Accounting 1A&B Reviewer Prepared by Marc Angelo S.

Sanchez
CHAPTER 1 INTRODUCTION TO ACCOUNTING

BUSINESS/ ENTERPRISE/ FIRM an organization engaged in the

trade of goods, services or both to consumers
PROFIT-ORIENTED TYPE OF BUSINESSES - Generally,
businesses are administered to earn profit to increase the wealth
of owners
NON-PROFIT ORIENTED
NON-PROFIT ORGANIZATIONS an organization that uses
surplus revenues to achieve its goals rather than to distribute
them as profit or dividends
-

While non-profit organizations are permitted to

generate surplus revenues, they must be retained by the
organization for its self-preservation, expansion or
plans
Examples: Charitable/ Educational Institutions

FORMS OF BUSINESS ENTERPRISES

-

A business enterprise may be classified according to the

nature of their business as either a SERVICE,
MERCHANDISING, OR MANUFACTURING business

SERVICE BUSINESS offers services and typically generate a

profit by charging a fee; SIMPLEST among the three
MERCHANDISING BUSINESS OR TRADING CONCERN buys
goods and sells them without any alteration made on their state
or condition
MANUFACTURING BUSINESS buys goods called raw
materials, then converts them into finished products; MOST
COMPLEX because of the conversion of the raw materials into
finished goods; MATERIALITY, LABOR, OVERHEAD
LEGAL FORMS
SOLE PROPRIETORSHIP one owner; can operate on his own or
employ others as business operations expand; most basic legal
form of business
ADVANTAGES
- Easiest to form
- Less complex business transactions
- Minimal regulatory requirements
- Decisions implemented faster
- Proprietor enjoys all profits
DISADVANTAGES
- Limited ability to raise capital
- No second opinion
- Proprietor bears the risks and losses of the enterprise
- Unlimited personal liability
PARTNERSHIP an association of two or more persons, the
partners, who bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the
profits among themselves

Partnerships are governed by the CIVIL CODE OF THE

PHILIPPINES
ADVANTAGES
- Easier to organize compared to a corporation
- Burden is shared
- More ideas are exchanged, better decision-making
DISADVANTAGES
- May result to disagreement
- Life of partnership is fragile
- Unlimited personal liability for partnership debts
CORPORATION most complex form of business organization.
Corporation code defines a corporation as an artificial being
created by law. They can sue and be sued
STOCKHOLDER a person who invests and becomes an owner
of the corporation
For every share purchased, a stockholder is issued a certificate of
stock
ADVANTAGES
- Has the greatest capacity to raise capital
- Stockholders may transfer their shares
- Limited liability of owners
DISADVANTAGES
- Cost of forming and managing is relatively high
- Subject to greater scrutiny, regulation, control and
supervision by the government
- Has limited powers
- Higher income tax rate
ECONOMIC DECISIONS
- One important assumption in decision making is the
existence of reliable information
- Significant number of this comes from accounting
information
- Making right decisions requires great skill, timing, sound
professional judgment, and the use of reliable financial
information
FINANCIAL INFORMATION
- Decision making process requires financial and nonfinancial information as well
Financial Information summary of all the transactions of the
business over a period of time
-

Transactions of the business

bookkeepers or accountants

are

recorded

by

Accounting may be viewed as a service function to

management; basically processes raw data and converts them
into meaningful information that will be useful for decisionmaking
ACCOUNTING DEFINED

Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.

Accounting 1A&B Reviewer Prepared by Marc Angelo S. Sanchez

Committee on Accounting Terminology of the American
Institute of Certified Public Accountants 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 a financial character and interpreting the results
thereof
American Accounting Association Accounting is the process of
identifying, measuring and communication economic information
to permit informed judgment and decision by users of the
information
Accounting Standards Council 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
BASIC PURPOSE OF ACCOUNTING
- Supply financial information to users to help them make
informed judgments and better decisions
ACCOUNTING THE LANGUAGE OF BUSINESS
Language is a means for communication ideas, thoughts, and
information to others
Accounting is the language used to communicate financial
information to interested parties; through accounting, different
users of financial information understand what is happening in the
business enterprise
ACCOUNTING AND BOOKKEEPING DISTINGUISHED
Bookkeeping is the procedural or mechanical aspect of
accounting; involves the set-up, update and maintenance of
accounting records
Accounting conceptual and goes beyond bookkeeping;
includes interpretation of information recorded under
bookkeeping
THE ACCOUNTANCY PROFESSION
The profession is relatively new; accounting is a profession
because it has the attributes required of a profession:
1. Mastery of a particular intellectual skill, acquired by training
and education
2. Adherence by its members to a common code of values and
conduct established by its administrating body, including
maintaining an outlook which is essentially objective
3. Acceptance of a duty to society as a whole (usually in return
for restrictions in use of a title or in the granting of a
qualification)
THE PHILIPPINE ACCOUNTANCY ACT OF 2004
This profession is governed by law; R.A. NO. 9298 was signed
into law with the following objectives:
- Standardization and regulation of accounting education
- Examination for registration of certified public
accountants

Supervision, control, and regulation of the practice of

accountancy in the Philippines

Article II of RA 9298 creates the Professional Regulatory

Board of Accountancy
PRBA agency tasked to enforce the provisions of the Philippine
Accountancy Act; also granted the right to issue, suspend, revoke
or reinstate CPA certificated for the practice of the profession
-

Composed of a chairman and six members, all of whom

are appointed by the President of the Republic of the
Philippines

THE CPA BOARD EXAMS

Requisites for any person applying for examination
- Filipino citizen
- Good moral character
- Holder of the degree of Bachelor of Science in
Accountancy conferred by a school, college, academy
or institute duly recognized and/or accredited by the
CHED or other authorized government offices
- Has not been convicted of any criminal offense involving
moral turpitude
Subjects, but not limited to:
- Management Services
- Business Law and Taxation
- Theory of Accounts
- Auditing Theory
- Auditing Problems
- Practical Accounting Problems I
- Practical Accounting Problems II
75% - general average, with no subject lower than 65%
Conditional credit must retake subjects lower than 65% and
should pass it
After 2 failed attempts in the boards, candidates should enroll
24 units of the subjects again
SECTORS OF ACCOUNTING PRACTICE
PUBLIC PRACTICE includes individual practitioners, small
accounting firms, medium sized and multinational accounting firms
that render independent professional accounting services to the
public; CPAs charge professional fees
Examples of services by CPAs
- Auditing the most common service being provided by
CPAs; involves the independent examination of financial
statements for the purpose of expressing an opinion on
the fairness of these statements
- Tax services this includes the preparation of tax
returns for various clients, provision of advice on tax
matters, and representation of clients in tax cases
- Management consulting services involves providing/
consulting services to clients on matters of accounting,
finance, business policies, organization procedures,
budgeting, product costing and the conduct of
operations

Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.

Accounting 1A&B Reviewer Prepared by Marc Angelo S. Sanchez

COMMERCE AND INDUSTRY Accountants in commerce and
industry assist management in planning and controlling a
companys operations
Comptroller highest accounting officer in a business
organization
EDUCATION employs accountants as professors, reviewers or
researchers; they take steps to clarify ad address emerging
accounting issues encountered by accountants in other sectors
GOVERNMENT may be hired as staff, auditor, budget officer,
or consultant in government units like CoA, BIR, DF, DBM, and SEC
BRIEF HISTORY OF ACCOUNTING
Accounting traces its roots to the Middle East region, where as
early as 850BC, tradesmen use clay objects to represent
commodities such as flocks of sheep, jars of spices and oil, bolts
of clothing and other goods
The ancient civilizations of Babylon, Greece and Egypt also used
clay tablets (in later years, papyri were used as the medium for
record-keeping)

MANAGEMENT ACCOUNTING is concerned primarily with

financial reporting for internal users, such as management. These
users have control over the accounting system and can specify
precisely the type of reports needed for use in decision-making
COST ACCOUNTING measures a businesss costs to help
management in controlling expenses. Cost accounting records
guide managers in setting prices for their products and services
to achieve greater profits
TAX ACCOUNTING has two aims: compliance with the tax
laws and minimizing the companys tax bill through legal means.
Accountants provide tax planning and tax consultancy services,
such as giving advice to clients on what type of investments to
make and on how to structure business transactions
GOVERNMENT ACCOUNTING encompasses the process of
analyzing, classifying, summarizing, and communicating all
transactions involving the receipt and disposition of government
funds and property and interpreting the results thereof. In other
words, the focus of government accounting is the proper custody,
disposition and accounting for public funds
ACCOUNTING AND INFORMATION TECHNOLOGY

13th to 15th centuries growth of trade, more systematic recordkeeping methods were developed; FLORENTINE, VENETIAN and
GENOAN merchants used these methods to keep trac of their
business. DOUBLE ENTRY RECORDS first appeared in Genoa in
1340AD

The advent of IT revolutionized accounting and gave it a big

boost in terms of efficiency and timeliness. Accounting procedures
can now be performed with speed and accuracy by computers.
They can never replace the professional judgment of an
accountant

LUCA PACIOLI AND THE SUMMA

Accounting s a dynamic profession

1494 Friar Luca Pacioli wrote a book which contains discussions

on the double-entry bookkeeping entitled SUMMA DE
ARITHMETICA
GEOMETRIA,
PROPORTIONI
ET
PROPORTIONALITA (Everything about Arithmetic, Geometry,
Proportions and Proportionality. This is a summary of the existing
mathematical knowledge at that time. He was considered the
FATHER OF DOUBLE-ENTRY BOOKKEEPING because of this.
THE INDUSTRIAL REVOLUTION
Mid 18th to mid 19th century from craftsmen method to
assembly-line method; OVERHEAD COSTS became problematic.
To solve this, cost accounting was developed.
COST ACCOUNTING specialized field of accounting which
deals with the allocation of costs to products
The corporate form of business organization was created to
accommodate the need for increasingly large amounts of funds
which are required to finance the expansion of business during
this period
Owners, managers, financial statements
FIELDS OF ACCOUNTING
FINANCIAL ACCOUNTING focuses on the preparation and
presentation of general-purpose financial statements with the aim
of meeting most of the needs of external users

Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.