Fundamentals of Accountancy, Business, and Management 1 PDF

SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1...

SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING OVERVIEW OF TOPICS: performs the specific task of collecting, processing and Introduction to Accounting communicating financial information. In doing so, it follows some Branches of Accounting definite steps like the collection, recording, classification, Users of Accounting Information summarization, finalization, and reporting of financial data. Forms of Business Organizations Accounting is both an art and a discipline. Accounting is the art Types of Business According to Activities of recording, classifying, summarizing and finalizing financial REFERENCES: data. The word ‘art’ refers to the way something is performed. It Fundamentals of Accountancy Business, and Management Part 1, 3rd Edition, Ferrer is behavioral knowledge involving a certain creativity and skill to & Millan help us attain some specific objectives. Accounting is a systematic 21st Century Accounting Process, International Edition 2019, Vera Cruz-Manuel method consisting of definite techniques and its proper Basic Financial Accounting and Reporting 2022 Edition, Win Ballada application requires skill and expertise. So by nature, accounting is an art. And because it follows certain standards and professional ethics, it is also a discipline. INTRODUCTION TO ACCOUNTING Accounting deals with financial information and transactions: PERFORMANCE STANDARD: Accounting records financial transactions and data, classifies The learners shall be able to cite specific examples in which these and finalizes their results given for a specified period of accounting is used in making business decisions. time, as needed by their users. At every stage, from start to finish, accounting deals with financial information and financial LEARNING COMPETENCIES: information only. It does not deal with non-monetary or non- 1. define accounting. financial aspects of such information. 2. describe the nature of accounting. 3. explain the functions of accounting in business. Accounting is an information system: Accounting is recognized 4. narrate the history/origin of accounting. and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has evolved Definition of Accounting to meet the need for financial information as required by various Accounting is a service activity of identifying, recording, and interested groups. communicating economic information, which is financial in nature, that is useful in making economic decision. Function of Accounting in Business Accounting is the means by which business information is Nature of Accounting communicated to business owners and stakeholders. The role of According to Accounting Theory “Accounting is a systematic accounting in business is to provide information for managers recording of financial transactions and the presentation of the and owners to use in operating the business. In addition, related information to appropriate persons.” Based on this accounting information allows business owners to assess the definition we can derive the following basic features of efficiency and effectiveness of their business operations. accounting: Prepared accounting reports can be compared with industry standards or to a leading competitor to determine how the Accounting is a service activity. Accounting provides assistance business is doing. Business owners may also use historical to decision makers by providing them financial reports that will financial accounting statements to create trends for analyzing guide them in coming up with sound decisions. and forecasting future sales. Accounting is a process: A process refers to the method of Accounting is considered as the language of business. performing any specific job step by step according to the Accounting helps the users of these financial reports to see the objectives or targets. Accounting is identified as a process, as it true picture of the business in financial terms. In order for a 1  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING business to survive, it is important that a business owner or Institute of Accountants in Glasgow, creating the profession of the manager be well-informed. Chartered Accountant (CA). History of Accounting In the late 1800s, chartered accountants from Scotland and Accounting is as old as civilization itself. It has evolved in Britain came to the U.S. to audit British investments. Some of response to various social and economic needs of men. these accountants stayed in the U.S., setting up accounting Accounting started as a simple recording of repetitive exchanges. practices and becoming the origins of several U.S. accounting The history of accounting is often seen as indistinguishable from firms. The first national U.S. accounting society was set up in the history of finance and business. 1887. The American Association of Public Accountants was the forerunner to the current American Institute of Certified Public The History of Accounting Accountants (AICPA). The Cradle of Civilization Around 3600 B.C., record-keeping was already common from In this period rapid changes in accounting practice and reports Mesopotamia, China and India to Central and South America. The were made. Accounting standards to be observed by accounting oldest evidence of this practice was the “clay tablet” of professionals were promulgated. Notable practices such as Mesopotamia which dealt with commercial transactions at the mergers, acquisitions and growth of multinational corporations time such as listing of accounts receivable and accounts payable. were developed. A merger is when one company takes over all the operations of another business entity resulting in the 14th Century - Double-Entry Bookkeeping dissolution of another business. Businesses expanded by The most important event in accounting history is generally acquiring other companies. These types of transactions have considered to be the dissemination of double entry bookkeeping challenged accounting professionals to develop new standards by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy. that will address accounting issues related to these business Pacioli was much revered in his day, and was a friend and combinations. contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern The Present - The Development of Modern Accounting accounting and were the first to commonly use Arabic numerals, Standards and Commerce rather than Roman, for tracking business accounts. Luca Pacioli The accounting profession in the 20th century developed around wrote the Summa Aritmetica, Geometria, Proportioni et state requirements for financial statement audits. Beyond the Proportinalita in 1494, the first book published that contained a industry's self-regulation, the government also sets accounting detailed chapter on double-entry bookkeeping. standards, through laws and agencies such as the Securities and Exchange Commission (SEC). As economies worldwide continued French Revolution (1700s) to globalize, accounting regulatory bodies required accounting The thorough study of accounting and development of accounting practitioners to observe International Accounting Standards. This theory began during this period. Social upheavals affecting is to assure transparency and reliability, and to obtain greater government, finances, laws, customs and business had greatly confidence on accounting information used by global investors. influenced the development of accounting. Nowadays, investors seek investment opportunities all over the The Industrial Revolution (1760-1830) world. To remain competitive, businesses everywhere feel the Mass production and the great importance of fixed assets were need to operate globally. The trend now for accounting given attention during this period. professionals is to observe one single set of global accounting standards in order to have greater transparency and 19th Century – The Beginnings of Modern Accounting in Europe comparability of financial data across borders. and America The modern, formal accounting profession emerged in Scotland Accounting in the Philippines in 1854 when Queen Victoria granted a Royal Charter to the Bookkeeping was introduced to the Philippines by the Spaniards. They called a bookkeeper 'Teneder de Libro'. 2  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING The early part of the 20th Century is characterized by the Government Accounting – is the process of recording, analyzing, proliferation of American companies. classifying, summarizing, communicating and interpreting First CPA licensure exam (1923) financial information about the government in aggregate and in Establishment of PICPA (1929) detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets BRANCHES OF ACCOUNTING and liabilities. This branch of accounting deals with how the funds of the government are recorded and reported. Government PERFORMANCE STANDARD: accounting deals with these transactions, the recording of inflow The learners shall be able to make a list of business within the and outflow of funds of the government. community on the types of accounting services they require; solve exercises in the identification of the branches of accounting Auditing – There are two types of auditing: external and internal described through the types of services rendered. auditing. External auditing refers to the examination of financial statements by an independent CPA (Certified Public Accountant) LEARNING COMPETENCIES: with the purpose of expressing an opinion as to fairness of 1. differentiate the branches of accounting. presentation and compliance with the generally accepted 2. explain the type/kind of services rendered in each of accounting principles (GAAP). The audit does not cover 100% of these branches. the accounting records but the CPA reviews a selected sample of these records and issues an audit report. Internal auditing deals with determining the operational efficiency of the company regarding the protection of the company’s assets, accuracy and Financial Accounting – is the broadest branch and is focused on reliability of the accounting data, and adherence to certain the needs of external users. Financial accounting is primarily management policies. It focuses on evaluating the adequacy of a concerned with the recognition, measurement, and company's internal control structure by testing segregation of communication of economic activities. This information is duties, policies and procedures, degrees of authorization, and communicated in a complete set of financial statements. It is other controls implemented by management. assumed under this branch that the users have one common information need. Financial accounting conforms with accounting Tax Accounting – helps clients follow rules set by tax authorities. standards developed by standard-setting bodies. Financial It includes tax planning and preparation of tax returns. It also accounting is primarily concerned with processing historical data. involves determination of income tax and other taxes, tax Although financial accounting generally meets the needs of advisory services such as ways to minimize taxes legally, external users, internal users of accounting information also use evaluation of the consequences of tax decisions, and other tax- this information for their decision-making needs. related matters. Management Accounting – emphasizes the preparation and Cost Accounting – sometimes considered as a subset of analysis of accounting information within the organization. The management accounting, cost accounting refers to the recording, objective of managerial accounting is to provide timely and presentation, and analysis of manufacturing costs. Cost relevant information for those internal users of accounting accounting is very useful in manufacturing businesses since they information, such as the managers and employees in their have the most complicated costing process. Cost accountants decision-making needs. Oftentimes, these are sensitive also analyze actual and standard costs to help managers information and is not distributed to those outside the business - determine future courses of action regarding the company's for example, prices, plans to open up branches, customer list, operations. Cost accounting will also help the owner set the etc. Managerial accounting involves financial analysis, budgeting selling price of his products. For example, if the cost accounting and forecasting, cost analysis, evaluation of business decisions, records shows that the total cost to produce one can of sardines and similar areas. is PHP50, then the owner can set the selling price at PHP60. 3  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING Accounting Education – this branch of accounting deals with developing future accountants by creating relevant accounting curriculum. Accounting professionals can become faculty INTERNAL USERS members of educational institutions. Accounting educators Internal users of accounting information are those individuals contribute to the development of the profession through their inside a company who plan, organize, and run the business. effective teaching, publications of their research and influencing These users are directly involved in managing and operating the students to pursue careers in accounting. Accounting teachers business. These include marketing managers, production share their knowledge on accounting so that students are supervisors, finance directors, company officers and owners informed of the importance of accounting and its use in our daily Engage the learners in a question-and-answer type lecture. lives. Accounting supplies managers and owners with significant financial data that is useful for decision making. This type of Accounting Research – focuses on the search for new knowledge accounting in generally referred to as managerial accounting. on the effects of economic events on the process of summarizing, analyzing, verifying, and reporting standardized financial Examples of Internal Users: information, and on the effects of reported information on Management – 0rganization’s management requires accounting economic events. Researchers typically choose a subject area information for analyzing the performance and actual position of and a methodology on which to focus their efforts. the business. Accounting information helps the management to arrive at an evaluated decision. It helps with cost determination, The subject matter of accounting research may include investment decisions, helps to identify warning signals in case of information systems, auditing and assurance, corporate a downfall etc. governance, financials, managerial, and tax. Accounting research plays an essential part in creating new knowledge. Academic Employees – are interested to know the accounting details of accounting research "addresses all aspects of the accounting their organization so that they are aware of overall profitability of profession" using a scientific method. Practicing accountants also the company which has a direct impact on their remuneration and conduct accounting research that focuses on solving problems job security. for a client or group of clients. The Accounting research helps standard-setting bodies around the world to develop new Owners – accounting information is presented to internal users standards that will address recent issues or trend in global usually in the form of management accounts, budgets, forecasts business. and financial statements. This information will support whatever decision of the internal users. Owners are more concerned about USERS OF ACCOUNTING INFORMATION the returns they get out of their investment in the organization and this purpose is fulfilled through the accounting information. PERFORMANCE STANDARD: Not only do they want their capital safe they are also interested The learners shall be able to solve exercises and problems on the in knowing the profit earned or loss incurred by the business time identification of users of information, type of decisions to be to time. made, and type of information needed by the users; cite users of financial information and identify whether they are external or EXTERNAL USERS internal users. External users are individuals and organizations outside a company who want financial information about the company. LEARNING COMPETENCIES: These users are not directly involved in managing and operating 1. define external users and give examples. the business. The two most common types of external users are 2. define internal users and give examples. potential investors and creditors. 3. identify the type of decisions made by each group of users. Potential Investors use accounting information to make decisions 4. describe the type of information needed by each group to buy shares of a company. Creditors (such as suppliers and of users. bankers) use accounting information to evaluate the risks of 4  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING granting credit or lending money. Also included as external users of the stakeholders who rely on such information in forming their are government regulatory agencies such as Securities and decisions. Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security Banks & Non-Bank Financial Companies – they are a crucial part System (SSS), and Local Government Units (LGUs). of any business environment since they advance both short & long-term loans to a business. Accounting information helps them Example of External Users: in determining the creditworthiness of the organization. Based on Creditors – for determining the credit worthiness of an the financial health of an organization, the future terms and organization. Terms of credit are set by creditors according to conditions of credit are assessed by the Banks and NBFCs. the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Suppliers – other businesses which supply goods to an organization on credit would also want to assess the repaying Tax Authorities (BIR) – for determining the credibility of the tax capacity of that organization before providing any form of credit. returns filed on behalf of a company. Regulatory Authorities Accounting information plays a crucial role in this case. including the govt. agencies ensure that the accounting information is prepared based on the accounting principles, Public – general public would want to know the financial health of standards and rules & regulations governing the organization. a business to get a fair idea of the firm’s niche & overall economy The primary objective is to protect the interest of the stakeholders of the nation. It can help to analyze employment trends, the of the organization. Correct tax evaluation is also done by the general financial stability of a country etc. authorities after analyzing the financial statements. FORMS OF BUSINESS ORGANIZATIONS Investors – for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a reasonable return PERFORMANCE STANDARD: on their investment before they commit any financial resources to The learners shall be able to differentiate the forms of business a company. Similar to owners, external investors are concerned organization in terms of nature of ownership; make a list of about their ROI (Return on Investment) from the organization. existing business entities in their community and identify the form Since investors do not have a direct control over the business of business organization. operations. They use accounting information to find out how their money is being spent by the managers. It helps them in decision- LEARNING COMPETENCIES: making such as whether to increase, decrease or hold their 1. differentiate the forms of business organization. investments. 2. identify the advantages and disadvantages of each form. Customers – for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply Suppose you want to open your own sari-sari store that will need in the long term. They are a complex group which includes P10,000 to start and you used your P10,000 savings to start the producers at every level of processing, wholesalers, retailers, and said business. You are the sole owner of the said sari-sari store. end users. Good financial health shows that customers at each This type of business is called sole/single proprietorship. level are comfortable with continuous inflow of stock from the business. Customers use the accounting information for 1. Sole/single proprietorship. It is the simplest form of business assessing the financial position of its suppliers which is essential organization, owned by one person known as the proprietor for maintaining a stable source of supply in future. or entrepreneur. A sole proprietorship is registered with the Department of Trade and Industry (DTI). Regulatory Authorities (SEC, DOLE) – for ensuring that a company's disclosure of accounting information is in accordance ADVANTAGES DISADVANTAGES with the rules and regulations set in order to protect the interests The owner keeps all the The life of the business is profits. limited to the life of the 5  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING The owner makes all the owner. Once the owner dies, enforceable. decisions. the business will cease to It is easy to form and operate under the name of Assuming your dream is to open a grocery store and not just a operate. Only minimal the proprietor. sari-sari store but you will need P1,000,000 to start the said requirement set by the The amount of capital is business. You have only PHP25,000, your friend Juan has government. limited only by the P25,000, and your mother is willing to invest her P50,000, but The owner, not the business, wealth of the proprietor. still these are not enough to start your dream grocery store. is taxed. Unlimited liability. Where will you get the money to raise the P1 million? You may Losses are solely shouldered consider setting up a corporation? by the owner. 3. Corporation. A corporation is a business organized as a What if the needed amount to start your dream sari-sari store is separate legal entity (artificial person) under the corporation P50,000 and you only have P25,000 cash savings. You ask Juan, law with ownership divided into transferable shares of stocks. your friend if he is willing to invest his P25,000 and become part ü The Corporation Code of the Philippines creates a owner of the sari-sari store. Assuming he agrees, what form of corporation. The corporation begins its existence business organization was created? from the date the Articles of Incorporation is approved by the Securities and Exchange 2. Partnerships. It is defined as an association of two or more Commission (SEC). persons who bind themselves to contribute money, property, ü The SEC (Securities and Exchange Commission) is or industry to a common fund with the intention of dividing the the government agency primarily tasked to regulate profits among themselves. A partnership is registered with the private corporations in the Philippines. Securities and Exchange Commission (SEC). Partnerships are ü The owners are called stockholders or shareholders. owned by two or more persons. The details of the ü The word ‘Corporation/Incorporation/Corp./Inc.’ arrangement between the partners are outlined in a written appears in the name of the entity. document called articles of partnership. Profits are divided ü The voting rights of a shareholder is generally based among partners based on their agreed sharing. The owner is on the percentage of ownership. called a partner. ü The management of the business is delegated by the shareholders to the Board of Directors where the ADVANTAGES DISADVANTAGES incorporators (founders) shall not be less than 5 but Easy to form; mere The profits are divided among not more than 15 individuals. However, there could agreement unless stipulated the partners. me as many stockholders as its authorized can organize and form one A partner can be held liable partnership. capitalization permits. for the acts of the other Higher capital because two or partners (Agent of ü The ownership is divided into shares and the value more persons will contribute partnership) of one share may be denominated at a smaller to the common fund (capital, Unlimited liability amount, for example at P10 per share. skill and industry) In a lawsuit, the personal ü The proof of ownership is evidenced by a stock Lesser government properties of the partners can certificate. requirement and supervision be held beyond their Tax-exempt if professional contributions and may be ADVANTAGES DISADVANTAGES partnership but taxed as used to answer for any Can easily raise additional It is relatively complicated to corporation if commercial liability of the partnership. funds by selling shares of set up. Most costly and corporation Limited life stocks to the public. difficult to organize (higher Restricted transfer of Shareholders are not cost of incorporation) ownership. Requires the personally liable for the debts Subject to several legal consent of all partners before of the corporation. restrictions as listed in the transfer of interest be Power of succession – unlike Corporation Code of the 6  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING the other types of business Philippines ü This form of business organization is regulated by organization, corporation can Taxed at flat 25% (effective the Cooperative Development Authority (CDA). still exist and continue in Jan 1, 2022) spite of incapacity of one ADVANTAGES DISADVANTAGES shareholder. Each member is entitled to It is prone to poor Ease of transfer of interest in only one vote regardless of management because case of incapacity of one his or her shareholdings. The managers/officers were shareholder. number of shares will only elected by board of directors Limited liability – matter on the amount of rather than employed shareholders are not legally profit you will be receiving. professional managers. liable for the corporate Generally, exempt from Since there is a “one- unpaid outside and within paying taxes. member, one-vote” policy, liabilities. Compared to a corporation, it influential members tend to The extent of their liability is is easier and less costly to dominate the election limited to their equity form because of fewer process. (ownership) in the business requirements. The Cooperative Code corporation. Limited liability. requires a cooperative to Unlimited life – may renew its Unlimited life. Although it has appropriate a portion of its life every 50 years. a legal life of 50 years, this annual profit to some funds, can be renewed for an making the only remaining Assuming all the mothers in your barangay decided to open a indefinite number of portion of the income can be sari-sari store where all the members can buy in cash or in credit. renewals. distributed among the Some mothers were also taught how to sew dresses and bags as members. part of the project of the group. These bags are then sold to a It is more difficult to sustain certain company. Aside from that, the organization provides growth due to lack of profit seminars to the members on various topics involving mothers and motive and management their roles. At the end of the year, the profits are distributed expertise. among the members based on their capital contribution. The There are restrictions of transfers of members’ shares. amount of their purchases in the sari-sari store during the year is also computed and they receive something out of the TYPES OF BUSINESS ACCORDING TO ACTIVITIES profit/surplus based on their purchases. This form of business organization is called a cooperative. PERFORMANCE STANDARD: The learners shall be able to differentiate the types of business 4. Cooperative. A cooperative is a duly registered association of persons with a common bond of interest, voluntarily joining according to activities; make a list of businesses in their community according to their activities. together to achieve their social, economic, and cultural needs. ü The owners are called members who contribute LEARNING COMPETENCIES: equitably to the capital of the cooperative. 1. compare and contrast the types of business according to ü The members are expected to patronize their activities. products and services. 2. identify the advantages, disadvantages, and business ü The word ‘cooperative’ appears in the name of the requirements of each type. entity and it also has juridical personality similar to a corporation. ü The founding members shall not be less than 15 individuals. However, it can have as many members 1. Service business - This type of business offers professional at its by- laws permit. skills, advice and consultations. Examples: barber shops and 7  SYSTEMS PLUS COLLEGE FOUNDATION Fundamentals of Accountancy, Balibago, Angeles City, Pampanga Basic Education Department – SHS Business, and Management 1 MODULE 1: INTRODUCTION TO ACCOUNTING beauty parlors, repair shops, banks, hotels and restaurants, can lower the unit cost. costs can be high. hospitals and clinics, schools, accounting and law firms. You rely mostly on raw materials. ADVANTAGES DISADVANTAGES You don’t need to worry You may not have a flexible about inventory, personal time because you warehousing, and distribution need to be directly involved in costs. providing services to your You may only need a small customers. capital because what you are Your business’ success selling is your skill set and depends on your credibility. you only need yourself to Service business is founded render a service. on good reputation. 2. Merchandising (Trading) - This type of business buys at wholesale and later sells the products at retail. They make a profit by selling the merchandise or products at prices that are higher than their purchase costs. This type of business is also known as "buy and sell". Examples are bookstores, sari-sari stores, hardware stores. ADVANTAGES DISADVANTAGES Increased sales Needs a retail store to display Brings customers in your goods. attractive spaces Less flexibility in managing costs. Keeping track of inventory is tedious. Also, you can incur additional costs on spoilages, theft, breakages, damages, and obsolescence. 3. Manufacturing - This type of business buys raw materials and uses them in making a new product, therefore combining raw materials, labor and expenses into a product for sale later on. Examples are shoe manufacturing businesses, car manufacturing plants. ADVANTAGES DISADVANTAGES High growth potential due to High start-up capital wider market and can Conceptualizing a viable produce large number of manufacturing business may quantities. be difficult. High opportunity to establish Needs continuous innovative a brand. and abreast of changes in Has a better pricing policy technology. because mass production Warehousing and logistics 8