Introduction to Accounting 1 Chapter 1 Introduction to Accounting [2 1. a 3. 4, 5. TN ‘earning Objectives Define accounting. Describe the nature and purpose of accounting. Give examples of branches of accounting. State the function of accounting in a business. Differentiate between. external and intérnal users of accounting information. : Narrate the history/origin of accounting. State the forms of business organization. State the types of business according to their activities. Definition of accounting : Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions. Essential elements of the definition of accounting 1. Identifying - The accountant analyzes each business transaction and identifies whether the transaction’ is an “accountable event” or “non-accountable event.” This is because only “accountable events” are recorded in the books, of accounts. “Non-accountable events” are not recorded in the books of accounts. “Accountable events” (or ‘economic events’) are those that affect the assets, liabilities, equity, income or expenses of a business. Sociological and psychological matters are outside the scope of accounting. : Recording - The accountant recognizes (i.e, records) the identified ‘ “accountable events.” This process is called “ournalizing.”—_—_—_—_—_—ea_“Q\“YQYQwr ON After journalizing, the accountant then classifies th effects of the event on the “accounts.” This process is cally “posting.” > Account is the basic storage of information in accounting eg, “cash,” “land,” “sales,” etc. 3. Commuinicating - At the end of each accounting period, th accountant summarizes the information processed in th accounting system in order to produce meaningful reports This is important because information processed in th accounting system is useless unless it is communicated t interested users. Accounting information is communicated ti interested users through accounting reports, the mos common form of which is the financial statements. Nature of accounting Accounting is a process with. the basic purpose of providin; information about economic activities that is intended to be usefu 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 0 descriptive form. Qualitative information is found in the note to financial statements as well as on the face of the othe components of financial statements. . Financial information - information expressed in mone} Financial information is also quantitative information becaus monetary amounts are normally expressed in numbers. Accounting as science and art 1. Asa social science, accounting is a body of knowledge which ha been systematically gathered, classified and organized. 2. Asa practical art, accounting requires the use of creative skill and judgement.Introduction to Accountis Accounting as’an information system A system is one that consists of an input, a process, and an output. For example, in your digestive system, the input is the food you eat; the process is when your body produces digestive juices to convert the food into an output called? ... energy! (The output my friend is energy. The one you are thinking of is called waste. ©4) Your body needs energy so it can function properly, Similarly, in an accounting system, the inputs are. the identified accountable events; the processes are recording, classifying and. summarizing; and the output is the accounting report that is communicated to the users. Bookkeeping and Accounting, Although bookkeeping function is part .of accounting, -bookkeeping and accounting are not the same, > ‘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. > Accouiriting, on the other hand, covers the whole process’ of identifying, recording, and ‘communicating information to interested users. Functions of Accounting in Business Accounting is often referred to as the “language of busiriess” because it is fundamental to the communication of financial information. 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; and 2. To provide internal users with information that is useful in managing the business,Users of Accounting Information Users of accounting information are broadly classified into ty namely; 1, Internal users - those who are directly involved in managing | business. Examples of internal users include: a. Business owners who are directly involved in managi, the business b. Board of directors c. Managerial personnel 2, External users - those who are not directly involved managing the business. Examples of external users include: a. Existing and potential investors (e.g., stockholders wt are not directly involved in managing the business) b. Lenders (eg., banks) and Creditors (e.g,, suppliers) c. Government agencies (e.g,, Bureau of Internal Revent ‘BIR’, Securities and Exchange Commission ‘SEC’) d. Non-managerial employees e, Customers f. Public Users of Accounting Information Internal userIntroduction to Accounting 5 Types of accounting information classified'as to users’ needs 1. General purpose accounting information - is 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 - is information designed to meet the specific needs of particular statement users. It is provided by management accounting or other branches of accounting and is prepared primarily for internal users, Examples of decisions and types of information needed to make those decisions Example of Example of User decision to make _| information needed 1. Externaluser | > Existing investor: | > Audited financial (Investor) _, | Whether to hold statements of the or sell business to aid in investment in analyzing the stocks. value of the >> Potential investor: company. Whether or not (General purpose to buy shares of information) stocks. 2. Externaluser “| > Lender: Whether | > Audited financial (Lender or of not to extend statements of the supplier) Ioan toa business to aid in business. analyzing the > Supplier: Whether | company’s or not to extend ability to pay its credit toa debts. (General business. purpose information)6 Chapter hai 3. Internal user (Manager) > Whether or not to increase the sale’price ofa product, > Analysis of the effects of sales volume:and sa} pricesto. + earnings. (Sped purpose information) 4, Internal user > How much > Budget report. (Manager) capital is needed (Special purpose to manufacture a information) ° new product? Examples in which accounting is used in investment: an credit decisions External user of Decision ‘Accounting information information 1, Investor Shall invest in | The financial _ this business? Is | __ performance of th this a profitable business. undertaking? 2. Creditor Shall I lend © The ability of the money to this business to business? Does generate revenue this business and cash flows have the ability from its operation to pay back my, loan? + Now that we have understood how accounting plays # important role in making business decisions, let us have a brié Overview on how accounting came to be.Introduetion to Accounting 7 Brief history of accounting Accounting can be traced as far back as the prehistoric times. Since the dawn of civilization when mankind began 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 old 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. Source: http//EzineA rticles.com/456988) Other ancient civilizations keeping’ account records are Babylonia (4500 B.C.), Egypt (2250 B.C.), China and Greece.’ In the middle ages (13 and 15% 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.8 Chapter BS Common branches of accounting 1. Financial accounting ~ is the branch of accounting that focus on general purpose financial statements. > General purpose financial statements are those statemen that cater to the contmon needs of external users, primar the potential and existing investors, and lenders an other creditors. : > Financial accounting is governed by the Philippi Financial Reporting Standards (PFRSs): The scope of this book is the fundamentals of financia accounting and reporting. Financial accounting vs, Financial reporting The terms “financial accounting” and” financial reporting” an often used interchangeably. Although, both focus on genera purpose financial statements, finaricial reporting endeavors { promote principles that are also useful to “other: financia reporting.” “Other financial reporting” comprises information provided outside the financial statements that assists in the interpretation of a complete set of financial statements ot improves users’ 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 processed are periodically communicated to users. » A financial report includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions.Introduction to Accounting 9 a Financial statements - Financial report 1. Statement of financial 1. Statement of financial position position 2. Statement of profit or loss 2. Statement of profit or loss and other comprehensive and other comprehensive income income 3. Statement of changes in 3. Statement of changes in equity equity 4. Statement of cash flows 4, Statement of cash flows 5. Notes 5. Notes 6. Additional statement of 6. Additional statement of financial position financial 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, for exaymple a ‘business.’ However, not only-businesses prepare financial statements. Other types of organizations, such as non-profit organizations, the government, or cven a private individual, may also prepare financial statements. Yes, even you can prepare your own personal financial statements. 2 Actually, government employees are required to prepare and submit their personal financial statement called the ‘SALN’ or Statement of Assets, Liabilities and Net worth.)8 ~Pler) eee ee Common branches of accounting 1. Financial accounting — is the branch of accounting that focus on general purpose financial statements. > General purpose financial statements are those statemen that cater to the common needs of external users, primari| the potential and existing investors, and lenders anj other creditors. + > Financial accounting is. governed by the Philippin| Financial Reporting Standards (PFRSs): The scope of this book is the fundamentals of financial accounting and reporting. Financial accounting vs. Financial reporting The terms “financial accounting” and” financial reporting” are often used interchangeably. Although, both focus on gener 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 assists in the interpretation of a complete set of financial statements ot improves users’ 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 processed are periodically communicated to users. > A financial report includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions, Introduction to Accountir. Financial sta Statement of finar position Statement of profi and other compre income Statement of chan equity Statement of cash Notes Additional staterr financial position Financial report about an entity 1 investors, lender and credit decisi« Primary objectit To provide infor (assets), claims tc changes in thos. changes). Secondary object To ‘provide inf management stewa entity’s managen the entity’s econa (*The term ‘entity’ refe required, oF chooses, 10 5 not only businesses prey non-profit organizations, Financial statements. Yes © Actually, governme: Financial statement calledIntroduction to Accounting 9 (2 ___ Financial statements - Financial report 1. Statement of financial 1. Statement of financial position position 2. Statement of profit or loss} 3. Statement of profit or loss and other comprehensive and other comprehensive income income 3. Statement of changes in 3. Statement of changes in equity equity 4, Statement of cash flows 4, Statement of cash flows 5. Notes 5. Notes 6. Additional statement of 6. Additional statement of financial position financial position 2._ 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 tesources (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.¢., 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, for exaynple a ‘business.’ However, not only businesses 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.)10 Chapi, aE na nT SRE an maa | Management accounting — involves the accumulation a communication of information for use by internal users. ; offshoot of management accounting is management advis, services which includes services to clients on matters accounting, finance, business policies, organizatiy procedures, product costs, distribution, and many oth phases of business conduct and operations, Financial Accounting Management Accounting Focuses on the information — | > Focuses on the informatio, needs of external users. needs of internal users. a N Government accounting - refers to the accounting for t government and its instrumentalities, focusing attention c the custody of public funds, the purpose or purposes to whic those funds are committed, and the responsibility an accountability of the individuals entrusted with those funds. . Auditing — involves the inspection of an entity’s financi: statements or business processes to ascertain the correspondence with an established criteria. Tax accounting - is the preparation of tax returns an rendering of tax advice, such as the determination of t consequences of certain proposed business endeavors. . Cost accounting ~ is the systematic recording and analysis | the costs of materials, labor, and overhead incident to t! production of goods or rendering of services. Accounting education - refers to teaching accounting aft accounting-related subjects in an organized _Jearnif environment. It is a process of facilitating the acquisition ( knowledge and skills regarding one or more of the oth branches of accounting.Introduction to Accounting u 8. Accounting research — pertains to the careful analysis of economic events and other variables to understand their impact on 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 market environment, Examples are provided below: Accounting research topic Related branch of accounting © Impact of fair value|* Financial accounting measurement on the financial statements. © Inventory management and | * Management accounting its effect on earnings. © Intermal controls and |e Auditing modern technology. Becoming a certified public | ¢ Accounting education accountant. Q summary: Branch of Type of accounting ; Accounting service provided Users of service 1. Financial > General record- > Allbusinesses Accounting keeping, ie, use financial . maintenance of accounting in Journals and their record- Ledgers. keeping. These records provide information that is also used in the other branches of accounting. > Preparation of . > Businesses general purpose prepare general financial . purpose FS at statements (FS). least annually for2 Chay a EEE the use of lenders, investors, or government regulatory bodies. 2. Management | > Preparation of > Required by Accounting specifically tailored management management aid them in reports. performing the management functions. 3. Government | > General record- > Required by th Accounting keeping and government an preparation of its agencies, financial reports for the government and its agencies. It also includes the preparation of budgets and accountability reports, 4. Auditing > Expression of an >. Businesses wit! opinion on the gross annual cortespondence sales or receip! between exceeding management 3,000,000 are assertions and required to hs" established criteria. their financial ar statements ‘The most common audited by at form of an audit independent | : Independa . Certified Publ L____ independent auditors Accountant_~Introduction to Accoxinting 1B Report which is attached (CPA). to audited financial statements. 5. Tax > Preparation of fax All businesses Accounting returns. are required to file tax returns. * Failure to file tax . returns results to penalty and imprisonment of not less than 6 years but not more than 10 years. , > Providing tax Some; taxpayers advice. miay require the . : professional advice of a tax practitioner regarding the management of taxes, 6. Cost > Analyses of costs of | > Businesses use Accounting products or cost accounting services. to analyze the cost of their products or services and the “effects of those costs in, among others, earnings and pticing policies. 7. Accounting | > Teaching of Required by Education accounting and business14 ay related subjects. students, business own accounting professionals their Continy Professional Developmen (CPD), and o interested parties. 8. Accounting Research > Accounting research papers, articles and similar publications. Required by business own professional organizations and other interested parties. Forms of Business Organizations A business is an activity where goods or services are exchanged money. A person who is engaged: in business is called entrepreneur or businessman. Businesses in the Philippines are organized in one of following: 1. Sole or single proprietorship — is a business that is owned by‘ one individual. It is the most common and simplest form business organization. The business owner is called a" proprietor.” A sole proprietorship is registered with the Depart of Trade and Industry (DTI). 2, Partnership - is a business that is owned by fvo or! individuals ‘who entered into a contract to carryIntroduction to Accounting : 15 - business and divide among themselves the earnings therefrom. The business owners are called partners. A partnership is registered with the Securities and Exchange Commission (SEC). 3. Corporation - a corporation ‘is also owned by more than one individual. However; unlike a partnership, a 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 if 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 stockholders as its authorized capitalization permits. A corporation is registered with the Securities and Exchange Commission (SEC).yy 16 : Chapter 1 FO Oe 4. . Cooperative - a cooperative is also owned by more than one individual. However, a cooperative is formed in accordance with the piovisions of The Philippine Cooperative Code of 2008, The owners of a 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 produce to the market. In here, the farmers voluntarily join together to achieve a common goal, which is to address their need to get their produce to the market. Another concept of a cooperative is that members need to patronize the cooperative’s goods or services. In the example above, the member farmers shall hire delivery trucks from the cooperative rather than from other businesses. If the cooperative earns profit (net surplus), a farmer can recover 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).troduction to Accounting 17 @Q Summary: Forms of Business Organizations Form of business . Formation/ Pee Ownership * a organization Registration 1, Sole proprietor |> One individual | > _ Registered with (ie, sole the DTI. proprietor) 2. ‘Partnership > Morethanone | > Formed by (ie, partners) contractual . agreement. > Registered with the SEC. 3. Corporation } Morethanone | > - Formed by (ie. stockholders) operation of law > Registered with the SEC. 4. Cooperative > Morethanone | > Formed in (ie, members) accordance with the Cooperative Code. > Registered with the CDA. Advantages and Business Organizations Sole Proprietorship advantages of the Different Forms of Disadvantages Advantages &_ You are the boss and you You assume all the risk of keep all the profits. loss, © Decision making is simple because you have complete control over the business. * You take all responsibility and rely mostly on yourself in making decisions.18 Oa et Chapter & Relatively easier and less costly to form because there are fewer formal business requirements. It is more difficult to raise capital because you rely mostly on your personal assets and loans to initially finance the business. % Lower extent of You are personally liable government regulation and for the debts and relatively lower taxes. obligations of the business. Partnership Advantage Disadvantage ‘& Better business decisions can be made because “two heads are better than one.” Making business decisions may give rise to conflict among the partners. }” You share the business risk and the responsibility of running the business with your partner(s). You don’t keep all the profits because you need to share them with your partner(s). & Compared to corporations and cooperatives, a partnership is easier to form because only a contractual agreement between the partners is needed. Limited life, in the sense that a partnership can be easily dissolved by the withdrawal, retirement, death or insanity of one of the partners, % Greater capital compared to a sole proprietorship. Lesser capital compared to a corporation. .| & Relatively lower extent of government regulation compared to corporations. A partnership (other than a general professional partnership) is taxed like a corporation.Introduction to Accounting 19 ? Unlimited liability. The partners can be held liable for partnership debts up to their personal assets. Corporation Advantage Disadvantage & Astockholder whois nota |? Your “say” on corporate member of the affairs depends on the corporation's board of number of shares you own. directors is relieved fr managerial responsibilities. Only the stockholders that are elected as members of the board of 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, Those who own more shares are the bosses and enjoy a larger share of the corporation's profits. © Limited liability of the owners because stockholders are liable for corporate debts only up to the amount they have invested. Acorporation is more difficult and more costly to form because there are more formal business requirements. & Greater capital and ease in raising additional funds because a corporation can issue shares to a wider extent of investors. Extent of mvestors. % Greater extent of government regulation and higher taxes. [ai Pea dp carpe Baerlf the corporationis listed, § Unlike fora sole You can easily transfer your proprietorship or a , shares to other investors by partnership where busines, selling them in the stock profits are easily distribute market, Many investors .to the owner(s), ina | eam profit this way - by corporation, you have to buying shares at a cheap wait for the board of Price, wait for prices to go directors to declare up, and then sell them. This dividends before you can. activity is referred to as get your share in the stock trading. profits, Unlimited life, in the sense that the, withdrawal, retirement, 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 Advantage Disadvantage &- Unlike ina corporation, % A cooperative is prone’ to your “say’.on cooperative poor management. affairs is not affected by the Cooperatives are, more number of shares you own. often'than not, managed t + This is because, ina members who were.elect® cooperative, each member as board of directors:rath is entitled toonly one vote than by: employedIntroduction to Accounting 21 regardless of his or her shareholdings. However, members with larger professional managers. Since there is a ‘one- member, one-vote’ policy in shareholdings are entitled a cooperative, influential to larger share in profit (net members tend to dominate surplus). 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 A cooperative is susceptible exempt from paying taxes. to corruption. Due to its This is the main advantage management structure and of a cooperative and the lack of profit motive, the most common reason why elected officers may be cooperatives are organized. inclined to act on their Moreover;'a cooperative ‘personal interests.” may: teceive assistance from the government, Compared to a corporation, The Cooperative Code a cooperative is easier and places some restrictions on Jess costly to form because the distribution of.a there are fewer formal cooperative’s profit to its business requirements, members. More specifically, the 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,Chapte, De % Limited liability - the members are liable for cooperative debts only up to the amount they have invested. the amount accumulated q a fund called the “reserve _ fund” will not be returneg to the members, but rathey donated to ariother cooperative or to the community. Compared to a corporation it is more difficult for a cooperative to sustain growth. This is in part 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 a business dependson 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 our country Some might be located in your community.Introdiction to Accounting & Unlimited life, in the sense that the withdrawal, retirement, death or insanity of one of the members does not dissolve the cooperative. Although a cooperative has a legal life of 50 years, this can be renewed for an indefinite number of renewals, Unlike in a corporation where the stockholder can freely transfer his shares, in a cooperative, there are restrictions on the transfer of a member's shares. For example, the approval of the board of directors must first be obtained before a member can transfer his or her shares. Types of Business According to Activities The following are the major types of business according to the activities they 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 businesses include: Schools Professionals (accounting firm, law firm, electrician, etc.) Hospitals and clinics Banks and other financial institutions Hotels and restaurants Transportation and travel (taxi operator, travel agency, etc.) Entertainment and event planners (wedding planners, concert promoters, etc.) amoeon op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--hand cars dealers, etc.) Manufacturing business A manufacturing business is one that buys raw materials and processes 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.) ¢. Food processing companies (San Miguel Pure Foods, Silver, Swan, etc.) d. Factories (clothing factories, animal feeds factories, plastic wares factories, etc.) Some businesses, 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 types 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-typé, business. |Introduction to Accounting 2 Advantages .and Disadvantages of the Different Types of Business Service Business Disadvantages Advantages & You don’tneed to worry You may not have a flexible about inventory, personal time because you warehousing and need to be directly involved distribution costs because in providing a service to a you don’t have any customer. You can stock inventory. You only have inventory but not service. some minimal supplies “ necessary in providing your For example, if you are a services. ~ 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.Chapte, fo Laan & You may only need a small capital because what you are selling is your skill set and you only need yourself to render a service. If you are a manufacturer, you need to buy raw materials and machinery to produce your product. & You are perceived as an expert in your chosen field. People respect you. You can also have fans!©S € Service businesses normal, suffer first from decline jn’ demand during times of economic difficulty. This because most services are perceived as luxuries rath than necessities for survival. For example, a guy with low funds would refrain from having a haircut ang uses his funds for food | instead. A smart gal with low funds would cut back her expenditures on spa and pedicure. Your business’ success - depends on your credibility. Personally, yo must have a good reputation. You need to bt always discreet in the things you say and the wa you act in the society. @ Since a service business is founded on good teputation, it is more cost! to commit an error in a service business compa toa merchandising business, For example, iff merchandising business erroneously sells damajIntroduction to Accounting 27 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 Advantages Disadvantages & Compared toa You need to have a retail manufacturing firm, you store to display your goods may need a much lower start-up capital because you don’t need to acquire machineries to produce your goods. and the store must be ina strategic location for it to attract more customers. © You can take advantage of price fluctuations, For example, when goods are on sale, you can acquire them at a discounted price and resell them at a much higher price. You can’t do ‘this in a service business. Less flexibility in managing costs. This is because the cost of your goods is based primarily on their purchase price, which you do not control, “In a manufacturing business, you can cut down costs by redesigning your product, improving your processes, acquiring more efficient machines, employing more skillful personnel, and so much more.Chapter a Shaper S Lower cost of quality. This is because “what you buy is what you sell.” Ina service or manufacturing business, you need to continually ‘improve your products to maintain their salability. In a merchandising business, ifa certain product is not selling well, you can just stop buying it and find an alternative product, another brand maybe. 9 Keeping track of inventory ) is tedious, most especially when you are selling, numerous and varied items with fast turnover rate, like for example if your business is a hardware store ora grocery store. Also, you can incur additional costs __ due to spoilages, theft, breakages, damages, and | obsolescence, It is much easier to start a ~ merchandising business because you don’t need to have an expertise or a special skill (service business) and you don’t need to have invented a new product or have conceptualized an innovative idea for an existing product (manufacturing business). Self-satisfaction is low because you did not produce the products you sold. 3Introduction to Accounting Manufacturing Business 29 Advantages Disadvantages & Youhaveahigh growth | @ Youneed a high start-up potential because you can capital to acquire tap into a wider market and machineries, to employ can produce in large people, and to acquire a big quantities. space for your production. L & Youhave the opportunity -| ? Conceptualizing a viable to establish a brand that manufacturing business is could last longer than your difficult. This is why more lifetime. This is the ultimate entrepreneurs would rather dream of most engage in merchandising. entrepreneurs. © Self-satisfaction is high. % You need to be Knowing that consumers continuously innovative are happy and satisfied and abreast of changes in with a tangible product you technology. If another have produced brings you company comes up witha pride and joy. better and cheaper product, your product will automatically lose demand. & “You may not need to have a strategically located retail store to.display your products because you can sell directly to'wholesalers Father than to end Warehousing and logistics costs can be high. - consumers. © You canhave a better } You rely on raw materials. Pricing policy because mass You need to manage them Production can decrease properly to ensure that they—_— 30 , | Chapter} oo your unit cost (often called ‘economies of scale’). For example, you are paying rent of P100,000 for your factory space. If you produce only 1 unit ofa product, your unit costis high because the rent will be allocated to only 1 unit, ite., 100,000 unit cost (P100,000 + 1 unit). Therefore, you need to sell this unit for more than 100,000 to earn profit. However, if you produce 10,000 units, your unit cost would be much lower because the rent will be allocated to more units, i.e., P10 (P:100,000 + 10,000 units). You can now sell each unit at a much lower price. are available when they arg needed. This is because a shortage in a raw material can disrupt your operation, and that can be very costly, For example, when cookin; rice, all the ingredients yo, need must be available. Yo cannot cook the rice now and just add the water late on. | In amerchandising | business, if you run out of specific good, you don’t necessarily need to close your store because you c still sell other goods. &” Greater flexibility in managing costs. (See discussion in disadvantage of a merchandising business above") Managing a manufacturit business can be difficult because production processes are often complicated and there is always some room for improvement (although many skilled managers ™ take this positively as a challenge).Introduction to Accounting 31 Also, more accounting, work is needed. That is why there is a separate branch of accounting formed primarily for manufacturing businesses, iLe., cost accounting. Chapter 1 Summary: © Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions. © Only “accountable events” are recorded in the books of accounts. Accountable events are those that affect the assets, liabilities, equity, income or expenses of a business. * The information processed in an accounting system is communicated to interested users through accounting reports (eg,, financial statements). * Accounting is considered the “language of business” because it is essential in the communication of financial information. * Accounting provides information that is useful in making economic decisions. * The common branches of accounting include the following: (1) Financial accounting, (2) Management accounting, (3) Goveinment accounting, (4) Auditing, (6) Tax accounting, (6) Cost accounting, (7) Accounting education, and (8) Accounting research. * Financial accounting focuses on the information needs of external users, while management accounting focuses on the information needs of internal users. * External users are those who are not directly involved in Managing the business. Internal users are those who are directly involved in managing the business.Accounting information may be either (a) general purpose or, Special purpose. General purpose accounting information provided by financial accounting and is prepared prima for external users. Special purpose accounting information provided by management accounting or other branches accounting and is prepared primarily for internal users. * The different forms of business organization are: (1) { Proprictorship, (2) Partnership, @) Corporation, and Cooperative. * | The types of business according to activities are: (1) Sen business, (2) Merchandising business, and (3) Manufactur business. PROBLEMS PROBLEM 1: TRUE OR FALSE 1. The main purpose of accounting is to provide information t is useful in making economic decisions. 2. All business transactions are recorded in the books accounts. 3. Accounting information is expressed both in numbers (¢ monetary amount) and in words (eg, descriptions 4 explanatory information. 4. Accounting is considered a practical art because it requires! use of creative skills and judgment. 5. Accounting, as an information system, consists of an’ input process and an output. 6, Although bookkeeping is part of accounting, the two are f the same. 7. Entity A buys goods and sells them at a mark-up. Entity Ait merchandising business, 8. Entity-B is required to file audited annual financial statem¢, with the SEC. Entity B can either be a corporation ‘ot partnership, but not a sole'proprietorship or a cooperative. 9.. A school is most likely to be considered a manufactu business — the raw materials are the students and the finisIntroduction to Accounting ‘o products are _ responsible and competent business ptofessionals. 10. A business that produces goods in large quantities can save on fixed costs. This is called economies of scale. PROBLEM 2: TRUE OR FALSE 1. Only accountable events are recorded in’ the books of accounis. Accountable. ‘events are .those that affect the accountant. . 2. General purpose financial statements are the end product of the financial accounting process. These statements are intended for internal users. 3. Accounting is the major facet of a business that is responsible in. generating funds needed to support the. business operations. 4. A business transaction is considered an accountable event if it affects the assets, liabilities, equity, income or expenses of the business. 5. You and your friend are members in a cooperative. You hold 1 - share, while your friend holds 10,000 shares. During members’ meetings, your friend can cast 10,000 votes, whereas you.can only cast 1 vote. 6. Mr. A owns and manages a sole proprietorship business. The financial reports prepared tailored to Mr. A’s’ financial information needs are not general purpose financial statements. . ‘ 7. Mr. A (in #6 above) accepts Mr. B as co-owner to his business. The business is now called A&B Co. The business of Mr. A and Mr. B is a partnership. : . 8.. Mrs. C is a taxi and jeepney. operator. Mrs. C has three taxis and five jeepneys. Mrs. C’s business is registered with the DTI. Mrs. C’s business is a corporation. 9. Mr. A and Mr. B in #7 above decided to acquire the business of Mrs. C in #8, The newly formed business is called ABC, Inc. ABC, Inc. is owned by Mr. A, Mr. B, Mrs. € and two drivers of34 Chapt; 4S Mrs. C. ABC, Inc. issued shares of stocks to the owne representing their ownership interest in the business. T} newly formed business is a partnership. * 10, The word “Inc.” in ABC, Inc. (see #9 above) is the abbreviati; for incorporated, which connotes a corporate business. PROBLEM 3: FOR CLASSROOM DISCUSSION Definition, nature and function of Accounting 1. Which of the following does not properly descril accounting? a. It is a process by which useful information is generated. b. It isa social science. c. It requires the application of creative skills and judgmeni - d._ Itis often referred to as the “language of the soul.” Users of accounting information 2. Which of the following is considered an intemal user financial information? a. Rank and file employees of the reporting entity b. Stockholders of the entity who are not directly involved managing the entity c. Lenders and other creditors d. The entity’s management 3. What type of information néeds of users do general purpo! financial statements cater to? a. common needs c.aandb b. specificneeds d. caring needs 4, Which of the following is least likely to be a decision made b an external user of the financial information of an entity? a. whether to buy, hold or sell investment in stocks b. whether to extend loan or other forms of credit c. whether to obtain additional financing d. all of these are decisions that external users makeIntroduction to Accounting : a Branches of accounting 5. This branch of accounting deals with the preparation of general purpose financial statenients. a. General accounting c. Financial accounting b. Management accounting —_d. Auditing 6. General purpose financial statements are intended to meet a. all the information needs of all users - external and internal alike. b. the common needs of both external and internal users. ¢. the common needs of external users, primarily investors, lenders and other creditors. d. both the common and specific needs of external users. Forms of business organizations 7. This type of business organization is created by a contractual agreement between two or more individuals. a. corporation c. partnership b. cooperative d. sole proprietorship ‘Types of business according to activities 8. Which of the following refers to a manufacturing business? buying and selling of goods in their original form sale of a skill-set and not necessarily a physical object ability or potential to mass-produce absence of ability to stock goods for future sale (ao oP Advantages and disadvantages of the different types of business 9. A disadvantage of a partnership is a. better decisions ~ “two heads are better than one.” b. business risk is assumed by more than one owner. ¢. unlimited life. d. unlimited liabilities of the partners. 10. This type of business organization has the tendency to become monopolistic. It can hamper the economy by funneling wealthhs, . , Chapter} to only few individuals (ie, the organization’s top owners restricting the redistribution of wealth to the majority of th members of the society. a. Cooperative ¢ Partnership b, Sole proprietorship 4. Corporation PROBLEM 4: MULTIPLE CHOICE 1. Which of the following statements is correct? a. Accounting is not a service activity. b. Both accountable and non-accountable events are record; in the books of accounts. ¢. Recording is the accounting process in which finand statements are prepared. d. Posting is the process of classifying the effects of record: events on the accounts. . 2. It is the basic storage of information in accounting. a. Account c. Memory card b. Journal 4. USB 3. The terms “record” and “recording” are most synonyme with a, identifying. ¢ posting, b. journalizing. 4. communicating. 4, Imagine you are an accountant. Which of the following wot most likely describe your basic purpose? a. to be used by unscrupulous persons in embezzling fund 'b. to count money, cows and sheep c. to provide. objective information about a reporting, ent that is intended to be useful to interested users in maki different types of economic decisions ; d. to chitchat with officemates, regularly check Facebot drink coffee, kill time, wait for 5PM then go homeIntroduction to Accounting ‘= 5. Which of the following statements is incorrect? a. The basic purpose of accounting is to provide information that is useful in making economic decisions. . b. Although bookkeeping and accounting are interrelated, they are not the same. ¢. Accounting is often referred to as the “language of business” because it is fundamental to the communication of financial information. d. Fra Luca Pacioli is the mother of modern accounting. 6. Which of the following statements is correct regarding financial accounting? é a. Financial accounting is mainly intended to provide financial information tailored to the needs of the entity’s management. b. Information processed in financial accounting is not used in the other branches of accounting. ¢. Financial accounting is the branch of accounting that deals with the inspection of an entity’s financial statements for the purpose of expressing an opinion thereon. d. Compared to the other branches of accounting, financial accounting necessarily needs to conform to the Philippine Financial Reporting Standards (PFRSs) for it to be able to produce useful information. 7. Without this branch of accounting there will, be no accountants. a. Tax accounting c. Accounting education b. Auditing d. Daddy accounting 8. You are planning on investing in the stock market. You have your eyes on ABC Corporation. Being an accounting student, you know that “haste makes waste.” Accordingly, you downloaded ABC Corporation’ financial statements from the internet to help you analyze whether the current market price of ABC Corporation’s shares of stocks are undervalued. orP Chapter, 3 eee eee overvalued, In this regard, what type of financial staternen user are you? a, External user c, Wi-Fi user b. Internal user d. User name and password 9. ABC Co. is a car dealer. It buys cars from companies lik Toyota, Mitsubishi and Ford and resells the cars to en consumers. What type of a business is ABC Co. according { the type of activity it undertakes? a. Corporation c, Merchandising: b. Partnership d. Manufacturing 10. It is the form of business organization that provides th highest degree of continuity. a. Sole proprietorship c, Cooperative b. Partnership 4d. Corporation PROBLEM 5: MULTIPLE CHOICE 1. You are the accountant of a business. Your company entere into a transaction. After identifying that the transaction is a accountable event, what should you do next? a. Record it. c. Ignore it. b. Communicate it. d.Tell your boss about it. 2, Users of financial information are broadly classified in! external and internal users based on a. their relationship with the reporting entity, b. the extent of their ability to affect the internal affairs of tf reporting entity. . c. whether they reside inside or outside of the company. main office building, d. the first letter of their surnames. 3. It is the branch of accounting that supports virtually. all t# other branches of accounting.Introduction to Accounting S39 a Management Accounting ¢, Government accounting, b. Financial Accounting d. General accounting 4. Although financial accounting and financial reporting are similar and are frequently interchanged in practice, there is a subtle difference between them. Which of the following is correct regarding this difference? a. b. Financial accounting involves accounting, while financial reporting does not. Financial accounting involves the processes of identifying, recording, classifying and summarizing, while financial reporting involves only the process of communicating. Financial accounting is governed by U.S. standards, while financial reporting is governed by international standards. Financial accounting focuses on general purpose financial statements, while financial reporting focuses on general purpose financial statements plus “other _ financial reporting.” 5. Your friend says he is a stockholder. This means that your friend is a. b. c d. raising chickens and other livestock. a part owner of a corporation. a co-owner of a partnership. an owner of a sole proprietorship business. 6. Sole proprietorship businesses are registered with the a. b. DTI. : ¢. CDA. SEC. d. all of these Use the following information for the next two questions: You want a new laptop computer and a good internet connection so you can market your products on Facebook. The problem is you are short of cash. You went to Papa to get a loan but he said, “No way, Jose!”7. Which of the following would most likely persuade Papal give you the loan? a. Cay like a spoiled brat while running up and down { stairs. | b. Look at Papa with teary eyes while wiping the liq. dripping from your nose. * Get Mama on your side. d. Show Papa your projected financial statements, explain him your business plan and confidently assure him { 9 you will pay back the loan. 8. Papa's decision on whether to extend you a loan is a decig made by a(an) a. external user. c. wise man. b. internal user. 4. kuripot man. 9. You are a business owner. It came to your attention that s¢ of your products are overstocked, while some are frequet out-of-stock. Warehousing costs have been increasing and} are losing potential sales. To come up with a right mix products to store in your warehouse, what should you do? a. Fire your sales personnel. b. Fire your warehouse custodian. ©. Cry like a little baby; face pressed on a pillow. 4. Obtain an accounting record of your sales per product) and identify which products are sold faster than others. Stock more of those products and stock less: of products that take longer to sell. 10. Your friend offered you a business proposal. According your friend, the initial investment is 10,000. You will some products - 2 skin whitening soaps and 1 bottle dishwashing liquid. If you get other investors to invest # those other investors get other investors and those “oll! other investors get some more investors, you will receit house and lot! (Wow!) As a business learner, you should} any of the following except !Introdtth swore -~ «=== oo a. give your parent's hard earned money to your friend. b. ask if your friend’s business is properly registered with government regulatory agencies, e.g, Securities and Exchange Commission ‘SEC’. Ask if you can examine the related registration documents. c. obtain an objective understanding of your friend’s business and his or her ability to give you a house and lot. Ask if your. friend owns a house and lot. If he or she answers “No,” there is a small chance that he or she could give you one. d. say LOL. In your mind, you are thinking “I am an accounting student. You cannot fool me with your scam.” PROBLEM 6: CASE STUDY Instructions: 1. Interview someone who has a business. He or she can be a relative, a friend, a neighbor (e.g., an owner of a sari-sari store nearby), or anyone (e.g., an owner of a food stall in your school’s canteen). Let him or her tell you a story on how his or her business came to be. (Important: Listen, and listen well. Do not interrupt while he or she tells you his or her story, Notice any spark of passion in his or her eyes.) Summarize his or her story and pass it to your teacher’ for grading. At the minimum, your summary should include the following: a. Name of the business b. Form of the business and type of business activity c. Nature of products or services d.” Brief history of the busirtess - Reason for -putting up "the business (including any interesting facts and circumstances — most businesses have this!) - + Initial capital and how that capital was generated (i.e., from savings or borrowings or both)Chapa - Difficulties faced by the owner during the starty period : e. Other information....(use your imagination; be creative!) chances are, this could be hope. Enjoy! ©8) NOTE: Be polite and courteous. life-changing experience for you... | PROBLEM 7: ESSAY If you have the opportunity to put up a business, what would it and why? | “NOTE: Disregard any financial restrictions that you may hay Imagine you have the money you need to put up any business like. However, you need to consider any skills that you curren| have or skills you are willing to acquire. Such skills can} technical (e.g., cooking skills, computer programming, art, mus mathematics, gardening, carpentry, etc.) or non-technical’ (e, communication skills, people skills or ‘charisma’, street sma etc.). Also, you need to consider the things or activities that ma you happy - those that motivate you, those that you find ful fillit Final note: Be honest to yourself! You will be graded based | your honesty, so don’t write things just to impress your teach Enjoy.....6©