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. It 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.
Example:
 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.
Example:
 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.