Introduction to Accounting

Definition of Accounting
Accounting has 3 widely accepted definition

American Accounting Association

“Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and
decisions by users of the information.”

American Institute of Certified Public Accountants

“Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and
events which are in part at least of financial character, and interpreting the results thereof.”

Accounting Standards Council

“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities
that is intended to be useful in making economic decisions.”
Accounting
• It is the systematic process of measuring and reporting relevant financial information about the activities of an economic
organization or unit.
• Its underlying purpose is to provide financial information.
• It is expressed in monetary terms.

Nature of Accounting
A systematic process
Process
• series of actions that produces something
• lead to a particular result.
An art
Art
• skill acquired by experience, study, or observation
A service activity
Service
• occupation
• function of serving
Activity
• something that is done as work or for a particular purpose.
Aspects of Accounting
1. Recording
• writing down of business transactions chronologically
Business Transactions
• interactions between businesses and other stakeholders (customers, suppliers, investors, government offices, etc.)
Examples:
 Purchase of office supplies
 Payment of monthly bills
 Selling of business’ products
 Rendering of services
2. Classifying
• sorting similar and related business transactions into 3 categories:
 Assets
 Liabilities
 Owner’s Equity/Equity

3. Summarizing
• preparing the financial statements from the transactions recorded in the books of account that are needed by its users.
Financial Statement
• According to Philippine Accounting Standard (PAS) 1 - Presentation of Financial Statements, a complete set of financial
statement prepared periodically should compose of:
 Statement of Financial Position (Balance Sheet)
 Statement of Comprehensive Income (Income Statement)
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes
4. Interpreting
• representing the qualitative and quantitative financial information about the business transactions understood by the users of
financial statement.

Functions of Accounting
a) To fulfill the stewardship function of management (owners)
b) To help interested users to come up with informed decisions
c) To support daily operations of the business
Generate relevant and timely financial information for interested individuals/parties (investors, government agencies, creditors, and
management) in making decision.

Bookkeeping vs. Accounting

Bookkeeping
• focused with recording of monetary transactions
Accounting
• broader than bookkeeping.
History of Accounting
14th Century: Double Entry Bookkeeping
• 1494 C.E.
Frater Luca Bartolomes Pacioli
 An Italian monk and mathematician
Wrote:
• Summa de Arithmetica
• Geometria
• Proportioni et Proportionalita (Everything about Arithmetic, Geometry, Proportion, and Proportionality) which was published in
Venice in November 1494.
 Father of Modern Accounting.
Summa de Arithmetica, Geometria, Proportioni et Proportionalita
 Particularis de Computis et Scripturiz, a section of this book (24 pages) is composed of 36 short chapters that describe
bookkeeping.

Users of Accounting Information

• Accounting communicates financial information to different decision-makers who use accounting information.
• Users of accounting information are collectively referred to as stakeholders which are classified as internal and external.

Internal Users of Accounting Information

Internal users
• those who make decisions on behalf of the organization
• they directly manage the company’s daily operations
a) Managers/management
• they plan, organize, and run a business

1. Top-level management
• they use the information to oversee the performance of the whole organization
 Chief Executive Officer (CEO)
 Chief Financial Officer (CFO)
 Chief Operating Officer (COO)
2. Middle-level management
• they ensure that their unit performances are aligned with the organization’s objectives
 Department heads
 Branch managers
 Junior executives

3. Lower-level management
• they oversee the day-to-day operations and direct employees in the performance of tasks.
 Supervisors
 Team leaders
Employees/ Labor Union
• they assess the company’s profitability and stability, and their consequence on future salary and job security.
Financial information
• help determine if they have a future the company.
Owners
• they provide the capital to the business
Accounting information
• helps owners decide whether to withdraw or increase their investments.
• they are interested to know the returns on their investment.

The accounting information provided to internal users can be in the form of management reports, budgets, and financial statements.

External Users of Accounting Information

External users
• are those who make their decisions based on the company’s financial information.
• they are secondary users of financial information who are parties outside the company.
• they are not directly involved in the company’s operations
Potential Investors
• they need information to help them decide whether they should invest in the business.
• they would want to know potential returns on their investment.
Creditors and Potential Creditors
• they assess the creditworthiness and the capability of the business
Customers
• they assess their suppliers' financial position
• “Will the business continue to honor its warranties?”
Suppliers
• they use the financial statements of their customers
Tax Authorities
• they use the financial reports to determine whether the business paid the correct amount of taxes.
Regulatory Bodies
• they want to ensure whether the accounting information is following the rules and regulations set to protect the stakeholders.
Examples:
• Securities and Exchange Commission (SEC)
• Bangko Sentral ng Pilipinas (BSP)

Public
• they use the accounting information to know how the business affects the economy
Direct vs. Indirect
• they have direct interest over the company.
• they use the information to protect their own stake in the entity.
Examples:
Owners, management (directors and officers), employees, tax authorities, suppliers, creditors, and customers.
Indirect Users
• They use the financial information to provide advice to and protect the interest of direct users.
• Examples: Regulatory agencies or registration authorities, financial analysts and advisors, stock exchange, lawyers, reporting
agencies, trade associations, and labor unions.
 FUNDAMENTALS OF AACOUNTING

The Accounting Standards Council defines accounting as follows:

• It is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities
that is information to be useful in making economic decisions, in making reasoned choices among alternative courses of action."
• It is the language of business.
• It is also defined as the systematic art of recording, classifying and summarizing in a significant manner and in terms of
money, transaction and events which are in part at least of a financial character and interpreting the results thereof.
• It is actually information system that measures business activities, processes information into reports and communicates the
results to decision makers.

These are the followings activities of accounting:

Recording
• is engaged putting into records all the business transactions.
• can be recorded either manually or electronically.
• is usually done in chronological manner according to date of occurrence.
• also known as Bookkeeping.
Classifying
• is sorting and grouping of all similar and interrelated transactions.
Summarizing
• is the preparation of financial statements intended for the users of financial information.
Interpreting
• is engaged in analyzing the financial statements and the changes to its financial performance from prior years to other similar
businesses.

Purpose of Accounting in Business

1. It provides information useful for decision making.
2. It records and analyzes necessary business transactions.
3. It provides useful information both inside and outside stakeholders of the organizations.

Types of Business
1. The Service Business
• provides services to the customers.
• example, banks, barber shop, accounting firm, hospital, school’s cinema etc.
2. The Merchandising Business.
• buys goods and resells the goods more than the cost for a profit.
• example, a clothing store, or a supermarket, grocery stores, shoe store, etc.

3. The Manufacturing/Producing Business

• buys raw materials, turns them into a new product, and sells the products to earn a profit.
• example, a construction company or a pulp mill.
• producing businesses include businesses like farms, mining, forestry, etc.
4. The Non-Profit Organization
• involves activities to meet social needs and not for a financial profit.
• example, a church, service club, the Cancer Society, cooperatives, charitable institutions. etc.

Forms of Business Ownership

1. Sole Proprietorship/ Single proprietorship
• entity owned by an individual or single person.
• owner is called proprietor.
2. Partnership
• entity owned and shared by 2 or more persons.
• owners are called partners.
3. Corporation
• is an entity whose operation is created according to the law.
• capital is shared and divided in form of stocks.
• owners are called shareholders or stockholders.
4. Cooperatives
• entity exempts from taxation.
• owners are called members.

Users of Financial Information

The accounting information is prepared to be useful both to internal and external stakeholders.
Stakeholders
• are any individual or group of people that have interest to the financial information
• important in decision making.

The stakeholders and the accounting information need;

1. Management
Information necessary for planning and controlling to who will have a significant impact to the operation of the business.
2. Owner/s firm or prospective owners
Information necessary to know the progress of the business and to determine how their money was being used.
3. Investors
Information necessary to know on how profitable the business would be and to estimate the rate of return of the invested money.
4. Employees
Information necessary to determine the stability of the business that will give assurance of security of employment through good
remuneration and benefits.
5. Lenders/Financial Institutions
Information necessary to determine whether the company can pay the principal and interests when due.
6. Suppliers/other trade creditors
Information necessary whether the company has the capacity to pay the amounts on the goods and services delivered.
7. Government and their agencies
Information necessary to investigate whether the business operation complies to the promulgated government's rules and regulation.
8. Customers
Information necessary to determine the fairness of prices and stability of business for continuous patronage of goods and services.
9. Financial analyst and advisors
Information necessary to determine the market position of the business in the industry as well as to give best advised on how to
improve the profitability level of the company.
10. Trade Associations
Information necessary to report industry statistics, and business industry comparisons relevant in economic decisions.
11. Public
Information necessary to determine if the company has significant contribution to the economy through employment and payment of
taxes.
Certified Public Accountant
According to the Board of Accountancy, under Professional Regulation Commission who administers the CPA board exam every month
of May and October.

The board determines the qualification for CPA examinees and they should possess the following;
• A Filipino citizen
• At least 21 years old
• Good moral character
• Graduates of Bachelor of Science in Accounting, or Bachelor of Science in Commerce, major in accounting or its equivalent.
• He should pass the board examination for Certified Public Accountant in order to practice the said profession.
• The Profession of Accountancy

The following are the categories in practicing accountancy as a profession:

1. Private Accounting
• it provides accounting services to private companies.
• the accountant may or may not be a CPA.
• he is specialized in one specific task such as budgetary accounting, internal auditing, management accounting, etc.
Comptroller/Controller
• the executive officer in charge of accounting activity.
2. Public Accounting
• it provides accounting services to the general public.
• he is Certified Public Accountant by profession.
• he renders services such as taxation, auditing, management advising etc., to the clients.
3. Government Accounting
• accountants who are employed in any government units such as LGU's, Bangko Sentral ng Pilipinas, Bureau of Internal
Revenue etc.
• they render services as auditor, budget officer or consultant in government offices.
5. Research and Education
Accountants
• who impart knowledge, expertise and skills to schools, university, and review centers as instructors, reviewers or researchers.
• only CPAs can practice this profession. They are required to enhance their knowledge through continuous education.

Specialized Accounting Fields

1. Auditing
field of accounting that reviews and investigates any aspect of a business, whether financial or nonfinancial in nature
Auditor
• is known to be the one responsible in auditing activities.
• are fully trained to examine whether the financial statements are in accordance to generally accepted accounting principles
(GAAP)
• give opinion as to the accuracy and fairness of presentation of accounting data.
2. Tax Accounting
• field of accounting specialized in offering advice on tax and calculating tax liability and completing tax returns.
• offer advice on tax efficient business decisions.
• mostly practiced by public accountants.
3. Management Accounting
• field of accounting that examines and provides cost information to the internal management for the purposes of planning,
controlling and decision making.

4. Cost Accounting
• field of accounting that is responsible to classifying, recording and appropriate allocation of expenditure
• it is the main principle of management accounting.
5. Financial Accounting
• field of accounting that involves preparation and interpretations of financial statement primarily concerns for external users.
6. Government Accounting
• field of accounting that deals on proper use the public funds for the service of the people and not for profit. This is commonly
used in non-profit organization.

Generally Accepted Accounting Principles (GAAP)

• the rules, procedures and practices came to be known as generally accepted accounting principles (GAAP).
• encompasses the conventions rules, procedures practice and standards followed in the accumulation, preparation and
presentation of accounting data in the financial statements.

Qualitative Characteristics of Financial Statement

1. Relevance
• useful information should have the capacity to make a difference in the decision- making process of entrepreneurs and
managers.
• should help data users in predicting the outcome of different business undertakings.
• is affected by its nature and materiality
Non-Material Transaction
• cannot influence a business decision thus it isn't relevant.
2. Reliability
• refers to the degree of confidence data users put on the faithfulness and truthfulness of the financial accounting information.
• an attribute of financial information making it neutral, free from bias and error and complete.
Concept of Prudence or Conservatism
• has a direct impact upon the reliability of the financial information.
3. Understandability
• requires that financial accounting information must facilitate understanding.
• it should be intelligible and comprehensible
• it can be flexible and be understood by not just business executives and stockholders but as well as the general public.
• it should be presented and expressed in business language that all data users understand.
4. Comparability
• ability to compare, to bring together financial accounting information for the purpose of noting similarities, difference and to
monitor the growth of the business entity.
• should be comparable horizontally and dimensionally
• should be comparable within the entity and across entities.
Accounting Concepts
• rules of accounting that should be followed in preparation of all accounts and financial statements.

Four fundamental concepts

1. Accruals concept
• revenue and expenses are recorded when they occur and not when the cash is received or paid out.
2. Consistency concept
• continuously choosing the same accounting method for the entire operation of the business, that method must not be changed
unless there is a sound reasons to do otherwise.
3. Going concern
• It is a basic accounting principle that assumes a business entity will continue to operates in foreseeable future.

4. Prudence concept (also conservation concept)

Prudence
• is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not
understated. There are transaction or events that are uncertain. In order to maintain the relevance of information, it must be recorded
on time, and must estimate required judgment for its uncertainty.
5. Time period
• it is the assumptions that at have indefinite life of business divided into time periods or accounting period for the purpose of
preparing financial statements
• can be prepared on a monthly basis, every three months (quarterly), six months (semi-annual), twelve months
(yearly/annually).
An accounting period can be calendar year, fiscal or normal business year.
Calendar Year
• starts the operation of the business from January to December.
Fiscal Year
• a 12-month period, starting any month of the year except for January.
Normal Business Year
• is also the 12-month operation that ends any month the year when the business is at lowest point of the business or slack
point of the season.
Cost basis
• asset value recorded on its original acquisition cost and not on its market value.
Business entity
• business entity treated as a separate and distinct from its owners or forms other business units.
Full disclosure
• financial statements should disclose relevant data necessary in decision making.
Lower of cost or market value
• inventory is valued either at cost or the market value, whichever is lower;
Matching
• transactions affecting both revenues and expenses, should be recognized in the same accounting period.
Materiality
• the relevance of the information to influence the decision making. It is the impact of the ability of the information to affect the
decision of the users of financial statement, whether it involves amount of the money or the importance of the occurrence of the events.
Unit of measurement
• all business transaction should be measured on its equivalent monetary value.
• all financial data should be recorded with a common unit of measure.
Objectivity
• financial statements should be based only on verifiable evidence, including an audit trail.

Accounting Reports
Accounting information
• is very important for the stakeholders because it holds qualitative and quantitative information useful in economic decision
making of the entity.
• All financial information are well presented and summarized in the so-called financial statement. Valix (2012) defined financial
statement as "the means by which information accumulated and processed in financial accounting is periodically communicated to the
users. In other words, the financial statements are the end product or main output of financial accounting process."

It is necessary to prepare the financial statement in interim periods for internal purposes but it is a must to prepare the statement every
year.

Purpose of Financial Statements

Financial statements presentation purports the following reasons, (Valix 2012), stated;
1. It provides information about the financial position, performance and cash inflows of an enterprise that is useful to wide range
of users in making economic decisions.
2. It shows the results of the management's stewardship of the resources entrusted to it.
3. It provides information about an enterprise's assets, liabilities, equity, income and expenses, including gains and losses and
cash flows.
The financial statement is composed of the following:
• Balance Sheet
• Income Statement
• Statement of changes in equity
• Cash flow statement
• Notes of Financial Statement
Balance sheet
• report showing the financial position of a company on a particular date.

Three Elements
• Assets
According to ASC SFAS No. 1, assets are classified into two namely; current assets and non-current assets.
Assets are current when it is expected to be realized in or held for sale of consumption in normal course of sale consumption in normal
course of enterprise's operating cycle. It is held primarily for trading purposes, or for the short term and expected to be realized when
12 months of the balance sheet.
Operating Cycles
• are time between the acquisition of material put into process and realization in cash and an instrument that is readily
convertible to cash.
Account Titles
• are assigned name and titles for the accountant and used for conversation for ease of reference. The following are the
account titles used in current and non-current assets;
• Cash
is any medium of exchange that a bank will accept at face value. It includes coins and currencies, checks, money orders and bank
drafts.
• Accounts Receivables
are claims against debtors, customers or clients arising from services rendered on account and the sale of merchandise on account.
• Notes Receivables
are claims against debtors, customers or client for the services rendered evidenced by written promise to pay issued by the debtor.
• Merchandise Inventories
are goods on hand available for sale.
• Supplies/Supplies on Hand
are consumable goods used in the course of business, represents the cost of supplies on hand. It can be classified as office or store
supplies, papers, pencils, pens, folders etc. are the examples.
• Prepaid Expenses
are expenses paid in advance. Example: six months rental paid in advance (Prepaid rent), one year insurance premium (Prepaid
Insurance).

Noncurrent Assets
• The ASC states that Noncurrent Assets are "all other assets not classified as current should be classified as noncurrent."
Property, Plant and Equipment/Fixed Assets
• Per PAS # 16. These are the tangible assets that are held by enterprise for use in the production or supply of goods and
service or for rental to others for administrative purposes which are expected to be used during more than one period.
Accumulated Depreciation
• is an account that contains the sum of periodic depreciation charges.
• a contra-account that represents the whole amount from depreciation expenses charged in the past and current periods.

Equipment
• are tangible assets which are tools or instruments used in the operation of business. It has its own specific design and style to
handle activities both for production and administrative purposes. It can be classified as store equipment or office equipment. They
include computers, air-conditioning units, calculator, typewriter, cash register, and other similar assets.
Delivery Equipment
• include assets used for transporting merchandise.
Machinery
• is tangible assets that has its own system to work in order to produce products and to provide services to customers.
Furniture and Fixtures
• are properties owned by the business which are not part of the building property. quickly depreciate compared to other assets.
• include the following: office tables, filing cabinets, chairs, showcases and other similar items used in the operation of business.
Intangible Assets
• are the identifiable non-monetary assets without physical substance.
• provide future economic benefits to the company
• include franchise, copyrights, patent trademarks and computer software.
• Liabilities
• it is defined by ASC Framework as "present obligations of an enterprise of which is expected to result in an outflow from the
enterprise arising from past transactions or events, the settlement of which is expected enterprise or resources embodying economic
benefits
• are debts and obligation of the business to creditors which is not recognized unless incurred.
• it can be settled through cash or promissory note.
Current Liabilities
• it is a present obligation that is expected to be settled in the normal operating cycle of the business
• is due to be settled within one year from the balance sheet.

The following are account titles used in current and non-current liabilities;
Accounts Payable
• are the amount due to creditors for assets acquired in account.
Notes Payable
• are the amount due to creditors supported by promissory note
Salaries Payable
• are unpaid salaries to the employees at the end of the accounting period.
Taxes Payable
• are present obligation due to the government.
Interest Payable
• are interest incurred on the loan but they are not yet paid at the end of the period.
Non-current Liabilities
• It is long term liabilities expected to be settled for more than a year.
Mortgage Payable
• are long term debts secured by collateral.
Capital/Equity: (Owner's Capital)
• is the account that represents the equity or claims of the owner on the assets of the business
• it is the residual interest in the assets of the business. It is the difference of total assets and total liabilities.
Owner's Drawing account
• charged to the owner's drawing are cash or other assets withdrawn or taken by the owner form the business for personal use.
Income Statement
• a report showing the financial performance of an enterprise for a given period time
• shows the income results and the expenses incurred during the operation of the business.
Revenue Or Income
• defined as "gross inflow of economic benefits during the period in the form of inflows or enhancement on assets or decrease
in liabilities that results in increase in equity, other those relating to contributions from the owner or owners." (ASC)
• income earned in providing services to customers and from the sales of merchandise as well.

The following are the common income titles used:

Sales
• are total sales of merchandise sold.
Professional fee
• income is income earned after rendering professional services such as CPA's, doctors, lawyers.
Rent Income
• is the amount of lease/rental earned for the period.
Service Income/Revenue
• is the amount of income earned from services rendered from service concern business.
Interest Income
• is the amount earned for lending money.
Expenses
• the "gross outflow of economic outflow result benefits during the period in the course of ordinary activities when these results
in decrease in equity other than those relating to distribution owners." (ASC)
• cost incurred during the course of business.
The following are the account titles used in expenses:
Cost of sales
• is the cost of goods purchased and sold merchandise or sold manufactured and sold.
Advertising expense
• are expenses incurred to promote the product of the business.
Salesmen's salaries
• are the compensation given to sales agent.
Salesmen's commission
• is the incentive given to sales agents based on their total amount of sales earned.
Salesmen's travelling expenses
• are travelling allowances given to sales agents.
Office salaries
• are compensations given to administrative employees.
Supplies expense
• are the number of supplies used during the operation of business.
Taxes
• are governmental duties incurred in the current period.
Utilities expense
• are expenses incurred for light and water consumed during the operation of business.
Repairs and maintenance
• are expenses paid for repairing the assets of the business.
Bad debts
• are the estimated number of losses from uncollectible accounts of the business.
Depreciation
• expense is the allocated cost of fixed assets in the current period.
Statement of Owner's Equity
• is a report that summarizes the changes to equity in a given period time
• accounts that affect owner's equity are the following: changes to equity, income/losses, drawing account.
Statement of Cash Flows
• is the report that shows the cash inflow and cash outflow which resulted from three business activities; operating, investing
and financing activities during the period.
Cash Inflows
• are receipts or increase in cash balance while
Cash Outflow
• is disbursement/payment out of cash or decrease in cash as of balance sheet date.

Operating activities
• involved the production of merchandise and the sale of goods or services to customers.
Investing Activities
• transactions that involve making and collecting loans or that involve purchasing and selling plant assets, other productive
assets and the investments
Financing activities
• are transactions that involve proceeds of equity securities, short term/long term borrowings, payment of dividends to investors,
etc.

Branches of Accounting
Common Branches of Accounting
• Financial Accounting
It is the branch of accounting that focuses on general-purpose financial statements.
• General Purpose Financial Statements
cater to the common needs of external users, primarily the potential and existing investor, and lenders and other creditors.
• Management Accounting
Involves the accumulation and communication of information for use by internal users.
• Management Advisory Services
 Is an offshoot of management accounting.
 includes services to clients on matters of accounting, finance, business policies, organization procedures, product cost,
distribution, and other phases of business conduct and operations.
• Government Accounting
Refers to the accounting for the government and its instrumentalities, focusing attention on the custody of public funds, the purposes to
which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds.
• Auditing
Involves inspection of an entity’s financial statements or business processes to ascertain their correspondence with established criteria.
• Tax Accounting
It is the preparation of tax returns and rendering tax advice, such as the determination of tax consequences of ascertaining proposed
business endeavors.
• Cost Accounting
It is the systematic recording and analysis of the costs of materials, labor, and overhead incident to the production of goods or
rendering of services.
• Accounting Education
 Refers to teaching accounting and accounting-related subjects in an organized learning environment.
 It is the process of facilitating the acquisition of knowledge and skills regarding one or more of the other branches of
accounting.
• Accounting Research
 Pertains to the careful analysis of economic events and other variables to understand their impact on decisions.
 Includes a broad range of topics, which may be related to one or more of the branches of accounting, the economy as a
whole, or the market environment.
Forms of Business Organizations
• A business is an activity where goods or services are exchanged for money.
• A person who is engaged in business is called an entrepreneur or businessman.

Businesses in the Philippines are organized in one of the following:

Sole or Single Proprietorship
• A business owned by only one individual.
• It is the simplest form of business organization.
• The business owner is called “sole proprietor.”
• It is registered with the Department of Trade and Industry (DTI).

Partnership
• A business owned by two or more individuals who entered into a contract to carry on the business and divide among
themselves the earnings therefrom.
• It is registered with the Securities and Exchange Commission (SEC).
Corporation
• More than one individual owns it.
• Unlike a partnership, it is created by operation of law rather than contract.
• Ownership in a corporation is represented by shares of stocks. The owners are called stockholders or shareholders.
• It is an artificial being or a juridical person.
• In the eyes of the law, it is like a person separate from its owners.
• It can transact on its own, have its properties, incur its obligations, and sue or be sued.
• Incorporators (founders) shall not be more than 15.
• However, it can have as many stockholders as its authorized capitalization permits.
• A corporation is registered with the Securities and Exchange Commission (SEC).
Cooperative
• Owned by more than one individual.
• However, it is formed in accordance with the provisions of The Philippine Cooperative Code of 2008.
• The owners of a cooperative are called members.
• It is an association of individuals who joined together to contribute capital and cooperate to achieve certain goals.
Example:
A group of farmers may form a cooperative to acquire delivery trucks to be used in transporting their produce to the market. If the
cooperative earns profit (net surplus), a farmer can recover his costs through patronage refunds.
• Another concept is that members need to patronize the cooperative’s goods or services.
Patronage refunds
• Pertain to the profit that a cooperative returns to its owners.
• A member who has not patronized any of the services of the cooperative for an unreasonable period may be removed from
the cooperative upon majority vote of the board of directors.
• It also has juridical personality similar to a corporation.
• Founding members shall not be less than 15 individuals.
• However, a cooperative can have as many members as its by-laws permit.
• It is registered with the Cooperative Development Authority (CDA)

Types of Business According to Activities

The following are the major types of business according to the activities they undertake:
1. Service Business
• It offers services as its main product rather than physical goods.
• May offer professional skills, expertise, advice, lending service, and similar services.
Examples:
• Schools
• Professionals (accounting firm, law firm, etc.)
• Hospitals and clinics
• Banks and other financial institutions
• Hotels and restaurants
• Transportation and travel (travel agency, etc.)
• Entertainment and event planners.
2. Merchandising Business/Trading
Buys and sells goods without changing their physical form.
Examples:
• General merchandise resellers (grocery stores, department stores, hardware stores, pharmacies, online stores, sari-sari
stores, etc.)
• Distributors and dealers (rice wholesalers, vegetable dealers, 2nd hand dealers, etc.)

3. Manufacturing Business
• One that buys raw materials and processes them into final products.
• Changes the physical form of the goods it has purchased in a production process.
Examples:
• Car manufacturers
• Technology, food processing companies
• Factories
Some businesses, called hybrid businesses, engage in more than one type of activity.
Example: A restaurant uses ingredients to cook meals (manufacturing), sells Coca-Cola drinks (merchandising), and serves food to
customers (service).
• Hybrid businesses are classified into one of the major types based on the activity that is most in line with the business’s
purpose.
• Restaurants are expected to fill-in customer orders and provide dining services; thus, they are more of a service-type
business.

Accounting Concepts and Principles

• Accounting concepts and principles (assumptions or postulates) are a set of logical ideas and procedures that guide the
accountant in recording and communicating economic information.
• They serve as a guide in the development of new practices and procedures.
• Provide reasonable assurance that information communicated is prepared in a proper way.
Economic Entity Assumption
• Can also be called “Separate Entity Concept.”
• Assumes that all of the business transactions are separate from the business owner’s personal transactions.
Example: Dr. Teng has two businesses, a skin clinic and a spa. Both businesses should be considered as separate entities.
What should happen to the businesses and Dr. Teng's personal expenses? Can be mixed or separated: SEPARATED.
Problem: Mr. Alex Cruz, the owner of Bilis Serbisyo Repair Shop, bought school supplies for his son using his own money. Should we
record this transaction in the accounting books of the business? NO.
Historical Cost Concept/Cost Principle
• In this concept, assets are initially recorded at their acquisition cost.
• All assets acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the
prevailing market value or future value.
Historical Cost/Cost Principle:
Sellers Amount of Computer Unit
Company X: P 42,000.00
Company Y: P 40,000.00
Problem: Bilis Serbisyo Repair Shop bought one computer unit for P42,000.00 from X Company, but could have been purchased at
P40,000 from Company Y.
• The shop should record the transaction at? P 42,000.
Going Concern Assumption
• A business entity is assumed to remain in existence for an indeterminate period.
• Assumes that a company will continue to exist long enough to carry out its objectives and will not liquidate in the foreseeable
future.
• Opposite of this is liquidating concern.
Matching (Association of cause and effect)
Under this, some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.
Matching Principle
• Sales salary expenses should be reported in the period when the sales were made.
• Wages to Bilis Serbisyo employees are reported as an expense in the week when employees worked, not in the week when
the employees are paid.
• Gasoline expenses are charged to the period when the service was rendered or the goods delivered.
Problem: ABC Company received its electricity bill on April 6, 20xx. The due date of the said bill will be on April 30, 20xx. ABC
Company paid the bill on April 26, 20xx. When should the expense be charged? April 6, 20xx.

Accrual Basis Assumption

• Under the accrual basis of accounting, economic events are recorded in the period in which they occur rather than at the point
in time when they affect cash.
Revenue
• Is recorded in the period it is earned, regardless of the time the cash is received or collected.
Expense
• Is recognized and recorded at the time it is incurred, regardless of the time that cash is paid.
Prudence (Conservatism)
• Observes some degree of caution when exercising judgments needed in making accounting estimates under conditions of
uncertainty.
• If the business needs to choose between a potentially unfavorable versus potentially favorable outcome, the accountant
chooses the unfavorable one.
Example:
• Assets and revenue are intentionally reported at figures potentially understated.
• Liabilities and expenses are overstated.
• If there is uncertainty about incurring loss, accountants are encouraged to record it.
• If there is a possibility of a gain, the company is advised to ignore it until it occurs.
Time Period
• The life of an economic entity can be divided into artificial time periods for the purpose of providing periodic reports on the
economic activities of the entity.
• Means that financial statements are prepared at equal time intervals.
• An annual accounting period may follow a calendar or fiscal year.
• A period shorter than 12 months is called an “interim period.” It can be a month, quarter, or semi-annual.
Time-Period Assumption:
• Calendar Year: Twelve-month period that ends on December 31.
• Fiscal Year: Twelve-month period which may or may not end on December 31.
• Natural Business Year: Twelve-month period which ends on the month when the sales activities of the company are at their
lowest.
Stable Monetary Unit (Monetary Unit)
• Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure, which is the peso in the
Philippines.
Materiality Concept
• Financial reporting is only concerned with information significant enough to affect decisions.
• An item is considered significant if knowledge of it would influence prudent users of the financial statements.
Example:
• Items of insignificant amounts such as paper clips can be charged outright to expenses.
• Big companies round-off amounts in their financial reports. P 323,487.679 may be reported as P 323,488.
Cost-benefit (Cost constraint)
• The costs of processing and communicating information should not exceed the benefits to be derived from the information’s
use.
Example:
• Mr. Alex Cruz, the owner of Bilis Serbisyo Repair Shop, discovered that his chief mechanic was stealing collection from his
customers.
• The total amount is suspected to be over P10,000, but Mr. Cruz is not sure. It is estimated that he would pay his accountancy
and attorney P25,000 to dig through his records and discover the exact amount of the theft.
• In this case, it would not be beneficial for him to do further research and sue his employees.
Full Disclosure Principle
• Related to both the concepts of materiality and cost-benefit.
• The business should include sufficient information to permit the stakeholders to make an informed judgment about the
financial condition and performance of the enterprise.

Consistency
• Requires a business to apply accounting policies consistently and present information consistently from one period to another.
• It can only be changed if it is required by the standard. Any change must be disclosed.
Objectivity
• Requires a business to have some form of impartial supporting evidence or documentation.
• It also entails that bookkeeping and financial recording be performed with independence, free of bias and prejudice.
Objectivity Principle
• The purchase of merchandise from a vendor requires an invoice to support the transaction. This invoice should be approved
by the BIR.
• Utility expenses must be supported by a Statement of Account from utility companies.