial responsibilities. This
can be an advantage because a
regular investor does not need to
work for the corporation to earn
income.
 Limited liability of the owners o A corporation is more difficult and
because stockholders are liable for more costly to form because there
corporate debts only up to the are more formal requirements.
amount they have invested.
 Greater capital and ease in raising o Greater extent of government
additional funds because a regulations and requirements.
corporation can issue shares to a
wider extent of investors.
 If the corporation is listed, you o Unlike for sole proprietorship or a
can easily transfer your shares to partnership where business
the other investors by selling them profits are easily distributed to the
 in the stock market. Many owner(s), in a corporation, you
investors earn profit this way – by have to wait for the board of
buying shares at a cheap price, directors to declare dividends
wait for prices to go up, and then before you can get your share in
sell them. This activity is referred the profits.
to as ‘stock trading’.
 Unlimited life, in the sense that,
the withdrawal, retirement or
death or insanity of one of the
stockholders does not dissolve the
corporation.

Although, a corporation has a

legal life of 50 years, this can be
renewed for an indefinite number
of renewals.

Cooperative

Advantages Disadvantages
 Unlike in a corporation, your “say” o A cooperative is prone to poor
on cooperative affairs is not management. Cooperatives are,
affected by the number of shares more often than not, managed by
you own. This is because, in a members who were elected as
cooperative, each member is board of directors rather than be
entitled to only one vote regardless employed professional managers.
of his/her shareholdings. Since there is a ‘one member – one
However, members with larger vote’ policy in a cooperative,
shareholdings are entitled to influential members tend to
larger share in profit (net surplus). dominate the election process. The
result is that those who get
elected may not be the ones who
are most qualified for the task.
 A cooperative is generally exempt o A cooperative is susceptible to
from paying taxes. This is the corruption. Due to its
main advantage of cooperative management structure and lack of
and the most common reason why profit motive, the elected officers
cooperatives are organized. may be inclined to act their
Moreover, a cooperative may personal interest.
receive assistance from the
government.
 Compared to a corporation, a o The Cooperative Code places some
cooperative is easier and less restrictions on the distribution of
costly to form because there are a cooperative’s profit to its
fewer formal business members. More specifically, the
 requirements. Code requires a cooperative to
appropriate a portion of its annual
profit to some funds. Only the
remaining portion can be
distributed to the members.

Furthermore, when the

cooperative is dissolved, the
amount accumulated in a fund
called “reserve fund” will not be
returned to the members, but
rather donated to another
cooperative or to the community.
 Limited liability – the members are o Compared to corporation, it is
liable for cooperative debts only more difficult for a cooperative to
up to the amount they have sustain growth. This is in part
invested. because of the lack of profit
motive and the lack of
management expertise. Moreover,
a cooperative’s success strongly
depends on the members’
cooperation and members are not
always willing to cooperate. The
success of the business depends
on continuing effort. Sadly, many
cooperatives are zealous at the
start but fail to sustain continuing
effort resulting to the waning
down of their activities. This does
not mean though that all
cooperatives are small businesses.
There are many multi-billionaire
cooperatives in the country. Some
might be located in your
community.
 Unlimited life, in the sense that o Unlike in a corporation where the
the withdrawal, retirement, death stockholders can freely transfer
or insanity of one of the members his shares, in a cooperative, there
does not dissolve the cooperative. are restrictions on the transfer of
a member’s shares. For example,
Although a cooperative has a legal the approval of the board of
life of 50 years, this can be directors must first be obtained
renewed for an indefinite number before a member can transfer his
of renewals. or her shares.

Types of business according to activities

The following are the major types of business according to the activities undertake:
1. Service Business
2. Merchandising (Trading)
3. Manufacturing
Service Business
A service business is one that offers services as its main product rather than physical
goods. A service business may offer professional skills, expertise, advice, lending
service, and similar services.
Examples of Service Business include:
a. Schools
b. Professionals (accounting firm, law firm, electrician, etc.)
c. Hospitals and clinics
d. Banks and other financial institutions
e. Hotels and restaurants
f. Transportation and travel (taxi operator, travel agency, etc.)
g. Entertainment and event planners (wedding planners, concert promoters, etc.)
Merchandising Business
A merchandising business (or trading business) is one that buys and sells goods
without changing their physical form.
Examples of merchandising businesses include:
a. General merchandise resellers (grocery stores, department stores, hardware
stores, pharmacies, online stores, sari-sari stores etc.)
b. Distributors and dealers (rice wholesalers, vegetable dealers, 2 nd hand cars
dealers, etc.)
Manufacturing business
A manufacturing business is one that buys raw materials and process them into final
products. Unlike a merchandising business, a manufacturing business changes the
physical form of the goods it has purchased in a production process.
For example, a business that buys and sells eggs is a merchandising business.
On the other hand, a business that buys eggs and uses the eggs as ingredient in
making cakes for sale is a manufacturing business.

Examples of manufacturing businesses include:

a. Car manufacturers (Toyota, Isuzu, Volkswagen, etc.)
b. Technology companies (apple, Samsung, Sony, etc.)
c. Food processing companies (San Miguel Pure Foods, Silver Swan, etc.)
d. Factories (clothing factories, animal feeds factories, plastic wares factories, etc.)
 Some business, called hybrid businesses, engage in more than one type of
activity. For example, a restaurant uses ingredients to cook a meal
(manufacturing), sells Coca-Cola drinks (merchandising), and serves food to
customers (service). Nevertheless, a hybrid business is classified into one of the
major typed based on the activity that is most in line with the business’
purpose. Restaurants are expected to fill-in customer orders and provide dining
services, thus, they are more of a service-type business.

Advantages and Disadvantages of the Different Types of Business

Services Business

 You don’t need to worry about o You may not have a flexible
inventory, warehousing and personal time because you need to
distribution costs because you be directly involved in providing a
don’t have any inventory. You only service to a customer. You can
have some minimal supplies stock inventory but not service.
necessary in providing your
services. For example, if you are a
manufacturer, you can spend over
time to produce goods, stock them
and then take a break. However, if
you are a doctor, you are on call,
and have to be the one to
personally examine a patient.

Until your business is big enough

to be able to hire other
professionals to do the work for
you, you will need to render the
services yourself.
 You may only need a small capital o Service businesses normally suffer
because what you are selling is first from decline in demand
your skill set and you only need during times of economic
yourself to render a service. If you difficulty. This is because most
are a manufacturer, you need to services are perceived as luxuries
buy materials and machinery to rather than necessities for
produce your product. survival.
For example, a guy with low funds
would refrain from having a
haircut and uses his funds for
food instead. A smart gal with low
funds would cut back her
expenditures on spa and pedicure.
 You are perceived as an expert in o Your business’ success depends
 your chosen field. People respect on your credibility. Personally,
you. You can also have fans. you must have a good reputation.
You need to be always discreet in
the things you say and the way
you act in the society.
o Since a service business is
founded in good reputation, it is
more costly to commit an error in
a service business compared to
merchandising business. For
example, if a merchandising
business erroneously sells
damaged goods, the customer can
just return the goods and have
them replaced. However, if you are
a barber and commits an error,
you can’t just replace your
customer’s hair.

Merchandising business

 Compared to a manufacturing o You need to have a retail store to

firm, you may need a much lower display your goods and the store
start-up capital because you don’t must be in a strategic location for
need to acquire machineries to it to attract more customers.
produce your goods.
 You can take advantage of price o Less flexibility in managing costs.
fluctuations. For example, when This is because the costs of your
goods are on sale, you can acquire goods is based primarily on their
them at a discounted price and purchase price, which you do not
resell them as much higher price. control.
You can’t do this in a service
business. *In manufacturing business, you
can cut down costs by redesigning
your product, improving your
process, acquiring more efficient
machines, employing more skilful
personnel, and so much more.
 Lower cost of quality. This is o Keeping track of inventory is
because “what you buy is what tedious, most especially when you
you sell.” are selling numerous and varied
items with fast turnover rate, like
In a service or manufacturing for example, if your business is a
business, you need to continually hardware store or a grocery store.
improve your products to Also you can incur additional
maintain their salability. In a costs due to spoilages, theft,
merchandising business, if a breakages, damages, and
certain product is not selling well, obsolescence.
you can just stop buying it and
 find an alternative product,
another brand maybe.
 It is much easier to start o Self-satisfaction is low because
merchandising business because you did not produce the products
you don’t need to have an you sold.
expertise or a special skill (service
business) and you don’t need to
have invented a new product or
have conceptualized and
innovative idea for an existing
product (manufacturing
business).

Manufacturing business

 You have a high growth potential o You need a high start-up capital
because you can tap into a wider to acquire machineries, to employ
market and can produce large in people, and to acquire a big space
quantities. for your production.
 You have the opportunity to o Conceptualizing a viable
establish a brand that could last manufacturing business is
longer than your lifetime. This is difficult. This is why
the ultimate dream of most entrepreneurs would rather
entrepreneurs. engage in merchandising.
 Self-satisfaction is high. Knowing o You need to be continuously
that customers are happy and innovative and abreast of changes
satisfied with a tangible product in technology. If another company
you have produced brings you comes up with a better and
pride and joy. cheaper product, your product
will automatically lose demand.
 You may not need to have a o Warehousing and logistics costs
strategically located retail store to can be high
display your products because
you can sell directly to
wholesalers rather to end
consumers.
 You can have a better pricing o You rely on raw materials. You
policy because mass production need to manage them properly to
can decrease your unit cost (often ensure that they are available
called ‘economies of scale’). when they are needed. This is
because a shortage in a raw can
For example, you are paying rent disrupt your operation, and that
of P100, 000 for your factory can be very costly.
space. If you produce only 1 unit
of a product, your unit cost is For example, when cooking rice,
high because the rent will be all the ingredients you need must
allocated to only one unit, i.e., be available. You cannot cook the
P100,000 unit cost (P100,000÷1 rice now and just add the water
unit). Therefore, you need to sell later on.
 this unit for more than P100,000
to earn profit. However, if you In a merchandising business, if
produce 10,000 units, your unit you ran out of a specific good, you
cost would be much lower don’t necessarily need to close
because the rent will be allocated your store because you can still
to more units, i.e., sell other goods.
10(100,000÷10,000 units). You
can now sell each unit at a much
lower price.
 Great flexibility in managing o Managing a manufacturing
costs. (see discussion in business can be difficult because
disadvantage of a merchandising production processes are often
business above*) complicated and there is always
some room for improvement
(although many skilled managers
may take this positively as a
challenge).