University of Caloocan City

College of Business and Accountancy

ACC 211: Fundamentals of Accounting – Sole Proprietorship

Lecture 1: Basic Considerations

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Accounting:
• System that measures business activities, processes that information into reports and
communicates the results to decision makers
• 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.
• Process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by the users of the information.
• Art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events which are part at least, of a financial character and interpreting the
results thereof.
• An information system that measures, processes and communicates financial information
about an identifiable economic entity.
Forms of Business Organizations

Sole Proprietorship: this business organization has a single owner called proprietor who
generally is also the manager. Sole Proprietorships tend to be a small service-type businesses
and retail establishment. The owner receives all profits, absorbs all losses and solely responsible
for all debts of the business. From accounting viewpoint, the sole proprietorship is distinct from its
proprietor. Thus, the accounting records of the sole proprietorship do not include the proprietor’s
personal financial records.
Partnership: a contract whereby two or more persons bind themselves to contribute money
property, or industry to a common fund with the intention of dividing the profits among
themselves. Each partner is personally liable for any debt incurred by the partnership. Accounting
considers the partnership a separate organization, distinct from the personal affairs of each
partner.
Corporation: a corporation is a business owned by its stockholders. It is an artificial being
created by law, having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence. The corporation is a separate legal entity.

Types of Business Organizations

Service: Companies perform services for a fee. (Ex. Law firms, accounting firms, salon, and repair
shop)
Merchandising: Companies purchases goods that are ready for sale and then sell these to
customers.
Manufacturing: Companies buy raw materials convert, them into products and then sell the products
to other companies or to final consumers.

Activities in Business Organization

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Financing Activities: Financing Activities are method of an organization used to obtain financial
resources from financial markets and how it manages these resources. Primary sources of financing
for most business are owners and creditors, such as banks and suppliers. Repaying the creditors and
paying a return to the owner are also financing activities.

Investing Activities: Investing activities involve the selection and management of long-term
resources, including the disposal and replacement of these resources that will be used to develop,
produce and sell goods and services. Investing activities include buying of land, building, equipment
and other resources that are needed in the operation of the business and selling these resources
when they are no longer needed.
Operating Activities: Operating activities involve the use of resources to design, produce, distribute
and market goods and services. It includes research and development, design and engineering,
purchasing, human resources, production, distribution, marketing, selling and servicing.
Purpose and phases of accounting
• Recording:
• Classifying:
• Summarizing:
• Interpreting:

Before the effects of transactions can be recorded, they must be measured. In order that accounting
information will be useful, it must be expressed in terms of common denominator – money. Money
serves a both medium of exchange and a measure of value.
To record the business transactions, the time the transaction occurred, the value of the transaction,
and how the transactions should be classified are needed.
To be useful in making decisions, the recorded data must be classified and summarized.
Classification reduces the effects of numerous transactions into useful groups or categories.
Summarization of financial data is achieved through the preparation of financial statement or financial
reports. These usually summarize the effects of all business transactions that occurred during some
period. It is imperative that the result of summarization phase be interpreted or analyzed to evaluate
the liquidity, profitability and solvency of the business organization.
Accounting provides the decision makers with information to make reasoned choices among
alternative uses of scare resources in the conduct of business and economic activities.
Fundamental Concepts
Entity Concept: accounting entity is an organization or a section of an organization that stands apart
from other organizations and individuals as a separate economic unit. Simply put, the transactions of
different entities should not be accounted for together. Each entity should be evaluated separately.

Periodicity Concept: An entity’s life can be meaningfully subdivided into equal time periods for
reporting purposes. This concept allows the users to obtain timely information to serve as a basis on
making decisions about future activities.
Stable Monetary Unit Concept: Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable.

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Basic Principles
Accounting practices follow certain guidelines. The set of guidelines and procedures that constitute
acceptable accounting practice at a given time is GAAP (Generally Accepted Accounting Principles).
• Objectivity Principle: Accounting record and statements are based on the most reliable data
available so that they will be as accurate and as useful as possible. Reliable data are verifiable
when they can be confirmed by independent observers. Ideally, accounting records are based
on information that flows from activities documented by objective evidence.
• Historical Cost: this principle states that acquired properties should be recorded at their actual
cost and not at what management thinks they are worth as a reporting date.
• Revenue Recognition Principle: Revenue is to be recognized in the accounting period when
goods are delivered or services are rendered or performed.
• Expense Recognition Principle: Expenses should be recognized in the accounting period in
which goods and services are used up to produced revenue and not when the entity pays for
those goods and services.
• Adequate Disclosure: Requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity be disclosed in the financial statement.
• Materiality: Financial reporting is only concerned with information that is significant enough to
affect evaluation and decisions. Materiality depends on the size and nature of the item judged in
the particular circumstances of its omission.
• Consistency Principle: the firms should use the same accounting method from period to
period to achieve comparability over time with in single enterprise. However, changes are
permitted if justifiable and disclosed in the financial statements.
User and Information Needs
Investors: need information to help them determine whether they buy, hold or sell.
Employees: are interested in information about the stability and profitability of their employers. They
are also interested in information which enables them to assess the ability of the enterprise to provide
remuneration, retirement benefits and employment opportunities.
Lenders: are interested in information that enables them to determine whether their loans and the
related interest will be paid when due.
Suppliers and trade creditors: are interested in information that enables them to determine whether
amounts owing to them will be paid when due.

Customers: have an interest in information about the continuance of an enterprise, especially when
they have a long-term involvement with, or are dependent on, the enterprise.
Government and their agencies: they require information in order to regulate the activities of the
enterprises, determined taxation policies and as the basis for national income.
Public: Financial statements may assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range of its activities.

Objective of Financial Statements

• The objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an enterprise that is useful to wide range
of users in making economic decisions.
• Financial Statements do not provide all the information especially non-financial.
• Management of the enterprise has the primary responsibility for the preparation and presentation
of the financial statements of the enterprise.

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Accrual Basis
• Under the accrual basis, the effects of transaction and other events are recognized when they
occur and not as cash is received or paid.
• Revenues should be recorded when earned and expenses when incurred.
• Based on GAAP, Financial statement should be prepared on accrual basis.
Cash Basis
• Does not record transaction until cash is received.
• Generally, cash receipts are treated as revenues and cash payments as expense.
Qualitative Characteristics of Financial Statements
Fundamental Qualitative Characteristics
Materiality – Threshold Quality: a threshold quality (or a cut-off point) is one that needs to be
considered first before considering the other qualities of information. If any information does not pass
the test of the threshold, it does not need to be considered further.

Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement. Information is material if its omission of misstatement could influence the
economic decisions of users taken on the basis of financial statements.
Relevance: information has the quality of relevance when it influences the economic decisions of
users
Faithful Representation: to be reliable, the information must represent faithfully the transactions and
other events it either purports to represent or could reasonably be expected to represent.
Completeness: a complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
Neutrality: free from bias. A neutral depiction is not slanted, weighted, emphasized, de-emphasized
or otherwise manipulated to increase the probability that financial information will received favorably
or unfavorably by users.
Freedom from Error: no errors or omission in the description of the phenomenon, and the process
used to produce the reported information has been selected and applied with no errors in the
process.
Enhancing Qualitative Characteristics
Comparability: information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for another period.
Consistency: refers to the use of the same methods for the same items, either from period to period
with in reporting entity or in a single period across entities.

Timeliness: information is available to decision-makers in time to be capable of influencing their

decision.
Understandability: Classifying, characterizing and presenting information clearly and concisely
make it understandable.

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