Business Types, Forms, and Requirements PDF

1. Basic Concepts BUSINESS TYPES, FORMS, AND ITS REQUIREMENTS Introduction A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. I...

1. Basic Concepts BUSINESS TYPES, FORMS, AND ITS REQUIREMENTS Introduction A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. It is a person or organization engaged in the regular conduct of commercial, industrial or professional activities, whether for profit or not, in order to fulfill a purpose, goal, mission or cause. It is the regular conduct or pursuit of a commercial activity or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person is engaged therein is a non-stock, non-profit private organization or government entity. (Sec 105, NIRC) Key Notes Business: Person or organization Business Regular conduct Commercial, industrial or professional activities Conducted in the Philippines Lawful transactions Whether for profit or not To fulfill a purpose, goal, mission or cause Types of Business There are four major types of businesses: 1. Service Business A service type of business provides intangible products (products with no physical form) for a fee. Service type entities offers professional skills, expertise, advice, and other similar products. Examples of service businesses are: Business services, such as accounting, advisory, taxation, legal, auditing firms, etc. Automotive repairs, car rental, car wash, parking spaces Personal services, such as laundry, beauty salon, photography Recreation facilities, amusement parks, bowling centers, golf courses, theatres Hospitals and clinics, schools, museums, banks Hotel and lodging 2. Merchandising Business A merchandising business buys product and sells the same at prices higher than their purchase costs. They are known as "buy and sell" businesses. A merchandising business buys a product and sells it without changing its form. Examples of this type of business are grocery stores, convenience stores, distributors, and other resellers. 3. Manufacturing Business A manufacturing business buys material and converts them into a new product. A manufacturing business combines raw materials, labor, and overhead costs in its production process. The goods produced will then be sold to customers. “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 1  Examples of manufacturing businesses are: Automobile manufacturing, Aerospace and Shipbuilding Paper industry for producing paper, cardboard and related products Fashion Industry for producing textiles, clothing, footwear, accessories and cosmetics Consumer Goods production such as foods, beverages and toiletries Printing & Publishing materials and books 4. Mixed/Hybrid Business These are companies that can be classified in more than one type of business. They run different departments or divisions for different purposes. An example of this is a restaurant, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders (service). Forms of Business Organization These are the basic forms of business ownership: 1. Sole Proprietorship The sole proprietorship is the simplest business form under which one can operate a business. It is a business owned by only one person and is personally responsible for its debts. The sole proprietorship is usually adopted by small business entities due to its simplicity, ease of setup, and nominal cost. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them. The advantages of a sole proprietorship include: Owners can establish a sole proprietorship instantly, easily and inexpensively. Owner has full control over business decisions The disadvantages of a sole proprietorship include: Owners are subject to liability for the debts, losses and liabilities of the business Limited source of funds 2. Partnership A partnership is a business owned by two or more persons who contribute resources into the entity, and divide the profits among themselves. Generally, all partners have unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited partners. The advantages of a partnership include: Relatively easy to establish compared to a corporation Talents and strengths of each partner can best be utilized Minimal paperwork and legal restrictions The disadvantages of a partnership include: Partners have unlimited liability with regard to the liabilities and debts of the business Limited ability to raise capital Divided authority “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 2  3. Corporation Corporation is a business organization that has a separate legal personality from its owners. It is usually adopted by large business organizations. Ownership is usually represented by shares of stock. The advantages of a corporation include: Can generate large amounts of capital from investments easy to transfer ownership The disadvantages of a corporation include: not easy to set-up and organize owners (stockholders) enjoy limited liability but have limited involvement in the company's operations. Not considered engaged in business: Government agencies and instrumentalities Pure compensation employment (local or abroad, private or government) Directorship in a corporation Gratuitous transfer of properties by succession or donation Isolated or casual transactions by persons not engaged in trade or business Also considered engaged in business: Freelancers, agents and consultants Broadcast media talents and artists Legal Requirements 1. Business Name and Entity Registration: Depending on the form of the business, it must register with the following government agencies: a. Sole Proprietorship - Department of Trade and Industry (Business Name Registration) b. Partnership or Corporation - Securities and Exchange Commission (Registration System) 2. Secure Business Permits and Licenses Depending on the nature of its activities, the business must secure its permits and licenses in the city or municipality where it conducts its business. Generally, the following will be obtained: a. Business Permit - from the Mayor's Office b. Fire Safety Inspection Certificate - from the Bureau of Fire Protection c. Barangay Clearance and Community Tax Certificate - from the barangay where the business is operating d. Employer Registration - SSS, HDMF, PHIC, DOLE (if applicable) “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 3  3. Comply with BIR Requirements: The business entity must also comply with the following requirements of the Bureau of Internal Revenue: Business registration Issuance of receipts and invoices Keeping of tax and accounting records Withholding of taxes on certain payments Filing and payment of taxes However profitable or noble the purpose of the business may be, the failure of the business entity to comply with any of these requirements might lead to penalties, fines, surcharges or, at worst, closure of the business. After the registration and securing all the necessary certificates and permits, the company needs to maintain its accounting records. Summary: Business Types, Forms, and its Requirements Summary Notes Business - organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. Types of Business: 1. Service Business - provides intangible products for a fee. 2. Merchandising Business - buy and sell merchandise 3. Manufacturing Business - buys materials and converts to a new product 4. Mix/Hybrid Business - more than one type of business Forms of Business: 1. Sole proprietorship - owned and controlled by only one person 2. Partnership - owned by partners who agree to undertake business to make profit 3. Corporation - a legal entity owned by shareholders 4. Legal Requirements a. Business Name and Entity Registration b. Secure Business Permits and Licenses c. Comply with BIR requirements 2. Introduction to Accounting Accounting is commonly known as the "language of business". It provides financial information about the organization through financial reports to different users to help them in making decisions. By learning this language, you can communicate and understand the financial operations of any and all types of organizations. It means that accounting allows us to see things like how much money the business is earning, how much money the business spend and more. Definition Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions (Accounting Standards Council). “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 4  Accounting is an information system that measures, processes and communicates financial information about an identifiable economic entity. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information (American Accounting Association). Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof (American Institute of Certified Public Accountants). Purpose of Accounting The purpose of Accounting is to provide financial information about the business that will be useful in making economic decisions of the users of the information. Let's have a simple illustration: Mr. Juan Dela Cruz started a Repair Service Shop. Initially, he invested Php 25,000 to open a mini repair shop. There are many customers and the business went well. One day, one of his primary equipment was broken and decided to buy a more advanced equipment. He then applies for a loan in a bank to buy a new equipment. The bank officer asked Mr. Juan how much profit did he made for the year, how much his assets are worth, how much debt he has, what his cash flow is each month. With no recording of transactions, Mr. Juan wasn't able to answer the questions and consequently, the bank officer did not approve Mr. Juan's loan application. We can easily answer the bank officer's questions if we kept track of the company's transactions. If we used Php 15,000 to buy equipment and Php 2,000 to pay rents, then we'd have Php 8,000 cash left. If we collected Php 10,000 from our customers, then we would have Php 18,000. Accounting is important to keep track of business transactions. It is clear that the ultimate purpose of accounting is to provide information to different users. The users utilize the information in making economic decisions. Financial Statements Accounting information is data about a business entity’s transactions. Once identified and analyzed, the information is then recorded, classified, and it eventually finds its way into various reports commonly called Financial Statements. Financial Statements are summary accounting reports prepared periodically to inform interested parties as to the financial condition and operating results of the business. The following are the Financial Statements generally prepared to provide information to different users. 1. Statement of Financial Performance (Income Statement) - The financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year. Income statements are always prepared for a period of time and the term “for the period ended” is included in the title. 2. Statement of Changes in Owner's Equity - The financial report that summarizes all the changes in owner’s equity (capital) that occurred during a specific period. 3. Statement of Financial Position (Balance Sheet) - shows the amount and nature of business assets, liabilities, and owner’s equity (capital) as of a specific point in time. The account balances at the end of accounting year will carry forward to become the beginning balances of the subsequent year “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 5  4. Statement of Cash Flow - The financial statements also show the inflows and outflows of cash in the different activities of the business (operating, investing, and financing activities). 5. Notes to the Financial Statements - Qualitative, quantitative, and financial information that could affect the decisions of users are included in the notes to financial statements. Users of Accounting Information We learned that the whole purpose of accounting is to provide information that is useful and relevant for interested users when making decisions regarding the company and its operations. Who are these users of financial information? What information do they need? Key Notes Users can be grouped into two categories namely internal users and external users Internal Users (within the business organization) Owners Managers Employees Officers Internal Auditors External Users (outside the business organization) Customers Suppliers Creditors Investors External Auditors Government Agencies Industrial Organizations Public Branches of Accounting 1. Financial Accounting - a systematic method of recording business transactions in accordance to the accounting principles. 2. Management Accounting - provides information to management for better administration of the business. 3. Cost Accounting - Cost accounting deals with evaluating the cost of a product or service offered. 4. Tax Accounting - deals with the preparation and filing of various tax returns and dealing with their legal implications. 5. Auditing - It is where an external certified public accountant known as an Auditor inspects and certifies the accounts of the business for their accuracy and consistency. Summary: Introduction to Accounting Summary Notes Accounting - is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof (American Institute of Certified Public Accountants) “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 6  Purpose of Accounting - to provide financial information about the business that will be useful in making economic decisions of the users of the information. Financial Statements: Statement of Financial Performance (Income Statement) Statement of Changes in Owner's Equity Statement of Financial Position (Balance Sheet) Statement of Cash Flows Notes to Financial Statements Users of Accounting Information 1. Internal Users (Owners, Managers, Employees, Officers, Internal Auditors, etc.) 2. External Users (Customers, Suppliers, Creditors, Investors, Government Agencies, etc.) Branches of Accounting Financial Accounting Management Accounting Cost Accounting Tax Accounting Auditing 3. Introduction to Bookkeeping Bookkeeping is the recording of financial transactions and is part of the process of accounting in business (Financial Accounting 2003, Weygandt; Kieso; Kimmel). It is largely concerned with the implementation of the accounting procedures manual and maintenance of the accounting records. Bookkeeping is the procedural implementation of Accounting. Bookkeeper is the person who keeps and maintains the books of accounts of the business organization. The bookkeeper is responsible for recording the transactions of the business. Functions of a Bookkeeper General Accounting ✓ Verify deposit of cash collections ✓ Verify petty cash disbursements ✓ Prepare bank reconciliation ✓ Post to the subsidiary and general ledgers ✓ Reconcile general and subsidiary ledgers ✓ Prepare a draft of the Trial Balance ✓ Assist the Accountant in the closing of the accounts and finalization of the financial statements. ✓ Maintain proper filing and retrieval of accounting records Accounts Receivable ✓ Record sales invoices ✓ Record cash receipts from customers ✓ Record sales returns, account adjustments and credit memos from suppliers ✓ Issue Statement of Accounts to customers ✓ Reconcile accounts receivable ledger balance with unpaid customer invoices. ✓ Maintain Accounts Receivable Subsidiary Ledger ✓ Prepare Accounts Receivable reports “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 7  Accounts Payable ✓ Record purchase invoices ✓ Record payments to suppliers ✓ Record purchase returns, account adjustments and debit memos from suppliers ✓ Receive Statement of Accounts from suppliers ✓ Reconcile accounts payable ledger balance with unpaid customer invoices. ✓ Maintain Accounts Payable Subsidiary Ledger ✓ Prepare Accounts Payable reports Inventory Accounting ✓ Record receipts of inventory from suppliers. ✓ Record release of inventory to customers ✓ Record inventory returns and adjustments ✓ Prepare purchase requests and Inventory issuance slips ✓ Reconcile physical count of inventory to ledger balances ✓ Maintain inventory subsidiary ledgers ✓ Prepare Inventory reports The Bookkeeper may also be assigned to handle other functions, such as: ✓ Property control and monitoring ✓ Payroll preparation ✓ Remittance of statutory deductions and reports ✓ Tax bookkeeping ✓ Treasury and banking ✓ Audit assistance ✓ Managerial and administrative functions. The scope and variety of functions depends on the nature, type, size, organization structure of the business and other factors. Due to the importance of his or her functions, the Bookkeeper must possess the knowledge, abilities and temperaments required to properly fulfill his or her duties and functions. One of the knowledge requirements would be the basic knowledge in Accounting. “Unauthorized reproduction of this file exclusively for the CB Certification program is strictly prohibited” 8