CHAPTER 1

TYPES OF BUSINESSES
INTRODUCTION

ACCOUNTING IS THE LANGUAGE OF 1. Service-Oriented Business – its 1. Sole Proprietorship – owned by

BUSINESS. product is the service rendered, one person called the Proprietor.
skills, knowledge, or expertise. It is also the easiest to form 
 Bridge of two-way communication 2. Merchandising or Trading unlimited liability
(of financial data/information, Business – it sells finished 2. Partnership – owned by two or
between the Business to Users of products which the business buys. more people called the Partners.
financial information) 3. Manufacturing Business – it It can be formed formally (with a
processes inputs to form finished written agreement) or informally
LECTURER’S NOTE: A SHIFT IN goods which they sell later. (may be formed even with a mere
PARADIGM OR WAY OF THINKING ABOUT 4. Agriculture Business – these handshake)  unlimited liability
ACCOUNTING IS IN UNDERSTANDING businesses are those who do the 3. Corporation – owned by share–
THAT IN WHATEVER ORGANIZATION, actual planting of the product, do or stockholders with shares of
ACCOUNTING IS– the fishing, raise poultry or cattle, stocks as evidence of their
 The most straightforward and piggery, etc. and sell whatever ownership. There are also
objective in manner by which any they produce. corporations that do not issue
stakeholder will know. 5. Hybrid Business – the business shares of stocks, and there are
 How efficient and effective the which has two or more types of called Non-Stock Corporation (ex.
organization has been in utilizing business USJ-R, INC.); their owners are
available resources and funds, Ex. Bake Shop which produces called members.
 To achieve its goals and their pastries (manufacturing) and
sells sodas or other drinks NOTE: The law also allows the
objectives, whether that be for formation of one person
profit, cost savings, or delivery of (merchandising).
corporations, where there is only one
public services. owner of shares of stocks, still
DIFFERENT KINDS OF ENTITIES subject to regulation by the
INTERNATION DEFINITION OF THAT USE ACCOUNTING securities and exchange commission,
ACCOUNTING INFORMATION AND REPORTS but does not issue stocks to other to
raise additional capital, whether in a
Defined by the American Institute of 1. Businesses Operated for Profit closed manner or publicly.
Certified Public Accountants (AICPA): 2. Schools
4. Cooperatives and Associations
- It is the art of recording, 3. Hospitals
– an organization which intention
classifying, and summarizing in a 4. Government Department and
is to help the members to
significant manner and in terms of Agencies
augment their livelihood. The
money, transactions, and events 5. Local Government Units
owners are called members and
which are, in part at least, of a 6. Non-Profit Organizations
they joined the organization
financial character and 7. Foundations and Trusts
voluntarily.
interpreting the results thereof. 8. Common Markets and Exchanges

FORMS OF BUSINESS
ORGANIZATIONS
FOUR (4) PHASES OF ACCOUNTING In order to enhance the quality of b. Signifies transfer of economic
information in financial statements, benefits (this could be a transfer
business transactions are grouped in of cash or other property);
different classes or categories on the c. Results of past events;
(a) Recording. This involves the
basis of their economic characteristics. d. A complementary nature of assets
routine and mechanical process of
The broad classes or categories are called and liabilities (like mirror images
writing down the business
Elements of Financial Statements. These of each other–meaning, if there is
transactions and events in the
elements help measure the business’ an effect on assets, there has to
books of accounts in a
financial position (1) and performance (2). be in any way effect on liabilities).
chronological manner called
Journalizing. OWNER’S EQUITY. Residual interest in
(b) Classifying. This involves sorting the assets of the business after deducting
or grouping of similar transactions ELEMENTS THAT REFLECT THE all its liabilities (or also known as the net
and events into their respective FINANCIAL POSITION… assets).
kind and classes. This is actually
the process of transferring the I. The elements that are directly May pertain to the following:
entries from the journal to the related to the measurement
ledger called Posting. of financial position in the ▪ Sole Proprietorship – capital (or
(c) Summarizing. This involves the Balance Sheet of the business investment net of withdrawal)
completion of the financial are – ▪ Cooperative or Association –
statements and accounting member’s contribution
ASSETS. Valuable resources owned by ▪ Corporation – stockholder’s equity
requirements as well. This
the business
includes preparation of the trial
balance, worksheet, financial  In a way, this is also an obligation of
a. Controlled by the business;
statements, closing entries, post- the business to the owner(s);
b. Results of past events (either
closing trial balance, and  Influenced with the profit or loss of
bought, donated, invested, or
reversing entries. the business;
traded);
(d) Interpreting. This involves the  For a corporation, the stockholder’s
c. Can provide future economic
“analytical and interpretative equity is also affected by the dividend
benefits for the business
works”. It is then, that when that the business declares during the
financial statements are analyzed, Ex. Cash, Accounts Receivable, Inventory, period.
interpreted, and communicated to Property, Plant and Equipment (PPE)
those interested parties where
LIABILITIES. Elements that are the
these could be of great help to
obligation of the business to outside
management as basis for making
parties who have furnished resources (or ELEMENTS THAT REFLECT THE
a sound decision.
what the business owed). INCOME STATEMENT…

a. These represent the business’ II. The elements that are directly
THE ELEMENTS OF FINANCIAL obligations; related to the measurement
STATEMENTS of performance in the Income
 Statement of the business are specific period. It therefore shows
– the results of the business’
Financial Statements are the results or operations which may be–
INCOME. Increases in economic benefits output of accounting for any given period. a. Profit (Revenue or
during the accounting period in the form Income > Expenses)
of inflows or enhancements of assets, or ▪ They contain the financial
b. Loss (Revenue or Income
decreases of liabilities that result in information / data processes by
< Expenses)
increases in equity. accounting which are relayed to
c. Breakeven (Revenue or
the different users for whatever
Income = Expenses)
 Encompasses both revenue use they are to the latter.
(income that arises in the courses NOTE: In accounting, loss is written
of the ordinary courses of the 1) Income Statement / Statement of with parentheses.
business) and gains (increase in Comprehensive Income / Statement
economic benefits that is not from of Profit or Loss STATEMENT OF CHANGES IN
the ordinary course of the 2) Statements of Changes in Owner’s OWNER’S EQUITY
business). Equity
3) Balance Sheet / Statement of ▪ The Statement of Changes in
Ex. Sales, Service Revenue, Tuition Fees Financial Position Owner’s Equity summarizes the
collected, Gain on Exchanges, Interest on 4) Statement of Cash Flows changes that occurred in the
Bank Deposits, Income on room 5) Notes to the Financial Statements / owner’s investments or Capital to
accommodation, etc. Disclosures the business. The Owner’s Equity
6) Comparative Information prescribed can be affected by the ff.:
EXPENSES. Decreases in economic a. Results of the operations
by the International Accounting
benefits during the accounting period in of the business
Standards
the form of outflows or depletion of  Profit (+)
assets, or incurrence of liabilities that NOTE: The IAS state that all financial  Loss (-)
result in decrease in equity, other than statements are required to be  Breakeven (no
those relating to distributions to equity presented with equal prominence. effect)
participants. b. Additional Investments
(+)
 Encompasses the expenses that
c. Withdrawals or Drawings
arise in the course of the ordinary
of the business (-)
activities of the business, losses
that represent other items that is BALANCE SHEET
not in the ordinary course of the
INCOME STATEMENT
business and cost of goods sold or ▪ The Balance Sheet is otherwise
services rendered. ▪ The Income Statement (otherwise known as the Statement of
know as the Statement of Financial Position. It also discloses
Ex. Selling Expense, Cost of Sales, the financial position or condition
Comprehensive Income for the
Advertising Expense, etc. or net worth of the business by
Period) presents a summary of
the revenues or income and listing its total Assets, Liabilities,
THE COMPONENTS OF A expenses of an entity for a and Owner’s Equity.
COMPLETE SET OF FINANCIAL
STATEMENTS
▪ It may be presented through narrative report which include the ASSETS = LIABILITIES + OWNER’S
Report Form wherein the Assets, explanations of what are the EQUITY
Liabilities, and Owner’s Equity are significant information that
simply listed in a vertical relates to the different
sequence or through Account statements.
Form wherein the Assets are listed ▪ It may or may not include EXPANDED ACCOUNTING
on the left side and the Liabilities supporting schedules pertaining EQUATION
and Owner’s Equity are on the to significant items in the financial
right side of the report. statements. ASSETS = LIABILITIES + OWNER’S
▪ But according to IAS in 1.112 and EQUITY (+ OWNER’S CAPITAL –
the notes to the FS should always DRAWING + INCOME + ADDITIONAL
indicate the basis and the policies INVESTMENT – EXPENSES)
STATEMENT OF CASH FLOWS
used in preparing the information
▪ The Statement of Cash Flows contained in the Financial
provide the information about the Statements. TRIVIA: In actually every area of life,
total cash receipts and cash even in the personal, the basic
payments of the business during EXPLANATION ON THE SEQUENCE accounting equation rules.
a period. In the statement, the OF PREPARATION
cash receipts are classified as
inflows, while the cash payments Income Statement CHAPTER 2
are the outflows.
▪ There are three (3) activities  Income – Expenses
RULES ON DEBIT AND CREDIT
disclosed in this statement–  (=) Results of Operations
a. Operating – current assets DEBIT – value received / left side
Statement of Changes in Owner’s
and liabilities
Equity CREDIT – value parted with / right side
b. Investing – long-term
assets  Owner’s Equity, Beg. + Additional
c. Financing – long-term Investment – Drawing +/- Results
liabilities of the Operations
▪ It indicates the net increase and  Owner’s Equity, End
decrease in cash during the NORMAL BALANCES
period and the cash balance at Balance Sheet
the end of the specific period.
 Assets (includes Cash which DEBIT (Dr.) CREDIT (Cr.)
balance is supported in the
NOTES TO THE FINANCIAL Statement of Cash Flows)
STATEMENTS  (=) Liabilities + Owner’s Equity ASSETS LIABILITIES

▪ The Notes to the Financial

DRAWINGS / OWNER’S
Statements or otherwise known BASIC ACCOUNTING EQUATION
WITHDRAWAL / EQUITY /
as ‘Disclosures’ is the only DIVIDEND CAPITAL
 Debit and Credit. The left-hand CASH (ASSET) DECREASED by
EXPENSES REVENUE side is debit and right-hand side is $100
credit.

▪ This is a confirmation of the

OWNER’S EQUITY theory of Fray Luca Bartolome
de Pacioli (Father of Modern
Owner’s Equity, Beginning – xxx Accounting) which states that
whenever we receive something
(+) Additional Investment - xxx when we should have something
to give up in return. Thus, in the
(+) Net Income / Profit - xxx
analysis of transactions we will be
(-) Drawing - xxx using the:

(-) Net Loss - xxx

A. Debit and Credit – that is what
we have to know what we
Owner’s Equity, End - xxx received (debit) and what we
parted with (credit);
B. Different elements and their
FORMULAS: corresponding accounts –
hence, it is very important that
▪ Owner’s Equity, Beg. = Total we are very familiar with these
Assets – Total Liabilities accounts.
▪ Net Income = Total Revenue –
Total Expenses SAMPLE #1

Adam bought pen from XY Marketing for

cash, $100.

ANALYSIS:
ANALYSIS OF TRANSACTIONS Value received (DEBIT)  Pen for $100
What is double-entry accounting?
Value parted with (CREBIT)  Cash for
▪ Double-entry Accounting is a $100
system of accounting where entry
to an account requires a
corresponding and opposite entry
PEN (ASSET) INCREASED by
to a different account. The
$100
double-entry has two equal and
corresponding sides known as