I

NTRODUCTI
ON

Account
inghasevol
ved,asinthecaseofmedicineandfaw,inresponset
ot hesocialand
economicneedsofsoci
ety.Asbusinessandsociet
ybecomemor ecomplex,account
ing
devel
opsnewconceptsandt echni
questomeettheever-
incr
easingneedsforfinanci
al
i
nformat
ion.Wit
houtsuchinformati
on,manycomplexeconomicdev el
opment sandsocial
progr
amsmaynev erhavebeenunder t
aken.

I
namar keteconomy,inf
ormati
onhelpsdecisi
onmakersmakeinf
ormedchoicesr
egar
dingthe
all
ocat
ionofscar cer
esourcesunderthei
rcont
rol
.Whendeci
sion-
makersar
eabletomakewell-
i
nformeddeci si
ons,r
esourcesareal
locat
edinawaythatbet
termeetst
heneedsandgoalsof
thosewithi
nthemar ket.

Account
ingi
sr el
evantinallwalksofl i
fe,anditisabsolutelyessenti
ali
nt hewor l
dofbusi ness
Account
ingi
st hesystem thatmeasur esbusinessact iv
iti
es,processesthati nformat
ioninto
repor
tsandcommuni catesther esult
st odecisi
on-maker s.Accounti
ngquant if
iesbusiness
communicat
ion.Forthisreason, accounti
ngiscal l
edthel anguageofbusi ness.Thet askof
l
earni
ngaccountingisverysimil
art othetaskofl earni
nganewl anguage, thus,theneedf orthi
s
bookwhichteachestheBasi csofAccount inginav eryconceptualmanner .

Nobusi nesscoul doperatev er

yl ongwi t
houtknowi nghowmuchi twasear ningandhowmuchi t
wasspendi ng.Account i
ngpr ovidest hebusinesswi t
htheseinformat i
onandmor e.So,
accountantscanbecal l
edt hescor ekeepersofbusiness.Wi t
houtaccount ing.abusi ness
couldn'
tfunct i
onopt i
mall
y ,i
twoul dn'tknowwher ei
tstandsfinanciall
y,whetheri t
'smakinga
profi
tornot ,anditwouldn'tknowi tsf i
nanci
al si
tuati
on.Also,asoundunder standingofthis
l
anguagewi l
l br
ingaboutabet termanagementoft hefinanci
al aspectsofliving.Personal
fi
nancialplanning,educati
onexpenses, caramor ti
zati
on,businessloans, i
ncomet axesand
i
nv est
ment sar ebasedont heinf ormationsystem thatwecal laccounting.

DEFI
NITI
ONSOFACCOUNTI
NG

Account i
ngisaser vi
ceacti
vi
ty.It
sf unct
ionistoprovidequanti
tat
iveinf
ormation,pr
imari
l
y
fi
nancialinnatur
e,abouteconomi centit
iesthati
si nt
endedtobeusef ul
inmaki ngeconomic
decisi
ons( St
atementofFinancialAccount i
ngStandardsNo1, "
BastConceptsandAccount i
ng
Princi
plesUnderl
yingFinanci
alStatement sofBusinessEnter
pri
ses( Manil
a:Accounti
ng
StandardsCouncil,1983)
,par.1).

Accountingisaninfor
mationsystem t
hatmeasures,pr
ocessesandcommuni catef
inanci
al
i
nformat i
onaboutaneconomi centi
ty(St
atementofFinanci
alAccounti
ngConcepNo.1,
"Object
ivesofFinanci
alReport
ingbyBusinessEnter
pri
ses(Norwalk,
Conn.
:Financi
Accounti
ng
StandardsBoard,1978),
par.9).
Accounti
ngistheprocessofidenti
fyi
ng,measur
ingandcommuni catinginf
ormat i
ontopermi t
i
nformedjudgmentsanddeci si
onsbyusersoftheinfo(Ameri
canAccount i
ngAssoci at
ion,"
A
Stat
ementofBasicAccountingTheory(EvansAmericanAccounti
ngAssoci ati
on,19661.par.1;
Accounti
ngPrinci
plesBoar
d, St
atementBasicConceptsandAccountingPrinci
plesUnderly
ing
Fi
nancialSt
atementsofEnterpr
ipes"(NewYork:AI
CPA, 1970)
,par.40).

Account i
ngistheartofrecordi
ng,cl
assi
fyi
ngandsummar i
zinginaandi
ntermsofmoney ,
transacti
onsandeventswhi chare,i
npartatl
east,
ofafchar act
er,
andi
nter
pret
ingt
heresul
ts
thereof(Ameri
canInsti
tuteofCerti
fi
edAccountants"
ReviewandResume" ,
Account
ing
Termi nol
ogyBull
eti
nNo, 1(NewYor ka1953),par91signif
icantm

EVOLUTI
ONOFACCOUNTI
NG

Account
inghist
oryi
simpor t
anttoaccount ingpedagogy ,
poli
cyandpr acti
ce.I
tpossibl
eto
bett
erunder
standourpresentandt oforecastourfuture:
Accouhi stor
yisthe"st
udyofthe
evol
uti
oninaccount
ingthought,practi
cesandi nst
ituti
onresponset ochangesinthe
envi
ronmentandsociet
alneeds.Italsoconsidersthethatthi
sev oluti
onhaswor kedonthe
envi
ronment.

Pr
imi
ti
veAccount
ing

Peopl ehav ecount edandkeptr ecor dst hr

oughouthi st
ory .Theorigi
nofkeepi ngaccounthas
beent racedasf arbackas8500B. C, thedatear chaeologistshaveestabl i
shedf orcer t
aincl
ay
tokens-cones, disks,spher esandpel l
ets-f
oundi nMesopot amia(moder nI r
aq) .Thent okens
representedsuchcommodi t
iesassheep, jugsofoi l
,breadorcl ot
hingandwer eusedi nthe
MiddleEastt okeepr ecords.Thet okenswer eoftensealedi nclayball
s, cal
ledbul bwhi chwere
brokenondel iverysot heshi pmentcoul dbecheckedagai nsttheinvoice,bull
si nef f
ect,were
thef i
rstbil
lsofl ading.Later,symbol si mpressedonwetcl ayt
abletsreplacet het okens.Some
expertsconsi dert hi
sst ageofr ecor dkeepingthebegi nningoft heartofwr iti
ng, whichspread
rapidl
yal ongt hetrader outesandt ookhol dthroughoutt heknowsci vil
izedwor l
d.

Accountr ecordsdat ebackt otheancientcivi

li
zationsofChi na,Baby l
oni
a,GreeceandEgy pt
Peopleint hesecivili
zati
onsmai ntai
nedv ar
ioust y
pesofr ecor
dsofbusi nessacti
vit
ies.Duri
ng
the1stdy nastyofBaby l
oni a(2286-2242B.C.),i
tslawwhi chwasbasedont heCodeof
Hammur ablrequiresmer chantstradi
nggoodst ogivebuy ersaseal edmemor andum containi
ng
theagreedpr icebef or
ei tcanbeconsi deredenf orceable.Theagr eedupontransact
ionwas
recor
dedbyt heScr ibe(thepr edecessorofthemoder naccount ant)onasmal lmoundofcl ay
witht
hepar ti
esaf foxi
ng" theirsi
gnatures"onit.Thisclaywasal lowet odryandservedast he
recor
doft hetransaction.Fort hemor eimportantones, therecentcanbeki l
n-dri
ed.
Ataround3600B. C.inBabyl
onia,cl
aytabletsalsorecordedpaymentsofwages.Ther ul
ersof
thesecivil
i
zati
onsusedaccountingtokeept rackofthecostsoflaborandmat eri
alsusedi n
buil
dingstruct
uresasinthecaseoft hepharaohsofEgy ptinbui
ldi
ngtheirgreatpyramids
Account i
ngisoneofouroldestskil
l
s.Theear li
estcoll
ecti
onsofunderstandablewr i
ti
ngtrack
howmanybushel sofgrai
ncamei ntotheking'swarehouse.Tablet
srecordedwhobr oughtin
thegrainandhowmucht hekingtookashi sshare.Evenintheearl
ydays, t
axcollecti
ngisan
acti
vitycl
oselyl
inkedtoaccounti
ng.

Thepr esenceofbookkeepi ngintheanci entwor l

dhasbeenat tribut
edtov ar
iousf act
ors
i
ncluding( i
)theinventionofwr i
ti
ng.( i
)thei nt
roductionofArabicnumer al
s;(
ii)thedecimali
system; (i
v)thedif
fusionofknowl edgeofal gebra;(v)thepr
esenceofinexpensi vewrit
ing
materials;(
vi)t
heriseofl it
eracy;and(vil
)t heexistenceofastandar dmedium ofexchange.AC.
Uttl
etoni nAccountingEv ol
utionto1900l i
stssev enprecondi
tionsfortheemer genceof
systemat i
cbookkeepi ng:

TheAr tofWr i
ti
ng,sincebookkeepi ngisf i
rstofallarecord;Ari
thmet ic,sincet hemechani cal
aspectofbookkeepi ngconsi stsofasequenceofsi mpl ecomput ati
ons; Pr i
vatePr oper t
y,since
bookkeepi ngisconcer nedonl ywithrecordingthefact saboutproper t
yandpr oper tyrights;
Money( e.,amongeconomy )
, si
ncebookkeepi ngisunnecessaryexceptasi treducesal l
tr
ansact i
onsi npropertiesorpr opert
yrightstothiscommondenomi natorCr edit(e.
uncompl etedt r
ansactions),sincetherewoul dbelit
tleimpulsetomakeanyr ecor dwhat ev erif
al
l exchangeswer ecompl etedonspot :Commer ce,sinceamer elylocal tradewoul dnev erhav e
createdenoughpr essure( v
olumeofbusi ness)tostimulatement ocoor dinatediver seideas
i
ntoasy stem; Capit
al,sincewi t
houtcapitalcommer cewoul dbet r
ivi
alandcr editwoul dbe
i
nconcei vable.

Mi
ddl
eAges

Asar esul
toftheCrusadesf r
om the11thtothe13thcentur
ies,Nort
hernIt
aly'
sli
ter
acyhas
becomewi despr
ead.Arabicnumer al
swerealsobeingusedasar esultoft
radewiththeNear
Eastall
owingcolumnsofnumber stobeaddedandsubtracted.Theuseofcreditwastpr
eval
ent
andasembl anceofaninternati
onalbanki
ngsystem wasalsofuncti
oning.

TheIncaEmpi re,
whi chspannedt hewestcoastofSout hAmer i
cathroughoutt he11t o14t h
centuri
es,usedknot t
edcor dsofdiff
erentlengthsandcolorscall
edquiput okeepaccount i
ng
records.Developmentofmor efor
mal account -
keepingmethodsisattr
ibutedtot hemer chants
andbanker sofFlor ence,VeniceandGenoadur ingthe13thto15thcenturi
es, Double-
ent r
y
bookkeepingisnotadi scov er
yofscience;itistheoutcomeofcont i
nuedef f
ortst omeett he
changingnecessi t
iesoft rade.GermanphilosopherOswal dSpenglerwroteinTheDecl i
neoft he
West( 1928)thatthei nventionofdouble-
ent r
ybookkeepingwast hedecisi
v eev enti
nEur opean
economi chist
or y
.
TheFl
orent
ineAppr
oach

RenaissanceFlorenti
nemar ket swereaf asci
natingcombi nati
onoff ormalizati
on,i
nt hef orm of
accountbooksanddoubl e-
ent rybookkeeping,andofi nformal socialnetworks,constructedout
ofthesur r
oundingrulesofFlor ent
inesocial
ity
.Tot hem, doi ngbusinessandl iv
ingli
fewer e
extensionsofeachot her
,Busi nesswasconduct edonl ogicoff r
iendship,butfri
endshipi ntur
n
wasi nstr
ument al
,aswellasemot ional
Accountbookswer enotinconsistentwithsocial
exchange, r
ather,
theyformalizedandmadesoci aleasier.Theexpl osi
onofcommer ci
al credi
t,
atthattime,requi
redasy st
em ofr ecording

Theearliestevidenceoft i
ninessbookkeepi nginFlorenceFr ancewasev i
dencedbybankjestger
fr
agment sof1211( transcri
bedi n1867byPut r
oSant i
niandwi t
hthedevel
opmentof
accountinginTuscanyI t
alyduringthe13t hcentury,asevidencedtheaccountbooksorextract
s
But,t
hesewer ewi t
hinthef r
amewor kofthe"narrati
o"paragraph"typeofaccount
ingrecordto
sezi
oni sovrappostel,peshapisderivedfrom "chargeanddi schargefor
matusedinpublic
accounts.Thesy st
em waspr i
nutiv
eaccounwer enotr el
atedi nanyspeci
alway(i
nt er
msof
equali
tyforentries),andbalancingoft heaccount swaslacki ng

Theemergenceofdoubl
eentryi
tsel
f,wasfir
stwit
nessedi
ntheledgersofPeni
enf
orRi
nier
i)
Fi
ni&Brother
s(1296-
1305)andGiovanniFarol
f&Company(1299-1300)

Giov annoFarol
li&Company,asappearsfrom t
he"ledger"
,wasaf i
rm ofFlor
enti
nemer chants
whoseheadof f
icewasatNimesinLanguedoc, i
nthekingdom ofFrance.Theindger,howev er
,
relatesexcl
usiv
elytothebr
anchatSalon,atownintheindependerecountyofProv ence.
Amat i
noManucci wasapart
neri
nGiov anniFar
olf
i&Company ,mer chantpar
tnershipbasedi n
Florence.

Financial
recordsthathekeptfort hefir
m'sbranchinSalon,Provence,
survi
vefrom 1299.1300.
Althoughtheserecordsareincompl ete,t
heyshowenoughdet ailtobeident
if
ieddouble-ent
ry
bookkeeping.Thesedet ai
l
sincludet heuseofdebitsandcreditsandduali
tyofentr
ies.Theyare
theoldestknownexi st
ingexampl esofthedouble-ent
rysystem.

Amat inoManucciwast heinv ent

orofdouble-
entr
ybookkeeping.Hemanagedt oconstructa
compr ehensiv
eandf ull
y-ar
ticulat
edsetofdouble-ent
ryrecor
ds,wit
har egul
arbalanci
ng
procedureoncl osureoft heGener alLedger
.Heusedf i
vebooks-generall
edger
,two
mer chandisel
edgers, expensesl edger,
andcashbook( witht
hewhi t
eledgerasasixth)
-
constitut
edwhatl ooksv erylikeat r
uedoubleentr
ysystem.Inaddit
ion,t
herewereatleasttwo
subsidiar
ybooks.

Hegaveimport
ancetotheaspectoff
inancial
contr
ol.Thebookswerel
ogi
cal
lysubdi
vi
dedwith
segr
egat
ionofcashandgoodsaccountsfrom themainledger
,aper
pet
uali
nvent
oryofeach
l
ineofagri
cult
uralpr
oduceandeachgr adeofcl
othoryam dealtin,
andful
lrecordsofdebt
ors
andcredi
tors,
expenses,
pr of
it
s,i
nter
estandpar
tners'
drawings,aswell
asthest at
ementof
accountwit
htheheadofficeatNimes,andanesti
mate(15%perannum)oft heexpect
edrateof
ret
urnoncapitalempl
oyed.

TheMet
hodofVeni
ce

LucaPaci ol
i,aFranciscanf r
iarandacel ebratedmat hemat i
cian,generall
yassociatedwiththe
i
ntroduct i
onofdoubl e- entrybookkeepi ng.In1494hepubl ishedhi sbook.Summade
Ari
thmet icaGeomet ria, Proporti
oni etPr oporti
onali
taor" Ev er
y t
hingaboutAr i
thmet i
c,Geometry,
ProportionsandPr opor t
ionalit
y,whichi ncludes,Parti
cularisdeComput i
setScr i
pturi
sor
"Detai
lsCal culat
ionandRecor dingdescr ibi
ngdoubl e-entrybookkeepi ng.Histreati
serefl
ected
thepract i
cesofVeni ceatt hetime, whenhebecameknownast heMet hodofVeni ceort he
i
tali
anmet hod.Theref ore,hedi dnoti nventdoubl eentrybookkeepi ng,butrat
herdescr i
bedwhat
werepr evalentaccount i
ngpr acticesoft heday .

AlthoughPaciol
imadenocl aimt odevel
opingtheartofbookkeeping,hehasbeenr egardedas
thefatherofdoubl
e-entr
yaccount i
ng.Hestatedthatthepurposeofbookkeepi ngwas"togiv
e
thetraderwit
houtdelayinf
ormat i
onastohisassetsandl i
abil
it
ies.Paciol
i al
soadv i
sedthe
comput ati
onofaper i
odi
cpr ofi
tandtheclosi
ngoft hebooks.Hesai d,"I
tisalway sgoodto
closethebookseachy ear,
especiall
yify
ouar einapar t
nershi
pwi thothers.Frequent
accountingmakesforlongfriendshi
p.

Thi
sItal
i
anbookkeepi
ngprosper
edwit
hthedevel
opmentoft
hecommer
cial
republ
i
csofI
tal
y
andtheuseoft
hedouble-
entr
ymethodint
hefour
teent
hcent
ury
.

Goethe,t
hef amousGer manpoetanddramatist
,ref
err
edtodouble-
entr
ybookkeepingas" one
oft
hef i
nestdiscover
iesofhumani nt
ell
ect
."WernerSombar
t,aneminenteconomistsociol
ogi
st,
bel
ievedthat"doubl
e-ent
rybookkeepi
ngisbornofthesamespiri
tasthesystem ofGali
leoand
Newton."

Sav
aryandNapol
eoni
cCommer
cial
Code

Theear l
i
estsy stemati
zedf orm ofaccountingr egul
ationdev el
opedi ncont i
nent
alEurope,
startinginFrancein1673.Thegov ernmenti ntroducedt hesubmi ssionofanannual f
airvalue
statementoff i
nanci
al posi
tiontoprotecttheeconomyf rom bankrupt cies.Thi
slegal
requirementf orbusinessest okeepaccount ingrecordswasf i
rstintroducedi ntheOrdonnance
deCommer ceof1673whi chwasputt hroughbyJean- Bapti
steCol ber tduri
ngtherei
gnofLoui s
XIV, andtheNapol eonicCommer ci
al Codeof1807, thatinf
luencedt hebookkeepi ngprovisi
ons
ofcommer ciallawthroughoutCont i
nental Europe,FrancophoneAf ri
ca, andbeyond.
TheNapoleoni
cCodeorCodeNapoléoni
stheFr
enchci
vi
lcode,
est
abl
i
shedunderNapol
éon
Bonapar
teonMarch21,1804.TheCommerci
alCodewasadopt
edi
n1807.

JacquesSav ary,theel der(1622-

1690)i nanear l
yaccount i
ngt extstated,i
fthismer chandiseis
start
ingt odeteriorat
e, orgooutofst y
le,oristhatwhi chonej udgeshecoul df indatt hefact
ory
orwhol esalersat5%l ess,itmustber educedt ot hispr i
ce"Althought hisistheol destknown
formulationoft helower -of-
cost-
or-marketpr i
nciple,Vancer epor tedthatsev eralearli
er
account i
ngt ext
sr ecommendedcur rentcostrathert hanhi stori
cal costvaluationofi nventor
yin
specifi
cexampl eswher ethemar ketvaluati
onwast ower .I
nvent oryvaluat
ionatt hel ower-of
-
cost-
or-mar ketwasr equiredbytheCodeofCommer ceinFrancei n1673,inPr ussiain1794
(Vance, 1943),andi ntheGer manCommer cialCodeof1884( Schmal enbach, 1959, p.17).As
Savarywast hepr i
ncipal author
,theFrenchCommer cialCodeof1673wasal socal l
edt heCode
Savary.

I
nthe17t
hcentur
y,Ni
col
asPetr
iwasthef
ir
stpersontogroupsimil
artr
ansacti
onsinaseparate
r
ecor
dandentert
hemonthl
ytot
alsi
nthej
ournal
,rat
herthanrecor
dingall
transact
ionsser
iat
im,
t
hati
s,i
naseri
es.

In1769,Benj
aminWorkmanpubl
i
shedTheAmer
icanAccount
ant
,theear
li
est
-knownAmer
ican
account
ingtext
book.

I
ndust
ri
alRev
olut
ion,
Cor
por
ateOr
gani
zat
ion,
Rai
lr
oads,
Uni
tedSt
atesSt
eel

Account ingpr act

icer eall
ydat esf r
om antiqui
tybuttheformat i
onofanaccount ieref
iece
professionwascl oselyt i
edt ot heri
seofamoder nindustr
ialsoci
etyinBrit
ainduringthefar18
century.Theneedf oraccount ingservicesemer gedslowly
,butbyt heearl
ydecadesoft he19t h
centuryaf l
urryoftext booksandhandbooksonaccount i
nghadappet heimpactoft he
Industr
ial Revolut
ion.Thi sr evoluti
on,whichoccur r
edinEnglandfrom themid-18"tothemi d-19
century,changedt hemet hodofpr oducingcommer ci
algoodsf r
om thehandicraftmethodto
thefactor ysystem wi ththischangecamet heproblem ofcosti
ngforal ar
gev ol
umeapr oducts.
Thespeci al
izedfieldofcostaccount ingemer gedtomeett hi
sneedf ortheanalysisofvari
ous
costs.

Theexpandedbusinessoper at
ionsinit
iatedbytheIndust r
ial Revoluti
onrequi redincr
easingl
y
l
argeamountoff undstobuildfactori
esandpur chasemachi ner y
,Thisneedr esult
edtothe
developmentofthecorporat
efor m oforganizat
ionThegr owt hofcorporationsspur r
edthe
developmentofaccountingCorporateowner s,t
heshar eholder swerenol ongert hemanager sof
thei
rbusinessManagershadt ocreateaccount i
ngsy st
emst or eporttotheowner stheresul
ts
oftheirst
ewardshi
poft hebusiness.Thissit
uationcreatedaneedf oranindependentr eportto
provi
deassurancethatmanagement '
sfinancial
representationsar ereli
able.
Accountancywasst i
llanindet
erminatecal
l
inginBrit
ainaslateasthe1830s.Ment hen
engagedinaccountingnotonlymadesi mpleaccountsbutalsofounditfi
nancial
l
ynecessaryto
actasauct i
oneer
s,apprai
sers,agentsanddebtcoll
ector
s.Thepr of
essionwasshapedby
l
egisl
ationAccountancyreachedtheshoresoftheUnitedStatesofAmer i
caasanat ur
alresul
t
oftheinvestment
sbei ngmadebyBr iti
shbusi
nessmeni nt
ot helandofopportuni
ti
es

Railr
oads, heav yusersofdebtf inancinginthelate1800s, werethefir
stAmer icanfirmst oissue
balancesheet st oabsenteecr editors.By1880,theUSr ai
lroadsy st
em hasaccumul ated$4.6
bill
i
onofi nvest ment swhichwasr oughlyequiv
alentto40%oft heAmer icaneconomy '
sannual
output.Depr eciati
onwasf or
mal lyconsideredgiventhattherailr
oadcompani esusedhi gher
valueandl onger -
livedequipment -l
ocomot i
ves,rai
lcarandt r
ack-thanprev i
ousest ablished
enterpri
ses.Wi t
ht hehauli
ngoff r
eight,t
hiequipmentgraduallylostproductivecapaci tyand
neededt ober eplaced.Thislosspr esentedafinanci
alreporti
ngpr obl
em sincei twasnev er
clearwhent hewearandt eartookpl ace.Also,
there'
sthepr oblem ofmat chingofr evenuesand
expenses.

Theconceptofdepr eci
ati
onwasl argel yi
gnoredunt i
lthe1909UScor porat
ei ncomet axl aw
permi t
tedadeductionfordepr eci
ationchargesi nthecalculati
onoft axableincome.Att he
beginningofthe20thcent ury
,somemanager sbegant ousedepr eciationtosmoot hrepor t
ed
earningsA1912l ournalofAccount ancyeditori
al complainedthatthatdepr eciat
ionhasbecome
atool usedbymanagementt ocount erfl
uct
uationsinpr ofi
ts.I
ngoody ears,heav ydepreciat
ion
chargesweremade.Bady earssawnopr ovi
sionorani nadequatechar ge.

OnMar .12,1903,UnitedStatesSteelpubl
ishedconsol
idatedfi
nanci
alstat
ementsasof
December31, 1902, t
oget
herwi thPri
ceWat erhouse&Company '
s(PW)assurancethatthey
wereauditedandf oundcorrect.USSteelr
esultedfr
om theamalgamationofvar
ioussteel
pr
oducersatt hatti
me.It'
sthef ir
stbi
l
lion-
doll
arcorpor
ation.I
tcont
rol
led75%oft heUnit
ed
St
atessteelbusiness.

Thereexistedcomplesrelati
onshipsbet weenUSSt eelandi t
smanysubsi diari
essucht hatPW
ManagingPar tnerAr
thurLowesDi cki nsonbeli
ev edt hatthest ockhol
derscouldbei nfor
med
adequatelyoftheenti
ty'
srelati
vefinancialconditiononlyt hroughaconsol i
dati
onofaccount s
05steel'
sconsol i
dat
edf i
nancialstatementsrapidl ybecameaf andmarkinaccount i
nghistory.
Theeraofmoder nfi
nancialaccountinghaddawnedSci entif
icAmer i
canwr i
tethatitwas" t
he
mostcompl et
eandcircumst ant
ialreporteverissuedbyanygr eatAmeri
cancor porat
ion,noti
ng
thatt
hecompany 'st
otalassetsofov er$1.50bi l
li
ondwar fedt he$50mi l
li
onappr opri
atedby
Congressf ort
heSpanishAmer i
canWarsev eraly earsear l
ier
Schmal
enbachandTheModelChar
tofAccount
s

EugenSchmal enbach(1873-1955)wasaGermanacademi candeconomist.Hewasbor ni

n
Halver
,andattendedtheLeipzigColl
egeofCommercestarti
ngin1898.Schmalenbachwasa
prof
essorattheUni v
ersit
yofCologneandasacontri
butortoGermanlanguagejournal
sonthe
subj
ectsofeconomi cs,busi
nessmanagementandfinanci
alaccount
ing.

Intheear
ly1920s,Pr
of essorSchmalenbachwasf r
ustr
atedrepeatedlywithhisfai
l
uret o
comparemeaningful
lyt hefi
nanci
aldatamadeav ail
abl
ebydiffer
entcompani es.Thisledtoa
resear
chontheproblem andt hepubli
cati
onofhisbook.TheModel ChartofAccounts.Wab
thi
sbook,helai
dthef oundati
onforallsubsequentdevelopmentsinuniform accounti
ngi n
Germany,I
talsobecamet hebasi
sforcorrespondingeffor
tsinotherEuropeancount r
ies,

Schmalenbachclaimedthatimport
antinformationcouldbegai nedfr
om af i
rm'saccounts.The
resul
tsofone'sfi
rm shoul
dshowt hrough-f
lowsmor eusef ul
l
yt hanbalances.Whathetermed
"DynamicBalances"weretobeprompt l
yandr egular
lypreparedandpr esent
ed,sothatexternal
changesandi nt
ernalef
fi
cienci
escouldbegauged.I nter
-fi
rm comparisonswerealsotobe
faci
li
tat
ed.

I
mposi
ti
onofI
ncomeTaxandConf
li
ctswi
thFi
nanci
alAccount
ing

I
ntheyear10CE,XinDynast
y'
sEmperorWangMangi nsti
tut
edanunprecedent
edt
ax-
the
i
ncometax-att
herateof10%ofpr
ofi
ts,
forpr
ofessi
onalsandski
l
ledlabor.

Topayf orweaponsandequi pmenti npr eparati

onfortheNapoleoni
cwar s,Wi l
l
iam Pit
tthe
YoungerofBr i
tainlevi
edani ncomet axinhi sbudgetofDecember1798.The1862Uni on
Governmentest abl
ishedtheBur eauofI nternalRevenuetoassesspersonal andcorporate
i
ncomet axestohel pfinancetheCi vi
lWar .In1943, t
heUSCongr esspassedi ncomet ax
wit
hholdingast heonlywayt ocollectonhi ghtaxratestofundWor l
dWarI I.ThePhili
ppines
BureauofInter
nal Revenue(BIR)wascr eatedthroughthepassageofReor ganizat
ionActNo.
1189dat edJuly2,1904.OnAugust1, 1904, t
heBIRwasf ormall
yorganizedandmade
operat
ionalundertheSecr et
aryofFi nance..

Financialaccounti
ngisconserv
ativ
eandi t'
saboutmatchingef f
ort
sandr esult
s.Taxaccounti
ng,
i
nt urn,isaboutimprovingt
heamountandt i
mingofcoll
ections.Notethat"t
axesarethe
l
ifebloodoft hegovernmentandtheirpr
omptandcertainav ai
labi
li
tyareanimperiousneed
(Commi ssi
onervs.Pinedo,
21SCRA105) .Thi
sdif
fer
encei nperspecti
veproducesconfli
cts.

Notethatall
returnsrequi
redtobefil
edbytheTaxCodeshall
bepreparedalwaysinconf
ormit
y
wi
ththepr ovi
sionsoftheTaxCode.Incaseofconf
li
ctswit
hgeneral
lyacceptedaccount
ing
pr
inci
ples(GAAP) ,i
nthefinal
reckoni
ng,t
heTaxCodewill
prevai
l
.
I
nfor
mat
ionAge

DanBr inklinandBobFr ankstonwr ateVi si

Colef ortheApple.thef irstel
ectroni
cApr eadsheet,
themosti mportantbusi nessapplicationfortheper sonalcomput erTr emendousadv ancesin
i
nformat iontechnologyhav efurt
herr evolut
ionizedaccount i
ngisr ecentyear sTaskst hoseare
ti
me- consumi ngwhendonemanual lycannowbedonewi thspeed, consi
stency,precisi
onand
rel
iabil
itybycomput er
s.Ther eisanabundanceaccount i
ngapplicat i
onsandmodul est osui
te
thebusi nessesv ari
ousneeds.Wi t
ht hepr ol
iferati
onofnet booksandsmar tphonesal ongwi t
h
i
tsmi nd- boggl
ingar r
ayofappl icat
ions, sunely,doingbusinesswi l
l change.Thiswillnecessari
ly
bri
ngchangest ot hefieldofaccount ing.Ast heysay ,i
nformati
ont echnologyi sit
,youei t
her
breathei torperi
sh

ASEAN

Est
abl
ishmentandMemberSt
ates

TheAssoci at
ionofSoutheastAsianNati
ons,orASEAN, wasest abl
ishedonAug, 8,1967i
n
Bangkok, Thailand,
withthesigni
ngoftheASEANDecl ar
ation(BangkokDecl ar
ati
onbythe
FoundingFat hersofASEAN, namely:I
ndonesia,
Mal ay
sia,Phil
i
ppines,SingaporeandThai
l
and.
Brunei Darussalam t
henjoi
nedonJan.7.1984, VietNam onJul y21995, LaoPDRandMy anmar
onJul y23, 1997andCambodi aonApr i
l30,1999,makingupwhati st odaythetenMember
StatesofASEAN.

Vi
sion

WhatisASEAN?I nanutshell
,theVisi
on:"
astable,
prosperousandhighl
ycompeti
ti
veASEAN
EconomicRegioninwhichthereisafreef
lowofgoods, serv
ices,
inv
estmentandafr
eerfl
owof
capi
tal
,equi
tableeconomicdev el
opmentandreducedpov er
tyandsocioeconomi
cdispar
it
ies.

Oppor
tuni
ti
es

Whataretheoppor t
unit
ies?Tenmemberst at
eswitha2013popul
ati
onof625mi ll
ionASEANis
char
acter
izedbyrisingi
ncomes, youngpopul
ati
on,
withcombi
nedgrossdomest i
cproduct
(GDP)atcurr
entpricesofUS$2,399bill
i
onoraGDPpercapit
aatcurrentpr
icesofUS$3,839
andGDPgr owthrateof5.1.

FourPi
ll
arsofASEANEconomi
cCommuni
ty

TheASEANCommuni
tyi
scompr
isedoft
hreepi
l
lar
s,namel
y:t
heASEANPol
i
tical
Secur
it
y
Communi
ty,
ASEANEconomi
cCommuni
tyandASEANSoci
a-Cul
tur
aCommuni
ty.

Intur n,theASEANEconomi cCommuni ty(AECisthebl ueprint

)hasf ourpil
lar
s.Theyaras
fol
lows: Singlemar ketandpr oductionbase( measurest oensurethef r
eef l
owofgoods,
services, i
nv estment,capit
al,skil
l
edl abor ,pr
ior
ityi
ntegr ati
onsectoncompet i
tiveeconomic
region( actionsoncompet it
ionpol i
cy ,consumerpr otectionintel
l
ectualpropertyri
ghts,
i
nfrast ructuredev el
opment ,taxati
on, e-commer ceequi tableeconomi cdev el
opment( SME
devel opment ,i
nit
iat
iveforASEANi ntegr at
ionandintegr ati
onintothegl obaleconomy( coher
ent
appr oacht owar dsexternaleconomi sr elati
ons,enhancedpar t
ici
pati
oni nglobalsupply
networ ks).

Whatarethepriori
tyintegrat
ionsector
s?Gondslagr
ohasedgoods, automot
ivepr
oduct
s,
el
ect
ronics/el
ectri
cal
, f
isheri
es,r
ubberbanedgoods,t
exti
l
es/clot
hingandwoodbaped
pr
oducts).Ser
vices(art r
ansport
,e-ASEANheal
thcareserv
ices,l
ogist
ic,

ASEANFr
amewor
kAgr
eementonSer
vices

ASEANi sgov er
nmenttogov er
nmentcooper at
ion.Toreal
izeitsdreams,ASEANhas
progressi
vel
yent er
edi
ntomor elegal
l
ybindingandi nst
it
uti
onalizedagr
eement sthr
oughthe
adoptionoftheASEANTr adeinGoodsAgr eement( ATI
GA) ,
theASEANCompr ehensiv
e
i
nv estmentAgreement(
ACI A)andtheASCANFr ameworkAgr eementonServices(AFAS)

AFASaimst opr
ovidegreat
ermobil
it
yofASEANprofessional
stoprov
idethei
rser
vicesi
nthe
regi
on.Thi
swill
requir
eroundsofnegot
iat
ionst
oli
beral
izetradei
nservi
ces.

Mut
ualRecogni
ti
onAr
rangement
sandASEANChar
ter
edPr
ofessi
onalAccount
ant

NIRAS( mutualrecognitionar r
angements)arecontractsbetweenaNat i
onal Account ancyBody
(NAB)and/ orProfessional Regul
ator
yAuthor i
ty(PRA)f r
om countri
esthathav esi gnedt he
Gener alAgr
eementonTr adeinServi
cesin1995al lowingprofessi
onalservicepr oviders
register
edinsignatorycount ri
estobeequallyrecognizedinanothersignatorycount ry.The
existi
ngMRAS: f
orengi neering(MRA2005) ,nursi
ng( MRA2006) ,archi
tect
ur al(MRA2007) ,
medi cal(MRA2009) ,dent al(MRA2009),accountancy( MRA2014)andsur veying( MRA
Framewor k2009)ser vices.

AProfessionalAccount antisel
i
gibl
etoapplythrought heMoni
tori
ngCommi t
teeofhisCountr
y
ofOri
gin,tober egi
steredasanASEANChar ter
edPr ofessi
onal
Account ant(
ACPA)ont he
ASEANChar t
eredPr of
essionalAccount
antRegister(ACPAR)subjectt
ocer t
ainqual
ifi
cat
ions
enumeratedinAr ti
cle4oft heASEANMRAonAccount ancyServi
cessignedlastNov.13,
2014.

TheMoni
tor
ingCommi
tt
eeshal
lassesst
hePr
ofessi
onal
Account
antaccor
dingt
othe
Guideli
nesonCri
teri
aandProcedur esinAppendixIloftheMRA, andguidedbyAppendixIl
lin
prepari
nganAssessmentStatementf orthepurposeoft heappli
cation.I
twillt
hensubmitthe
appli
cati
ontotheASEANChar teredPr of
essi
onalAccount antCoordinati
ngCommi t
tee
(ACPACC)ACPACEshal lhav
et heaut hori
tyt
ocont erandwi t
hdrawt hetit
leofACPAorASEAN
Charter
edProf
essional
Account ant

Topr act
iceinahostcount r
y ,anACPAneedt oapplyt obecomeaRegi ster
edFor ei
gn
Professi
onalAccountant(RFPA)Uponappr oval
,thesuccessfulACPAappl icantshal
lbesubj ect
tothedomest i
cregulat
ions, bepermi t
tedtowor kasaRFPA, noti
ni ndependentpracti
ce,butin
coll
aborati
onwithdesignatedPr ofessionalAccountantsinthehostcount r
y,withi
nsuchar eaof
hisowncompet encyasmaybeappr ovedbyt heNAB( inourcase,thePhi l
i
ppineInsti
tuteof
CPAs)and/ orPRA(thePr ofessionalRegulati
onCommi ssionandtheBoar dofAccount ancy)of
thehostcountry.

ASEANQual
if
icat
ionsRef
erenceFr
amewor
k(AGRF)

AQRSacommonr eferenceframewor k,f

unctionsasadev icetoenabl
ecompar i
son
quali
ficati
onsofskill
edl aboracrossASEANMemberSt ates.Thefr
amework,amoreothers
suppor t
srecogniti
onofqual ifi
cati
on,pr
omot equalityofeducat i
onandlear
ningandfacil
i
tate
l
abormobi l
it
y,i
taddr essesalleducati
onandt rai
ning,i
ncludingformalnon-
formalandinfor
mal
l
earningNot i
ngthatASEANMemberSt atesareatdi f
ferentstagesofdevel
opment,each
countryisexpectedtov oluntari
lycomplywiththeAQt hei
rowncapaci t
yandstartt
he
ref
erencingprocessby2016andatt helatestby2018

Thedev elopmentofanAQRFspeci fi
callysupportsthei mpl ement ationofASEANEconomi c
Communi tyBlueprint.I
taimst ofacil
i
tatet hefreefl
owofser vicest hroughr ecognitionof
professionalqualif
icati
onsaswel l
ast heASEANSoci o-Cultural Communi tyBlueprintwhich
targetstoestablishnationalskil
l
sf r
amewor ksasani ncrement alappr oacht owardsanASEAN
skill
srecogniti
onf ramewor k.Accordingt oformerPRCChai rTer esitaR.Manzal a,theASEAN
MemberSt ateshav eagr eedon2018ast hetargetfort hereferencingoft heirnati
onal
qualif
icati
onsf r
amewor kswiththeASEANQual i
fi
cationsRef er enceFr amewor k.This
framewor kwi l
lfunctionasadev icetoenabl ecompar isonsofqual ifi
cationsandpr ov i
dingt
he
conceptof" bestf i
t"betweenqual i
fi
cationsfrom differentcount ri
es.

FUNDAMENTALBUSI
NESSMODEL

Forabusi nesst obesuccessf ul,

itneedstodevelopapr oductorserv i
cethatcustomerswill
pay
forandt huscreat ear evenuestr
eam.Itcanbeanewpr oductorservicethatmeetsspecif
ic
needs.Itcanal sobeabet terpr
oductorservi
ce.Or ,
itcanapr oductorser vi
cethatoff
ersa
bettervalueproposi t
ion.Abusinessrequi
resinvestment stoenabl
ei ttopayf ort
he
i
nfrastructur
e,equi pmentandper sonnel
.Onlyafteraskill
fulcombinationoftheseelementscan
abusi nessgener atear evenuestr
eam.
Fi
gure1-1i
l
lust
rateshowabusinessi
sstruct
uredt
opr
ovi
deacust
omerpr
oposi
ti
onThe
busi
nessmodelisbuil
tonf
iveacti
vi
ti
es:

1.Fir
st,
theinvest
orspr
ovi
dether
equi
redcapi
tal
fort
hebusi
ness.Thecashi
nvest
imentwi
l
l
thenbeheldinabankaccount
.

2.Thecashi
nthebusi
nesscanbe:

 convertedintoanot
herty
peofassett
hatwi
l
lbeusedi
nthebusi
ness(
e.gequi
pment
)or
sol
d( eg.invent
ory)
:or

 spentonoper
ati
ngcost
ssuchassal
ari
es,
rent
alsandut
il
it
ies.

3.Thecombi
nat
ionofbusi
nessr
esour
cespr
ovi
dest
hebasi
sforpr
oduci
ngt
hepr
oduct
sof
serv
ices.

4Thesal
eofaproductorser
vicegener
atesanassetcal
l
edar
ecei
vabl
e.Thi
sassetonce
col
l
ect
edwil
lpr
oduceacashinflowfort
hebusiness

5.Ift
here'
sanexist
ingdebtf rom banks, t
hecashi nf
lowfrom coll
ecti
onswi l
lbeusedt opr
ovide
thedebtprovi
derswit
hi nter
estont heirl
oanst othecompany .Therestoft hecashcanbesent
backtothecyclebybeingconv er
tedi ntootherassetsorspentonoper at
ingcost s(backto
stage21inthenormalcour seofbusiness, t
hiswholeprocesswi l
learnprof i
tsonwhichtaxwi l
l
havetobepaid.Anyprof i
taft
ertaxcancont i
nuetober ei
nvestedinthecy cleorpai
doutt othe
ownersasa" r
etum"ont heiri
nvestment s

Themodel il
l
ustr
atest hewaymoneyflowsaroundabusinessandprovi
desthebasi
sof
accounti
ngTomanageabusi nessef
fecti
vel
yitisi
mport
anttoknowhowt hecashhasbeen
spentandhowpr ofi
tablet
heproduct
sorserviceshav
ebeent othebusi
nessTheavail
abi
l
ityof
thi
shist
orici
nfor
mat ionhel
psmanagementt omakejudgmentsonhowt oimprovethe
perf
ormanceofbusiness.

TYPESOFBUSI
NESS

Althoughthef undament
albusinessmodeldoesnotvar
y,t
hereareinfi
nit
eway sofapply
ingi
tto
providetherangeofproductsandserv
icesthatmakeupthebusinessworld.However,
the
rangeofpr oductsandserv
icescanbesummar i
zedi
nsevenbroadcategori
es,theyar
eas
foll
ows:
Ty
pe Act
ivi
ty St
ruct
ure Exampl
e

Ser
vices Sel
l
ingpeopl
e'
sti
me Havi
ngski
ll
edstaff Soft
waredevel
opme
andsel
l
ingthei
rti
me Account
ing
Legal

Tr
ader
s Buyingandsel
l
ing Buyingar angeofr aw Whol esal
er
product
s materialand Ret
ail
er
manuf actur
edi goods
andconsol i
dati
ng
them, makingthem
avail
ableforsale.m
l
ocat i
onsneartot heir
customer soronline
fordeli
very

Manuf
act
ure Designi
ngpr oduct
s, Taki
ngr awmat er
ial
s Vehi
cleAssembly
aggregati
ng andusingequipment Constr
uction
component sand andstafft
oconv ert Engi
neering
assemblingfini
shed them mtofi
nished El
ectri
cit
y,Water
products goods Foodanddr i
nk
ChemicalsMedia
Pharmaceuti
cals

RawMat
eri
als Growi
ngorextr
act
ing Buyi
ngblocksofland Farming
rawmater
ial
s andusingthem to Mi
ning
prov
iderawmat eri
als

I
nfr
ast
ruct
ure Sel
l
ingtheut
il
izat
ion Buyingandoper ati
ng Transport(
airpor
t.
ofi
nfr
astr
uct
ure assets(typi
callylarge operator
,air
li
nes,
assets);sel
li
ng tr
ansportferr
ies,
occupancyof tenin buses)
combi nati
onwi th
servi
ces HotelsTelecoms
Sportsfacil
i
ties
Propert
y
management

Fi
nanci
al Receiv
ingdeposit
s, Accepti
ngcashf r
om Bank
l
endingandinvesti
ng deposi
torsandpay ing I
nvest
menthouse
money them i
nter
est;usi
ng
themoneyt oprovide
l
oanstobor r
ower s.
chargi
ngthem fees
 andahi gherr
ateof
i
nterestthanthe
deposit
orsrecei
ve

I
nsur
ance Pool
i
ngpremiumsof Collectingcashf rom I
nsur
ance
manytomeetcl
aims manycust omer s:
ofafew i
nv estingt hemoney
topayt hel osses
exper i
encedbyaf ew
customer s.By
under standi ngther hk
accept edandt he
l
ikelihoodofacl ai
m,
mor epr emi um
i
ncomecanbeear ned
thancl aimspai d

FORMSOFBUSI
NESSORGANI
ZATI
ONS

Anyoft heaboveTypesofactiessaybeperformedbyabedinessorgani
zat
ionbei
tasol e
propri
etorshi
p,apatner
shi
poracor por
ation.Abusi
nessgeneral
lyassumesoneofthethree
formsofor gani
zat
ion.Theaccouti
nngprocedurest
hedependonwhi chfi
rmtheorgani
zation
takes.

Sol
ePr
opr
iet
orshi
p

Thebusi nessor ganizat ionhasasi ngleownercal l

edthepr opri
etorwhogener al
lyi
sal sothe
manager .Sol epropriet orshi
pst endtobesmal l
ser vi
cetype( eg.
phy si
cians,lawyersand
accountant s)businessesandr etai
lestabli
shment s.Theownerr ecei vesall
pr of
it
s,atsorbsal
l
l
ossesandassol elyr esponsitaleforalldeimsoft hebininessFrom t heaccount i
ngnewpoi nt
,
thesolepr opriet
orshipi sdist
inctfrom it
spr opr
ietor.Thus,theaccount i
ngr econdsoft hesol
e
propr
ietorshipdonoti ncludethepr opr
ietor'
sper sonalfi
nancialrecords.

Par
tner
shi
p

Apar
tnershi
pisabusi
nessownedandoperat
edbyt
woormorepersonswhobindthemsel
ves
t
ocontr
ibutemoney,
proper
ty,
ofi
ndust
rytoacommonf
und,wit
htheintent
ionofdi
vi
dingt
he
profit
samongt hemsel
ves.Eachpar t
neri
sper sonal
lyl
i
ablef
oranydebtincur
redbythe
partnershipAccount
ingconsidersthepar
tnershipasasepar
ateor
ganizati
on,di
sti
nctf
rom t
he
personal aff
air
sofeachpartner.SeeChapter12.

Cor
por
ati
on

Acorpor
ati
onisabusinessownedbyi tsst
ockholders.I
tisanarti
fi
cialbei
ngcr eat
edby
oper
ati
onoflaw,havi
ngtheri
ghtsofsuccessionandt hepowers,att
ribut
esandpr opert
ies
expr
essl
yauthor
izedbylaworincidentt
oitsexist
eri
ce.Thestockholdersarenotpersonal
ly
l
iabl
efort
hecorporat
ion'
sdebts.Thecorporat
ionisaseparatelegalenti
ty.SeeChapter14.

MI
CRO,
SMALLANDMEDI
UM ENTERPRI
SES

Bigbusinessmaybet hecount r
y'
stoptaxpayersandhighestpayingemployer
s.Col
lect
ively,
though,micro,smal l
andmedi um enter
pri
ses(MSMEs)pr ovideempl oy
mentfor61%ofthe
country
'slaborf or
ce.Accordi
ngt otheNati
onalStat
ist
icsOffice,
MSMEsi n2010account edfor
99.6%oft hetotalbusinessenter
pri
sesat777,687.The99.6%i sbrokendownasfol
lowsmi cr
o
enterpr
ises,91.6%andSMEs, 8%.

Intermsofeconomi cout
put,MSMEsaccountf oronly32%Then, 68%oft heeconomy'
stotal
outputcanbeattri
butedt
othel ar
gest0,4%ofPhi l
ippineenter
prises,or3,023outofatot
al
777,687fi
rmscount edi
n2010.ButMSMEshol dthekeyt ooureconomi cpr ogr
ess,
the
chall
engeli
esinbeingabletoincr
easepr oducti
vi
tyoft heMSMEs, al
so,there'
saneedtofurt
her
i
ncreasethei
rnumberandi ntheprocesshel pi
createmor ejobs.MSMEsi nChinaprov
ide74%
ofthejobsandinJapan,78%; inASEAN, 68%inSi ngapore,
77%i nThai l
andand97%i n
Indonesi
aIndonesi
a'sMSMEscont r
ibut
e57%t ogrossdomest i
cpr oduct.

OnMay23, 2008, Republ

icActNo.9501wassignedi nt
olawbyPr esidentGlori
aMacapagal-
Arroy
o.Thislawseekst oaddressprobl
emsfaci
ngMSMEs, part
icul ar
lythelackofcapit
aland
accesstocredi
t.Underthelaw,banksandl
endinginsti
tut
ionsarenowr equiredtoall
ocat
eat
l
east10%oft heirtot
all
oanpor t
fol
iotoMSMES, l
i
steddownasf ol lows:8%t omi cr
oandsmall
enter
pri
ses,and2%t omedi um ent
erpTheol
dlawpr ovi
dedonlyf orat otalof8%

Thenewlawalsogi
vest
heSmall
BusinessCor
por
ati
on,thegov
ernmentf
inanci
alinst
it
uti
on
cr
eatedtoassi
stMSMEs,mor
efi
nancial
muscl
ebyincr
easingi
tsaut
hecapit
alstocktoP10.
0
bi
ll
ion.

Thelawalssupdatedthedefi
niti
onsofMSMEsbyi ncreasi
ngt henetasset
sthresholdsMi cro
enter
pri
sesarethosewithassets,befor
efinanci
ng,ofP3.0(befor
eP1.5mi l
li
on)orlessand
employnotmoret hanni
newor kers.Smallenter
pri
sesarethosewithassetsbeforefinancingof
aboveP3.0(bef
oreP1.5mi l
l
ion)toP15mi l
li
onandem 10t o99wor ker
s.Medium ent erpr
ises
haveassets,
befor
efi
nancing,
ofabov exmi l
l
iontoP100mill
i
onandemploy eesof100to199
worker
s,Morethanever
,thegov ernmentshoul
dpr omot
eandbuil
danentrepreneur
ial
cul
tur
e
andenvir
onmentspar
kanent repreneur
ialr
evolut
ionamongtheFi
li
pinoy
out h.

I
ntheUS97%ofthe28mi l
l
ionf
irmsaresmallandmedi um-scaleenter
pri
seswithlesst
han
US$1.
0mill
i
onannualgrosssal
es.Thismeansthateveninadv anceeconomies,SMEsmakeup
abigmaj
ori
tyi
nter
msofnumber s.I
nChinaentr
epreneurshi
phast aken250mi l
l
ionChineseout
ofpov
ert
yovert
helastdecades

ACTI
VITI
ESI
NBUSI
NESSORGANI
ZATI
ONS

Manytypesofdecisi
onsaremadei nbusinessor
ganizat
ions.Account
ingprovi
desi
mport
ant
i
nformati
ontomaket hesedeci
sions.Thethreet
ypesoforganizat
ionacti
vi
ti
esareasf
oll
ows:
f
inanci
ng,i
nvest
ing,andoperat
ing.

Fi
nanci
ngAct
ivi
ti
es

Organi zat
ionsrequir
efinanci
alresourcest oobtainotherr esourcesusedt oproducegoodsand
services.Theycompet efortheseresour cesinfinancialmar kets.Fi
nancingactivi
ti
esarethe
met hodsanor ganizati
onusest oobtainf i
nancialresourcesf rom fi
nancialmarketsandhowit
managest heseresources.Pri
mar ysourcesoff inancingformostbusi nessesareownersand
creditors,
suchasbanksandsuppl i
ers.Repayingt hecreditorsandpay ingareturntotheowner
s
areal sofi
nancingactivi
ti
es.

I
nvest
ingAct
ivi
ti
es

Managersusecapitalf
rom fi
nancingacti
vi
ti
estoacqui
reotherresourcesusedinthe
tr
ansfor
mat i
onprocessthatis,t
otransf
ormresour
cesfrom oneformt oadiff
erentf
orm,whi
ch
i
smor evaluabl
e,tomeettheneedsoft hepeopl
e.Havi
ngtherightresourcesi
sessenti
alt
o
eff
ici
entandeffect
iveoperat
ions.

Aneffi
cientbusi
nessisonethatprov
idesgoodsandservicesatl
owcostsrel
ati
vet
othei
r
sel
li
ngpr i
ces.Aneff
ecti
vebusinessi
sonet hati
ssuccessfuli
nprov
idi
nggoodsandserv
ices
demandedbyt hecustomers.

I
nvestingact
ivi
ti
esinvolvetheselect
ionandmanagementi ncludi
ngdisposalandrepl
acement
oflong-t
ermresourcesthatwil
l beusedtodevel
op,produce,andsellgoodsandservi
ces
I
nvestingact
ivi
ti
esincludebuyingland,equi
pment,bui
ldi
ngsandot herresourcest
hatare
neededintheoperati
onoft hebusiness,andsel
l
ingtheseresourceswhent heyarenolonger
needed.
Oper
ati
ngAct
ivi
ti
es

Operatingacti
vi
tiesinvolvetheuseofr esourcest odesign,produce, di
stri
bute,andmar ket
goodsandser vicesOper ati
ngactivi
ti
esincluder esearchanddev el
opment ,designand
engi
neer i
ng,purchasing.humanr esources,product i
on,distr
ibut
ion,mar keti
ngandsel l
ing,
and
serv
icingOrganizati
onscompet einsupplierandl abormar ketsf
orr esourcesusedint hese
acti
vit
ies.Al
so,theycompet einproductmar ketst osell
thegoodsandser vi
cescreatedby
operati
ngactivi
ties.

PURPOSEANDPHASESOFACCOUNTI
NG

Theaccount i
ngfuncti
onispar tofthebroaderbusi nesssystem,anddoesnotoperatein
i
solati
on.Ithandl
esthefinancialoperat
ionsoft hebusinessbutalsoprov
idesinf
ormat i
onand
advi
cet ootherdepart
ment s.Businesstransacti
onsar etheeconomicacti
vi
ti
esofabusi ness
Recordi
ngt hesehist
ori
calev ent
sisasi gnif
icantfuncti
onofaccounti
ngAccountsarepr oduced
toaidmanagementi nplanning,control
anddeci sion-makingandtocomplywithregulat
ions.

Befor
etheef f
ectsoftr
ansact
ionscanber
ecorded,t
heymustbemeasur ed.I
nor
dert
hat
account
inginfor
mationwil
lbeuseful
,i
tmustbeexpressedinter
msofacommonf i
nancial
denominat
or-money.Moneyservesasbot
hamedi um ofexchangeandameasur
eofvalue

Tomeasureabusinesst ransact
ion,t
heaccount
antmustdecidewhent hetr
ansact
ionoccur
red
(r
ecogni
ti
onissue),
whatv al
uetoplaceonthetr
ansact
ion(
valuat
ionissue)andhowthe
componentsofthetransacti
onshouldbeclassi
fi
ed(cl
assi
fi
cati
onissue).

Bysimplymeasur i
ngandr ecordingtr
ansact i
ons, theresul
tingi
nformationwi l
lbeofli
miteduse.
Tobeusefulinmaki ngdecisions,t
herecor deddat amustbecl assi
fiedandsummar i
zed.
Classi
fi
cat
ionreducestheef fectsofnumer oust ransacti
onsint
ousef uligroupsorcategori
es.
Summar i
zati
onoff i
nancialdataisachievedt hrought heprepar
ati
onoff inancial
stat
ements.
Thesesummar izetheeff
ect sofallbusinesst r
ansact i
onsthatoccurredduringsomeper i
od.