Business Organizations PDF - Accounting Environment, Lesson 2.2

FUNDAMENTALS OF ACCOUNTING M ACCOUNTING ENVIRONMENT L BUSINESS AND ACCOUNTING T Business Organizations Learning Objectives At the end of the topic, the learner should have the following skills and abilities (ML – micro learning):...

FUNDAMENTALS OF ACCOUNTING M ACCOUNTING ENVIRONMENT L BUSINESS AND ACCOUNTING T Business Organizations Learning Objectives At the end of the topic, the learner should have the following skills and abilities (ML – micro learning): ML 1 Business organization and  Elaborate on the different forms of its environment business organizations. ML 2 Business concepts  Expound the different business concepts. ML 3 Business stakeholders and  Identify and know the interests of various their informational needs business stakeholders.  Differentiate data from information.  Understand the need for business information.  Know the different classifications of information. ML 4 Financial information  Relate the importance of information to decisions.  Explain why money is the language of business. ML 5 Business and government  Justify the importance of limited regulations government participation in the market place. 2 Business concepts Lesson 2.2 ML 1 Business Organizations 1.0 Business organizations A business organization is an association of men motivated by profit. Understanding business organizations as to its varied forms and stakeholders, their interests and informational needs, would be essential in providing financial reports. Fig. 1.0 Business Environment 1.1 Definition A business organization is a social arrangement with collective goals having controls in its performance in a boundary separating it from its environment (ACCA). 1.2 Forms of business organizations Organizing men for a business purpose may take manifold perspectives. People may undertake business activities alone or with others. People may also choose the type of business they want to enter in relation to the line of product they offer or the market they serve. Business organizations may be formed according to the following classification: Table 1.0 Business Organizations Business Organizations Organization Classification Types deals with As to activities Service diversity! Distribution (or Merchandising) Production (or Manufacturing) As to legal form Proprietorship Partnership Corporation Cooperative As to control Ownership Workership  3 Business concepts Lesson 2.2 Table 1.0 Business Organizations Business Organizations Organization Classification Types deals with Government-controlled diversity! As to orientation Profit-oriented Not-for-Profit oriented As to size Microenterprises SMEs (Small and Medium-sized Enterprises) Large Enterprises Multinational corporations As to public Publicly accountable enterprises accountability Not-publicly-accountable enterprises As to activities Business organizations as to activities are classified as those engaged in service, distribution or production activities. Service Service is A service business or service-type business uses talents, skills, and other competencies in talent performing business activities. Basic examples are laundry center, barbershop, internet cafés, proprietorship! and professional services (ie, physicians, lawyers, accountants, and nurses). Some of the more sophisticated examples of servicing business are: Table 2.0 Examples of Business Enterprises by Service Industry Industry Enterprises Telecommunications PLDT, Smart, Globe Food Jollibee, Mcdonald’s, KFC, Barrio Fiesta, Max’s Restaurant Mail and cargo delivery LBC, Federal express Financial transfers Express Padala, Pinoy Express Banking Bank of the Philippine Islands, Equitable Bank, Metrobank, One Network Bank Transportation Victory Liner, Raymond Transportation, Batangas Liner, Super Ferry Electricity Distribution Davao Light, MERALCO Publications Philippine Daily Inquirer, Sun Star Consultancy Agamata Business Consultancy, Accenture  4 Business concepts Lesson 2.2 Distribution (eg, Merchandising) Distribution business bridges the time, distance, volume, and price of goods from the producer Distribution means to the consumers. It consists of merchandiser, wholesaler, retailer, reseller, distributor, and availability. similar entities. Distribution business is commonly known as merchandising or trading business. A merchandising business buys goods and sells the same in its original state and form at a higher price. Some types of merchandising businesses are: Table 3.0 Examples of Business Enterprises by Distribution Industry Distribution Memoranda Examples Class Wholesaling sells goods in large Makro, Pure Gold, 168 volume or quantities at a Stores price lower than the retailing business Retailing sells goods in small 7-11, Mini Stop quantities at a price higher than the wholesaling business Consignment distributes a product Various market stall entrusted to it as an owners and dealers agent, earns by commission or markup, and remits collections to the seller-principal Production (eg, Manufacturing) A manufacturing business converts a resource (ie, materials, minerals) into its systems to Production produce another product. Examples of these businesses are San Miguel Corporation-Beer adds commercial Division, Reynolds Corporation, Toyota Philippines, Fujitsu, Petron Corporation, Lepanto Mining value. Corporation, and Kodak Corporation. As to legal form Business organizations as to their legal form may be classified as proprietorship, partnership, corporation, or cooperative. Below is a tabular dissection of these types of business organizations.  5 Business concepts Lesson 2.2 Table 4.0 Examples of Business Enterprises by Legal Form Business organizations Memoranda Examples Proprietorship Owned by only one person Lydia’s Lechon, Nenette’s Variety Store, Bobet’s Spa and Health Clinic Partnership An association of two or more SGV & Co., Punongbayan persons who bind themselves to and Aurollo, CPAs, Isla contribute to a common fund Lipana & Co., CPAs money, skills, and property and agreed to distribute the profit among themselves. Business organizations Memoranda Examples Corporation An artificial being created by Metropolitan Bank and operation of law having the right Trust Company, Philippine of succession, properties, and School of Business interests for the purpose of Administration, and carrying a defined business Benpres Holdings, Inc. objective. Cooperative An association of men organized Our Lady of Fatima for the purpose of promoting and Cooperative Store, PnC protecting the interests of its Cooperative Bookstore members, and not primarily for profit. The choice in the form of business organization normally follows the intention of the business organizers, the nature of the business, and the incentives given by the government. As to control Business organizations are normally controlled by owners who contributed resources for Business business purposes. Owners who contribute money or physical resources to a business funds interest is to are called capitalists. Owners who contribute special skills or talents in the enterprise are be controlled. known as specialists or industrialists. Other businesses are controlled by workers especially in countries where labor unions are strongly recognized as engines of economic growth. Examples of worker-controlled business organizations are Cheque Dejeuner, a prepaid voucher and cards company in France; Acome, a cable, wire and synthetic tubing industry, in France; and Kantega, information technology company in Norway.  6 Business concepts Lesson 2.2 Some business organizations are government–controlled business enterprises such as the Development Bank of the Philippines and Philippine Postal Corporation. As to orientation Profit or not- Business organizations are inherently formed for profit. Some organizations are not-for-profit for-profit? organizations that exist for educational and charitable reasons and from which its shareholders or trustees do not benefit financially. Examples are Habitat for Humanity, Red Cross, and United Way. As to size Small, large, or The Department of Trade and Industry in its Council Resolution No. 01 Series of 2003 dated 16 huge! January 2003, defines Micro, Small, and Medium Enterprises (MSMEs) “as any business activity/enterprise engaged in industry, agri-business/services, whether single proprietorship, cooperative, partnership, or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, must have value falling under the following categories: By Asset Size* Micro Up to P3,000,000 Small P3,000,001 - P15,000,000 Medium P15,000,001 - P100,000,000 Large above P100,000,000 This definition was adopted from RA 9501 signed into law on May 23, 2008, otherwise known as the “Magna Carta for Micro, Small, and Medium Enterprises (MSMEs)”. Alternatively, MSMEs may also be categorized based on the number of employees: Micro 1 - 9 employees Small 10 - 99 employees Medium 100 - 199 employees Large More than 200 employees Multinational corporations are those whose operations are located in various countries around the globe and are normally engaged in various industries and lines of businesses. As to public accountability Publicly accountable organizations are those enterprises listed in the capital exchanges where Fiduciary or its ownership base is diverse and its equity interests are actively traded in the capital market or proprietary? other over-the-counter market or those business organizations entrusted with fiduciary function by the general public such as banks, mutual funds, and insurance companies. 7 Business concepts Lesson 2.2 Publicly accountable organizations are answerable for fiscal and social responsibilities to the general public. Examples of publicly accountable companies are those listed in capital market exchanges and those imbued with fiduciary functions such as banks, insurance companies, and trustees of funds.  8 Business concepts Lesson 2.2 ML 2 Business Concepts Business Concepts 1. Entity concept 2. Going concern 2.1 Periodicity 2.1.1 Accrual 2.2 Fair valuation 2.2.1 Dual Effects 2.2.2. Stable Monetary Unit 2.2.3 Estimates and judgment 3. Prudence 3.1 Conservatism 2.0 Business concepts Business comprises activities aimed at accumulating wealth in accordance with the standards of morals, ethics, and law. It thrives in an environment where talent, industry and creativity harmoniously intertwined to make men rich and affluent. Men in business, and those who intend to deal in business, consider the following business concepts: business entity concept, going concern, periodicity, accrual, fair valuation, dual effects, stable monetary unit, estimates and judgment, and prudence. 2.1 Business entity concept The business is an entity separate and distinct from its stakeholders 1+1=2 “arm’s length and all other persons interested into it such as the owners, creditors, transactions” suppliers, employees, government agencies, and the general public. This powerful concept treats business, just like any person, to have the right to enter into contract and transactions, develop reputation, and to be assessed as to its present status and future potentials. It also gives the enterprise the right to own possessions, use it, and dispose it. It further gives the enterprise the right to generate wealth and to suffer losses whenever it fails to intelligently use its resources and talent. The business entity concept also paves the way for the creation of business personality, its traditions, heroes, and strings of historical failures and successes. It jives with the notion that a business has a life separate from other persons, interested as well as not interested, in its activities.  9 Business concepts Lesson 2.2 This overriding concept also supports the enterprise to keep and maintain its records similar to an individual keeping its diaries of important events and memoirs. 2.2 Going concern The business is expected to continuously undertake its activities 1, 2, 3 …n unless there is a compelling reason to believe otherwise. This concept “Strategic underlines the truism that an enterprise is created to accumulate thinking!” more wealth for a long period of time, if not in perpetuity. Because of this enterprise’s assumed and unbridled continuity, there is a need to measure and report its activities on a periodic basis to apprise its stakeholders about its financial standing and performances “as at” and “for” a given period of time. This concept gives birth to the principles of periodicity, accrual, and fair valuation. Periodicity (Time Period Concept) This concept relates to business reporting and operating measurement. It “2”, “1 to 2” states that the effects of the business activities should be measured and Short-term reported on a periodic basis (say, weekly, monthly, bi-monthly, semi- measurement! annually, or annually) to determine the results of its activities for a given period of time (say, for a given month, quarter, etc.) and to figure out the financial health and status as of a given period of time (say, “as of June 30, 2020”; “as of December 31, 2020”) or for a given period of time (say, “for the month ended, June 30, 2020”; “for the year ended, December 31, 2020”). This concept underlines the importance of timely information to be used in making reasoned economic decisions. Accrual The concept of accrual relates to periodic financial reporting. It also relates to the accuracy in measuring business activities for periodic reporting. There are two comprehensive bases of commercial and financial reporting, namely, the cash basis and the accrual basis. Profit is not Cash basis records and reports only those transactions involving cash. Cash basis of reporting is cash! useful in the long-run when all the investmenting and operating activities are completed and cash has been realized. However, the cash basis is not useful in the short-term reporting system. This is because the “1 minus 1” is purpose of investments in long-term assets has not yet been accomplished and the operating not zero, for activities in the short-run have not yet been completed. This means the long-term assets are now…  10 Business concepts Lesson 2.2 still to be used in the upcoming years of business activities and therefore the cost of using such long-term assets should also be compared with the income generated from its use. This problem is solved by deferring the cost of long-term assets and amortizing the same cost over its useful and economic life. This concept of amortizing or spreading the cost of the long-term assets over its economic life thereby converting the previous asset into an expense is known as the systematic and rational allocation method. Some of the short-term operating activities are not consummated through cash. There are such things as accruals and deferrals. Accrued expenses are already incurred but not yet paid, and accrued income is already earned but not yet received. Deferred assets or prepaid assets are already paid but not yet used, and deferred income is already received but not yet earned. The recognition of these accruals and deferrals is important in the proper measurement of profit or loss for a given business period. The process of recognizing accruals and deferrals in the accounting books is supported by the concept of associating cause and effect. Accrual is developed to properly report operating activities for a given business period. Accrual basis records transactions according to their effects and date of realization or incurrence. That is, income is recognized when realized not when received and expenses are recognized when incurred and not when paid. Fair valuation This concept states the economic resources and obligations are subject to fair valuation in order to measure the true worth of the owner’s interest in the business. It covers the dual effects of business transactions, stable monetary unit, and estimates and judgment. Dual Effects of Business Transactions Business transactions are activities necessary to generate wealth. The effects of “+1, -1” the business transactions should be measured in accordance with the concept of Value given-up values. And there are two values to be measured, the values given up and the vs. Value values received. The sum of these values should always be equal. This concept received! gives birth to the controlling equation that the total of assets equals the total of liabilities and equities. Stable Monetary Unit Transactional The recording of the effects of the business transactions should be recorded in currency the most accurate manner. The measurement basis to be used in recording the values of the transactions should also be in the most objective way. In “P1 today = P1 business, the most objective way of expressing values is in terms of money. It tomorrow” is presumed that the monetary unit used in recorded the business transactions is stable.  11 Business concepts Lesson 2.2 Estimates and judgment Probable cash inflows, costs allocation, estimated liabilities, and probable losses are subject to changes in the variables and developments affecting the business environment. The unexpected decline in the business status of a major customer may impact the collections of receivables, the competitor’s introduction of a new market-defining product would affect the income from the existing product, pending lawsuits, estimated liabilities from product warranties, and other estimates in financial values may be undertaken with reasonably accuracy and certainty using the applicable financial recording and reporting standards. 2.3 Prudence In the exercise of doing business, prudence should be maintained. Prudence Prudent speaks of due care and conservatism. Due care is the ability to think balancing of thoroughly, analyze carefully, and plan in detail all actions to be undertaken risk and return! in relation to business activities. Due care also assumes that actions should be made in accordance with the plan. Conservatism Do not count Conservatism is a doctrine where all plans and actions should be done in line with the the chicks until expectations of receiving the least possible benefit or spending the highest reasonable expense the eggs are to be incurred. This would avoid the thought of unnecessarily overstating benefit and hatched! understating expense which have been proven to be detrimental in the conduct of doing business. 12 Business concepts Lesson 2.2 Business Stakeholders and Their ML 3 Informational Needs 3.0 Business stakeholders Business is a facility where interested parties interact and make exchanges in values. The parties involved in the exchange process are business stakeholders. They may be grouped into either as internal parties or external parties. Internal business stakeholders include management and employees. External business stakeholders include owners, creditors, suppliers, government regulatory agencies, customers, business analysts and the general public. Fig. 2.0 Business Stakeholders 3.1. Business relationships Business transactions create business relationships. Sometimes relationships create business transactions. The diagram on the left shows the relationships of the business with its various interacting parties. Clearly, the focal point of all business interactions is the enterprise. It serves as a facility to give and receive money, to create income and incur expenses, and increase the wealth of all those involve in the business transactions. This relationship must be clearly understood by the person leading the enterprise to meticulously and critically balance each stakeholder’s special business interests. 3.2. Transactional relationships The business transaction between the enterprise and its stakeholders is limited by the degree of one’s participation in the business operating cycle, financing cycle, and strategic activities. The transactions and interests of each business stakeholder are tabulated below:  13 Business stakeholders and their informational needs Lesson 2.3 Table 5.0 Transactional Relationships Business Business transactions and interests Stakeholders Management They operate the business, plan its sources of money, make a strategic resource allocation, implement effective and efficient operating systems, and create wealth. Owners They entrusted their savings and monies to the business with the expectations of greater returns than the creditors. As a trade-off, they expose themselves to higher business risk. Creditors Fund providers through loans to the business requiring interest for the use thereof. Suppliers Providers of goods or services complementing the business nd operating activities of an enterprise. Customers Business partners in the distribution of products to consumers or users in the marketplace. Consumers Ultimate users of goods or services. Employees They work for the business and earn in the form of wages, salaries and other personnel benefits. Regulatory agencies It includes both government and private agencies that set requirements and regulations for businesses to operate legally or with accreditation. Service providers It includes utility companies, security agencies, professional firms, manpower services, and other services complementing the main business of the enterprise. Financial analysts They assess the potential cash generating ability of the business and makes advises on the investment worthiness of the enterprise. General public Other suppliers, competitors, academicians, researches, etc. 3.3. Business stakeholders and their informational need Business stakeholders are innately interested to know the conditions, capabilities, potential, Business is and related information about the enterprise. They need business reports to protect and harmony in diversity. harness their business interests, not only in terms of association, but most especially in terms of increasing the value of their money. Preparing and publishing business information reports are the fundamental purposes of accounting. Business information reports tell the stories about a business: what it had done, what does it have, and what capability does it have to generate wealth in the future? The International Accounting Standards Board in the Introductory of its Conceptual Framework states that “The Board believes that financial statements prepared for this purpose meet the common needs of most users. This is because nearly all users are making economic decisions, for example: 14 Business stakeholders and their informational needs Lesson 2.3 (a) to decide when to buy, hold or sell an equity investment. (b) to assess the stewardship or accountability of management. (c) to assess the ability of the entity to pay and provide other benefits to its employees. (d) to assess the security for amounts lent to the entity. (e) to determine taxation policies. (f) to determine distributable profits and dividends. (g) to prepare and use national income statistics. (h) to regulate the activities of entities.” Below is an attempt to map out some of the informational needs of the various business stakeholders: Table 6.0 Business Informational Needs Business Stakeholders Business Informational Need Managers The operating results, financial condition, cash flows, the details of the accounts presented in the financial statements, segment reporting, and other off-financial statements information Owners Changes in business wealth and ability of the business to return his investment Creditors Ability of the enterprise to pay interest and its principal liabilities on maturity date Merchandise The needs of the business to buy goods or services, and the business Suppliers ability to continuously place orders and pay its purchases Customers Adequacy and stability of products to be distributed and the ability of the enterprise to make a timely delivery Consumers Enterprise values in its commitment to deliver the needed goods or services and its capability to sustain the same Employees Ability of the business to pay wages, salaries, and other personnel benefits Regulatory Compliance with the government rules and regulations and that of agencies private accrediting agencies Utility Ability of the business to pay the equivalent amount of utilities it companies consumed Financial Assess the potential cash generating capability of the business and analysts advise on the investment worthiness of the enterprise General Employment, pricing patterns, environmental friendliness, health, public technology and others The diversity in the informational need of the business stakeholders, however, does not permit accounting professionals to produce multifarious reports. Accounting reports are generally classified into three (3): the general-purpose financial accounting reports, the specific- purpose management accounting reports, and the government compliance reports.  15 Business stakeholders and their informational needs Lesson 2.3 In this study, we are dealing with the preparation of general-purpose financial accounting reports prepared by the management and made available to all external business stakeholders who do not have participation, control, or influence in the financial recording and reporting aspects of business. It is in this area that the competence, integrity and independence of the accounting system are expected to be professionally delivered. 4.0 The need for information is fundamental! Firstly, there is earth. Secondly, there is man. And thirdly, there is a need for information. Relevant Man deals with his environment and with other men. To deal properly, man should be well information informed about his environment in order to adjust his sensitivities and actions. He needs to has strategic be informed about the past, present, and future of his environment. If he is not informed value. nor correctly informed, his actions would not fit with his environment. Information is communication, and communication is intelligence. The need for information relates to the unique intelligence of men. It is this feature that separates him from animals. And it is in the quality of information that men based its informed or rational choices. 4.1 Information is power Let us take this imaginary story of Mr. Andrew. Mr. Andrew lives in the Island Garden City of Samal in the southern Philippines. One day, while he was relaxing in front of his house near the cross roads, a car stops by, the driver alights and courteously inquired on the direction going to the fabled White Sand Beach in their town. Andrew precisely informed the driver as to the direction going to the White Sand Beach. Later, another car parked by his house, but this time the driver asked on his way to the public market. Andrew courteously told the man to take the second street to the left, straight ahead, and within 500 meters he could see to the right the entrance to the town’s public market. A little later, a lady was asking for the direction going to the hospital. Andrew carefully instructed the lady on how to get to the hospital. For that particular day alone, Andrew was approached by a dozen of persons asking for street, sundry directions and other vital information about the town such as its population, vernacular, popular cuisine, and even sometimes the name of the town mayor. He also figured out that he had consumed about an hour of his working time attending to the informational requests of the visitors. Fig. 3.0 Information is Fundamental From that experience, Andrew realized that visitors in their town need information. He urgently prepared the town’s Power informational map that includes some of the vital information frequently asked by the town’s visitors. The following morning, while Andrew was in front of his Information house and attending to his daily routine, a man stops by and Freedom Wealth asks where he could possibly find the town’s bookstore. 16 Business stakeholders and their informational needs Lesson 2.3 Andrew says he has a map that shows all the important directions and destination in the town, including the town’s bookstore, which he sells for five pesos only. The man paid five pesos, gets the map from Andrew and hurriedly proceeded to the bookstore. All throughout, Andrew was able to assist a dozen of persons, sold his map to them, and received a total of sixty pesos for the day. Without Andrew’s informational map, people would have spent more gasoline in locating their destination, unnecessarily used more of their precious time, get more physically exhausted and, maybe, getting annoyed in the process. 4.2 Information is wealth Now, let us draw an association of Andrew’s town and a business, say, an internet café. Both would benefit from the guests visiting their places. They have products to offer, the main product and secondary products. They have support services for the comfort and safety of their visitors. The tabulation below would give us a more glaring comparison of these two types of businesses: Table 7.0 Peculiarity in Informational Needs Factors Local tourism Internet cafe Attraction (ie, product) Beach Internet connection Main attraction (ie, White sand beach Fast and reliable internet main product) connection Secondary attraction Cuisine, scenery, special trip Webcam, printing services, (ie, other products) to the nearby island copying services, prices, membership discounts, assistance to the beginners, internet gaming Facilities (ie, support Hospital, security, bookstore, Comfortable chair, air services) supermarket conditioned room, clean comfort room, spacious parking Information need Town information and Business information reports directional map, information (ie, financial reports, on the number of visitors’ transactional summary, arrival, available beach analysis) service providers, sale of souvenir items, and similar data Despite the inherent differences in operating the two businesses, the local tourism and internet café are drawn to a common need. They need information to make prudent economic decisions. 17 Business stakeholders and their informational needs Lesson 2.3 The town council would need information to more effectively package and sell its town’s best places and activities. It also needs information to better prepare its facilities in ensuring the safety, comfort, and security of its visitors. Likewise, it would need information to evaluate the effectiveness of its promotional campaign by assessing the number of visitors’ arrival, length of their stay in the town, and other related demographics. The internet café manager also needs information to inform the public of its product offering. He also needs understandable information to package its products into useful or interesting goods. Likewise, he needs to assess the results of its business activities and find ways on how to properly improve its services for better business. Indeed, man needs information to do his task more accurately. Without information, he would be constrained to use the unsystematic and disorganized trial and error approach in doing things he had not done before. This would mean more errors, more time spent, and more resources to use. In plain language, it means higher cost. In contrast, the availability of right information would lead to conducting things quickly and precisely resulting to efficiency, savings, and growth. 4.3 Information is freedom Freedom is the power to make a choice among alternative options. An intelligent choice should be based on relevant information crafted from a processed data. Data Data are abstract, unorganized set of facts or opinion, and, therefore, meaningless expressions of events. Data should be processed, organized, and presented in an understandable manner to become relevant information. Information Information is a relevant presentation of organized data serving as a basis in making reasoned business decisions. Information may be viewed in various perspectives as follows: Information Fields of interests Culture Sports Politics Finance Etc. Measurement Quantitative Financial Non-financial Quantitate  18 Business stakeholders and their informational needs Lesson 2.3 Presentation Written Oral Symbolic Others Information may be classified in multifarious ways. It may be classified in relation to fields of interest such as sports, politics, culture, religion, education, finance, business, and the like. Information may also be classified in terms of measurement, either quantitative or qualitative. Quantitative information is measurable in terms of metric systems such as kilograms, cubic meter, kilometers, kilohertz, feet, or in amount of money, or other means of measurement. Quantitative information may be financial or non-financial in measure. Qualitative information is expressed in relative or abstract terms, where the meaning depends on the interpretation of the speaker or the listener. Examples are tall, wide, beautiful, diligent, orderly, and other similar relative terms. Information may also be classified as to its form of presentation, such as written, oral, or symbolic. Information may also be classified as to its origin, either experiential or normative. Experiential information is derived from the experiences of a person. Normative information is derived from traditions, beliefs, experiences of others, and laws in accordance with expected activities and results. Examples of data, information and some assumed decision alternatives are as follows: Table 8.0 Data and Information Data Information Decision alternatives beautiful , lady, black skirt The lady in black skirt is beautiful. Accept or not to accept the proposition. Fundamentals of E. Cunanan has authored a book in To buy or not to buy the book Accounting book, national Fundamentals of Accounting, 2014 bookstore, P350, edition, and is now available in the informative, 2010 edition, National Bookstore for only P350. E. Cunanan P50 million, ABC ABC Enterprises owns 5 buildings Accept or reject the Enterprises, 5 buildings worth P50 million. statement Information is needed in making reasoned decisions. Business decisions A decision is an option or alternative chosen to do or not to do a task. We always make Decisions decisions in our lives. We make decisions every hour, every minute or tick of a second. We shape destiny! decide on simple things such as which dress to wear for the day to a more strategic decision of what college study program to take. Simple decisions affect us only for a day, a week, or a  19 Business stakeholders and their informational needs Lesson 2.3 month. Strategic decisions affect us for a long time, ie, more than a year. Other strategic decisions even affect us in our life time. Decisions define the activities we do. It shapes our future. It creates our destiny. It forges what we are and who we are. Decisions are made in business activities. Normally guided by the overriding criterion of Our future is cost-benefit analysis, business decisions affect the growth, survival, success and downfall the sum of all our decisions! of an economic entity. Business decisions are made by proprietors or officers of a business enterprise. Business decisions should be based on information. Right information would help in crafting the right decision at the right place, at the right moment. Wrong information and, worse, misleading information would lead to erroneous decisions oftentimes resulting to business failures or the downfall of a great business enterprise. An unsuccessful business venture would mean millions of money lost in thin air just because of plain disregard to the value of information. In business, the importance of right and true information is indispensable. 4.4 Information and the power of correspondence Correspondence is an exchange of information between two parties. One is acting as the sender and the other acting as the receiver. The parties have equal rights. The sender has the right to give information while the receiver has the right to believe or not to believe on the information sent. Fig. 4.0 The Correspondence Process 20 Business stakeholders and their informational needs Lesson 2.3 In providing business information, the Accountant acts as a sender. As such, he is privileged to choose the information to be provided, the manner to which the information is given, the format to be used, and the timing of its release. Over and above, he has the opportunity to furnish complete or partial, or even, correct or incorrect information. These privileges and power are purely within the Accountant’s control and can only be assessed by technical and ethical standards. If the technical standards are not complied with, the competence of the Accountant will be doubted and his technical integrity put under adverse pressure. Once the ethical standards are not complied into, the Accountant’s objectivity shall be greatly challenged and his ethical integrity will consequently suffer. As such, the Accountant is expected to act with expertise, prudence, impartial, not bias, understandable, and keen in determining to whom and when should the information be provided. He should provide accurate and verifiable information. On the other side, the receiver or information user has the opportunity to test the credibility and relevance of the information furnished by the Accountant. If the information provided is used and found to be credible, the reputation, and therefore the integrity, of the Accountant- Sender is affirmed and his status as a professional shall be highly regarded. If the information is found not in compliance with established standards or the same is lacking of importance, the receiver-user of the information shall be unhappy resulting to great doubt and skepticism as to the information furnished by the Accountant. This would result to negating the credibility and therefore the integrity of the Accountant.  ML 4 Financial Information 5.0 The accounting information There is one overriding reason why accounting information is needed. It serves as a basis in making informed economic decisions by various parties and stakeholders interested in business. Decisions define the enterprise’s performance in the past, present, and future. 5.1. The basic financial statements If we have heard of a political statement, a fashion statement, or a cultural statement, we also have financial statements. An example of a set of financial statements is shown in Appendix 1 Information of this book triggers intelligence. The financial statements are end-products of the accounting process. These are the financial reports of the business on the activities it had in the previous period, the financial status it has as at a given date, and its potential as an economic enterprise in the coming period. The basic financial statements are the following: Table 9.0 Financial Statements and their Informational Content Financial statements What information does it present? Statement of Financial Position It presents the financial position or status of a business as (also known as Balance Sheet) at a given point of time (ie, as of December 31, 2020, as of February 28, 2021). This financial statement reflects the financial health of a business on a particular date. Statement of Profit or Loss It presents the results of business operating activities for (also known as Statement of a given period of time (ie, for a week, for a month, for a Comprehensive Income or quarter, or for a year). These activities include sales to Statement of Income) customers and expenses used and paid in a given period. The net result of its operating activities may be a profit or loss. Statement of Changes in Equity It presents the increases and decreases in the variables of owner’s equity. Equity means the financial interest of the owners in the business. It reflects the value of the owner’s wealth in the business resources. It includes additional investments, accumulated profit, drawings and withdrawals. Statement of Cash Flows It presents the sources and uses of cash classified as operating, investing, and financing activities during a given period of time. Notes to Financial Statements These are accompanying notes, schedules, explanations, and informed opinion giving purposeful meanings and  22 Business and Accounting Module 1 Financial statements What information does it present? insights on the matters presented, or not presented, on the statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows. The importance of these notes should not be discounted to favor the four financial statements presented. 5.2. Money as the information language of business Business information is expressed in money because it is the language of business. It is the Money is the bloodline of language understood by the owners, creditors, suppliers, employees, government agencies, business. and other interested parties in business. Accounting information is expressed in terms money. It uses money to express business reports. It also uses money as a mode of measurement because it is the most objective way of expressing measurable financial reports. Rightfully, accounting claims as “the language of business” 5.3. Accounting information is business information Accounting information is financial information. The financial information in business is contained in the financial reports technically called the financial statements. These financial statements give critical information as to the financial performance and standing of the business. The basic financial statements, which shall be discussed and illustrated thoroughly in Chapters 3, 8 and 11 are the Statement of Financial Position, Statement of Profit or Loss, Statement of Changes in Equity, Statement of Cash Flows, and the Notes to Financial Statements. International Accounting Standards 1, paragraph 10 publishes the following: A complete set of financial statements comprises: (a) a statement of financial position as at the end of the period; (b) a statement of profit or loss and other comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising a summary of significant accounting policies and other explanatory information; and (f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. Presented on the following page is a snapshot of the basic financial statements: 23 Business and Accounting Module 1 Fig. 5.0 Snapshots of Financial Statements Appendix 1 at the end of this textbook presents a full version of sample financial statements for small and medium-sized enterprises (SMEs).  24 Business and Accounting Module 1 MK 6 Business and Government Regulations 6.0 Government regulations A government is needed in a market society. Its primary duty is to protect the integrity of, and opportunity in, the market place. The market place needs laws to protect the rights of its players. It should also maintain fairness and equity in implementing such laws. The market also needs enough space for talents, creativity, and industry to promote new and improved ways of doing things that would lead to new and improved products. 6.1 The need for regulation The freedom provided to the market players should not be exercised without limits. Otherwise, Government the ideal environment that the seller and buyer would have equal degree of influence in the policy tempers market place would not come into natural play. More so, one of the two players may market eventually have a substantial control of the market thereby imperiling the interests of the players. other player. This would lead to market ineffectiveness and rejection that may further aggravate to the downfall of the free enterprise system. Considering the fragility of the market system where the intended balance of control between the buyer and the seller is open to abuse and too much profit-taking, the presence of regulatory government hand would be most welcome. This would lead to order, discipline, rule of law, and respect to the right of others. 6.2 Government agencies The hand of government regulations take into many forms from the getting of business names, registration, permits, licensing, business reporting and payment of taxes, to remittances of health and pension contributions. Some of the Philippine regulatory agencies are as follows: Table 10.0 Government Regulatory Agencies Government agencies Area and nature of regulation Department of Health Private hospitals Department of Trade and Industry Business name Securities and Exchange Commission Partnership and corporation registration and financial reporting Bangko Sentral ng Pilipinas Banks and other financial institutions (eg, 25 Business and Accounting Module 1 Government agencies Area and nature of regulation pawnshop, lending companies) operations and reporting Cooperative Development Authority Cooperatives Local government units Local business operators by issuing mayor’s permit and business licenses Land Transportation Franchising and Franchise to land transportation business Regulatory Board Department of Education Permit to operate private elementary and secondary schools Insurance Commission Insurance business operations and financial reporting requirements Bureau of Internal Revenue Tax collections National Telecommunications Telecommunication companies Commission National Electrification Administration Electricity generation and distribution business Energy Regulation Board Gas and oil companies Social Security System Private employees’ contributions to health, pension, and retirement funds PAG-IBIG Government employees’ contributions to housing and other loan needs Local Government Units Business permit and licensing in the locality Examples of government accounting reports are those submitted to the Social Security System to accompany remittances of contributions, to Bureau of Internal Revenue for taxes paid, to Securities and Exchange Commission for the audited financial statements, to Philhealth to support the remittances for health contributions, to PAGIBIG for social welfare contributions on housing and household loans, to Bangko Sentral ng Pilipinas for banks and entities performing banking activities, and to Cooperative Development Authority for cooperative. The Securities and Exchange Commission by virtue of RA 8799 has been empowered to registration of securities, analysis of every registered security, evaluation of the financial condition and operations of applicants for security issue, screening of applications for broker's or dealer's license and supervision of stock and bond brokers as well as the stock exchanges. Recently, it has been acting as the central agency in coordinating the adoption and implementation of the International Financial Reporting Standards for listed companies and entities entrusted with fiduciary functions. The Bureau of Internal Revenue is mandated by law to assess and collect all national internal revenue taxes, fees and charges, and to enforce all forfeitures, penalties and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts (Sec. 2 of the National Internal Revenue Code of 1997). The BIR and SEC have been instrumental in promoting awareness in accounting reports and their importance to government operations. 26 Business and Accounting Module 1 TOPIC SUMMARY Business organizations are created for profit derived from entering into business transactions. To fulfill its purpose and existence, an organization have to act within the parameters of the economic model it has subscribed and compels the enterprise to be influenced by the norms of its social, cultural, political, technological, and educational environment. It also exposes the enterprise to changes in social demographics. As the enterprise plays its role in the environment, it practices fundamental concepts so it could function as a vital component of the larger society. Such business concepts include the entity concept, going concern, and prudence together with their secondary concepts of accrual, periodicity, fair valuation, unit of measure, dual effects, and stable monetary unit. As the business transacts with other parties, it creates relationships from its supply source to its destination, from its suppliers to customers. Moreover, it has to deal with its employees, government regulatory agencies, and the general public of which its paramount interests should be served. In the process, the informal and unwittingly recognized partnerships between the enterprise and its interested parties are formed. This dawns the need for information about the enterprise for the various stakeholders to be properly appraised and make reasoned economic decisions. The playing field in the marketplace needs to be regulated to avoid abuse and manipulations to the prejudice of the weaker and aggrieved economic players. The arms of government regulations are undeniably necessary to level the economic playing field.