RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

The Accounting Principles

BASIC CONCEPTS AND PROCEDURES

COURSE MODULE | BA-AC101 | 2021

Accounting Principles
 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

MODULE - 1

THE ACCOUNTING PRINCIPLES

Basic Concepts and Procedures

STRUCTURE:

1.1 Learning Outcomes

1.2 Introduction
1.3 History of Accounting
1.4 Business, Its Motive and Role in Society
1.5 Forms of Business
1.6 Types of Business Operations
1.7 Types of Business Activities
1.8 Accounting vs. Bookkeeping
1.9 Accounting Defined
1.10 Steps of Accounting
1.11 Meaning and Scope of Accounting
1.12 Users of Financial Information
1.13 Types of Accounting and Reports Prepared
1.14 Accounting Information System
1.15 Overview of the Financial Reports
1.16 Summary
1.17 Self-Assessment Questions
1.18 Exercises/Quizzes
1.19 References

1.1 OBJECTIVES

After going through this lesson, you will be able to:

 Describe the role of accounting in your personal life.
 Describe the role of accounting in business.
 Define business, and explain its motive and role in society.
 Describe the nature of a business, its form of organization and type of
operation.
 Describe the role of management in business.
 Define accounting and explain its relevance to stakeholders.
 Identify the stakeholders and describe their role as a decision maker in
business.
 Define accounting information system and discuss the fundamental system
principles.
 Discuss the contents of the financial reports and explain the financial
information.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

1.2 INTRODUCTION
Every person performs some kind of economic activity. As a student, you
actually encounter accounting in your daily routine not knowing that you are doing
some accounting tasks. Normally, you get an allowance from your parents, and use
this to pay for certain expenses like transportation fare, food and school supplies,
among others. At the end of the day, some of you may have totally consumed your
allowance while others may have saved something and plan to use this in the future.
This process of receiving money and spending it wisely is called Budgeting which is
one important area in accounting.
When you board a public utility vehicle, be it a jeepney or a bus you pay for
fare. All the fares received by the driver represent his Revenues. He has to spend
for gasoline, vehicle repairs, food and a fee called boundary which is paid to the
operator or owner of the vehicle. These would be his Expenses. The excess of his
total revenues over the expenses will be his take home pay called Profit or Net
Income.
When you pay for food bought from the school’s canteen this represents
their revenue. Their expenses would be the salary of the staff, electricity, water and
the supplies that they purchased such as meat, pork, fish, fruits and vegetables.
Again, the amount left after deducting the expenses from the revenues would be the
canteen’s net earnings or net income.
On another perspective, let us talk about your net worth. We are talking
about wealth which is in the form of properties or assets that you own such as cash,
cars, equipment, jewelries, and real estate (land and building). If you do not owe
anybody, that means you have no obligations to pay, then this wealth is you net
worth.
How much is you net worth? To measure net worth or wealth, you have to
put a value or price to the assets you own such as the following:

Cellphone ₱ 10,000
Laptop 40,000
Dresses 12,000
Shoes 4,000
Bike 15,000
Jewelries 15,000
TOTAL ₱ 96,000
Total assets which represent your net worth amounts to ₱96,000. Suppose
you purchased the laptop using a credit card? Then not all your assets really belong
to you as the credit company has a claim over it until it is fully paid. The obligation to
the credit company is called Liability. Deduct the liability of ₱40,000 from the total
assets of ₱96,000, your net worth or the assets that belong to you is only ₱56,000.
Net Worth is important! For one, a big net worth means you have a stable
life. Second, knowing how much is your net worth helps you plan on how to make it
grow. Knowing your net worth every year will give you a clear picture of where your
finances are going. Has it been growing (if you have more assets than liabilities) or

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

deteriorating? Maybe you have a lot of credit card debts and you don’t have enough
assets to pay for these. You lose self-esteem when you are hounded by many debts.
Think twice before you use your credit card or borrow from the bank as this will
decrease you net worth!
How to raise your net worth? As a student, you will probably have a low
net worth but you can build it up by not overspending and by keeping part of your
money in the bank so it can earn interest. But if you are enterprising, the best way to
make your money and other resources grow is to use it for a business venture. Think
of goods that you can sell to your classmates and friends, or think of how you can
put to good use your artistic or creative skills. If you are good in baking, you can start
your own business venture and sell cookies or cupcakes to your neighbors or
classmates.

1.3 HISTORY OF ACCOUNTING

According to some beliefs, the very art of writing originated in order to record
accounting information. Though this may seem to be an exaggeration, but there is no
denying the fact that accounting has a long history. Accounting records can be
traced back to the ancient civilizations of China, Babylonia, Greece and Egypt.
Accounting was used to keep records regarding the cost of labor and materials used
in building great structures like the Pyramids.
The first accounting book was written by Cotrugli in Naples and the modern
double entry bookkeeping system could be traced from the book prepared in 1494 by
an Italian mathematician, Fr. Luca Pacioli, entitled Summa de Aritmetica.
In the Philippines, bookkeeping was introduced by the Spaniards and the
bookkeeper was called Tenedor de Libro. But even before the Spaniards came,
trade was already flourishing between the Philippines and the other Asian countries
and records of goods being bartered were kept by the traders.

1.4 BUSINESS, ITS MOTIVE AND ROLE IN SOCIETY

A business is an economic unit that engages in buying and selling of

goods or services. A major concern of a business is how to use its resources;
machines, raw materials, labor skills, number of men to employ. In a business
endeavor, success is possible when money, machines, men and materials are used
efficiently at the least possible cost. Most often success is measured in terms of
profit and increase in funds.
When a person wants to put up his own business, the primary reason is
to earn profit. Profit or income is obtained when the amounts received from
customers and clients are higher than the cost of goods or services incurred or used
up. Profit generates more resources or funds for the business. With more funds, it is
possible for business to expand. You need more workers and this will create more

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job opportunities. Subsequently, more properties are acquired, more goods are
produced and sold, and more taxes are paid to the government.
Money received by the government from these taxes help fund projects
such as construction of roads, bridges, and other infrastructures which facilitate
transportation of people, goods and services. A flourishing business surely
contributes to the country’s economy.

1.5 FORMS OF BUSINESS

A business may be organized and take one of the following three legal
forms:
1. Sole proprietorship
The vast majority of small businesses start out as sole proprietorships. These
businesses are owned by one person, usually, the individual who has day-to-
day responsibility for running the business. Most sole proprietor-owned
businesses are beauty parlors, dress shops, barbershops and bakeries.

Advantages
 Only a small amount of capital is needed
 Its operation can be managed easily by the proprietor.
 The owner or proprietor gets all the profits.
 Ease in formation since only a minimum requirement to legally operate
is needed.

Disadvantages
 Difficult to expand the business and sell different products or services
because of low capital and only one owner-manager.
 It has no indefinite life. Owner may just one day want to close it, or
become incapacitated or die.
 Owner has unlimited liability. It means that if the business is unable to
pay its debt, the bank or creditor can attach the owner’s personal
properties.

2. Partnership
This is a business owned by two or more persons called partners who
contribute money, property and talent into a common fund for the purpose of
sharing profit among themselves. Most often the partners are also the
managers. Professionals such as lawyers, accountants, engineers and
doctors usually put up a partnership or consultancy firm.

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Cities of Mandaluyong and Pasig

Advantages
 Ease in managing the business and in attracting clients because of
more owners involved.
 Management is more efficient because of division of responsibilities
among partners.

Disadvantages
 No indefinite life since disagreements could easily arise because of
many owners involved.
 Partners, like sole proprietors, have unlimited liability.

3. Corporation
A business organized as a separate legal entity from the owners. It means
that it can conduct business by itself – enter into contracts, bus and sell
properties and stocks. An investor simply buys shares of stock in a corporation
and become a shareholder. It is managed by a Board of Directors selected
by the shareholders from among themselves.

Advantages
 More capital can be raised because of the large number of
shareholders.
 Can afford to hire experts who can efficiently manage and operate the
business.
 Can exist for an indefinite period of time with a legal life of fifty years,
which can be renewed by the SEC for another fifty years.
 More stable than a partnership because it is not affected by the
withdrawal of a shareholder. A shareholder who wants to withdraw from
the corporation simply sells the shares owned to others or can even sell
the shares back to the corporation.
 Higher amounts of profits may be obtained because of its large
amount of resources used.

Disadvantages
 A shareholder, unlike a sole proprietor or a partner, has no unlimited
liability. There is therefore a higher risk involved on corporate debts
since these can only be paid out of corporate funds.
 It is subject to more legal and tax requirements.
 Abuse of power by the Board of Directors could certainly affect the
welfare of the corporation and its shareholders.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

1.6 TYPES OF BUSINESS OPERATIONS

A business earns profit depending on its type of operation. There are at

least three general lines of operation:

1. Service Business
A service business is one which provides service, for a fee, to clients or
customers.

Some more examples of service businesses are:

 Computer service specialists

 Airlines
 Banks
 Maintenance or repair services
 Theaters
 Corporate event planners
 Bookkeepers
 Pet sitting services

2. Merchandising Business
A merchandising business is one which buys and sells goods or merchandise.
People generally shop at merchandising businesses to purchase clothes, food, or
electronics.

Some of the most common establishments in this sector are:

 Supermarkets and grocery stores

 Clothing departments

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 Auto dealerships
 Bookstores
 Craft stores
 Hardware stores

3. Manufacturing Business
A manufacturing business uses raw materials, labor, and machinery to assemble
or create finished goods. These companies will also generally use advanced
technology and assembly lines to make their products.

The most popular brands in this sector, include-

 Volkswagen Group
 Apple (electronics)
 Nestle
 Sony
 Procter & Gamble (consumer goods)
 PepsiCo
 Unilever
 Pfizer (pharmaceuticals)

1.7 TYPES OF BUSINESS ACTIVITIES

Activities of the business include operating activities and non-operating

activities such as investing activities, and financing activities.
1. Financing activities include the inflow of cash from investors, as well as
the outflow of cash to shareholders as dividends as the company
generates income. Other activities which impact the long-
term liabilities and equity of the company are also listed in the financing
activities.
2. Investing activities include purchases or sales of an asset (assets can
be land, building, equipment, marketable securities, etc.), loans made to
suppliers or received from customers, payments related to mergers
and acquisitions, and dividends received.
3. Operating activities include the production, sales, and delivery of the
company's product as well as collecting payment from its customers. This
could include purchasing raw materials, building inventory, advertising,
and shipping the product.

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Cities of Mandaluyong and Pasig

1.8 ACCOUNTING VS. BOOKKEEPING

Bookkeeping may be defined as "the art of recording the business

transactions in the books of accounts in a systematic manner." A person who is
responsible for and who maintains and keeps a record of the business transactions
is known as Bookkeeper. His work is primarily clerical in nature.
On the other hand, Accounting is primarily concerned with the recording,
classifying, summarizing, interpreting the financial data and communicating the
information disclosed by the accounting records to those persons interested in the
accounting information relating to the business.

1.9 ACCOUNTING DEFINED

The American Accounting Association defines accounting as "the process

of identifying, measuring and communicating economic information to permit
informed judgements and decisions by the users of the information."

1.10 STEPS OF ACCOUNTING

The following are the important steps to be adopted in the accounting

process:
(1) Recording: Recording all the transactions in subsidiary books for purpose of
future record or reference. It is referred to as "Journal."
(2) Classifying: All recorded transactions in subsidiary books are classified and
posted to the main book of accounts. It is known as "Ledger."
(3) Summarizing: All recorded transactions in main books will be summarized for
the preparation of Trail Balance, Profit and Loss Account and Balance Sheet.
(4) Interpreting: Interpreting refers to the explanation of the meaning and
significance of the result of financial accounts and balance sheet so that parties
concerned with business can determine the future earnings, ability to pay interest,
liquidity and profitability of a sound dividend policy.

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(5) Communicating: All financial information is communicated through accounting

reports.
1.11 MEANING AND SCOPE OF ACCOUNTING

COMPANY
accumulates financial data through its various activities

ACCOUNTING
processes the financial data and prepares financial reports

STAKEHOLDERS or USERS
read the reports and make decisions

Accounting as a Language of Business

Accounting is often called the language of business. The main
objectives of Accounting is to safeguard the interests of the business, its
proprietors and others connected with the business transactions. This is done by
providing suitable information to the owners, creditors, shareholders, Government,
financial institutions and other related agencies.

1.12 USERS OF FINANCIAL INFORMATION

Users of financial statements are called stakeholders. A stakeholder is a

person or entity who has a “stake” or interest in the business. Aside from the owners
or investors, the other stakeholders are the managers, lenders, suppliers,
employees, government and customers.
USERS OF ACCOUNTING INFORMATION

INTERNAL USERS EXTERNAL USERS

OWNER OR INVESTOR LENDERS OR CREDITORS

MANAGER SUPPLIERS

EMPLOYEE GOVERNMENT

CUSTOMER

1.13 TYPES OF ACCOUNTING AND THE REPORTS PREPARED

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1. Management Accounting: Internal reports called managerial reports are

prepared for management use. Although management receives the other
reports, they also require additional information such as product cost,
estimate of profit to be earned for a planned project, comparison of two
alternative courses of solving problem, budgets, among others.
2. Financial Accounting: The main source of information of stakeholders or
users are the financial reports or the so-called general purpose financial
statements. These reports are audited by a Certified Public Accountant
who attests to its fair presentation and validity making it reliable and
acceptable by the stakeholders.
3. Tax Accounting: All firms are required to pay taxes to the Bureau of
Internal Revenue (BIR). Tax accounting specializes in the determination of
taxes and preparation of various tax returns required to be filled up by
taxpayers such as Income Tax, VAT, and Percentage Tax.
4. Special Reporting. Some firms, by the nature of their organization/
operation, are required to prepare special reports by certain regulatory
bodies. For example, banks prepare monthly, quarterly and annual reports
to be submitted to Bangko Sentral ng Pilipinas. A business planning must
submit to the Securities and Exchange Commission a Plan of Merger.

Channels of Accounting Information Flow

1.14 ACCOUNTING INFORMATION SYSTEM

Processing of transactions or activities to produce information must be

done in an orderly and efficient manner. Accounting Information System (AIS) can
be classified into two: measurement system (processing phase) and the
communication system (reporting and communicating phase). The processing
phase involves analyzing, measuring, recording, classifying, and summarizing, while
the reporting phase involves the presentation of formal reports which are
communicated to decision makers.

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1.15 OVERVIEW OF THE FINANCIAL REPORTS

There are four financial statements from which vital information can be
extracted:
1. Income Statement – shows how wealth is produced by listing the revenues
earned and expenses incurred by the business.
2. Statement of Owner’s Equity – shows why the net worth changed by listing
the activities that caused it to increase or decrease.
3. Statement of Cash Flows – shows what happened to the cash by
enumerating the activities of cash received and cash used by the business.
4. Statement of Financial Position (Balance Sheet) – shows how the wealth of
the business stands by enumerating the assets, liabilities and net worth of the
business.

1.16 SUMMARY

Accounting can be understood as the language of financial decisions. It is

an ongoing process of performance measurement and reporting the results to

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Cities of Mandaluyong and Pasig

decision-makers. The discipline of accounting can be traced back to very early times
of human civilization. With the advancement of industry, modern day accounting has
become formalized and structured. A person who maintains accounts is known as
the accountant. He is engaged in multifarious activities like preparing financial
statements, facilitating the control process, tax planning, auditing and information
management. The information generated by accountant is used by various groups
like, individuals, managers, investors, creditors, government, regulatory agencies,
taxation authorities, employees, trade unions, consumers and general public.

1.17 SELF-ASSESSMENT QUESTIONS

1. Define accounting. What purpose is served by accounting?

2. Discuss the role accounting to the business.
3. What are the various interested parties which use accounting information?
4. Explain the different types of accounting.
5. Differentiate Financial Accounting, Management Accounting and Cost
Accounting.

1.18 EXERCISES/QUIZZES

Exercises/Quizzes will upload on our Google Classroom so keep on monitoring

the classroom to be updated to the latest announcements.

1.19 REFERENCES

 21st Century ACCOUNTING PROCESS by Zenaida Vera Cruz Manuel (2015 Edition)
 Simplified ACCOUNTING FOR BUSINESS by Zenaida Vera Cruz Manuel (2019 Edition)

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RIZAL TECHNOLOGICAL UNIVERSITY
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To get a copy of this book,

you can message Mr.
Manuel. Kindly get his
contact number by
approaching your class
instructor.

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