Republic of the Philippines

Isabela State University

College of Business, Accountancy & Public Administration
Department of Accountancy & Management Accounting
Echague, Isabela

Bachelor of Science in Accountancy 1

Dr. Jeanette Ignacio-Gonzales, CPA

Subject Professor

First Semester
School Year 2021-2022
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MODULE 1: Accounting and its Environment

ACCOUNTING is considered by many as a thoroughly systematic profession which can only be understood by
accountants. The world of accounting, just like other professions, is continuously evolving in order to cope with the
changing times. The ever-increasing need for relevant financial information in the decision-making process relies
partly on what accounting has to offer. As a result of the changing and more complex demands of business and society,
new concepts and techniques have been developed to meet the varying needs of the business industry.

In reality, people practice accounting in the course of their daily living, whether they be the students trying to budget
their allowance, the housewives allocating the budget for the household expenses, or the heads of the family balancing
their checkbook, or estimating their income and expenses. Accounting is always involved in these processes.

Accounting has always been used in the business environment. It is the systematic process of measuring and reporting
relevant financial information about the activities of an economic organization or unit. As such, it is called the
“language of business.”

The development of nations towards an advance economy led to the opening of interrelated markets. As businesses
continue to expand from the international level to the multinational level surpassing national boundaries, the world
market has become a melting pot of races transacting business. From the acquisition of raw materials to the
production of finished goods as well as from the procurement of funds to the marketing of products, the world market
is always a preferred showroom of these events. With companies following this trend, business transactions are
becoming more complicated. Hence, on the financial aspect, more is expected from the accountants. They will have to
widen their horizon to cope with the global trend.

Along with globalization is technological development. Computers have tremendously increased productivity,
efficiency, data collection, storage, and analysis. It has brought many changes in the field of accounting. Thus, the
accountants of the 21st century cannot just sit down and be left behind. They must go with the flow of globalization
unless they want to stagnate.

Business students must be well equipped. They are expected to meet the demands of the industry once they graduate. As
future managers, they must be able to interpret financial information and make sound and timely decisions.

To prepare for this huge responsibility, one must be well versed in the business language. It is for this reason that the
module was written. For the students enrolled in the business/accountancy course, this will serve as their introduction
to the world of accounting.

This module aims to give the students a solid foundation in the fundamentals of accounting, which is an essential
foundation in the higher subjects of the course.

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MODULE 1: Accounting and its Environment

Be an Active Reader!

Glencoe’s Top 10 Reasons to Become a Better Reader

10. Give yourself more choices in life. Reading well opens the door to a wider variety
of interesting career options.

9. Empower yourself through the written word. Teach yourself sailing, computer
skills, the latest techniques in skateboarding. Discover how to create your own Web site.

8. Improve your chances of getting into and graduating from an institution of

higher learning. On the average, a person who gets a postsecondary education makes
three times more money than a highschool dropout!

7. Increase your chances of getting a job when you look for one. That’s
important, considering that the average person will hold 11 different jobs over his or her
lifetime.

6. Advance more quickly in your chosen career. In many positions, people with
strong reading skills are 10 times as likely to receive training from their employer as those
with limited reading skills.

5.Make the country economically stronger. More people reading well means more
people contributing to the progress and prosperity of the country.

4. Save money and gain confidence. For example, you’ll be able to pass your driver’s
test and read the lease for your first apartment.

3. Be more civic minded. People who read well are more likely to vote and to
participate in democratic elections and in civic life.

2. Once learned, never forgotten. Reading is a lifelong skill, like riding a bicycle—once
you learn, you’ll never forget!

1. Enjoy life more! Reading not only helps you get ahead and stay ahead in life—but also,
it’s fun!
Glencoe’s

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MODULE 1: Accounting and its Environment

MODULE 1
Accounting and its Environment

Introduction

The module, Accounting and its Environment, contains materials and activities related to
explaining what accounting is and its role in business including its purposes and phases,
identifying the career opportunities open to accountants and branches of accounting &
understanding why ethics is a fundamental business concept.

In this module you are required and expected to go through a series of learning activities in
order to complete each learning outcomes/objectives. In each learning
outcomes/objectives are Task/Activity Sheets. Follow and perform the activities on your
own. If you have questions, do not hesitate to ask for assistance from your professor. You
are required to submit these activities (Student Portfolio).

Learning Objectives
After studying this module, you shoud be able to
1. Define accounting and explain its role in business.
2. Differentiate between the different forms and activities of business organizations.
3. Discuss the importance of the purposes and phases of accounting.
4. Summarize and explain the fundamental accounting concepts and principles.
5. Discuss why ethics are important in accounting
6. State the career opportunities open to accountants.
7. Recall the branches of accounting

Learning Contents
1. Definition, purpose and nature of accounting
2. Types of business and forms of business organization
3. Fundamental accounting concepts and principles.
4. Role of Ethics in business and ethical financial reporting
5. The Accountancy Profession
6. Branches of Accounting

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MODULE 1: Accounting and its Environment

Some people believe accounting is boring. There, we said it. It’s a pretty safe bet
that you didn’t enrol in an accounting course because you thought it would lead to a career
in the spotlight. How often do you see Tom Cruise starring in an action thriller about a jet-
setting accountant? Exactly. However, who do you think develops and approves the
budget for his films to go into production? Who do you think advises Mr. Cruise how to
invest the salary he makes? You got it—someone just like you, who is good with
accounting concepts and knows how to handle money.

The point is: Accounting can be a lot of things you would never have imagined. So, if
an accounting career matches up with some of your interests and goals, hang in there. We
promise there is a lot more to it than crunching numbers!

The Changing Horizon

Is Accounting More Than Arithmetic?
Sure, some careers in accounting can be a little dry, but there are many more that are dynamic and
exciting. Think of any business—Sony Music, Nike, Jollibee, Metro Bank. They all look to
accountants to help run their businesses. Think of your favorite celebrities—maybe Park Seo Joon
or Hyun Bin. Most have financial advisors. Movie producers hire accountants to track production
costs. Publishers of magazines, such as PC World and Sports Illustrated, depend on accountants to
work with national advertisers to keep things running smoothly. In this chapter you will identify
career opportunities in the accounting field.
Accounting is not just adding and subtracting. An accountant handles a broad range of
responsibilities, makes business decisions, and prepares and interprets financial reports. These are
skills that successful businesses cannot do without. If you are good, the sky is the limit.

In a market economy, information helps decision-makers make informed choices regarding

the allocation of scarce resources under their control. When decision-makers are able to
make well-informed decisions, resources are allocated in a way that better meets the
needs and goals of those within the market.

Accounting is relevant in all walks of life, and it is absolutely essential in the world of
business. Accounting is the system that measures business activities, processes that
information into reports and communicates the results to decision-makers. For this reason,
accounting is called the language of business. The task of learning accounting is very
similar to the task of learning a new language; thus, the need for this book which teaches
the Basics of Accounting in a very conceptual manner.

No business could operate very long without knowing how much it was earning and how
much it was spending. Accounting provides the business with these information and more.
So, accountants can be called the scorekeepers of business. Without accounting, a
business couldn't function optimally; it wouldn't know where it stands financially, whether
it's making a profit or not, and it wouldn't know its financial situation. Also, a sound
understanding of this language will bring about a better management of the financial
aspects of living. Personal financial planning, education expenses, car amortization,
business loans, income taxes and investments are based on the information system that
we call accounting.

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MODULE 1: Accounting and its Environment

Lesson 1 Definition, importance, purpose and nature of Accounting

DEFINITIONS OF ACCOUNTING
.
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. (Statement of Financial Accounting Standards No. 1, “Basic Concepts and
Accounting Principles, Underlying Financial Statements of Business Enterprises”)

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information. (American
Accounting Association)

Accounting is the art of recording, classifying and summarizing in a significant manner in

terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof. (American Institute of Certified Public
Accountants)

Accounting is an information system that measures, processes and communicates

financial information about an identifiable economic entity. (Statement of Financial Accounting
Concepts No. 1, Objectives of Financial Reporting by Business Enterprises”)

Accounting is an information system that measures, processes, and communicates

financial information about a business.

Accountants focus on the needs for financial information, whether the decision makers are
inside or outside a business or other economic entity. An economic entity is a unit that
exists independently, such as a business, hospital, or a governmental body. Accountants
supply the information decision makers need to make “reasoned choices among
alternative uses of scarce resources in the conduct of business and economic activities.”
As shown in Exhibit 1, accounting is a link between business activities and decision
makers.
 Accounting measures business activities by recording data about them for future
use.
 The data are stored until needed and then processed to become useful information.
 The information is communicated through reports to decision makers.
 Based on information from accounting, decision makers take actions that affect
subsequent business activities.

In other words, data about business activities are the input to the accounting system, and
useful information for decision makers is the output

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IMPORTANCE OF ACCOUNTING

Why is accounting so important to companies? The answer is that we live in an information

age in which accounting information impacts us all.

Accounting is an information and measurement system that identifies, records, and

communicates an organization’s business activities. Exhibit 2 shows these accounting
functions.

Exhibit 2
Accounting Functions

Our most common contact with accounting is through credit checks, checking accounts,
tax forms, and payroll. These experiences focus on recordkeeping, or bookkeeping,
which is the recording of transactions and events. This is just one part of accounting.
Accounting also includes analysis and interpretation of information.

Technology plays a major role in accounting. Technology reduces the time, effort, and cost
of recordkeeping while improving accuracy. As technology makes more information

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available, the demand for accounting knowledge increases. Consulting, planning, and
other financial services are closely linked to accounting.

PURPOSE AND PHASES OF ACCOUNTING

The accounting function is part of the broader business system, and does not operate in
isolation. It handles the financial operations of the business but also provides information
and advice to other departments. Business transactions are the economic activities of
a business. Recording these historical events is a significant function of accounting.
Accounts are produced to aid management in planning, control and decision-making and
comply with regulations.

Before the effects of transactions can be recorded, they must be measured. In order that
accounting information will be useful, it must be expressed in terms of a common financial
denominator—money. Money serves as both a medium of exchange and a measure of
value.

To measure a business transaction, the accountant must decide when the transaction
occurred, what value to place on the transaction and how the components of the
transaction should be classified.

By simply measuring and recording transactions, the resulting information will be of limited
use. To be useful in making decisions, the recorded data must be classified and
summarized. Classification reduces the effects of numerous transactions into useful
groups or categories.
Summarization of financial data is achieved through the preparation of financial statements
or financial reports. These usually summarize the effects of all business transactions that
occurred during some period. After going through the preceding phases, it is imperative
that the result of the summarization phase be interpreted or analyzed to evaluate the
liquidity, profitability and solvency of the business organization. Accounting provides the
decision-makers with information to make reasoned choices among alternative uses of
scarce resources in the conduct of business and economic activities.

Lesson 2 Forms of Business Organization

What Do Businesses Do, and How Are They Organized?
Our free enterprise system allows an entrepreneur to choose the kind of business to operate
as well as its organizational form.

FORMS OF BUSINESS ORGANIZATIONS

To start a business, a potential owner must have a sufficient amount of capital and must
choose an appropriate form of business organization.
A business assumes one of the three forms of organization. The accounting procedures
depend on which form the organization takes.

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Sole Proprietorship
Sole means “single” or “one.” Proprietor means “owner.” A sole proprietorship, therefore, is
a business owned by one person. It is sometimes simply called a proprietorship. Being a
sole proprietor does not mean working alone. Based on the operation’s size and scope, a
sole proprietorship may have many managers and employees. The oldest and most
common form of business organization, the sole proprietorship is the easiest business form
to start. Little or no legal paperwork (forms and documents) is required. The success or
failure of the business depends heavily on the efforts and talent of the owner.

Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and

accountants) businesses and retail establishments. The owner receives all profits,
absorbs all losses and is solely responsible for all debts of the business. From the
accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the
accounting records of the sole proprietorship do not include the proprietor's personal
financial records.

The advantages and disadvantages of organizing as a sole proprietorship are shown in

Figure 1-1
ADVANTAGES DISADVANTAGES
 Easy to set up  Limited expertise
 All profits go to owner  Hard to raise money
 Owner has total control  Owner has all the risks
 Few regulations to follow  Hard to attract talented employees
Figure 1-1

Partnership
A partnership is a business owned by two or more persons, called partners, who agree to
operate the business as co-owners. A partnership is a business owned and operated by two or
more persons who bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves. Business partners usually enter into
a written, legal agreement. This agreement specifies each partner’s investment in money
or property, responsibilities, and percent of profits and losses. Partnerships are often
formed when a business needs more capital than one person can invest. Each partner is
personally liable for any debt incurred by the partnership. Accounting considers the
partnership as a separate organization, distinct from the personal affairs of each partner.
Partnerships are not always small. For example, partnerships like the large accounting firm
KPMG may have as many as 1,600 partners and more than 18,000 employees.

Figure 1-2 lists some of partnership advantages and disadvantages.

ADVANTAGES DISADVANTAGES
 Easy start up  Risk of partner conflict
 Pooled skills and talents  Shared profits
 More money available  Shared risks
Figure 1-2

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Corporation
A corporation is a business owned by its stockholders. It is an artificial being created by
operation of law, having the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The stockholders are not personally liable for the
corporation’s debts. The corporation is a separate legal entity

A corporation is a business recognized by law to have a life of its own. Unlike a sole
proprietorship and a partnership, a corporation must get permission from the government
to operate. This legal permission, called a charter, gives a corporation certain rights and
privileges. It also spells out the rules under which the corporation is to operate.
Corporations often start as sole proprietorships or partnerships. The business owner(s)
may “incorporate” to obtain money needed to expand. To raise this money, organizers sell
shares of stock to hundreds or even thousands of people. These shareholders, or
stockholders, are the corporation’s legal owners.

Figure 1-3 outlines a few advantages and disadvantages of the corporate form of
organization.
ADVANTAGES DISADVANTAGES
• Easier to raise money • More costs to start
• Easy to expand • More complex to organize
• Easy to transfer ownership • More regulations
• Losses limited to investment • Higher taxes
Figure 1-3

Regardless of their form as a sole proprietorship, partnership, or corporation, all

businesses share common financial characteristics and methods for recording and
reporting financial changes.
PURPOSE OF BUSINESS ORGANIZATIONS or TYPE OF ACTIVITIES PERFORMED
BY A BUSINESS ORGANIZATION
he forms of business organizations above are classified according to the ownership
structure of the business entity. Entities, however, can also be grouped by the types of
goods or services they offer. Any of these types of activities may be performed by a
business organization be it a sole proprietorship, a partnership or a corporation.

Service Businesses
A service company provides a needed service for a fee or perform services for a fee.
Service businesses include travel agencies, salons like Fantastic Sam’s, repair shops, law
firms, accounting and audit firms, stock brokerage, beauty salons, recruitment agencies
and medical centers.

Merchandising Businesses
A merchandising business buys finished products and resells them to individuals or other
businesses. Merchandising companies purchase goods that are ready for sale and then sell
these to customers. Examples are car dealers, clothing stores and supermarkets).

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Manufacturing companies
Buy raw materials, convert them into products and then sell the products to other companies or to
final consumers (e.g. paper mills, steel mills, car manufacturers and drug manufacturers).

Lesson 3 Fundamental Accounting Concepts and Principles.

FUNDAMENTAL CONCEPTS
Several fundamental concepts underlie the accounting process.
In recording business actions, accountants should consider the following:

1. Entity Concept. The most basic concept in accounting is the entity concept. An
accounting entity is an organization or a section of an organization that stands apart
from other organizations and individuals as a separate economic unit. Simply put,
the transactions of different entities should not be accounted for together. Each
entity should be evaluated separately.For accounting purposes, a business
organization is a separate entity, distinct not only from its creditors and customers
but also from its owners. It should have its own set of financial records, and its
records and reports should refer only to its own affairs.

For example, Just Because Flowers Company should have a bank account
separate from the account of Molly, the owner. Molly may own a home, a car, and
other property, and she may have personal debts; but these are not the resources
or debts of Just Because Flowers. Molly may own another business, say a
stationery shop. If she does, she should have a completely separate set of records
for each business.

2. Periodicity Concept. An entity's life can be meaningfully subdivided into equal time
periods for reporting purposes. The life of a company can be divided into time
periods, such as months and years, and useful reports can be prepared for those
periods. It will be aimless to wait for the actual last day of operations to perfectly
measure the entity's profit. This concept allows the users to obtain timely
information to serve as a basis on making decisions about future activities. For the
purpose of reporting to outsiders, one year is the usual accounting period.

3. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of

measure and that its purchasing power is relatively stable. It allows accountants to
add and subtract peso amounts as though each peso has the same purchasing
power as any other peso at any time. This is the basis for ignoring the effects of
inflation in the accounting records.

4. Going Concern. Financial statements are normally prepared on the assumption

that the reporting entity is a going concern and will continue in operation for the
foreseeable future. Accounting information presumes that the business will continue
operating instead of being closed or sold. This means, for example, that property is
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reported at cost instead of liquidation value. Hence, it is assumed that the entity
has neither the intention nor the need to enter liquidation or to cease trading. This
assumption underlies the depreciation of assets over their useful lives.

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

To ensure that financial statements are understandable to their users, a set of generally
accepted accounting principles (GAAP) has been developed to provide guidelines for
financial accounting. “Generally accepted accounting principles encompass the
conventions, rules, and procedures necessary to define accepted accounting practice at a
particular time.” In other words, GAAP arises from wide agreement on the theory and
practice of accounting at a particular time. These “principles” evolve to meet the needs of
decision makers, and they change as circumstances change or as better methods are
developed.

Accounting principles are established by humans. Unlike the principles of physics,

chemistry, and the other natural sciences, accounting principles were not deduced from
basic axioms, nor can they be verified by observation and experiment. Instead, they have
evolved. This evolutionary process is going on constantly; accounting principles are not
eternal truths. The general acceptance of an accounting principle usually depends on how
well it meets three criteria: relevance, objectivity and feasibility.

A principle has relevance to the extent that it results in information that is meaningful and
useful to those who need to know something about a certain organization.

A principle has objectivity to the extent that the resulting information is not influenced by
the personal bias or judgment of those who furnish it. Objectivity connotes reliability and
trustworthiness. It also connotes verifiability, which means that there is some way of finding
out whether the information is correct.

A principle has feasibility to the extent that it can be implemented without undue
complexity or cost. These criteria often conflict with one another. In some cases, the most
relevant solution may be the least objective and the least feasible.

BASIC PRINCIPLES

In order to generate information that is useful to the users of financial statements,

accountants rely upon the following principles:

1. Objectivity Principle. Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as possible.
Reliable data are verifiable when they can be confirmed by independent observers.
Ideally, accounting records are based on information that flows from activities

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documented by objective evidence. Without this principle, accounting records would

be based on whims and opinions and is therefore subject to disputes.

2. Historical Cost. This principle states that acquired assets should be recorded at
their actual cost and not at what management thinks they are worth as at reporting
date.
The cost principle (or historical cost principle) dictates that companies record
assets at their cost. This is true not only at the time the asset is purchased, but also
over the time the asset is held. For example, if Ayala Land purchases land for
₽30,000,000 the company initially reports it in its accounting records at
₽30,000,000. But what does Ayala Land do if, by the end of the next year, the land
has increased in value to ₽40,000,000? Under the cost principle it continues to
report the land at ₽30,000,000.

3. Revenue Recognition Principle. Revenue is to be recognized in the accounting

period when goods are delivered or services are rendered or performed.
Revenue is recognized (1) when goods or services are provided to customers and
(2) at the amount expected to be received from the customer. Revenue (sales) is
the amount received from selling products and services. The amount received is
usually in cash, but it also can be a customer’s promise to pay at a future date,
called credit sales. (To recognize means to record it.)

4. Expense Recognition Principle. Expenses should be recognized in the accounting

period in which goods and services are used up to produce revenue and not when
the entity pays for those goods and services. A company records the expenses it
incurred to generate the revenue reported. An example is rent costs of office space.

5. Adequate Disclosure. Requires that all relevant information that would affect the
user's understanding and assessment of the accounting entity be disclosed in the
financial statements. A company reports the details behind financial statements that
would impact users’ decisions. Those disclosures are often in notes to the
statements.

6. Materiality. Financial reporting is only concerned with information that is significant

enough to affect evaluations and decisions. Materiality depends on the size and
nature of the item judged in the particular circumstances of its omission. In deciding
whether an item or an aggregate of items is material, the nature and size of the item
are evaluated together. Depending on the circumstances, either the nature or the
size of the item could be determining factor.

7. Consistency Principle. The firms should use the same accounting method from
period to period to achieve comparability over time within a single enterprise.
However changes are permitted if justifiable and disclosed in the financial
statements.

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Lesson 4 Role of Ethics in business and Ethical Financial Reporting

ROLE OF ETHICS IN BUSINESS

Ethics is concerned with right and wrong and how conduct should be judged to be good or
bad. It is about how we should live our lives and, in particular, how we should behave
towards other people. It is therefore relevant to all forms of human activity.

Business ethics tells what is right or wrong in a business situation, while professional
ethics tells the same thing regarding a profession. Ethical conflicts can arise, however,
when what might be best for the company is wrong morally or professionally.

Sometimes professional or personal ethics may conflict with business ethics. From the
business standpoint, staffs are paid to further their employer's interests. But the staff also
has professional and personal ethics to uphold. Here are some difficult sample situations:
 To remain competitive, a company decided to use cheaper lumber in the ladders it
sells; although this may, in some instances, cause injury.
 A staff is asked to take part in an underground investigation of the personal life of an
employee.
 A superior directs a subordinate not to hire a qualified individual because he is "not
his (superior's) type".
 A human resource manager must lay off a staff that desperately needs the income
and the staff is without any good alternative job option.
 Having privileged or insider information which can surely help the trusted staff earn
a significant amount of money from the stock market.

ETHICAL FINANCIAL REPORTING

For information to be useful, it must be trusted. This demands ethics in accounting. Ethics
are beliefs that separate right from wrong. They are accepted standards of good and bad
behavior. Accountants face ethical choices as they prepare financial reports. These
choices can affect the salaries and bonuses paid to workers. They even can affect the
success of products and services. Misleading information can lead to a bad decision that
harms workers and the business.

There is an old saying: Good ethics are good business.

Ethics is a code of conduct that applies to everyday life. It addresses the question of
whether actions are right or wrong. Actions—whether ethical or unethical, right or wrong—
are the product of individual decisions. Thus, when an organization uses false advertising,
cheats customers, pollutes the environment, or treats employees unfairly, the management
and other employees have made a conscious decision to act in this manner.

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Ethics is especially important in preparing financial reports because users of these reports
must depend on the good faith of the people involved in their preparation. Users have no
other assurance that the reports are accurate and fully disclose all relevant facts.

The intentional preparation of misleading financial statements is called fraudulent

financial reporting. It can result from:
 Distortion of records (e.g., the manipulation of inventory records)
 Falsified transactions (e.g., fictitious sales)
 Misapplication of various accounting principles

There are a number of motives for fraudulent reporting—for instance, to cover up financial
weakness to obtain a higher price when a company is sold; to meet the expectations of
investors, owners, and financial analysts; or to obtain a loan. The incentive can also be
personal gain, such as additional compensation, promotion, or avoidance of penalties for
poor performance.

Whatever the motive for fraudulent financial reporting, it can have dire consequences, as
the accounting scandals at Enron Corporation and WorldCom in 2001 and 2002,
respectively, attest. Unethical financial reporting and accounting practices at those two
major corporations caused thousands of people to lose their jobs, their investment
incomes, and their pensions. They also resulted in prison sentences and fines for the
corporate executives who were involved. In response to these scandals, the Sarbanes-
Oxley Act of 2002 regulates financial reporting of public companies and their auditors.
This legislation requires chief executives and chief financial officers of all publicly traded
companies to swear that, based on their knowledge, their quarterly statements and annual
reports filed with the Securities and Exchange Commission (SEC) are accurate and
complete. Violation can result in criminal penalties. Management expresses its duty to
ensure that financial reports are not false or misleading in the management report that
appears in the company’s annual report.

For example, in its management report, Target Corporation makes the following statement:
Management is responsible for the consistency, integrity, and presentation of the information in the
Annual Report.

However, it is accountants, not management, who physically prepare and audit financial
reports. They must apply accounting concepts in such a way as to present a fair view of a
company’s operations and financial position and to avoid misleading the readers of their
reports. Accountants have a responsibility—not only to the profession but also to
employers, clients, and society as a whole—to ensure that their reports provide accurate,
reliable information. The historically high regard for the accounting profession is evidence
that most accountants have upheld the ethics of the profession.

Committing fraud is certainly an illegal act usually perpetrated by senior management. It

shows that the people involved in these acts had a serious lack of ethical awareness and
ethical conscience. New laws, regulations and standards were passed to address the
problems. Ethics and corporate governance suddenly became the big thing. Business

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schools immediately faced the challenges squarely by revising and including business
ethics and governance in their curriculum.

Sarbanes-Oxley Act
In the United States of America, the Sarbanes-Oxley Act (or SOX), passed on July 30,
2002 is the most far-reaching attempt to protect investors since President Franklin Delano
Roosevelt's 1933 Securities Act following the Great Depression. The law applies to all
companies that are required to file periodic reports with the US SEC. This Act is significant
because of its international dimension. Around 1,500 non-US companies, including many
of the world's largest, list their shares in the US.

SOX is a legislation which resulted from the widespread disillusionment about corporate
integrity. The law shifts responsibility for financial probity and accuracy to the board's audit
committee. It also requires appointment of independent directors, increased financial
statement disclosures, an internal code of ethics, among others.

Code of Corporate Governance

On April 5, 2002, the Securities and Exchange Commission of the Philippines issued
Memorandum Circular No. 2 otherwise known as the Code of Corporate Governance. The
Code of Ethics for Professional Accountants in the Philippines was recently adopted from
the revised Code of Ethics for Professional Accountants developed by International
Federation of Accountants (IFAC) and will be effective June 30, 2020. These events usher
in a new era in the relationship among business, government, the investing public and
other users of financial information.

Lesson 5 The Accountancy Profession

THE ACCOUNTANCY PROFESSION: Characteristics
Accountancy qualifies as a profession because it possesses the following attributes:
 All members of the accountancy profession are Certified Public Accountants, which
means that they have earned a Bachelor of Science in Accountancy degree and
have passed the CPA Licensure Examinations.
 CPAs have their own body of language. They use terminology peculiar to the
profession (e.g. debits and credits).
 CPAs adhere to a Code of Ethics. This code upholds the CPA's responsibility to
serve the public with competence and integrity. The public, in return, expresses its
confidence to CPAs by relying on the financial statements they audit.
 Like other professions, CPAs are members of a national organization, the PICPA,
whose role is to ensure the continued improvement of the accountancy profession
to meet the demands of the times.

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Career Opportunities

The professional accountant is presented with a myriad of opportunities. The demand for
accounting services has increased with the increase in number, size and complexity of
businesses. The accountant may be engaged in any of the following areas of competence:

Public Practice
Accountants who render services on a fee basis and staff accountants employed by them
are engaged in public practice. Public accountants, who practice individually or as
members of public accounting firms, should be certified public accountants (CPAs). They
offer their professional services to the public. Their work includes auditing, taxation and
management advisory services.

Some public accountants pool their talents and work together in a single firm. Most public
accounting firms are called CPA firms since most of their professional employees are
CPAs. Firms vary greatly in size. Some are small proprietorships and others are large
partnerships. There are large global CPA firms with more than 1,000 partners.

In the United States, some of the largest accounting firms (in alphabetical order) are as
follows: Deloitte & Touche, Ernst & Young, KPMG, and PriceWaterhouse Coopers. Arthur
Andersen & Co. is now history; she used to be the biggest but succumbed to pressures
brought about by a lot of financial fiascos including that of Enron, Sunbeam, Waste
Management and WorldCom. These firms employ only about 12 percent of the CPAs in
the United States but they audit the financial statements of approximately 85 percent of the
top corporations.

In the Philippines, the biggest firm with eight offices across the country is Sycip Gorres
Velayo & Co. (SGV & Co.) with over 1,800 professionals from various disciplines. SGV &
Co. is a member practice of Ernst & Young Global. The other bigger firms are
Punongbayan & ArauIIo, Laya Mananghaya & Co., C.L. Manabat & Co., Isla, Lapana &
Co. (Joaquin Cunanan & Co.), Constantino, Guadalquiver & Co. and Carlos J. Valdez &
Co. among others.

The top partners in these large accounting firms earn about the same amount as the top
executives of other large businesses. Public accounting is the frequently traveled career
path because it offers excellent opportunities to gain multi-faceted business experience. It
is normal to hear of managers, executives and even supervisors becoming a large
corporation's Chief executive or financial officer.
 Sample Entry-level jobs: Junior Analyst, Consulting staff
 Middle-level positions: Senior Consulting Manager or Financial Advisory Manager;
 Advanced positions: Partner, Senior Partner, Senior Consultant/Financial Advisor.

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Commerce and Industry

Accountants employed in this area vary widely in their scope of activities and
responsibilities.
 Sample Entry-level jobs: Cost Analyst, Investment Analyst, Accountancy Staff,
Tax Accounting Staff, Financial Analyst, Budget Analyst, Credit Analyst.
 Middle-level positions: Controller/Comptroller, Senior Information Systems
Auditor, Senior Loan Officer, Senior Budget Officer
 Advanced positions: Finance Director/Chief Financial Officer, Chief Information
Officer.
Government Service
Accountants may be hired by the following: Congress of the Philippines, Commission on
Audit (COA), Bureau of Internal Revenue (BIR), Department of Finance, Department of
Budget and Management, Bangko Sentral ng Pilipinas (BSP) and the local government
units (e.g. provincial, city or municipal governments).
 Sample Entry-level jobs: State Accounting Examiner, NBI Agent, Treasury Agent,
State Accountant, LGU Accountant, Revenue Officer, Audit Examiner, Budget
Officer, Financial Services Specialist;
 Middle-level positions: State Accountant V, Director III and Director IV,
Government Accountancy and Audit, Financial Services Manager, Audit Services
Manager, Senior Auditor;
 Advanced positions: National Treasurer, Vice President for Finance/CFO (for
GOCCs), Commissioner, Associate Commissioner, Assistant Commissioner, (COA,
BTR, BOC).

Education/Academe
This area guarantees the continued development of the profession by endeavoring to
clarify and address emerging issues through research and sharing the results obtained
with their colleagues. Considered as modern day heroes, they make others understand the
body of accounting knowledge. In addition, they painstakingly prepare candidates for the
tough CPA exams. With the advent of information technology, this sector is being
challenged to focus accounting education from the "transfer of knowledge" approach to
the more effective "learning to learn" approach.
 Sample Entry-level jobs: Junior Accounting Instructor;
 Middle-level positions: Senior Faculty, Accounting Department Chair;
 Advanced positions: Vice President for Academic Affairs, Dean.

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Lesson 6 Branches of Accounting

The main branches of accounting and their brief descriptions are discussed as follows:
1) AUDITING
Auditing is the accountancy profession’s most significant serve to the public. An external
audit is the independent examination that ensures the fairness and reliability of the reports
that management submits to users outside the business entity. The result of the
examinations is embodied in the independent auditor’s report. Once the required
financial statements have been prepared by management, they have to be evaluated in
order to ensure that they do not present a distorted picture.

External auditors are appointed from outside the organization. The external auditor’s job is
to protect the interests of the users of the financial statements. By contrast, internal
auditors are employees of the company. They are appointed by, and answer to, the
company’s management though they work independently of the accounting and other
departments. They ensure the accuracy of business records, uncover internal control
problems and identify operational difficulties.

2) BOOKKEEPING
Bookeeping is a mechanical task involving the collection of basic financial data. The data
are first entered in the accounting records or the books of accounts and then extracted,
classified and summarized in the form of income statement, balance sheet and cash flows
statement. This process normally takes place once a month.

The bookkeeping procedures usually end when the basic data have been entered in the
books of accounts and the accuracy of each entry has been tested. At that stage, the
accounting function takes over. Accounting tends to be used as a generic term covering
almost anything to do with the collection and use of basic financial data.

Bookkeeping is a routine operation, while accounting requires the ability to examine a

problem using both financial and non-financial data.

3) COST BOOKEEPING, COSTING AND COST ACCOUNTING

Cost bookkeeping is the process that involves the recording of cost data in books of
accounts. It is, therefore, similar to bookkeeping except that data are recorded in very
much great detail. Cost accounting makes used of those data once they have been
extracted from the cost books in providing information for managerial planning and control.
The difference between bookkeeping per se and cost accounting is largely one of the
degree of detail. A cost accouting system contains a great deal more data, and this once
the data are summarized there is much more information available to the management of
the company. Cost accounting deals with the collection, allocation and control of the cost
of producing specific goods and services. This accumulation and explanation of actual and
prospective cost data is important to control current operations and to plan for the future.
Cost accounting now forms one of the main sub-branches of management accounting.

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4) FINANCIAL ACCOUNTING
Financial accounting is focused on the recording of business transactions and the periodic
preparation of reports on financial position and results of operations. Financial accounting
is the more specific term applied to the preparation and subsequent publication of highly
summarized financial information. The information supplied is usually for the benefit of the
owners of an entity, but it can also be used by management for planning and control
purposes. It will also be of interest to other parties, e.g. employees and creditors.

5) FINANCIAL MANAGEMENT
Financial management is a relatively new branch of accounting that has grown rapidly over
the last 30 years. Financial managers are responsible for setting financial objectives ,
making plans based on those objectives, obtaining the finance needed to achieve the
plans, and generally safeguarding all the financial resources of the entity.

6) MANAGEMENT ACCOUNTING
Management accounting incorporates cost accounting data and adapts them for specific
decisions which management may be called upon to make. A management accounting
system incorporates all types of financial and non-financial information from a wide range
of sources.

7) TAXATION
Tax accounting includes the preparation of tax returns and the consideration of the tax
consequences of proposed business transactions or alternative courses of action. As
typically known, accountants involved in tax work are responsible for computing the
amount of tax payable by both business entities and individuals but their work is really
more complex.

Accountants with this specialization aim to comply with existing tax statues but are also in
constant legal search for ways to minimize tax payments. It is not necessary for either
companies or individuals to pay more tax than is lawfully due. If tax experts attempt to
reduce their clients’ tax laibilites strictly in accordance with the law, this known as “tax
avoidance”. Tax avoidance is a perfectly legitimate exercise, but tax evasion (the non-
declaration of sources of income on which tax might be due) is a very serious offense.

8) GOVERNMENT ACCOUNTING
It is concerned with the identification of the sources and uses of resources consistent with
the provisions of city, municipal, provincial or national laws. The government collects and
spends huge amount of public funds annually so it is necessary that there is proper
custody and disposition of these funds.

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Flexible Teaching Learning Modality (FTLM) adapted

 Modular (E-copy of the Learning Module)
 Edmodo/Gmeet (online/virtual)
 Exercises & Problem sets

Assessment Task
 Assignment
 Quiz
 Major Examination

References
 Ballada,W., Ballada,S. (2019). Basic Financial Accounting and Reporting. Philippines: DomDane
Publishers
 Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals). Philippines: Bandolin Enterprise
 Needle, B. & Powers, M. 2014 (12th Edition)-Ebook. Principles of Financial Accounting, Cengage
Learning
 Weygandt, Kimmel & Kieso. 2015 (19th Edition)-Ebook. Accounting Principles. John Wiley & Sons.

Other References
Other literature that can be used/consulted if you want to read more and go deeper into the
content of the study sections.
 Aduana, N.L. (2018). Financial Accounting & Reporting. Philippines: C&E Publishing, Inc.
 Ballada,W., Ballada,S. (2020). Conceptual Framework & Accounting Standards. Philippines: DomDane
Publisher
 Catacutan, V.L., Gabriel, J.A.,Mallari, M.Q. (2012). Fundamentals of Accounting Part I. Philippines: St.
Andrews Publishing
 Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals). Philippines: Bandolin Enterprise
 Millan, Z.V. (2018). Conceptual Framework & Accounting Standards. . Philippines: Bandolin Enterprise
 Spiceland, Nelson (2019). Intermediate Accounting. MCGraw Hill
 Valix, C.T. (2018). Practical Financial Accounting-Volume 1. Philipines: GIC Enterprises & Co. Inc.
 Valix, C.T. (2018). Practical Financial Accounting-Volume 2. Philipines: GIC Enterprises & Co. Inc.
 Williams, Haka, Betner, Carcelo (2013). Financial Accounting. McGraw Hill.
 Philippine Accounting Standards
 International Accounting Standards

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Learning Activities/Tasks
AFTER YOU READ
Check Your Understanding

NAME: SCORE:
SECTION: DATE:

Activity 1: Discussion/Self-Evaluation Questions

1. What is accounting?
2. Why is accounting often referred to as the language of business?
3. To you mind, why is business ethics important?Cite some ethical dilemmas.
4. What are the three forms of business organizatio?Define each briefly
5. What are the types of business? Distinguish them.
6. What does the term generally accepted accounting principle.
7. Discuss the criteria for general acceptance of an accounting principle.
8. What is materiality?
9. What is the periodicity concept? Why is it important for business entities to provide
periodic information?
10. What are the branches of accounting?

Activity 2: TRUE OR FALSE

Instructions: Write TRUE if the statement is correct and write FALSE if the statement is incorrect.
__________1. Accounting is an information system that measures, processes, and communicates
financial information about a business.
__________2. The terms bookkeeping and accounting are synonymous.
__________3. The liability of corporate stockholders is limited to the amount of their investment.
__________4. A partnership is always owned by two individuals.
__________5. The personal liability of a partner is limited to the amount of his investment.
__________6. Accounting is often characterized as the “language of business”.
__________7. For accounting purposes, a business and its owner are considered one and the same.
__________8. The entity concept states that the transactions of different entities should not be
accounted for together.
__________9. An audit is the independent examination that ensures fairness and reliability of the
reports that management submits to users outside the business entity.
__________10. The Philippine accountant considers peso as the common unit of measure for all
business transactions.

Activity 3: Identifying Types of activities that may be performed by a business organization

Instruction: Indicate whether each of the following businesses is a service business, a merchandising
business, or a manufacturing business.
_________________________1. David Salon
_________________________2. SyCip, Gorres, Velayo and Co. (SGV)
_________________________3. Isabela United Doctors Medical Center
_________________________4. Mapapel Paper Mills Co.

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_________________________5. Pharmaceutical Company

_________________________6. MetroBank
_________________________7. Ace Hardware Stores
_________________________8. Savemore Stores
_________________________9. Furniture Shop
_________________________10. Sari-Sari Store

Activity 4: Categorizing Forms of Business Organizations

Instructions: Match the letter next to each form of business with the appropriate items in the
following list of advantages and disadvantages. You may use a letter more than once.
A. Sole Proprietorship B. Partnership C. Corporation

_____1. Easier to raise money

_____2. Limited expertise
_____3. Higher start-up costs
_____4. Owner has total control
_____5. Shared profits
_____6. Higher taxes
_____7. Fewer regulations to follow
_____8. Easy transfer of ownership
_____9. Risk of conflict between owners
_____10. Easy to expand

Activity 5
Multiple Choice
1. The measurement phase of accounting is accomplished by
a. storing data.
b. reporting to decision makers.
c. recording data.
d. processing data.
2. The consistency concept means that
a. Firms in the same industry must account for similar items in the same way.
b. Firms may never change the way in which they prepare their accounts.
c. When preparing the accounts of a firm, one should normally account for similar
items in the same way from one accounting period to the next.
d. None of the above.
3. The financial accounting process provides information about economic activities of an
enterprise for a specified accounting period that is shorter than the life of the enterprise.
a. going concern
b. measurement in terms of money
c. time period
d. measurement of economic resources and obligations
4. The financial statements should be stated in terms of a common financial denominator.
a. Stable monetary unit

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b. Accrual
c. Time period
d. Going concern
5. Which of the following accounting concepts states that an accounting transaction should be
supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar conclusion?
a. periodicity
b. matching
c. stable montary unit
d. objectivity
6. The entity concept means that
a. The financial affairs of a firm and its owner are always kept separate for the purpose
of preparing accounts.
b. Accounts must be prepared for every firm.
c. Because a firm is separate and distinct from its owners, those owners cannot have
access to its assets unless the firm ceases to trade.
d. None of the above.
7. The principle of objectivity includes the concept of
a. summarization.
b. classification.
c. conservatism.
d. verifiability.
8. They encompass the conventions, rules, and procedures necessary to define what is accepted
accounting practice.
a. Generally accepted accounting principles
b. Accounting assumptions
c. Conceptual frameworks
d. Accounting concepts
9. Which of the following is an appropriate definition of accounting?
a. The measurement, processing, and communication of financial information about an
identifiable economic entity
b. A means of recording transactions and keeping records
c. The interconnected network of subsystems necessary to operate a business
d. Electronic collection, organization, and communication of vast amounts of
information
10. Which accounting process is the recognition or non-recognition of business activities as
accountable events?
a. Recording
b. Identifying
c. Communicating
d. Measuring

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11. This principle requires relevant information to form part of financial statements for decision-
making purposes.
a. accounting entity
b. adequate disclosure
c. materiality
d. objectivity
12. Accountants do not recognize that the value of the peso changes over time. This concept is
called the
a. entity concept.
b. cost principle.
c. stable monetary unit concept.
d. going concern concept.
13. Which of the following is considered by accountants to be a separate entity from its
owner(s)?
a. Sole proprietorship only
b. Partnership only
c. Corporation only
d. Sole proprietorship, partnership, and corporation
14. Which of the following best describes the attributes of a partnership?
a. Ability to raise to raise large capital; unlimited personal liability of owners.
b. Ability to raise large amounts of capital; limited personal liability of owners.
c. Limited ability to raise capital; limited personal liability of owners.
d. Limited ability to raise capital; unlimited personal liability of owners.
15. Which of the following is true?
a. Partners are personally liable for the liabilities of the partnership if the partnership is
unable to pay.
b. Partners can normally transfer their partnership interests with ease.
c. Stockholders are personally liable for the liabilities of the corporation if the company
is unable to pay.
d. Normally, stockholders can only sell their ownership interests when the corporation
terminates.

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