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941b-1b946497ef84/sections/MyNotebook FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND
MANAGEMENT 1
INTRODUCTION TO ACCOUNTING
• 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.
• expressed in monetary terms.
• an art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions and events, and interpreting the results of. (American Institute of CPAs)
• deals with transactions which are financial in nature, all other transactions that are non-monetary are not
within the scope of accounting

BOOKKEEPING
• confined with the recording of monetary transactions

BASIC FUNCTION OF ACCOUNTING IN BUSINESS:

• generation of relevant and timely financial information for interested parties.
NATURE OF ACCOUNTING:
a. Systematic process – has definite techniques and proper application requires skill and expertise.
b. Art – refers to the design of how something can be performed. It is behavioral knowledge involving
creativity and skill.
c. Service activity – performs specific actions such as identifying, measuring, and communicating financial
information. It must follow logical steps in the
d. accounting cycle - like recording, classifying and summarizing financial transactions and
communicating the results after
e. Information system – a set of interrelated components that work together to achieve a common purpose
and serves as a repository of collected financial data, proposed financial information, and
communicated financial statements.

FOUR ASPECTS OF ACCOUNTING:

1. Recording – writing down of business transactions chronologically in the books of account as they
transpire.
2. Classifying – sorting similar and related business transactions into the three categories of Assets,
liabilities, and owner’s equity.
3. Summarizing – preparing the FS from the transactions recorded in the books of account that are
designed to meet the information needs of its users.
4. Interpreting – representing the qualitative and quantitative financial information about the business
transactions in a language comprehensible to the users of financial statements.

FUNCTIONS OF ACCOUNTING IN BUSINESS:

• help interested users come up with informed decisions
• to support daily operations of the business

Origin of Accounting
• Can be traced from the Renaissance Period.
• From the Italian monk and mathematician Frater Luca Bartolomes Pacioli who wrote Summa de
Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and
 Proportion) which was published in Venice in November 1494. It included a 24-page treatise on
bookkeeping, Particularis de Computis et Scripturiz (Details of Calculation and Recording), specifically
about record keeping and double-entry accounting.
• Aside from Pacioli, there are also other Italian personalities who wrote about double entry accounting
during that time, but it is only his work that had a huge impact on the field of accounting. It is for this
reason that he is regarded as the “Father of Modern Accounting”

Branches of Accounting:
1. PUBLIC ACCOUNTING – the accountant performs or offers to perform any activity that will result in the
issuance of an attest report that is in accordance with professional standards.
A. External Auditing – public accountants examine the financial statements in order to express an
opinion on whether statements have been fairly presented or not. Auditor issues an independent
report of his or her findings.
B. Tax Preparation and Planning Services – the accountant is a tax specialist who is expected to be
an expert about tax revenue regulations and tax laws, wherein they help and advice their clients in
tax planning and preparing tax returns.
C. Management Advisory Services – management consulting is an area in public accounting wherein
they provide financial planning and control, and the development of accounting and computer
systems.

2. PRIVATE ACCOUNTING – involves setting up systems of recording business transactions that are
aggregated into financial statements.

A. Financial Accounting – provides economic and financial information for investors, creditors, and
other external users.
B. Uses a system of reporting designed to meet the information needs of external users.
C. Governed by an established body of standards and principles.
D. Cost Accounting – focuses on accumulating manufacturing costs for financial reporting and
decision-making purposes. It covers the reporting of financial information relevant to manufacturing
operations.
E. Budgeting – provides a detailed collection and reporting of the expenditures and revenues involved
in a business or company operations. This branch tracks the financial details of the firm, including
the money taken in and the money spent by the company and the staff.
F. Accounting Information System – collects and processes transaction data.
G. Tax Accounting – deals with the preparation of various tax returns and doing tax planning for the
business. This is like the tax services done in public accounting.
H. Internal Auditing – reviews the business operations to check if they are complying management
policies.

3. GOVERNMENT ACCOUNTING – used in government offices to record and report financial transactions

4. ACCOUNTING EDUCATION – responsible for training future accountants.

Users of Financial Information:

A. Internal Users:
1. Employees – assess the company's profitability and stability, its consequence on their future salary and
job security
2. Managers – plan, organize and run a business
 3. Owners – provide the capital of the business, need accounting information to help us decide if we will
withdraw or increase our investments and are interested to the Return of Investment (ROI)

B. External Users:
1. Creditors – assess the creditworthiness and the capability of the business to pay its obligations
including the related interests on maturity date.
2. Potential Investors – need information to help them decide whether we should invest or not in the
business, know the potential returns on our investments if we decide to invest
3. Suppliers – use the financial statements of customers to determine whether the debts owed to them will
be paid when due or whether the customer has enough funds to pay the goods to be delivered
4. Customers – interested to know whether the business will continue to honor its product warranties.
5. Regulatory Bodies – want to ensure that the company’s disclosure of accounting information is in
accordance with the rules and regulations set.
6. Public – use the financial information to know how the business helps the economy and whether
employment is available in the company.
7. Tax Authorities – use financial reports to determine the credibility of the tax returns filed on behalf of
the company.
FORMS OF BUSINESS ORGANIZATIONS:
1. Types of Business According to Ownership:

a. Sole Proprietorship - a form of business which is owned by One person

BUSINESS REQUIREMENTS:
• Register the preferred business name with the
DTI. The approved registration should be
renewed every five years
• Secure a barangay permit in the barangay where
the business will be located. This permit should
be renewed every year.
• Apply for a business permit in the municipality
where the business is situated. This permit is
renewable every year.
• Register the business with the BIR. BIR requires
a sole proprietorship business to pay its
registration fee every year.
• Register the business with SSS, PhilHealth, and
HDMF/PAG-IBIG.

b. Partnership - a form of business owned by two or more persons, the written agreement between or among
partners is called articles of co-partnership.

BUSINESS REQUIREMENTS:
• Verify business name with the SSS and SEC.
• File articles of co-partnership with SEC.
• Register the business name with DTI (optional).
• Secure a barangay permit in the place where business
is located (renewable every year).
• Apply business permit in the municipality where the
business is located (renewable every year).
• Register the business with BIR (BIR requires an
annual registration fee).
• Register the business with the SSS, PhilHealth, &
 HDMF.

c. Corporation - required to have 5 to 15 incorporators, is an artificial being created by operation of law,

having
the right of succession and the powers, attributes and properties expressly authorized by law or incident to its
existence articles of incorporation and by-laws that are duly approved by the Securities and Exchange
Commission.

- BUSINESS REQUIREMENTS:
• Verify business name with Securities and
Exchange Commission (SEC).
• Draft and execute the articles of incorporation and
by-laws by incorporators.
• Deposit the cash collected from subscriptions.
• File articles of incorporation and by-laws with the
Securities and Exchange Commission (SEC).
• Register the business name with the Department
of Trade and Industry (DTI) (optional). • Secure a
barangay permit in the place where business is
located (renewable every year)
• Apply business permit in the municipality where
the business is located (renewable every year)
• Register the business with the Bureau of Internal
Revenue (BIR requires an annual registration fee).
• Register the business with the SSS, PhilHealth,
and HDMF

d. Cooperative – owned by a group of individuals who also serve as benefactors to the business endeavor.
requires at least 15 members to function. Board of Directors (BOD) and officers are elected to manage the
business

BUSINESS REQUIREMENTS:
• Prepare general statements to help measure the cooperative’s
chance of success. • Draft cooperative’s by-laws.
• Draft the articles of cooperation.
• Secure bond for accountable officer(s).
• Registrar with Cooperative Development Authority (CDA).

1. Service Business – focuses on providing intangible products,

such as offering professional skills, proposals and expertise.
Examples: Accounting firms, Law firms, schools, medical clinics,
banks, hair salons and the likes.

2. Merchandising - commonly known as the “buy and sell” business.

Products are bought from manufacturers or other merchandisers
and are sold as is at an amount higher than the purchase price.
Examples: grocery stores, hardware, department stores and drug
stores.
 3. Manufacturing - materials are bought to create a new product. Examples: food and garment factories,
car manufacturing companies.

ACCOUNTING CONCEPTS AND PRINCIPLES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

1. Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
2. Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
3. Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
4. Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial
reports.
5. Principle of Non-Compensation: All aspects of an organization's performance, whether positive or
negative, are fully reported with no prospect of debt compensation.
6. Principle of Prudence: Speculation does not influence the reporting of financial data.
7. Principle of Continuity: Asset valuations assume the organization's operations will continue.
8. Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal
quarters or fiscal years.
9. Principle of Materiality: Financial reports fully disclose the organization's monetary situation.
10. Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.

BASIC ACCOUNTING ASSUMPTIONS:

A. Economic Entity – all the business transactions are separated from the owner’s personal transactions.
B. Accrual Basis – under the accrual principle: revenue is recorded at the time it is earned while
expense is recognized and recorded at the time it is incurred.
“Even if Mr. Client does not pay yet the ₱10,000, Mr. Consultant will still record this ₱10,000 as
revenues… because the service was already rendered and therefore income was already earned.”
C. Going Concern – states that a business will exist long enough to carry out its objectives and
commitments and will not liquidate in the foreseeable future.
D. Monetary Unit – states that only transactions that can be expressed in terms of money are recorded.
E. Time-Period – requires a business to complete the whole accounting process of a business over a
specified operating time period.
• Calendar year – starts at January 1 and ends at December 31
• Fiscal year – starts on the first date of any other month except January and ends on the last day of
the twelfth month completing a one-year period
BASIC ACCOUNTING PRINCIPLES:
A. Cost Principle – states that all assets acquired should be valued and recorded based on the original
cost of acquisition, not the prevailing market/future value.
B. Full disclosure – states that all sufficient information must be included in the preparation of financial
statements to permit the stakeholders to make an informed judgement. It is also because of this
principle that “notes” to financial statements are included.
C. Matching Principle – requires that expenses be matched with revenues in order to show the true profit
of the business.
D. Revenue Recognition – revenues are recognized as soon as goods have been sold (delivered to the
customers) or a service has been rendered, regardless of when money is received.
E. Materiality Principle – business transactions that may affect the decision of a user of financial
information are considered important or material, and thus, must be reported properly. Some financial
information might be material to one company but might be immaterial to another.
 F. Conservatism Principle – states that given two options in the valuation of business transactions, the
amount recorded should be the lower rather than the higher value that will result in less effect in the
income and/or less asset amount.
G. Objectivity Principle – requires business transactions to have some form of impartial supporting
evidence or documentation. Examples are receipts, invoice and other documents.
Let us recall and continue with the case of Jose Mercado, the sole proprietor of the photocopying business
which opened on July 1, 2015. For the quarter ended September 30, 2015, the business was able to make
revenues of P50,000 (all in cash) and it was able to incur expenses of P35,000 (all in cash). As of the end of
the quarter, total liabilities amounted to P75,000. Jose Mercado wants to know the business’ total assets and
total owner’s equity. With the help of his friend who is an accountant, he arrived at P75,000 total assets and
P25,000 total owner’s equity. In getting these amounts, he reviewed all the business documents he had kept
for the past three months and reconstructed his statement of financial position as follows:

Assets = Liabilities + Owner’s Equity

Cash ₱ 45,000 =Accounts

Payable ₱ 50,000 +Mercado, Capital ₱ 10,000

Photocopying Equipment ₱ 30,000 = Revenues 50,000

= Expenses (35,000)

Total Assets ₱ 75,000 =Total

Liabilities ₱ 50,000 +Total Owner’s Equity ₱ 25,000

DOUBLE-ENTRY BOOKKEEPING
• a system in which at least one debit entry (left side) and at least one credit entry (right side) are entered
for each transaction
• developed by the Italian scholars of the Renaissance period.

DUALITY
• a fundamental convention of accounting that necessitates the recognition of all aspects of an
accounting equation.
• the underlying concept of the double-entry accounting system.

THE BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNERS EQUITY

Assets must equal the sum of the Liabilities and Owner’s Equity. The equal sign ensures the balance of the
movement in the three main accounts being used in accounting. The equal sign also separates the left side
(debit) from the right side (credit) of the equation. This equality should always be preserved.
ACCOUNT
• an individual accounting record of the movements (increases or decreases) in specific accounts.
CHART OF ACCOUNTS
• a listing of all the accounts and is usually tailored to the operations of the business.
•
•
• a guide to the accountants or bookkeepers in ensuring uniformity and consistency in the use of all
accounts in recording business transactions.

CHART OF ACCOUNTS

100 Assets 400 Revenues

110 Cash 410 Sales

111 Accounts Receivable 411 Sales Returns and Allowances

112 Notes Receivable 412 Sales Discount

113 Interest Receivable 500 Cost and Expenses

115 Merchandise Inventory 510 Cost of Goods Sold

116 Office Supplies 520 Sales Salaries Expense

117 Prepaid Insurance 521 Advertising expense

120 Land 522 Depreciation expense – Store Equipment

123 Store Equipment 529 Miscellaneous Selling Expense

124 Accumulated Depreciation – Store 530 Office Salaries Expense

Equipment

125 Office Equipment 531 Rent Expense

126 Accumulated Depreciation – Office 532 Depreciation expense – Office Equipment

Equipment

200 Liabilities 533 Insurance Expense

210 Accounts Payable 534 Office Supplies Expense

211 Salaries Payable 539 Miscellaneous Administrative Expense

212 Unearned Rent 600 Other Income

215 Notes Payable 610 Rent Income

300 Owner’s Equity 611 Interest Income

310 Capital Stock 700 Other Expenses

311 Retained Earnings 710 Interest Expense

312 Dividends

313 Income Summary

The following are the Five Major Types of Accounts / Accounting Elements Classification:
1. Assets
2. Liabilities
3. Owner’s Equity
4. Revenue
5. Expenses

ASSETS- possessions or valuable resources of the business

• things that add value to the business
• represent probable future economic benefits and arise as the result of past transactions o
events
 • “What the business owns”

Classification of Assets:
Current Assets – assets expected to be held in the business within one accounting period
1. Cash - described money either in paper or coins; includes currencies, coins, bills, and money
substitutes such as checks
2. Trade and Other Receivables
i. Accounts Receivable - collectibles from customers arising from credit sale of goods or
services rendered on account
ii. Notes Receivable - promissory note issued by client or the customer in exchange for
goods/services received as evidence of his/her obligations to pay
iii. Interest Receivable - amount of interest collectible on promissory notes received from
customer and clients
iv. Advances to Employees - certain amount of money loaned to employee’s payable in
cash or through salary deductions.
v. Accrued Income - income already earned but not yet received. c.
vi. Inventory - unsold goods held in the business during the end of the accounting period.
(Applicable in merchandising and manufacturing concern)
3. Prepaid Expenses - expenses paid in advance but not yet incurred or remained unexpired at the end
of the period
a. Prepaid Rent
b. Prepaid Insurance
c. Prepaid Advertising

Non-current Assets (Fixed Assets) – assets expected to be held in the business for more than one
accounting
period.
i. Long-Term Investments - assets held by an enterprise for accretion of wealth through capital
distribution.
ii. Land - a piece of lot or real estate where the business building or structures are placed
iii. Building - an edifice or structure used to accommodate the store, office, or factory of a business in
conduct of its operations
iv. Equipment - includes typewriters, computers, transportation and delivery vehicles, and the like
v. Furniture and Fixtures - includes tables, chairs, counters, display cases, lamp and lighting
fixtures, carpets, and wall decors
vi. Machinery - machines used by the business in the production process (Only used in
manufacturing concern type of business)
vii. Intangible Assets - nonmonetary assets without physical substance (Franchise and Copyright)

C. Contra- Asset Accounts

a. Allowance for Bad Debts - a “contra-asset” which provides possible losses from uncollected
accounts receivable. At the end of the accounting period, it is deducted from the accounts
receivable to get the net realizable value.
b. Accumulated Depreciation - a “contra-asset” deducted from the value of property, plant, and
 equipment.
a. Depreciation represents the wearing and tearing down of a fixed asset over a period
due to its continuous use
b. Accumulated depreciation represents the depreciation of the current year • Land is
NOT subject to depreciation

LIABILITIES- obligations of the firm

• probable future sacrifices of economic benefits which arise as the result of past transactions or
events
• “What the business owes?”

Classification of Liabilities:
A. Current Liabilities – debts expected to be settled within one year a. Trade and Other Payables
a. Accounts Payable – debts arising from purchase of asset or rendering services on
account; “utang”
b. Notes Payable – debts arising from purchase of asset or rendering services on account
evidenced by a promissory note
c. Loans Payable – liability to pay the bank or other financial institution arising from funds
borrowed by the business
d. Utilities Payable – obligation to pay utility companies for services received from them.
(e.g., telephone services, electricity to Meralco, water services to Maynilad)
e. Unearned Revenues – obligations of the business arising from advance payment
received before goods or services are provided to the customer
f. Accrued Expense – expense already incurred but not yet paid
i. Salaries Payable
ii. Utilities Payable
iii. Interest Payable
iv. Taxes Payable
c. Any other type of liability expected to be settled within one year

B. Noncurrent Liabilities – debts which are payable for longer than a year
a. Long-Term Loans Payable
b. Mortgage Payable - long-term debt of the business with security or collateral in the form of
real properties
c. Bonds Payable - certificate of indebtedness under the seal of a corporation specifying the
terms of repayment and the rate of interest to be charged.
d. Any other type of liability expected to be settled after one year

OWNERS EQUITY - owner’s direct investment in the business

- a profit of the business which the owner’s leave for business operations (Retained Earnings)
- Net Assets (Assets – Liabilities)
- creditors on assets, and investment/s of owners.

A. Owner, Capital – account bearing the name of the owner representing the original and additional
asset investments of the owner of the business • This account is increased by net income (or
decreased by net loss) and decreased by withdrawals during the accounting period
B. Owner, Drawing – asset withdrawals made by the owner of the business

REVENUE - the Increase in resources resulting from performance of service or selling of goods.
 A. Service Income (for service entities) - includes revenues earned or generated by the business in
performing services for a customer or client, examples but are not limited to:
a. Legal Fees d. Dental Fees
b. Audit Fees e. Laundry Income
c. Medical Fees f. Consultancy Fees

5. Expenses - the Decrease in resources resulting from the operations of business.

A. Salaries or Wages – include all payments made to employees or workers for rendering services to
a company
B. Utilities Expense – related to the use of electricity, fuel, water and telecommunication facilities
C. Supplies Expense – covers office supplies used by a business in the conduct of its daily
operations.
D. Insurance Expense – expired portion of the premiums paid on insurance coverage.
E. Depreciation Expense – annual portion of the cost of tangible assets such as building,
machineries, and equipment charged as expense for the year.
F. Bad Debts Expense/Uncollectible/Doubtful Accounts Expenses - accounts receivable that a
company does not expect to collect and has written off to income statement as an expense
G. Interest Expense – amount of money charged to the borrower for the use of borrowed funds

Types of Financial Statements:

1. Balance Sheet / Statement of Financial Position shows the FINANCIAL CONDITION of a business
as of a given period • consists of Assets, Liabilities and Owner’s Equity (ALO)
2. Income Statement / Statement of Comprehensive Income shows the results of operations for a
given period of time consists of Revenue and Expenses (RE)
3. Statement of Changes in Owner’s Equity / Statement of Owner’s Equity shows the changes in the
capital or owner’s equity as a result of additional investment or withdrawals by the owner, plus or minus
the net income or net loss for the year.
4. Statement of Cash Flows
i. summarizes the cash receipts and cash disbursements for the accounting period
ii. summarizes cash activities classifying them to cash inflows (receipts) and cash outflows
(payments) into operating, investing and financing activities
iii. shows a net increase or decrease of cash in a given period and the cash balance at the end of
the period.
iv. allows management to assess the business’ ability to generate cash and project future cash
flows.
v.
5. Notes to Financial Statements generally provide additional information needed by the readers but not
captured by the first four statements. This information include:
a. Company information (e.g., operations, legal form, regulatory registrations, etc.
b. Accounting policies used
c. Administrative requirements used by regulators (e.g., Bureau of Internal Revenue and Securities
and Exchange Commission)
d. Other relevant information
NORMAL BALANCE
• the side where the account increases:
ACCOUNT Normal Increases Decreases
Balance Through Through

Assets Debit Debit Credit

Liabilities Credit Credit Debit

Owner's Equity Credit Credit Debit

• Owner's Capital Debit Debit Credit
• Owner's Drawing

Revenues Credit Credit Debit

Expenses Debit Debit Credit

Contra-valuation accounts: Credit Credit Debit

• Allowance for Doubtful Accounts Credit Credit Debit
• Accumulated Depreciation

Basic Accounting Equation:

Assets = Liabilities + Owner’s Equity
(or Capital)

1. ₱ 100,000 = ₱ 50,000 + ₱ 50,000

This is a sample Basic Accounting Equation.

2. ₱ 200,000 = + ₱ 50,000

Liabilities are unknown, but we have the Assets and Owner’s Equity. Now we can simply
solve by getting the difference of the Assets and Owner’s Equity amount:

₱ 200,000 = (₱ 200,000 – ₱ 50,000) + ₱ 50,000

₱ 200,000 = ₱ 150,000 + ₱ 50,000

.
3. ??? = ₱ 130,000 + ₱ 250,000

This time, the Assets are unknown. Liabilities and Owner’s Equity figures are available.
Therefore, we can solve by adding the two available figures.

(₱ 130,000 + ₱ = ₱ 130,000 + ₱ 250,000

250,000)
 ₱ 380,000 = ₱ 130,000 + ₱ 250,000

INCREASE DECREASE NO EFFECT

TRANSACTIONS ASSETS LIABILITIES OWNERS EQUITY REVENUE EXPENSE