FINANCIAL ACCOUNTING AND REPORT

ELLYZA SHEEN C. BACARISAS, BSA-1

ACCTNG131 – A2

CHAPTER 1: INTRODUCTION TO TYPES OF INFORMATION PROVIDED BY

ACCOUNTING
ACCOUNTING
1. Quantitative Information
Accounting
➢ Information expressed in numbers, quantities,
➢ Is a process of identifying, recording, and
or units
communicating economic information that is
useful in making economic decisions
➢ Is a process with a basic purpose of providing 2. Qualitative Information
information about economic activities that is ➢ Information expressed in words or descriptive
intended to be useful in making economic form
decisions ➢ Is found in the notes to financial statements
➢ Referred to as the language of business as well as on the face of other components
because it is fundamental to the of financial statements
communication of financial information
3. Financial Information
ESSENTIAL ELEMENTS OF THE DEFINITION OF ➢ Information expressed in money
➢ Also quantitative information because
ACCOUNTING
monetary amounts are normally expressed in
numbers
1. Identifying
➢ Analyzes each business transaction and
identifies whether the transaction is an
“accountable event” or “non-accountable ACCOUNTING AS SCIENCE AND ART
events”
➢ Only accountable events are recorded in the 1. As a social science, accounting is a body of
books of accounts knowledge which has been systematically gathered,
classified, and organized
o Accountable Events – are those that affect
the assets, liabilities, equity, income or 2. As a practical art, accounting requires the use of
expenses of a business creative skills

ACCOUNTING AS AN INFORMATION SYSTEM

2. Recording
➢ Recognizes the identified “accountable
A system is one that consists of an input, a process, and
events” in a process called journalizing
an output. In an accounting system
➢ After journalizing, the accountant then
classifies the effects of the event on the
o Inputs are the identified accountable events
accounts in the process called posting
o Processes are recording, classifying, and
summarizing
o Journalizing —> journal
o Posting —> ledger o Output is the accounting report that is
o Summarizing —> trial balance communicated to the users

o Account – the basic storage of information in BOOKKEEPING AND ACCOUNTING

accounting
Bookkeeping
3. Communicating ➢ Refers to the process of recording the
➢ Summarizes the information processed in the accounts or transactions of an entity
accounting system in order to produce ➢ Normally ends with the preparation of the trial
meaningful reports balance
➢ Is communicated to interested users through ➢ Does not require the interpretation of the
accounting reports, the most common form significance of the information processed
of which is the financial statements
Accounting
➢ Covers the whole process of identifying,
recording, and communicating information
to interested users
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

FUNCTIONS OF ACCOUNTING IN BUSINESS

Accounting has the following two broad functions in a

business:
1. To provide external users with information that
is useful in making, among others, investment,
and credit decisions
2. To provide internal users with information that
is useful in managing the business

USERS OF ACCOUNTING INFORMATION

1. Internal Users
➢ those who are directly involved in managing
the business
▪ Business owners who are directly involved
in managing the business
▪ Board of directors
▪ Managerial personnel
2. External Users EXAMPLES IN WHICH ACCOUNTING IS USED IN
➢ Those who are not directly involved in INVESTMENT AND CREDIT DECISIONS
managing the business
▪ Existing and potential investors –
stockholders who are not directly
involved in managing the business
▪ Lenders (banks) and Creditors (suppliers)
▪ Government agencies (BIR, SEC)
▪ Non-managerial employees
▪ Customers
▪ Public

TYPES OF ACCOUNTING INFORMATION CLASSIFIED

AS TO USERS’ NEEDS

General Purpose accounting information

➢ Information designed to meet the common
needs of most statement users
➢ Provided by financial accounting and is
prepared primarily for external users BRIEF HISTORY OF ACCOUNTING

Special Purpose accounting information • More then 10,000 years ago, mankind began to
➢ Information designed to meet the specific engage in trade, and methods of record keeping and
needs of particular statement users accounting have been invented
➢ Provides by management accounting or
other branches of accounting • 1340 A.D., Double entry bookkeeping first came out
➢ Prepared primarily for internal users
• 1494, the first systematic record keeping dealing with
EXAMPLES OF DECISIONS AND TYPES OF the double entry recording system was formulated by
INFORMATION NEEDED TO MAKE THOSE DECISIONS Fra Luca Pacioli, a Franciscan monk and
mathematician

• The double entry recording system was included in

Piccioli’s book entitled “Summa di Arithmetica
Geometria Proportioni and Proportionista”

• Fra Luca Pacioli is considered as the father or

modern accounting
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

o Management Advisory Services

- Includes services to clients on matters
COMMON BRANCHES OF ACCOUNTING of accounting, finance, business
policies, organization procedures,
1. FINANCIAL ACCOUNTING product costs, etc.
➢ Branch of accounting that focuses on general
purpose financial statements 3. GOVERNMENT ACCOUNTING
➢ Governed by the Philippine Financial ➢ Refers to the accounting for the government
Reporting Standards (PFRSs) and its instrumentalities
➢ Focuses attention on the custody of public
o General purpose financial statements are funds, and the purpose or purposes to which
those that cater to the common needs of those funds are committed
external users, primarily the potential, and
existing investors, and lenders, and other 4. AUDITING
creditors ➢ Involves the inspection of an entity’s financial
statements or business processes to ascertain
Financial Statements Vs. Financial Reports their correspondence of certain proposed
business endeavors
• Financial Statements
➢ Are the structured representation of an 5. TAX ACCOUNTING
entity’s financial position and results of its ➢ The preparation of text returns and rendering
operations of tax advice, such as the determination of
➢ Are the end product of the accounting tax consequences of certain proposed
process business endeavors
➢ the means by which information gathered
and processed are periodically 6. COST ACCOUNTING
communicated to the users ➢ The systematic recording and analysis if the
costs of materials, labor, and overhead
• Financial Reports incident to the production of goods or
➢ includes the financial statements plus other rendering of services
information provided outside the financial
statements 7. ACCOUNTING EDUCATION
➢ assists in the interpretation of a complete set ➢ Refers to teaching accounting and
of financial statements accounting-related subjects in an organized
➢ improves users’ ability to make efficient learning environment
economic decisions ➢ 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 on decisions
➢ Includes broad range of topics, which may be

• Financial Reporting
➢ the provision of financial information about an
entity that is useful to external users in making
investment and credit decisions

2. MANAGEMENT ACCOUNTING related to one or more of the other branches

➢ involves the accumulation and of accounting, the economy as a whole, or
communicating of information for use by the market environment
internal users
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

• All businesses
• Preparation of
SUMMARY are required to
tax returns
file tax returns
Type of * Failure to file
Branch of
Accounting Users of Service tax returns results
Account
Service Provided to penalty and
• Some tax
• General • All businesses 5. Tax imprisonment of
payers may
record-keeping, uses financial Accounting not less than 6
require the
maintenance of accounting in years but not
professional
Journals and their record- more than 10
advice of a tax
Ledgers keeping. These years
practitioner
records provide
regarding the
information that is • providing tax
management of
also used in the advice
taxes
other branches of
1. Financial • Businesses use
accounting
Accounting cost accounting
to analyze the
• Preparation of • Businesses
cost of their
general purpose prepare general • Analyses of
products or
financial purpose FS at 6. Cost costs of
services and the
statements least annually for Accounting products or
effects of those
the use of services
costs in, among
lenders, investors,
others, earnings
of government
and pricing
regulatory
policies
• Required by • Required by
• Preparation of
management to business students,
specifically
2. Management aid them in business owners,
tailored
Accounting performing their accounting
management • Teaching of
management 7. Accounting professionals in
reports accounting and
functions Education their Continuing
related subjects
• General Professional
record-keeping Development
and preparation (CPD) , and other
of financial interested parties
reports for the • Required by
government •Required by the • Accounting
3. Government business owners,
and its government and research papers,
Accounting 8. Accounting professional
agencies. It also its agencies articles and
Research organizations,
includes the similar
and other
preparation of publications
interested parties
budgets and
accountability
reports
• Expression of FORMS OF BUSINESS ORGANIZATION
an opinion on
the Business
correspondence ➢ an activity where goods or services are
between
exchanged for money.
management • Businesses with
assertions and a gross annual
➢ a person who is engaged in business is called
established sales or receipts an entrepreneur or businessman
criteria exceeding
P300,000,000 are Businesses in the Philippines are organized in one of the
4. Auditing • The most required to have following:
common form of their financial
an audit opinion statements 1. Sole or single proprietorship
the audited by an
➢ a business owned by only one individual.
Independent independent
Auditor’s Report CPA ➢ most common and simplest form of a business
which is organization.
attached to ➢ business owner is called a “sole proprietor”
audited ➢ registered with the Department of Trade and
financial Industry (DTI)
statements
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

Advantages Disadvantages 3. Corporation

➢ Owned by more than one individual
You are the boss and you You assume all the risk
keep all the profits of loss. ➢ Formed by operation of law
➢ Ownership is represented by shares of stocks
Decision making is simple You take all ➢ Owners are called “stockholders or
because you have responsibility and rely shareholders”
complete control over mostly on yourself in ➢ An artificial being or a juridical person
the business making decisions. (persons created by law), meaning in the
It is more difficult to eyes of the law, a corporation is like a person
Relatively easier and less raise capital because that is separate from others
costly to form because you rely mostly on your
➢ Can transact on its own, have its own
there are fewer formal personal assets and
business requirements. loans to initially finance properties, incur its own obligations, and sue
the business. or be sued.
You are personally ➢ Incorporators of a corporation shall not be
Lower extent of less than 5 but not more than 15 individuals.
liable for the debts and
government regulation However, it can have as many stockholders
obligations of the
and relatively lower taxes.
business. as its authorized capitalization permits
➢ Registered with the Securities and Exchange
2. Partnership Commission (SEC)
➢ A business owned by two or more individuals
➢ Formed by contractual agreement
➢ Business owners are called “partners”
➢ Registered with the Securities and Exchange Advantages Disadvantages
Commission (SEC).
A stockholder who is not a Your “say” on corporate
Advantages Disadvantages member of the affairs depends on the
corporation’s board of number of shares you
Better business decisions Making business directors is relieved from own. Those who own
can be made because decisions may give rise managerial responsibilities. more shares are the
“two heads are better to conflict among the Only the stockholders that bosses and enjoy a larger
than one.” partners. are elected as members of share of the corporation’s
the board of directors and profits.
those they hire or appoint
You share the business You don’t keep all the
are tasked with managerial
risk and the responsibility profits because you
responsibilities. This can be
of running the business need to share them with
an advantage because a
with your partner(s). your partner(s).
regular investor does not
need to work for the
Limited life, in the sense corporation to earn income.
that a partnership can
Is easier to form because
be easily dissolved by
only a contractual
the withdrawal,
agreement between the
retirement, death or Limited liability of the A corporation is more
partners is needed.
insanity of one of the owners because difficult and more costly
partners. stockholders are liable for to form because there
corporate debts only up to are more formal business
the amount they have requirements.
Greater capital invested.
Lesser capital compared
compared to a sole
to a corporation.
proprietorship.
Greater capital and ease in Greater extent of
raising additional funds government regulation
A partnership (other because a corporation can and higher taxes.
Relatively lower extent of
than a general issue shares to a wider
government regulation
professional partnership) extent of investors.
compared to
is taxed like a
corporations.
corporation.

Unlimited liability. The

partners can be held
liable for partnership
debts up to their
personal assets.
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

If the corporation is listed, Unlike for a sole A cooperative is prone to

you can easily transfer your proprietorship or a poor management.
shares to other investors by partnership where business Cooperatives are, more
selling them on the stock profits are easily distributed Unlike in a corporation, your often than not, managed
market. Many investors to the owner(s), in a “say” on cooperative affairs by members who were
earn profit this way - by corporation, you must wait is not affected by the elected as board of
buying shares at a cheap for the board of directors to number of shares you own. directors rather than by
price, waiting for prices to declare dividends before This is because, in a employed professional
go up, and then sell them. you can get your share in cooperative, each member managers. Since there is a
This activity is referred to as the profits. is entitled to only one vote ‘one-member, one-vote’
stock trading. regardless of his or her policy in a cooperative,
shareholdings. However, influential members tend
members with larger to dominate the election
Unlimited life, in the sense shareholdings are entitled to process. The result is that
that the withdrawal, larger share in profit (net those who get elected
retirement, death or surplus). may not be the ones who
insanity of one of the are most qualified for the
stockholders does not task.
dissolve the corporation.
Although a corporation
has a legal life of 50 years, The Cooperative Code
this can be renewed for an places some restrictions on
indefinite number of the distribution of a
renewals.
cooperative’s profit to its
members. More
specifically, the Code
requires a cooperative to
4. Cooperative appropriate a portion of its
Compared to a annual profit to some
➢ Owned by more than one individual. corporation, a cooperative funds. Only the remaining
is easier and less costly to portion can be distributed
➢ Formed in accordance with the
form because there are to the members.
provisions of The Philippine Cooperative fewer formal business Furthermore, when the
Code of 2008. requirements. cooperative is dissolved,
➢ Owners are called “members” the amount accumulated
➢ Association pf individuals who joined in a fund called the
“reserve fund” will not be
together to contribute capital and returned to the members,
cooperate in order to achieve certain but rather donated to
goals. another cooperative or to
➢ Patronage refunds pertains to the profit the community.
that a cooperative returns to its owners
➢ Has juridical personality Compared to a
➢ Founding members shall not be less than corporation, it is more
15 individuals. However, can have as difficult for a cooperative
many members as its by-laws permit. to sustain growth. This is in
part because of the lack
➢ Registered with the Cooperative Limited liability - the
of profit motive and the
members are liable for
Development Authority (CDA) cooperative debts only up
lack of management
expertise. Moreover, a
to the amount they have
Advantages Disadvantages cooperative’s success
invested.
strongly depends on the
members’ cooperation
A cooperative is generally A cooperative is and members are not
exempt from paying taxes. susceptible to corruption. always willing to
This is the main advantage Due to its management cooperate.
of a cooperative and the structure and lack of profit
most common reason why motive, the elected officers
cooperatives are may be inclined to act on
organized. Moreover, a their personal interests.
cooperative may receive
assistance from the
government.
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2c

Advantages Disadvantages
The success of a business
depends on continuing You may not have a
effort. Sadly, many You don’t need to worry
flexible personal time
cooperatives are zealous about inventory,
Unlimited life, in the sense because you need to be
at the start but fail to warehousing, and
that the withdrawal, directly involved in
sustain continuing effort distribution costs because
retirement, death or providing a service to a
resulting to the waning you don’t have any
insanity of one of the customer until your
down of their activities. This inventory. You only have
members does not dissolve business is big enough to
does not mean though some minimal supplies
the cooperative. Although be able to hire other
that all cooperatives are necessary in providing your
a cooperative has a legal professionals to do the
small businesses. There are services
life of 50 years, this can be work for you
many multi-billionaire
renewed for an indefinite cooperatives in our
number of renewals. You may only need a small
country. Some might be Service businesses normally
located in your capital because what you
suffer first from decline in
community. are selling is your skillset
demand during times of
and you only need yourself
economic difficulty
to render a service

Unlike in a corporation Your business’ success

where the stockholder can depends on your
freely transfer his shares, in credibility. You must have
a cooperative, there are You are perceived as an
a good reputation and
restrictions on the transfer expert in your chosen field.
needs to be always
of a member’s shares. For People respect you
discreet in the things that
example, the approval of you say and the way you
the board of directors must act in the society
first be obtained before a
member can transfer his or
It is more costly to commit
her shares.
an error in a service
business compared to a
merchandising business

FORMS OF BUSINESS ACCORDING TO ACTIVITIES

2. Merchandising Business
The following are the major types of business ➢ Or trading business
according to the activities they undertake: ➢ Is one that buys and sells goods without
changing their physical form
1. Service Business
2. Merchandising Examples:
3. Manufacturing a. General merchandise resellers (grocery
stores, department stores, hardware stores,
Hybrid – engage in more than one type of activity pharmacies, online stores, sari-sari stores)
b. Distributors and dealers (wholesalers,
1. Service Business vegetable dealers, etc.)
➢ Is one that offers services as its main
Advantages Disadvantages
product rather than physical goods
➢ May offer professional skills, expertise, You may need a much You need to have a retail
advice, lending service, and similar lower start-up capital store to display your goods
because you don’t need and the store must be in a
services
to acquire machineries to strategic location for it to
produce your goods attract customers
Examples: You can take advantage Less flexibility in managing
a. Schools of price fluctuations the costs because the cost
b. Professionals (accounting firm, law firm, of your goods is based
electrician, etc.) primarily on their purchase
c. Hospitals and clinics price, which you do not
d. Banks and other financial institutions control
e. Hotels and restaurants
f. Transportation
g. Entertainment and Event Planners
 FINANCIAL ACCOUNTING AND REPORT
ELLYZA SHEEN C. BACARISAS, BSA-1
ACCTNG131 – A2

You rely on raw materials.

You need to manage
Keeping track of inventory
You can have a better them properly to ensure
Lower cost of quality is tedious, especially when
pricing policy because that they are available
because “what you buy” is you are selling numerous
mass production can when they are needed.
what you sell. If a certain and varied items with fast
decrease your unit cost This is because a shortage
product is not selling well, turnover rate. Also, you
(often called ‘economies in raw material can
you can just stop buying it can incur additional costs
of scale’) disrupt in your operation
and find an alternative due to spoilages, theft,
and that can be very
product or brand breakages, damages, and
costly
obsolescence
Managing a
It is much easier to start a manufacturing business
merchandising business can be difficult because
Greater flexibility in
because you don’t need production processes are
managing costs
to have an expertise or a Self-satisfaction is low often complicated and
special skill, and you don’t because you did not there is always room for
need to have invented a produce the products you improvement.
new product or have sold More accounting work is
conceptualized an needed. That is why there
innovative idea for an is a separate branch of
existing product accounting formed
primarily for
manufacturing
businesses, i.e., cost
3. Manufacturing Business accounting
➢ Is one that buys raw materials and
processes them into final products
➢ Changes physical form of the goods it has
purchased in a production process

Examples
a. Car manufacturers
b. Technology companies
c. Food processing companies
d. Factories

Advantages Disadvantages

You need a high start-up

You have a high growth
capital to acquire
potential-because you
machineries, to employ
can tap into a wider
people, and to acquire a
market and can produce
big space for your
in large quantities
production

You have the opportunity

Conceptualizing a viable
to establish a brand that
manufacturing business is
could last longer than your
difficult
lifetime

You need to be
continuously innovative
Self-satisfaction is high
and abreast of changes
knowing that consumers
in technology. If another
are happy and satisfied
company comes up with
with a tangible product
a better and cheaper
you have produced brings
product, your product will
you pride and joy
automatically lose
demand

You may not need to have

a strategically located
retail store to display your
Warehousing and logistics
products because you can
can be high
sell directly to wholesalers
rather than to end
customers