Introduction to Accounting Chapter 1 Introduction to Accounting Learning Objectives ass | 1. Define accounting. | 2, Describe the nature and purpose of accounting. 3. Give examples of branches of accounting. 4, State the function of accounting in a business. 5. Differentiate between external and internal users of | Narrate the history/origin of accounting. State the forms of business organization. 8. State the types of business according to their activities. Ssh [ | | | accounting information. Definition of accounting Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions. Essential elements of the definition of accounting 1. Identifying - The accountant analyzes each business transaction and identifies whether the transaction is an or “non-accountable event.” This is “accountable event” because only “accountable events” are recorded in the books t recorded in the of accounts. “Non-accountable events” are no} books of accounts. “Accountable events” (or ‘economic events’) are those that affect the assets, liabilities, equity, income or expenses of a business, Sociological and psychological matters are outside the scope of accounting. records) the is called nN Recording - The accountant recognizes (i.e., identified “accountable events.” This process “journalizing.”Chapter 1 eT Nature of accounting Accounting is a process information about economic a sournalizing, the accountant then classifies the the “accounts.” This process is called t is the basic storage of information in accounting, ccoun >A “and,” sales,” etc. e.g “cash, ting - At the end of each accounting period, the acco the information processed in the accounting system in order to produce meaningful reports. This is important because information processed in the accounting system is useless unless it is communicated to interested users. Accounting information is communicated to ‘ough accounting reports, the most interested users thr common form of which is the financial statements. Communica yuntant summarizes with the basic purpose of providing ctivities that is intended to be useful in making economic decisions. Types of information provided by accounting 1. Quantitative information — information expressed in numbers, quantities, or ‘units. Qualitative information ~ information expressed in words of descriptive form. Qualitative information is found in the notes to financial statements as well as on the face of the other components of financial statements. Financial information - information expressed in money. Financial information is also quantitative information because monetary amounts are normally expressed in numbers. Accounting as science and art 1. Asa social science, accounting is a body of knowledge which has been systematically gathered, classified and organized. a 2s ic i As a practical art, accounting requires the use of creative skills and judgment.Introduction to Accounting 3 Accounting as an information system A system is one that consists of an input, a process, and an output. For example, in your digestive system, the input is the food you eat; the process is when your body produces digestive juices to convert the food into an output called? wo... energy! (The output my friend is energy. The one you are thinking of is called waste. ©4) Your body needs energy so it can function properly. Similarly, in an accounting system, the inputs are the identified accountable events; the processes are recording, classifying and summarizing; and the output is the accounting report that is communicated to the users. Bookkeeping and Accounting Although bookkeeping function is part of accounting, bookkeeping and accounting are not the same. > Bookkeeping refers to the process of recording the accounts or transactions of an entity. Bookkeeping normally ends with the preparation of the trial balance. Unlike accounting, bookkeeping does not require the interpretation of the significance of the information processed. > Accounting, on the other hand, covers the whole process of identifying, recording, and communicating information to interested users. Functions of Accounting in Business Accounting is often referred to as the “language of business” because it is fundamental to the communication of financial information. : Accounting has the following two broad functions ina business: 1. To provide external users with information that is useful in making, among others, investment and credit decisions; and 2. To provide internal users with information that is useful in managing the business.ERS Chapter j Users of Accounting Information Users of accounting information are broadly classified into two, namely: 7 1. Internal users — those who are directly involved in managing the business. Examples of internal users include: a. Business owners who are directly involved in managing the business Board of directors c. Managerial personnel 2. External users — those who are not directly involved in managing the business. Examples of external users include: a. Existing and potential investors (e.g., stockholders who are not directly involved in managing the business) b. Lenders (e.g., banks) and Creditors (e.g., suppliers) c. Government agencies (e.g., Bureau of Internal Revenue “BIR’, Securities and Exchange Commission ‘SEC’) d. Non-managerial employees Customers Public mo Users of Accounting Information Directty involvedin managing the business?Introduction to Accounting 5 ———_- _ eae Types of accounting information classified as to users’ needs 1, General purpose accounting information ~ is information designed to meet the common needs of most statement users. It is provided by financial accounting and is prepared primarily for external users. 2. Special purpose accounting information - is information designed to meet the specific needs of particular statement users. It is provided by management accounting or other branches of accounting and is prepared primarily for internal users. Examples of decisions and types of information needed to make those decisions User _ Example of Example of | decision to make | information needed | 1. External user >. Existing investor: | > Audited financial — (Investor) Whether to hold statements of the | or sell business to aid in | ~ investment in analyzing the stocks. value of the > Potential investor: company. Whether or not (General purpose to buy shares of information) stocks, | | 2. External user > Lender: Whether | > Audited financial | (Lender or or not to extend statements of the | supplier) loan toa business to aid in business. analyzing the » Supplier: Whether company’s or not to extend ability to pay its credit to a debts. (General business. purpose information)Chapter 1 3. Internal user > Whether or not > Analysis of the (Manager) to increase the effects of sales sale price of a volume and sales product. prices to earnings. (Special purpose information) 4. Internal user > How much > Budget report. (Manager) capital is needed (Special purpose to manufacture a information) new product? a Examples in which accounting is used in investment and credit decisions External user of Decision Accounting | information — information 1. Investor Shall invest in | The financial | this business? Is | performance of the _ thisa profitable | business. undertaking? 2. Creditor Shall I lend © The ability of the money to this business to business? Does generate revenue this business and cash flows have the ability from its operations. to pay back my loan? Now that we have understood how accounting plays @” important role in making business decisions, let us have a bri overview on how accounting came to be.Introduction to Accounting Brief history of accounting Accounting can be traced as far back as the prehistoric times. Since the dawn of civilization when mankind began to engage in trade, perhaps more than 10,000 years ago, methods of record keeping and accounting have been invented. : As early as 8500 B.C, accounting has already existed. Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which were usually cones, disks, spheres and pellets. These tokens correspond to commodities like sheep, clothing or bread. They were used in the Middle West in keeping records. After some time, the tokens were replaced by wet clay tablets. During such time, experts concluded this to be the start of the art of writing. (Source: http://EzineArticles.com/456988) Other ancient civilizations keeping account records are Babylonia (4500 B.C.), Egypt (2250 B.C.), China and Greece. In the middle ages (13 and 15% centuries), trade flourished in places such as Florence, Venice and Genoa. This has brought advancement in account keeping methods. In 1211 A.D., one of the systems in accounting was kept by a Florentine banker. However, the system was primitive as the concept of equality for entries was absent. Double entry records first came out during 1340 AD. in Genoa. In 1494, the first systematic record keeping dealing with the “double entry recording system” was formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The “double entry recording system” was included in Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni and Proportionista,” published on November 10, 1494 in Venice. The concept of “double entry recording” is being used to this day. Thus, Fra Luca Pacioli is considered as the father of modern accounting.a a, 8 Chapter Common branches of accounting 1. Financial accounting — is the branch of accounting th on general purpose financial statements. at Focuses > General purpose financial statements are those state, that cater to the common needs of external users, ity the potential and existing investors, and lenders arily other creditors. and > Financial accounting is governed by the Philippi Financial Reporting Standards (PFRSs).. me The scope of this book is the fundamentals of financial accounting and reporting. Financial accounting vs. Financial reporting The terms “financial accounting” and” financial reporting” are often used interchangeably. Although, both focus on general financial reporting endeavors to purpose financial statements, “other financial promote principles that are also useful to reporting.” “Other financial reporting” comprises information provided outside the financial statements that assists in the interpretation of a complete set of financial statements oF improves users’ ability to make efficient economic decisions. Financial statements vs. Financial report >. Financial statements are the structured representation of an entity’s financial position and results of its operations: They are the end product of the accounting process and the means by which information gathered and processed are periodically communicated to users. the financial statements > A financial report includes other information provided outside the financial statements that assists in the interpretation of a complete set financial statements or improves users’ ability to make efficient economic decisions. usIntroduction to Accounting [qa _ Financial statements Financial report financial position financial position 1. Statement of financial Statement of financial | position position | 2. Statement of profit or loss 2. Statement of profit or loss | | and other comprehensive and other comprehensive | income income | 3. Statement of changes in 3. Statement of changes in | equity equity | 4. Statement of cash flows 4. Statement of cash flows | 5. Notes 5. Notes | | 6. Additional statement of 6. Additional statement of | L 7.__ Other information Financial reporting is the provision of financial information about an entity that is useful to external users, primarily the investors, lenders, and other creditors, in making investment and credit decisions. Primary objective of financial reporting To provide information about an entity’s* economic resources (assets), claims to those resources (liabilities and equity), and changes in those resources (income, expenses and other changes). Secondary objective of, ‘financial reporting To provide information useful in assessing the entity’s management stewardship (i.€., how efficiently and effectively the entity’s management has discharged its responsibilities to use the entity’s economic resources). The term ‘entity’ refers to the ‘reporting entity.’ A reporting entity is one that is required, or chooses, to prepare financial statements, for example a ‘business.’ However, not only businesses prepare financial statements. Other types of organizations, such as non-profit organizations, the government, or even a private individual, may also prepare ersonal financial statements. financial statements. Yes, even you can prepare your own pe ncaa © Actually, government employees are required to prepare and submit their personal t of Assets, Liabilities and Net worth.) financial statement called the ‘SALN’ or Statemen|Chapter } 10 involves the accumulation and ‘or use by internal users. Ar, agement advisory ing formation fe y accounting is man 2. Management account communication of in t anagemen 5 ients matters offshoot es aoe des services to clients on of services whi business policies, organization finance, Pans i duct costs, distribution, and many other prot uct and operations. accounting, procedures, phases of business cond i Management Accounting i ial Accountin, : g Financial" area Tr ‘| > Focuses on the information 7 teeta cag users. needs of internal users. needs of @: a 3. Government accounting — refers to the accounting for the government and its instrumentalities, focusing attention on the custody of public funds, the purpose or purposes to which those funds are committed, and the responsibility and accountability of the individuals entrusted with those funds. 4. Auditing — involves the inspection of an entity’s financial statements or business processes to ascertain their correspondence with established criteria. 5. Tax accounting ~ is the Preparation of tax returns and rendering of tax advice, such as the determination of tax consequences of certain proposed business endeavors. ke sa : oS is the systematic recording and analysis of sts of materials, labor, and overhead incident to the ods or rendering of services 7. Accounting educatio; iS ation — refers to teaching accounting and accounting- jt D -related Subjects in an organized learning a process of facilitating the acquisition of\ ; \ Introduction to Accounting 11 8. Accounting research — pertains to the careful analysis of economic events and other variables to understand their impact on decisions. Accounting research includes a broad range of topics, which may be related to one or more of the other branches of accounting, the economy as a whole, or the market environment. Examples are provided below: Related branch of accounting | __ Accounting research topic | ¢ Impact of fair value|* Financial accounting measurement on __ the financial statements. e Inventory management and | ¢ Management accounting its effect on earnings. : . Internal controls andje Auditing | modern technology. : e Accounting education ° Becoming a certified public accountant. : @ Summary: Branch of Type of accounting . - ‘ . Users of service Accounting service provided > 1. Financial > General record- > All businesses Accounting keeping, i.e., use financial maintenance of accounting in Journals and their record- Ledgers. keeping. These the other branches of accounting. > Preparation of > Businesses general purpose prepare general financial purpose FS at statements (FS). least annually for records provide information that is also used inape, the use of lenders, Investors, gr Kovernmens regulatory bodies —- 2. Management Accounting > Preparation of specifically tailored management reports, » Required by management t, aid them in performing the, management functions 3. Government Accounting > General record- keeping and preparation of financial reports for the government and its agencies. It also includes the preparation of budgets and accountability reports. > Required by the government and its agencies. 4. Auditing > Expression of an opinion on the correspondence between management assertions and established criteria. "The most common form of an audit Opinion is the Independent Auditors’ > Businesses with gross annual sales or receipts exceeding 3,000,000 are required to have their financial statements audited by an independent Certified Public AccountantIntroduction to Accounting 13 Report which is attached to audited financial statements. (CPA). 5, Tax Accounting > . Preparation of tax returns. * Failure to file tax returns results to, penalty and imprisonment of not less than 6 years but not more than 10 years. > Providing tax advice. All businesses are required to file tax returns. | | | Some taxpayers thay require the professional advice of a tax practitioner | regarding the | management of taxes. 6. Cost Accounting > Analyses of costs of products or services. Businesses use cost accounting toanalyzethe | cost of their products or services and the effects of those costs in, among others, earnings and pricing policies.Tat 4c - ~ a cooperative is also owned by more than one ‘ operative aerial cooperative is formed in accordang. individual. i of The Philippine Cooperative Code of 20% bg ot cooperative are called members. The owners fe root word “cooperate,” a cooperative is ar Is of individuals who joined together to contribute ital and cooperate in order to achieve certain goals. ii For example, a group of farmers may form a cooperative i e delivery trucks to be used in transporting their ket. In here, the farmers voluntarily join mmon goal, which is to address their to acquir produce to the mar! together to achieve a CO! need to get their produce to the market. ‘Another concept of a cooperative is that members need to patronize the cooperative’s goods or services. In the example above, the member farmers shall hire delivery trucks from the cooperative rather than from other businesses. If the cooperative earns profit (net surplus), a farmer can recover his costs through patronage refunds. Patronage refund pertains to the profit that a cooperative returns to its owners. It should be noted that a member who has not patronized any of the services of the cooperative for an unreasonable period of time may be removed from the cooperative upon the majority vote of the board of directors. A cooperative also has juridical personality similar to @ corporation. The founding members of a cooperative shall not be less than 15 individuals. However, a cooperative can have as many members as its by-laws permit. A cooperative is registered with the Cooperative Development Authority (CDA).Introduction to Accounting 15 nw Partnership — is a business that is owned by two or more individuals who entered into a contract to carry on the business and divide among themselves the earnings therefrom. The business owners are called partners. A partnership is registered with the Securities and Exchange Commission (SEC). Corporation — a corporation is also owned by more than one individual. However, unlike a partnership, a corporation is created by operation of law rather than a contract. Ownership in a corporation is represented by shares of stocks. The owners are called stockholders or shareholders. A corporation is an artificial being or a juridical person, meaning in the eyes of the law, a corporation is like a person, separate from its owners. Therefore, a corporation can transact on its own, have its own properties, incur its own obligations, and sue or be sued. For example, when you buy goods from a corporate business, you are actually transacting with the corporation and not its owners. If you get sick from consuming the goods, you will sue the corporation and not its owners. A partnership also has a juridical personality. However, unlike for corporations, the partners are viewed as agents of the partnership. Meaning, the partners transact on behalf of the partnership. For example, if you transact with a partner of a business, you are transacting with the partnership through the partner; while if you transact with a stockholder, this does not necessarily mean that you are transacting with the corporation. The incorporators (i.¢., founders) of a corporation shall not be more than 15. However, a corporation can have as many stockholders as its authorized capitalization permits. A corporation is registered with the Securities and Exchange Commission (SEC).14 ne Chapt, 7. Accounting Education > Teaching of accounting and related subjects. > Required by = business students, business owners, accounting professionals i, their Continuing Professional — Development (CPD), and other interested parties. 8. Accounting Research > Accounting research papers, articles and similar publications: > Required by business owners, professional organizations, and other interested~ parties. Forms of Business Organizations | A business is an activity where goods or services are exchanged for money. A person who is engaged in business is called an entrepreneur or businessman. at ; ; Gaal at he Businesses in the Philippines are organized in one of t! following: 1. Sole or single proprietorship — is a business that is owned by only’ one individual. It is the most common and simplest fo business organization. The business 0 proprietor.” A sole proprietorship is registered with of Trade and Industry (DTI). rm of a wner is called a “sole the DepartmettIntroduction to Accounting 17 (Summary: Forms of Business Organizations (i.e., stockholders) Form of business i ~ Formation/ ae Ownership 7 i organization __| ___ Registration 1. Sole proprietor | > One individual | > Registered with (ie, sole the DTI. | proprietor) | | | 2. Partnership > More than one > Formed by | (i.e., partners) contractual | agreement. | > Registered with | the SEC. | 3. Corporation > More than one > Formed by operation of law > Registered with the SEC. 4. Cooperative > More than one >" (i.e., members) Formed in accordance with the Cooperative Code. > Registered with the CDA. Advantages and Disadvantages of the Different Forms of Business Organizations Sole Proprietorship Advantages ‘ Disadvantages & You are the boss and you ¥ You assume all the risk of keep all the profits. loss. © Decision making is simple because you have complete control over the business. @ You take all responsibility and rely mostly on yourself in making decisions.LL _—_—_ Sy —_——— ier 18 a jo 3 [® Relatively easier and less costly to form because there are fewer formal business It is more difficult to Taig capital because you rely, mostly on your personal assets and loans to initially requirements. finance the business. % You are personally liable for the debts and obuigations of the business, & Lower extent of government regulation and relatively lower taxes. Partnership Advantage | & Better business decisions } can be made because “two heads are better than one.” Disadvantage $ Making business decisions may give rise to conflict among the partners. You share the business risk | @ You don’t keep all the | and the responsibility of | profits because you need to running the business with share them with your your partner(s). partner(s). © Compared to corporations | ¢ Limited life, in the sense and cooperatives, a that a partnership can be partnership is easier to form easily dissolved by the withdrawal, retirement, death or insanity of one ot the partners. because only a contractual agreement between the partners is needed. : ao & Greater capital compared to | ¢ ‘Lesser capital compared to a sole proprietorship. a corporation. | | Relatively lower extent of government regulation compared to corporations. A partnership (other thana general professional partnership) is taxed like 4 corporation.Introduction to Accounting 19 partners can be held liable for partnership debts up to their personal assets. Corporation Advantage Disadvantage & A stockholder who is not a member of the corporation’s board of directors is relieved from managerial responsibilities. Only the stockholders that are elected as members of the board of directors and those they hire or appoint are tasked with managerial responsibilities. This can be an advantage because a regular investor does not need to work for the corporation to earn income. Your “say” on corporate affairs depends on the number of shares you own. Those who own more shares are the bosses and enjoy a larger share of the corporation's profits. & Limited liability of the owners because stockholders are liable for corporate debts only up to the amount they have invested. A corporation is more difficult and more costly to | form because there are more formal business requirements. Greater capital and ease in raising additional funds because a corporation can issue shares to a wider extent of investors. Greater extent of government regulation and higher taxes.[& If the corporation is listed, you can easily transfer your shares to other investors by selling them in the stock market. Many investors earn profit this way — by buying shares at a,cheap price, wait for prices to go Nias —Tap,, Proprietorship ora partnership where busin profits are easily distri to the owner(s), in a corporation, you have ty wait for the board of directors to declare bute, up, and then sell them. This dividends before you can activity is referred to as get your share in the stock trading. profits. & Unlimited life - the withdrawal, retirement, death or insanity of one of the stockholders does not dissolve the corporation. Cooperative Advantage Disadvantage & Unlike ina corporation, A cooperative is prone to your “say” on cooperative poor management. affairs is not affected by the number of shares you own. This is because, ina cooperative, each member is entitled to only one vote regardless of his or her shareholdings. However, members with larger shareholdings are entitled to larger share in profit (net surplus). Cooperatives are, more often than not, managed by members who were elected as board of directors rather than by employed professional managers. | Since there is a ‘one- : member, one-vote’ policy in a cooperative, influential members tend to dominate the election process. The result is that those who getIntroduction to Accounting 21 elected may not be the ones | who are most qualified for the task. & A cooperative is generally exempt from paying taxes. This is the main advantage of a cooperative and the most common reason why cooperatives are organized. Moreover, a cooperative may receive assistance from the government. A cooperative is susceptible to corruption. Due to its management structure and lack of profit motive, the | elected officers may be inclined to act on their | personal interests. & Compared to a corporation, a cooperative is easier and less costly to form because there are fewer formal business requirements. = The Cooperative Code places some restrictions on the distribution of a cooperative’s profit to its members. More specifically, the Code requires a cooperative to | appropriate a portion ofits | annual profit to some | funds. Only the remaining | portion can be distributed | to the members. Furthermore, when the cooperative is dissolved, the amount accumulated in a fund called the “reserve fund” will not be returned to the members, but rather donated to another cooperative or to the community.22 Ss Chapter 1 & Limited liability - the members are liable for cooperative debts only up to the amount they have invested. Compared toa corporat itis more difficult fora ” | cooperative to sustain growth. This is in part because of the lack of Profit motive and the lack of management expertise, Moreover, a cooperative’s success strongly depends on the members’ cooperation and members are not always willing to cooperate. The success of a business depends on j continuing effort. Sadly, many cooperatives are zealous at the start but fail | _ to sustain continuing effort | resulting to the waning | | down of their activities. This does not mean though that all cooperatives are small businesses. There are | many multi-billionaire cooperatives in our country. Some might be located in your community.troduction to Accounting In ® Unlimited life, in the sense that the withdrawal, retirement, death or insanity of one of the members does not dissolve the cooperative. Although a cooperative has a legal life of 50 years, this can be renewed for an indefinite number of Unlike in a corporation where the stockholder can freely transfer his shares, in a cooperative, there are restrictions on the transfer of a member's shares. For example, the approval of the board of directors must first be obtained before a member can transfer his or her shares. renewals. Types of Business According to Activities The following are the major types of business according to the activities they undertake: 1. Service business 2. Merchandising (Trading) 3. Manufacturing Service business A service business is one that offers services as its main product rather than physical goods. A service business may offer professional skills, expertise, advice, lending service, and similar services. Examples of service businesses include: Schools Professionals (accounting firm, law firm, electrician, etc.) Hospitals and clinics Banks and other financial institutions Hotels and restaurants Transportation and travel (taxi operator, travel agency, etc.) Entertainment and event planners (wedding planners, concert Promoters, etc.) nme ao seris a 24 Chapte, : Merchandising business A merchandising business (or trading business) is one that bu Ys and sells goods without changing their physical form. Examples of merchandising businesses include: General merchandise resellers (grocery stores, departmen, a. stores, hardware stores, pharmacies, online stores, sari-say; stores, etc.) i Distributors and dealers (rice wholesalers, vegetable dealers, 2n4_hand cars dealers, etc.) Manufacturing business A manufacturing business is one that buys raw materials and processes them into final products. Unlike a merchandising business, a manufacturing business changes the physical form of the goods it has purchased in a production process. For example, a business that buys and -sells eggs is a merchandising business. On the other hand, a business that buys eggs and uses the eggs as ingredient in making cakes for sale isa manufacturing business. Examples of manufacturing businesses include: a. Car manufacturers (Toyota, Isuzu, Volkswagen, etc.) b. Technology companies (Apple, Samsung, Sony, etc.) c. Food processing companies (San Miguel Pure Foods, Swan, etc.) d. Factories (clothing factories, animal feeds factories, plastic wares factories, etc.) Silver Some businesses, called hybrid businesses, engage in mor than one -type of activity. For example, a restaurant uses ingredients to cook a meal (manufacturing), sells Coca-Cola drinks (merchandising), and serves food to customers (service Nevertheless, a hybrid business is classified into one of the major types based on the activity that is most in line with the business purpose. Restaurants are expected to fill-in customer orders ant provide dining services, thus, they are more of a service-tyP® business.—_— Introduction t0 Accounting 25 advantages and Disadvantages of the Different Types of Business service Business Advantages Disadvantages $ You don’t need to worry You may not have a flexible about inventory, personal time because you warehousing and need to be directly involved distribution costs because you don’t have any inventory. You only have some minimal supplies necessary in providing your services. in providing a service toa customer. You can stock inventory but not service. For example, if you are a manufacturer, you can spend over time to produce goods, stock them, and then take a break. However, if you area doctor, you are on call, and have to be the one to personally examine a patient. Until your business is big enough to be able to hire other professionals to do the work for you, you will need to render the services yourself.26 Chap, ® You may only need a small capital because what you are selling is your skill set and you only need yourself to render a service. If you are a manufacturer, you need to buy raw materials and machinery to produce your product. % Service businesses n suffer first from dea demand during sis é economic difficulty, Th because most Service, perceived as luxurie than necessities for survival. is S ate tathe, For example, a guy with low funds would refrain from having a haircut and uses his funds for food instead. A smart gal with low funds would cut back her expenditures on spa & You are perceived as an expert in your chosen field. People respect you. You can also have fans!©% ® Your business’ success depends on your credibility. Personally, you must have a good reputation. You need tobe always discreet in the things you say and the way you act in the society. | | and pedicure. | | @ Since a service business is founded on good reputation, it is more costly fo commit an error ina service business compared to a merchandising business. For example, merchandising business erroneously sells damaged ifa— introduction to Accounting === 27 can | just return the goods and have them replaced. | However, if you area | barber and commits an | error, you can’t just replace your customer's hair! Merchandising Business start-up capital because you don’t need to acquire machineries to produce your goods. Advantages Disadvantages & Compared toa You need to have a retail manufacturing firm, you store to display your goods may need a much lower and the store must be in a strategic location for it to attract more customers. & You can take advantage of price fluctuations. For example, when goods are on sale, you can acquire them at a discounted price and resell them at a much higher price. You can’t do this in a service business. Less flexibility in managing costs. This is because the cost of your goods is based primarily on their purchase price, which you do not control. *In a manufacturing business, you can cut down costs by redesigning your product, improving your processes, acquiring more efficient machines, employing more skillful personnel, and so much more.2 ee eae a ag ba ere > er cost of quality: This Lows is because what you sell.” “what you buy is Chapye, q Keeping track of inventor, is tedious, most especially when you are selling numerous and varied iter, with fast turnover rate, like for example if your Ina service Or manufacturing business, business is a hardware sto,, you need to continually or a grocery store. Also, you improve your products to can incur additional costs maintain their salability. In due to spoilages, theft, a merchandising business, , breakages, damages, and ifacertain product is not obsolescence. selling well, you can just stop buying it and find an alternative product, another brand maybe. Tris much easier to start a Self-satisfaction is low merchandising business: because you did not because you don’t need to produce the products you have an expertise or a sold. special skill (service business) and you don’t need to have invented a new product or have conceptualized an innovative idea for an existing product (manufacturing business).oduction to Accounting Manufacturing Business 29 Advantages Disadvantages You havea high growth potential because you can tap into a wider market and can produce in large You need a high start-up capital to acquire machineries, to employ | people, and to acquire a big | quantities. space for your production. | | You have the opportunity Conceptualizing a viable to establish a brand that, manufacturing business is could last longer than your lifetime. This is the. ultimate difficult. This is why more entrepreneurs would rather dream of most engage in merchandising. entrepreneurs. Self-satisfaction is high. You need to be Knowing that consumers continuously innovative are happy and satisfied and abreast of changes in with a tangible product you technology. If another have produced brings you company comes up with a | pride and joy. better and cheaper product, your product will automatically lose demand. You may not need to have a strategically located retail store to display your products because you can sell directly to wholesalers rather than to end consumers. Warehousing and logistics | costs can be high. | You can have a better Pricing policy because mass You rely on raw materials. You need to manage them properly to ensure that they Production can decreaseTy Chapt your unit cost (often called ‘economies of scale’). For example, you are paying rent of 100,000 for your factory space. If you produce only 1 unit of a product, your unit cost is high because the rent will be allocated to only 1 unit, i.e., 100,000 unit cost are available when they needed. This is because 7 . shortage in a raw Materia] can disrupt your Operation and that can be very costly, For example, when Cooking i rice, all the ingredients you | need must be available, You | cannot cook the ricenow | and just add the water late; (P 100,000 + 1 unit). “on. i} Therefore, you need to sell | this unit for more than In a merchandising i| 100,000 to earn profit. “business, if you run out ofa. However, if you produce specific good, you don’t | 10,000 units, your unit cost. necessarily need to close | | would be much lower your store because you can | | because the rent will be still sell other goods. j allocated to more units, i.e., ‘ P10 (100,000 + 10,000 units). You can now sell each unit at a much lower price. Greater flexibility in Managing a manufacturing managing costs. (See business can be difficult discussion in disadvantage of a merchandising business above*) because production processes are often complicated and there is always some room for | improvement (although many skilled managers may take this positively as a challenge). fIntroduction to Accounting ai Also, more accounting work is needed. That is why there is a separate branch of accounting formed primarily for manufacturing businesses, ie., cost accounting. | Chapter 1 Summary: Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions. Only “accountable events” are recorded in the books of accounts. Accountable events are those that affect the assets, liabilities, equity, income or expenses of a business. © The information processed in an accounting system is communicated to interested users through accounting reports (e.g., financial statements). Accounting is considered the “language of business” because it is essential in the communication of financial information. Accounting provides information that is useful in: making economic decisions. \ The common brariches of accounting includé the following: (1) Financial accounting, (2) Management accounting, (3) Government accounting, (4) Auditing, (6) Tax accounting, (6) Cost accounting, (7) Accounting education, and (8) Accounting research. Financial accounting focuses on the information needs of external users, while management accounting focuses on the information needs of internal users. External users are those who are not directly involved in managing the business. Internal users are those who are directly involved in managing the business.32 Seo z : = ting information may be either (a) general purpos 5€ Gp p Accoun special purpose. General purpose accounting informati on provided by financial accounting and is prepared pia for external users. Special purpose accounting informati,, provided by management accounting or other branch. accounting and is prepared primarily for internal users” The different forms of business organization are: ) s proprietorship, (2) Partnership, (3) Corporation, ang 7 Cooperative. The types of business according to activities are: (1) Servic, business, (2) Merchandising business, and (3) Manufactys;, business. PROBLEMS PROBLEM 1: TRUE OR FALSE 1. All events involving an entity are recorded in the books ¢: accounts. Sociological and psychological matters are within the scope c: accounting. Accountable events are recorded in the books of accouns through a process called “journalizing.” Measuring is the phase in accounting where financ* statements are prepared and provided to interested users. The basic purpose of accounting is to provide informati about economic activities that is intended to be useful making economic decisions. - As a practical art, accounting requires the use of creative S™ and judgment. : Bookkeeping refers to the whole process of identify" recording, and communicating information to inter” users, Investment and credit decisions are most likely to be adel! internal users of financial information.er Introduction to Accounting 33 9, Financial accounting is concerned with the preparation of information geared towards the common and specific needs of external users only. 10. Financial statements are the structured representation of an entity’s financial position and results of its operations. PROBLEM 2: TRUE OR FALSE 1, A “reporting entity” (or simply ‘enfity’) is one that is required, or chooses, to prepare financial statements. Accounting information is expressed only in numbers but never in words. You are planning on investing in the shares of stocks of ABC Inc. You then downloaded ABC Inc’s financial statements from the internet to help you analyze whether the current market price of ABC Inc.’s shares are undervalued or overvalued. In this regard, you are considered an internal user of financial statements. The output in the financial accounting process is the financial statements. 5, Ina partnership or a sole proprietorship, the owners’ liability for business’ debts is limited only to the amount the owner has contributed to the business. 6. Unlike bookkeeping, accounting requires the interpretation of the significance of the information processed. 7. In most cases, the start-up capital for a manufacturing business is more significant compared to a service business. 8. The corporate form of business organization provides the highest degree of continuity. 9. A business that converts raw ma! called a merchandising business. 10. Auditing is the branch of accounting inspection. of an enti ty’s financial statements or business processes to ascertain their correspondence with established criteria. ' terials into final products is that involves. thea NESTS “ Chapre, PROBLEM 3: FOR CLASSROOM DISCUSSION Definition, nature and function of Accounting 1. Which of the following does not properly descr, accounting? a. It isa process b b. It isa social science. c. It requires the application of creative skills and judgment d. Itis often referred to as the “language of the soul.” ry which useful information is generateg Users of accounting information 2. Which of the following is considered an internal user of financial information? a. Rankand file employees of the reporting entity b. Stockholders of the entity who are not directly involved in managing the entity c. Lenders and other creditors d. The entity’s management 3. What type of information needs of users do general purpose financial statements cater to? a. common needs b. specific needs c.aandb d. caring needs 4. Which of the following is least likely to be a decision made by an external user of the financial information of an entity? a. whether to buy, hold or sell investment in stocks b. whether to extend loan or other forms of credit c. whether to obtain additional financing d. all of these are decisions that external users make Branches of accounting 5. This branch of accounting deals with the preparation of general purpose financial statements. a. General accounting c. Financial accounting b. Management accounting d. Auditing —Introduction to Accounting 35 6. General purpose financial statements are intended to meet a. all the information needs of all users — external and internal alike. b. the common needs of both external and internal users. c. the common needs of external users, primarily investors, lenders and other creditors. d. both the common and specific needs of external users. Forms of business organizations 7. This type of business organization is created by a contractual agreement between two or more individuals. a. corporation c. partnership b. cooperative d. sole proprietorship Types of business according to activities } 8. Which of the following refers to a manufacturing business? buying and selling of goods in their original form sale of a skill-set and not necessarily a physical object ability or potential to mass-produce absence of ability to stock goods for future sale aose Advantages and disadvantages of the different types of business 9. A disadvantage of a partnership is a. better decisions — “two heads are better than one.” b. business risk is assumed by more than one owner. c. unlimited life. d. unlimited liabilities of the partners. 10. This type of business organization has the tendency to become monopolistic. It can hamper the economy by funneling wealth to only few individuals (i.e, the organization’s top owners) restricting the redistribution of wealth to the majority of the members of the society. a. Cooperative c. Partnership b. Sole proprietorship d. Corporation36 hate, PROBLEM 4: MULTIPLE CHOICE al It is the phase in accounting where an event is determ, iti i ined er or not it is to be recorded in the books of accounts Ned wheth« a. Accountable event c. Measuring b. Identifying d. Communicating These are events that affect the assets, liabilities, equity income or expenses of @ business. a. Accountant's events b. Internal‘events c. External events d. Accountable events of information in accounting cc. Account d. Memory Card It is the basic storage a. Cash b. Vault Accounting information is communicated to interested users most commonly through a. financial statements. b. statement of accounts. c. Journals d. Call and text Information expressed in numbers is called a. Quantitative information c. Financial information b. Qualitative information d. Numerical information Accounting is fundamental to the communication of financial information. Thus, accounting is often referred to as c. the “language of the soul.” a. a practical art. d. “language of business.” b. a social science. Which of the following is considered an internal user? a. Investors c. Creditors b. Management d. Rank and file employees It refers to accounting information designed to meet the common needs of most statement users. a. General purpose information — c. Common inform: b. Special purpose information d. All of these ationIntroduction to Accounting 37 9. An internal user’s economic decisions least likely include which of the following? a. Whether or not to increase the sale price of a product. b. Whether or not to extend credit to a business. c. Whether to increase or decrease the production of a certain product. d. Whether to increase the salaries of existing employees or to hire additional employees. 10. The focus of financial accounting is the preparation of a. general purpose financial:statements. b. special purpose financial statements. ce aandb d. journals and ledgers. PROBLEM 5: MULTIPLE CHOICE 1. The Philippine Financial Reporting Standards (PFRSs) are most relevant to which branch of accounting? a. Taxation c. Management accounting b. Financial accounting d. band 2. These are the end product of the accounting process and the means by which information gathered and processed are periodically communicated to users. a. Financial statements c. Journals and Ledgers b. Accountable events d. Accountant. 3. The Primary objective of financial reporting is a. to provide information about an entity’s economic resources. b. to provide information useful in assessing the entity’s Management stewardship. c. to comply with the PFRSs.38 Chapter; d. to provide information about an entity's econo, resources (assets), claims to those resources (liabilities i equity), and changes in those resources (income, expense eS and other changes). 4, Mr, George, an accountant, prepared a report showing alll the past due accounts of the business, collection trends, financig ratios and analyses. Mr. George stamped the wor “confidential” on all the pages of the report because the repor, is intended for management's use only. The preparation of the report is most likely to be within the purview of which branch, of accounting? a. Financial accounting c.. Management accounting b. Cost accounting d. Tax accounting 5, Mr. Clouds owns a car dealership. Mr. Clouds buys used cars, refurbish them and then sells them. Mr. Clouds is the only owner of the business. What form of busines origination is Mr. Clouds’ car dealership and what type of business activity is Mr. Clouds’ engaged in? a. Sole proprietorship Service b. Sole proprietorship Trading c. Partnership Trading d. Corporation Manufacturing 6. Inventory, warehousing and distribution costs are the least worry of a business that engages in what type of business activity? a. Service c. Manufacturing b. Merchandising or Trading —_d. None of these Use the following information for the next two questions: You want a new laptop computer and a good internet connectio® so you can market your products on Facebook. The problem isP|) Introduction to Accounting Ly you are short of cash. So, you went to Papa to get a loan but he said, “No way, Jose!” 7. Which of the following would most likely persuade Papa to give you the loan? a. Cry like’a spoiled brat while running up and down the stairs. b. Look at Papa with teary eyes while wiping the liquid dripping from your nose. Get Mama on your side. d. Show Papa your projected financial statements, explain to him your business plan and confidently assure him that 2 you will pay back the loan. 8. Papa’s decision on whether to extend you a loan is a decision made by a(an) a. external user. c. wise man. b. internal user. d. kuripot man. 9. You are a business owner. It came to your attention that some of your products are overstocked, while some are frequently out-of-stock. Warehousing costs have been increasing and you are losing potential sales. To come up with a right mix of products to store in your warehouse, what should you do? a. Fire your sales personnel. b. Fire your warehouse custodian. c. Cry likea little baby; face pressed on a pillow. d. Obtain an accounting record of your sales per product line and identify which products are sold faster than the others. Stock more of those products and stock less of the products that take longer to sell.Chapter; 40 TT 10. Your friend offered you a business proposal. According to . initial investment is 10,000. You will Ret your friend, the init kin whitening soaps and 1 bottle ena ae i i i you get other investors to invest ang rir orl get other investors and those “othey’ a i ay et some more investors, you will receive Aaa (wow!) As a business learner, you should dg LOU: 2 ing except ee aa earned money to your friend. b. ask if your friend’s business fl properly registered with government regulatory agencies, eg. Securities and Exchange Commission ‘SEC’. Ask if you can examine the related registration documents. } c. obtain an objective understanding of your friend's business and its ability to give you a house and lot. Ask if your friend owns a house-and lot. If he or she answers No,” there is a small chance that he or she could give you one. : d. say LOL. In your mind, you are thinking “I am an accounting student. You cannot fool me with your scam.” PROBLEM 6: CASE STUDY Instructions: 1. Interview someone who has a business, He or she can be a relative, a friend, a neighbor (e.g., an owner of a sari-sari store nearby), or anyone (e.g,, an owner of a food stall in your school’s canteen). Let him or her tell you a story on how his or her business came to be. (Important: Listen, and listen well. Do not interrupt while he or she tells you his or her story. Notice any spark of passion in his or her eyes.) 3. Summarize his or her story and pass it to your teacher for grading. At the minimum, your summary should include the following: a. Name of the business b. Form of the business and type of business activity— 41 Introduction to Accounting c, Nature of products or services d. Brief history of the business = Reason for putting up the business (including any interesting facts and circumstances — most businesses have this!) Initial capital and how that capital was generated (i.e., from savings or borrowings or both) Difficulties faced by the owner during the start-up period Other information....(use your imagination; be creative!) e. NOTE: Be polite and courteous.....chances are, this could be a life-changing experience for you.. hope. Enjoy! ©8) PROBLEM 7: ESSAY If you have the opportunity to put up a business, and why? what would it be *NOTE: Disregard any financial restrictions that you may have. Imagine you have the money you need to put up any business you like. However, you need to consider any skills that you currently ire. Such skills can be have or skills you are willing to acqui technical (e.g., cooking skills, computer programming, art, music, mathematics, gardening, carpentry, etc.) or non-technical (e.g., communication skills, people skills or ‘charisma’, street smart, etc.). Also, you need to consider the things or activities that make you happy - those that motivate you, those that you find fulfilling. Final note: Be honest to yourself! You will be graded based on your honesty, so don’t write things just to impress your teacher. Enjoy.....6©