The Basic Accounting Environment
Accounting is part of every organization whether profit or non profit. It touches your life since
you will become part of it in the future as CPAs, managers or administrators. Understanding the
business and forms of organizations is an essential skills for you to address the challenges ahead
.
Accounting standards- are the accounting rules, principles and procedures on how to recognize,
measure, summarize and report accounting information. The end result of accounting is to
provide users with financial statements which will enable them to make informed judgment and
sound economic decisions. In the future, it’s either you are the preparer (the accountant who will
analyze transactions and prepares reports or the user (the one who needs the reports)
Accounting with you as a decision maker
You will have to decide soon.
As an entrepreneur…. Should I set up an internet shop or water refilling station?
As an investor, should I buy Jollibee or San Miguel Corp. stocks?
Bank manager, should i approve the cash loan of Mr. Ben?
Financial manager, how many products to sell to breakeven?
Marketing manager, should our firm spend 500,000 to sell a new product?
All these you need information.
As a student: In budgeting, accounting will play a vital role.
Accounting and business
Accounting is more felt in business than personal. We need accounting information to make a
decision.
How has accounting developed?
2000 BC in the cities of Babylonia, Greece, Egypt and in 3500 bc in Assyria. Taxes were
imposed by the king from the people. In the construction of the pyramids of Egypt, the pharaoh
required a record of the materials, labor and overhead. The first accounting book is written by
Benedetto Contrugli in Naples but the modern day double entry bookkeeping could be traced
from the book prepared in 1494 by an Italian Mathematician, Fr. Luca Bartolomes Pacioli
entitled Summa de Aritmetica, Geometria, Proportioni et Proportionalita. It helped the Iitalian
merchants in their trade and has earned him Father of Accounting.
In the 15th century, the Italian merchants entrusted their properties to their servants.
Assets-properties owned by the merchants
Liabilities (debt) owed to others thus the term debtor and creditor. A debtor is the one who
borrws money or buys goods and services with a promise to pay in the future. A creditor is the
one who lends money or sells services or goods to be collected in the future. Debit and credit
evolved. In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper
Tenedor De Libro. Trade happens. The first licensure examination was given for CPAs in 1923
and the professional association of accountants was established in 1929.
Business, its motive and Role in Society
We interact with business everyday.
A business is an economic unit that controls resources and engages in buying and selling of
goods and services.Profit is obtained when the amount you receive is more than the amount you
paid for the goods and services you sold.
Sources of Capital
*Owner or Investor
Return of capital-getting back what you invested
Return on capital-receives more than the amount you invested
*Borrowing from banks and other financial institutions
Entrepreneur-is one who takes the risk of putting up a business to produce and sell goods and
services. Create new ideas or differentiates a products to entice customers
Business Uncertainty
Risk-element of uncertainty in a business
Careful planning and assessment of the business
Management of a Business
Management- art of managing or directing people and resources as efficiently as possible with a
view of accomplishing the goal of the organization.
Efficiency-requires that the company’s resource inputs (materials and labor) be used at the least
time, effort and cost to produce the required output.
Effectiveness-company’s attainment of its goals.
4 management functions-
Planning-management lines up the activities to be undertaken to accomplish the goals
Organizing-company structure upon which management will work out is plan
Directing and controlling-overseeing the day to day operations of carrying out the planned
activities
Forms of Business Organizations
1. Sole Proprietorship- is an unincorporated business owned by one individual.
Advantages: 1. Easy and inexpensively formed. 2. Subject to few government regulations 3.
Subject to lower income taxes than corporations
Disadvantages: Proprietors have unlimited personal liability for the business debts so they can
lose more than the amount of money they invested. 2. The business life is limited to the one who
created it and to bring in new equity, investors require a change in the structure of the business.
3. Have difficulty in obtaining large sums of capital
2. A partnership- is a legal arrangement between two or more people who decide to do business
together.
Advantages: Established easily and inexpensively., the firm’s income is allocated on a pro-rata
basis to the partners and is taxed on an individual basis. The firm can avoid corporate income
tax.
Disadvantages: Subject to unlimited personal liability, generally, The partner is liable. Unlimited
liability makes it hard to raise big capital.
3. Corporation- is a legal entity created by a state and it is separate and distinct from its owners
and managers. Managed by board of directors and shareholder
Advantages: limited liability, unlimited lives, easier to transfer shares of stocks, easy to raise big
capital.
Disadvantages:taxes-double taxation on earnings.
Types of business activities
Financing-- financing the business. Putting in cash and other resources. Borrow from banks
Investing- acquisition of properties PPE
Operating-earning activities of the enterprise such as selling goods and incurring services or
expenses
Type of business operations
Service business-one which provides services for a fee to clients or customers
Merchandising business-one which buys and sells goods or merchandise
Manufacturing-buys raw materials,forms this to finished products and then sells to customers
Ways of obtaining profit
Service business-cost of the service rendered
Merchandising business-cost of merchandise given
Manufacturing business- cost of the product given
Accounting as the language of business
Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgment and decision by users of the information. The Philippine financial
reporting standards is a compilation of accounting concepts, rules and principles which defines
accounting as a service activity which function is to provide quantitative information primarily
financial in nature, about economic entities that is intended to be useful in making economic
decisions.
Managerial reports which rise to management accounting
Financial reports- main source of information of stakeholders or users thus called general
purpose financial statements- gives rise to the course financial accounting. The FS are audited
by a CPA who assesses its fair presentation and validity making it reliable and acceptable to
users
Stakeholders are users and decision makers
A stakeholder is a person or entity who has an interest in the economic performance of a
business
owner/investor- assess if the business can provide him or her return on and of capital and earn a
profit.
Financial performance- ability of the business to earn profit.
Financial position- indicates the financial wealth of the business
Manager- responsible for the 4 business activities
Lender-assess the ability of the borrower to pay the debt and interest
Supplier-cash or credit terms
Government-taxes, complying with rules and regulations, as a customer to award contracts
Employee-higher wages and benefits, security
Customer- continuously supply the goods and services
External users vs internal users. Direct and indirect
Accounting Information System
- is an orderly way of gathering and processing data so that meaningful information will come
out and reports may be prepared. AIS-involves an orderly way of accumulating and reporting
business transactions through a process of analyzing, measuring recording classifying and
summarizing and from which reports are generated.
Fundamental system principles
Control principle-must possess internal control. IC enumerated the methods and procedures
necessary to monitor the activities of business and ensure efficient operation.
Cost benefit principle- the advantages of installing the system must outweigh its cost
Relevance-information must be reported promptly and must be understandable and useful to
enable users to reach a conclusion and decision.
Compatibility principle-prescribes a system designed to fit the unique characteristics of the
company-its personnel, activities and structure. Simple to complicated AIS.
Flexibility principle-the company's system should be changed when needed to come up with
timely and updated information in response to industry demand, government promulgations,
technological advances and competitive pressures.
Components of an AIS
People- personnel involved in gathering data to preparing and interpreting reports
Documents-in support of the data are gathered in the first phase
Methods-procedures of doing
equipment/devices-to be able to process data and generate information which are then
summarized in the form of financial report
