Chapter 1 merchandise.

which will be sold at a price

INTRODUCTION TO ACCOUNTING higher than the purchase cost. Examples
are supermarkets, groceries, hardware
stores, bookstores, drug stores, shoe
ACCOUNTING AND THE BUSINESS
stores, etc
Accounting is introduced primarily
2. Manufacturing - this involves the
for a business enterprise. It has evolved in
conversion of raw material into finished
response to the need of business
product, which will be sold at a price
managers for relevant financial
higher than the cost of production
information necessary to run the business
Examples are manufacturers of drugs, soft
effectively and to guide them in making
drinks, tables and chairs, computers,
plans or making decisions Accounting
pencils, ball pens, etc
satisfies this need by providing and
3. Servicing - this involves the rendering
communicating the required information:
of services for a certain fee which is
not only to the decision makers
higher than the cost of the services
(managers) but also to other interested
rendered. Examples are repair shops,
parties. Accounting is useful not only for a
parlors, movie houses, banks, insurance
business enterprise but also for any kind
companies, educational institutions, etc.
of organization or association that will
need financial information. Even
FORMS OF BUSINESS (As to
individuals can also make use of
Ownership Structure)
accounting information although on an
As to ownership, a business may be
informal basis. When they borrow money,
classified as follows:
compute their take home pay, pay their
income taxes, buy a new car on
1. Sole Proprietorship-this is a business
installment, or when they plan for
owned and operated by only one person.
retirement, all these will require
2. Partnership- this is a business owned
accounting information. The usefulness
by two or more persons
therefore of accounting to everyone,
3. Corporation-this is a business whose
especially to a business organization,
capital is divided into shares of stock
cannot be overemphasized
owned by several people called
shareholders or stockholders.
WHAT IS A BUSINESS?
4. Cooperative-this is a business whose
To explore the role of accounting in
capital is owned by several people
relation to a business, let us first
(generally poor people) called members:
understand what a business is. A
business is the exchange of goods or
Characteristics of the Different Forms
services that results in mutual benefit
of Business Organization
for both parties involved. The primary
Sole Proprietorship
objective of a business is to make profits.
1. One owner called proprietor
To make money, a business must sell.
2. Unlimited liability
What it will sell will depend on the nature
3. Owner manages the business
or kind of business
Partnership
1. Two or more owners called partners
3 KINDS OF BUSINESS
2. Unlimited liability
A business can generally be
3. There is a managing partners
classified into three kinds depending on
Corporation
the nature of its operations or what it is
1. Unlimited owners called
selling
shareholders
2. Limited Liability
1. Trading or Merchandising - this
involves the buying of goods or
 3. Management is vested in the board 8 External users are those who have
of directors financial claim or interest in the business.
Cooperative which include the following:
1. Unlimited owners called members
2. Limited liability 1. Owner/s (who are not the
3. Management is vested in the board manager/s) - being the owner or owners,
of directors they are naturally interested in what's
happening to the business,
In a SOLE PROPRIETORSHIP, if 2. Prospective investors-they want to
the business has unpaid debts which it know whether it is worthwhile investing in
can no longer pay, the creditors can run the business. Is the return (income) on
after the owner and attach his personal investment worth the risk?
properties to satisfy their claim. The same 3. Suppliers and creditors - they want
is true in the case of a PARTNERSHIP. to know the risk they are taking when they
This is the meaning of unlimited liability give credit terms to the business.
of the owner/s. In a CORPORATION and 4. Lending institutions - they want to
COOPERATIVE, the liability of the know whether or not to grant loan to the
shareholders or members is limited only business or whether the business can pay
up to the extent of their paid-up capital. In its outstanding loan.
the event the business gets bankrupt, the 5. Customers - they are interested in the
creditors cannot run after the owners. This stability of the business, which is the
is the reason why a corporation or supplier of their needs.
cooperative is the more popular choice of 6. Employees - they are interested to
prospective owners or investors. know the stability and profitability of the
business so they can look for another
This book (volume 1) will cover or company when necessary. They also want
discuss the operations of servicing, to know whether the business can afford
trading and manufacturing concerns an increase in their salaries and other
owned and operated by a single fringe benefits.
proprietor. The operations of a partnership 7. Government-is interested to know
or corporate form of business organization whether the business is paying the correct
will be covered in volume 2 of this book. taxes or is complying with all the
government requirements.
Users of Accounting Information 8. General Public - The public may be
The information provided by interested in the affairs of the business for
accounting is useful not only to the their own personal and varied reasons.
owners and managers of the business but
also to other interested parties. NATURE OF ACCOUNTING
Accounting is a service activity
The users may be classified into two, whose function is to provide quantitative
the internal and external user: information, primarily financial in nature,
about economic entities that is intended
Internal user refers to the management. to be useful in making economic
As stated earlier, in a corporation or decisions. The term "financial in nature"
cooperative, management is vested in the means that the information provided is
board of directors (BOD). In a single expressed in monetary terms, i.e.,
proprietorship, the owner is also the expressed in pesos.
manager. In a partnership, the partners For an effective stewardship of any
usually appoint a managing partner. organization, the manager will need all
the necessary financial information. This is
precisely the nature of accounting, which
is "information provider". Accounting Recording this involves putting into
communicates financial information not writing all the business transactions
only to the owners or managers but to including significant events which might
anybody who may have an interest or occur and which will affect the business.
financial claim in the business hence This is more popularly known as
accounting is often described as the Bookkeeping. Considering the voluminous
"language of business". transactions of a business enterprise for a
given period of time, it is necessary that
DEFINITION OF ACCOUNTING they be recorded. Furthermore, this is a
Accounting has been defined in BIR requirement. The recording can be
several ways, but the most complete is done manually or with the use of a
the definition pronounced by the computer.

Committee on Terminology of the Classifying this involves grouping

American Institute of Certified Public together similar items or accounts for
Accountants (AICPA) as follows: purposes of systematic recording and
preparation of reports.
Accounting is the art of
recording, classifying, summarizing, in a Summarizing this involves the
significant manner and in terms of money, preparation of the formal accounting
transactions and events, which are in part, reports or financial statements at the
at least of a financial character, and end of an accounting period.
interpreting the results thereof.
Interpreting this involves the analysis
As defined by the Financial Reporting of the financial statements by developing
Standards Council (FRSC)-formerly financial ratios and explaining their
Accounting Standards Council (ASC) significance to make the statements more
meaningful. In a computerized system of
Accounting is described as an art accounting, this is the only function the
because, the information or report is computer cannot perform hence
presented in an artistic and orderly accountants are still useful.
manner easily understood and
appreciated by the reader or user of the All the above functions will be
information, Accounting may also be discussed lengthily and thoroughly in the
considered as a science because the subsequent chapters of this book for a
accounting methods and procedures are better understanding. It is premature to
in accordance with the generally accepted discuss them at this time..
accounting principles, which are widely
used and internationally accepted. Role of Accounting in Business
The role of accounting in business may be
Based on the definition stated, it summarized as follows:
can be noted that there are four distinct
functions of accounting namely, 1. It helps the owner's or managers
recording, classifying, summarizing and make plans and decisions.
interpreting. Of the four functions, the 2. It reports and analyzes business
interpreting function may be considered transactions thru the financial
as the most important simply because the statements
first three functions can now be easily 3. It communicates financial
performed faster and with a reasonable information to all interested
degree of accuracy by the computer. parties.
 6 BRANCHES OF ACCOUNTING ACCOUNTING REPORTS
At the end of an accounting period
Because different users of (usually one year) accounting reports
accounting information have different called "financial statements" are
needs and requirements, and with the prepared. These are the end-products of
proliferation and diversification of financial accounting.
business enterprises, several branches of
accounting have emerged from a single The complete financial statements:
general accounting. Each branch will
serve the needs of a specific user or users. Income Statement this is a statement
which shows the results of operations of a
Financial Accounting (external users) business enterprise. It shows whether the
- deals with the reporting of past business makes a profit or incurs a loss.
activities and events and is intended
primarily for the external users.

Cost Accounting (both internal &

external)
-This branch of accounting primarily deals
with the determination of the cost of
goods manufactured and sold. The
definition has been expanded to include
the determination of the profitability of
the business as well as the valuation of Statement of Comprehensive Income
inventories.
Balance Sheet-this is a statement which
Managerial or Management shows the financial condition of a
Accounting (internal users) - this business.
branch of accounting originated from cost
accounting. It focuses mainly on the
information which can be useful to
management when it performs its basic
functions or when making decisions.

Government Accounting- this branch of

accounting specifically deals with the
reporting of past activities or transactions
of the government.

Auditing- these deals with the

verification of the fairness of the
accounting reports prepared and whether
they are in accordance with the
generally accepted accounting principles. Statement of Financial Position

Taxation deals with the determination of Statement of Changes in Owner's

the different taxes imposed upon a Equity - this is a statement
business by the government whether supplementing the balance sheet. It shows
local or foreign. the increases or decreases in the equity of
the owner/s.
 - Changes in Owner's Equity
shows how equity changes due to
various activities.
- Comprehensive Income
summarizes all revenues, expenses,
gains, and losses in one statement.
- Financial Position (Balance
Sheet) is like a snapshot of assets,
liabilities, and equity at a specific
moment.
Cash Flow Statement- this is a
- Cash Flow explains how cash
statement which shows the sources
comes in and goes out during a
(inflows) and uses (outflows) of cash.
period, emphasizing liquidity.

These statements work together to

provide a comprehensive view of a
company's financial health and
performance, with each one serving a
specific purpose.

GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP), CONCEPTS
& ASSUMPTIONS

Generally Accepted Accounting

principles (GAAP) - are principles
(including concepts and assumptions),
which have gained international
Statement of Cash Flow
acceptance in the business world and the
accountancy profession. The accounting
Also, in addition to the statements
procedures therefore, the profit
mentioned, significant accounting policies
determination, preparation and
and other explanatory notes must be
presentation of the financial statements
disclosed thru a supplementary report
must be in conformity with the generally
The Financial Reporting Standards
accepted accounting principles. An
Council (FRSC) in its most recent
independent external auditor is usually
pronouncement, suggested to change the
required to make a certification of
names of the accounting reports as
compliance by the business to these
follows:
principles. This is the assurance of the
Old Terminology New Terminology external users that the statements
prepared by the accountant are more or
-Income Statement -Statement of
less fairly presented. Knowledge of these
-Balance Sheet Comprehensive
-Cash flow statement principles serves as guides to the
Income
-Statement of
accountants in the practice of
Financial Position accountancy.
-Statement of Cash
Flow Selected accounting principles,
concepts and assumptions are
Differences in Simple Terms: enumerated below The other more
complex principles will be discussed in the incurred whether paid or not and
higher accounting subjects revenue is recognized when earned
whether collected or not.
Business Entity Concept - Under this
concept, the business is treated, as having Objectivity - This simply means that
a separate personality from the owner/s transactions recorded or amounts
as such the transactions of the business reported can be verified thru the
must be divorced from the transactions of supporting documents. This is
the owner/s. The business as an entity can necessary to maintain the trust, faith and
acquire properties in its own name, it can confidence of the users or readers on the
sue or be sued (except in the case of a financial statements. It also means that
sole proprietorship). the information provided is free from
bias.
Going Concern Concept - Under this
concept, it is assumed that the business Cost Principle- This simply means that
will continue operations indefinitely properties or assets acquired must be
unless there is evidence to the contrary. recorded at the actual acquisition cost
This is necessary for the proper valuation and not at an estimated cost.
of the properties of the business. If the
business is about to be liquidated Matching Costs Against Revenue -
(dissolve), the properties are valued at This simply means that all cost and
their realizable value (how much the expenses incurred during the period in
used item will be sold) but if the business generating the revenue, must be
is a going concern, the properties are matched (subtracted) against the
valued at their acquisition costs. revenue for the same period.

It means that when a company Consistency - This simply means that for
prepares its financial statements, it the financial statements to be
assumes the business will keep running comparative, the application of the
and won't be forced to close down or sell accounting methods, procedures, or
its assets quickly. principles must be consistent with the
previous period. However, if the change
This concept is important because will produce more accurate result, the
it allows businesses to plan for the change may be allowed provided the
future, make investments, and show a effect on the financial statements will be
more accurate picture of their financial disclosed.
health in their reports. It helps
stakeholders, like investors and creditors, consistency means sticking to the
understand that the business is expected same rules unless you find a better way. If
to continue operating smoothly. you do change, just be honest about it in
your financial statements.
The difference is whether you're in Tell everyone that you’ve changed
a rush to sell stuff to close down your way and tell them what you
(liquidation) or you're planning to keep changed.
using it for your business (going concern),
and that affects how you decide its value. Accounting Period - Considering that
the business is assumed to be a going
concern, its life is divided into periods
Accrual Basis of Accounting - This (usually one year) at the end of which
simply means that expenses of the financial statements are prepared. In
business are recognized or recorded when this manner, interested users or readers
will know the status of the business on a charge of formulating or developing the
period-to-period basis. accounting standards, which will guide
CPA practitioners. This council is a
Full Disclosure - This simply means that creation of the Professional Regulation
the financial statements should reflect all Commission (PRC) thru the
significant events or facts, which might recommendation of the Board of
influence the decisions to be made by any Accountancy (BOA)
interested party. This can be done by
using footnotes, parenthetical notations, Securities and Exchange Commission
or if warranted, a separate document (SEC) - is in charge of regulating the
called "Notes to the financial business operations of a partnership,
statements" can be attached to the corporation, and foundations
financial statements.
Cooperative Development Authority
(CDA) is in charge of regulating the
business operations of a cooperative.

Bureau of Internal Revenue (BIR) is in

charge with the collection of taxes.

Bangko Sentral ng Pilipinas (Formerly

Central Bank of the Philippines) - is in
GOVERNMENT REGULATORY charge of regulating the operations of
AGENCIES (Applicable to Accounting) banks and other financial institutions.

Professional Regulation Commission

(PRC) is in charge of administering the ACCREDITED PROFESSIONAL
professional examination (including the ORGANIZATIONS OF CERTIFIED
CPA licensure examination), regulating PUBLIC ACCOUNTANTS (CPAs)
and licensing of professionals,
promulgation and enforcement of Philippine Institute of Certified
professional ethics and standards. Public Accountants (PICPA)- this is the
recognized organization of all certified
Board of Accountancy (BOA) (sub public accountants (CPAs) in the
group of PRC) is in charge of conducting Philippines whose primary objective is to
semi-annually the CPA licensure improve the quality of service rendered by
examination. It is likewise in charge of CPA practitioners in collaboration with the
regulating the practice of accountancy. Board of Accountancy and Financial
The board is composed of a chairman, Reporting Standards Council. Under its
vice chairman, and 5 other members to be umbrella are the other
appointed by the President of the
Philippines upon the recommendation of Accredited Associations of CPAs:
the Philippine Institute of Certified Public - Association of Certified Public
Accountants (PICPA) and the Professional Accountants in Education (ACPAE)
Regulation Commission (PRC). The Board - Government Associations of
of Accountancy is under the jurisdiction of Certified Public Accountants
the Professional Regulation Commission. (GACPA)
- Association of Internal Auditors
Financial Reporting Standards (AIA)
Council (FRSC) formerly known as the
Accounting Standards Council (ASC) is in
 - Association of Certified Public independent) while the internal
Accountants in Commerce and auditor is an employee.
Industry (ACPACI)
- Association of Certified Public 2. Tax Service - The CPA will prepare
Accountants in Public Practice the tax return (the form to be filled
(ACPAPP). up when paying different kinds of
taxes) of the client company.
FIELDS OF ACCOUNTING
The fields of accounting simply 3. Management Advisory Services
refer to the career opportunities - The CPA will act as the
available to graduates of Bachelor of management consultant on matters
Science in Accountancy (BSA) or certified pertaining to accounting and
public accountants (CPA) finance.

Private Accounting - Accountants can In addition to the above services,

be employed in any private firm in any the CPA can also be a college instructor or
capacity or position requiring accounting professor. Subjects like accounting,
knowledge. They can be employed as finance, taxation, and other allied subjects
accounting clerks. bookkeepers, internal can be considered as within the areas of
auditor, chief accountant or even competence of the CPA. The new
controller depending on their Accountancy Act now allows CPAs to
qualifications and experience. teach even commercial law subjects.

Government Accounting - Accountants

can be employed in any government BRIEF HISTORY OF ACCOUNTING
agency in any capacity or position
requiring accounting knowledge. Statistics Although accounting (informal
will show that the government hires the recording) was introduced as early as
most number of accountants. 2000 BC in Babylonia and in 3500 BC in
Assyria, it was the book written by
Public Accounting - Accountants can Benedetto Cotrugli entitled Delia
practice their profession by rendering Mercatura et del Mercante Perfetto (Of
professional services for a certain fee just Trading and the Perfect Trader) sometime
like lawyers, dentists, doctors, etc. Under in the 14th century, which included a brief
the Accountancy Act, only CPAs can chapter describing many of the features of
engage in public accounting CPAs may double entry (debit and credit), where
offer the following services: accounting originated. In 1494, an Italian
friar by the name of Frater Luca
1. Auditing Service - The CPA (who Bartolomes Pacioli wrote a book Summa
must be independent) will audit the de Arithmetica, Geometria, Proportioni et
books and certify to the fairness of Proportionalita (Everything about
the financial statements prepared Arithmetic, Geometry and Proportion) in
by the client's accountant. This is which bookkeeping was one of the topics
called external auditing as covered. Although he never claimed to
distinguished from internal auditing have developed the double entry method
whose function is to examine and of bookkeeping and he even
evaluate the systems of internal acknowledged the book of Cotrugli, yet he
control of the company. The was the one recognized as the "Father of
external auditor is not an Accounting"
employee of the client (to be
 PHILIPPINE ACCOUNTANCY ACT OF c. A Certified Public Accountant in
2004 (Republic Act No. 9298) Commerce and Industry shall refer to
officer or employee in a private enterprise
This is an act regulating the involved in accounting, audit and related
practice of accountancy in the Philippines. function: decision making, requiring
Scope of the Practice of Accountancy professional knowledge in the science of
(Applicable only to CPAs) accounting: or representing his/her private
employer before any government agency
Section 4 of this act enumerates on tax matters related to accounting: and
the scope of the practice of accountancy such employment or position requires that
the holder thereof be a certified public
1. Practice of Public Accountancy accountant.
2. Practice in Commerce and Industry
3. Practice in Education/Academe d. A Certified Public Accountant in
4. Practice in the Government Education shall refer to person involved
in teaching accounting, auditing,
Definition of Terms - As used in the management advisory services, finance,
Philippine Accountancy Act of 2004 business law and taxation, and other
technically related subjects leading to the
Practice of Accountancy - shall refer to degree of accountancy, provided that
the practice of a Certified Public members of the integrated bar of the
Accountant of his/her profession providing Philippines may be allowed to teach
any service requiring accountancy or business law and taxation subjects.
related skills including accounting,
auditing, (taxation, and management e. A Certified Public Accountant in
consulting) and financial management Government Service shall refer to
services. officer or employee holding or appointed
to a position in the professional
a. Certified Public Accountant shall accounting or auditing group in
refer to a person who is a holder of a valid government or in government-owned and
certificate of registration/professional controlled corporation, involved in
license and professional identification card accounting, audit, and related function;
issued by the Professional Regulation decision making requiring professional
Commission in accordance with this act. A knowledge in the science of accounting,
certified public accountant is one who is including those performing proprietary
included in the roster of certified public functions, where civil service eligibility as
accountants under section 20 and a a certified public accountant is a pre-
member of the accredited professional requisite.
organization under section 29 of this act.
KET DIFFERENCE:
b. A Certified Public Accountant in
Public Practice shall refer to an - Public Accountants serve the
individual, sole practitioner and staff or, general public or other businesses
partner and staff of a general partnership as independent professionals or in
offering or rendering an opinion on the firms.
fairness of the financial statements, or - Commerce and Industry
both, to more than one client on a fee Accountants work for a specific
basis or otherwise, and other services company or organization.
requiring accounting or related skills. - Education/Academe Accountants
teach and research in educational
institutions.
 - Government Accountants work for Section 14 states that any person
government agencies to manage applying for examination shall establish
public finances. the following requisites to the satisfaction
of the board that he/she:

a. is a Filipino citizen
b. is of good moral character
c. is a holder of the degree of
Bachelor of Science in Accountancy
Prohibition in the Practice of conferred by a university, school,
Accountancy college, academy, or institute duly
recognized and accredited by the
Section 26 of the act states that Commission on Higher Education
no person shall practice accountancy in (CHED) or other authorized
this country, or use the title "Certified government offices; and
Public Accountant", or use the abbreviated d. has not yet been convicted of any
title "CPA" or display or use any title, sign, criminal offense involving moral
card, advertisement, or other device to turpitude (An NBI clearance is now
indicate such person practices or offers to required).
practice accountancy, or is a certified
public accountant, unless such person
shall have received from the Board a Scope of Examination
certificate of registration/professional
license and be issued a professional Section 15 states that the
identification card or a valid licensure examination for certified public
temporary/special permit duly issued to accountants shall cover but are not
him/her by the Board and the limited to, the following subjects:
Commission.
a. Theory of Accounts (TOA)
b. Business Law and Taxation (BLT)
c. Management Services (MS)
d. Auditing Theory (AT) e. Auditing
The Certified Public Accountant Problems (AP)
Examination e. Practical Accounting Problems I (P1)
f. Practical Accounting Problems II
Section 13 of the Accountancy Act (P2)
states that all applicants for registration
for the practice of accountancy shall be The Board, subject to approval of
required to undergo a licensure the commission, may revise or exclude
examination to be given by the Board in any of the subjects in the syllabi, and add
such places and dates as the Commission new ones as the need arises.
may designate subject to compliance with
the requirements prescribed by the Ratings in the Licensure Examination
Commission in accordance with Republic
Act. No. 8981. Section 16 states that to be
qualified as having passed the licensure
examination for accountants, a candidate
Qualifications of Applicants for must obtain a general average of 75%
Examination with no grade lower that 65% in any
subject. In the event a candidate obtains
the rating of 75% and above in at least
majority of the subject as provided for by Foreign Reciprocity
this Act, he/she shall receive a conditional
credit for the subject passed. Provided Section 34 states that subjects or
that a candidate shall take an examination citizens of foreign countries may be
in the remaining subjects within two years allowed to practice Accountancy in the
from preceding examination; a rating of at Philippines in accordance with the
least 65% in each of the subjects re- provisions of existing laws, international
examined, he/she shall be considered as treaty obligations including mutual
failed in the entire examination. recognition agreements entered into by
the Philippines Government with other
Accreditation to Practice Public countries. A person who is not a citizen of
Accountancy the Philippines shall not be allowed to
practice accountancy in the Philippines
Section 31 states that certified unless he/she can prove, in the manner
public accountants, firms and partnership provided by the rules of the court that, by
of certified public accountants, engaged in specific provision of law, the country of
the practice of public accountancy, which he/she is a citizen, subject or
including partnership and staff members national admit citizens of the Philippines
thereof, shall register with the to the practice of the same profession
Commission and the Board, such without restriction.
registration to be renewed every three
(3) years: Provided, that subject to the `So, it's about making sure that
approval of the Commission, the Board foreign accountants can work in the
shall promulgate rules and regulations for Philippines, but there are rules and
the implementation of registration agreements that must be followed for it to
requirements including the fees and happen.
penalties for violation thereof.

Continuing Professional Education

(CPE)

Section 32 states that all certified

public accountants shall abide by the
requirements, rule and regulations on
continuing professional education to be
promulgated by the Board, subject to the
approval of the Commission, in
coordination with the accredited national
professional organization of certified
public accountant or any duty accredited
educational institution. For this purpose, a
CPE Council is hereby created to
implement the CPE Program.

CPAs in the Philippines have to

keep learning and improving their skills
throughout their careers, and there are
specific rules and a council to make sure
they do.