II.

BRANCHES OF ACCOUNTING

Learning Objectives:
At the end of this chapter, the students should be able to:
1. define branches of accounting;
2. differentiate the branches of accounting; and
3. explain the kind/types of services rendered in each of these branches.

LO1, LO2, LO3: BRANCHES OF ACCOUNTING

1. Financial Accounting

The branch of accounting that focuses on general purpose financial

statements.

Financial Statements Financial Report

- are the structured representation of - includes the financial statements
an entity’s financial position and plus other information provided
results of its operations. They are the outside the financial statements
end product of the accounting that assists in the interpretation of
process and the means by which a complete set of financial
information gathered and processed statements or improves users’
are periodically communicated to ability to make efficient
users. economic decisions.
1. Statement of Financial Position 1. Statement of Financial Position
2. Statement of Profit or Loss and Other 2. Statement of Profit or Loss and
Comprehensive Income Other Comprehensive Income
3. Statement of Changes in Equity 3. Statement of Changes in Equity
4. Statement of Cash Flows 4. Statement of Cash Flows
5. Notes 5. Notes
6. Other information

Type of accounting service provided – Preparation of general purpose financial

statements.

Users of service – All businesses use financial accounting in their record-keeping.

These records provide information that is also used in other branches of accounting.

2. Management Accounting

Involves the accumulation and communication of information for use by

internal users. An offshoot of management accounting is management advisory
services which includes services to clients on matters of accounting, finance, business
policies, organization procedures, product costs, distribution, and many other phases
of business conduct and operations.
 Type of accounting service provided – Preparation of specifically tailored
management reports.

Users of service – Required by management to aid them in performing their

management functions.

3. Government Accounting

It 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.

Type of accounting service provided – General record-keeping and preparation

of financial reports for the government and the agencies. It also includes the
preparation of budgets and accountability reports.

Users of service – Required by government and its agencies.

4. Auditing

It involves the inspection of an entity’s financial statements or business

processes to ascertain their correspondence with an established criteria.

Type of accounting service provided – Expression of an opinion on the

correspondence between management assertions and established criteria.

Users of service – Businesses with gross annual sales or receipts exceeding

P3,000,000.00 are required to have their financial statements audited by an
independent Certified Public Accountant (CPA).

5. Taxation

The preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.

Type of accounting service provided – Preparation of tax returns and providing

tax advice.

Users of service – All businesses are required to file tax returns and some taxpayers
may require professional advice of a tax practitioner regarding management of
taxes.

6. Cost Accounting

The systematic recording and analysis of the costs of materials, labor, and
overhead incident to the production of goods or rendering of services.

Type of accounting service provided – Analyses of costs of products or services.

 Users of service – Businesses use cost accounting to analyze the cost of their
products or services and the effects of those costs in, among others, earnings and
pricing policies.

7. Accounting Education

Refers to teaching accounting and accounting-related subjects in an

organized learning environment. It is a process of facilitating the acquisition of
knowledge and skills regarding one or more of the other branches of accounting.

Type of accounting service provided – Teaching of accounting and related

subjects.

Users of service – Required by business students, business owners, accounting

professionals in their Continuing Professional Development (CPD), and other
interested parties.

8. Accounting Research

Pertains to the actual 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.

Type of accounting service provided – Accounting research papers, articles and

similar publications.

Users of service – Required by business owners, professional organizations, and

other interested parties.

III. USERS OF ACCOUNTING

Learning Objectives:
At the end of this chapter, the students should be able to:
1. define internal users and give examples;
2. define external and give examples;
3. identify the type of decisions made by each group of users; and
4. describe the type of information needed by each group of users.

LO1, LO3, LO4. INTERNAL USERS

1. Managers/Management – they plan, organize and run a business.

a. Top-level management – they use information to oversee the performance of
the whole organization and set its strategic direction.
 b. Middle-level management – they ensure that their unit’s performances are
aligned with the organization’s objectives.

c. Lower-level management – they oversee the day-to-day operations and direct

employees in the performance of tasks.

2. Employees – they assess the company’s profitability and stability, and their
consequence on future salary and job security.

3. Owners – they provide the capital to the business. They are interested to know the
returns on their investment.

LO2, LO3, LO4. EXTERNAL USERS

1. Potential and existing investors – they need information to help them decide
whether they should invest or not in the business.

2. Creditors and potential creditors – they assess the credit worthiness and the
capability of the business to pay its obligation including the related interests on
maturity date.

3. Customers – they assess the financial position of their suppliers which is necessary
for them to maintain a stable source of supply in the long term.

4. Suppliers – they use the financial statements of their customers to determine

whether the debts owed to them will be paid when due or whether the customer
has enough funds or resources to pay the goods to be delivered or the services to
be rendered.

5. Tax authorities – they use financial reports to determine the credibility of the tax
returns filed on behalf of the company.

6. Regulatory bodies – they want to ensure that the company’s disclosure of

accounting information is in accordance with the rules and regulations set in order
to protect the interest of the stakeholders who rely on such information.

7. Public – they use the financial information to know how the business affects the
economy possible prospects for employment, and/or educational research
purposes.

IV. FORMS OF BUSINESS ORGANIZATION

Learning Objectives:
 At the end of this chapter, the students should be able to:
1. differentiate the forms of business organization;
2. identify the advantage and disadvantages of each form; and
3. compare and contrast the types of business according to activities.

LO1. TYPES OF BUSINESS ACCORDING TO OWNERSHIP

1. Sole Proprietorship – a business that is owned by only one individual for the
practice of trade or profession. It is the simplest and least costly form of ownership
among other forms of business.

2. Partnership – a business that is owned by two or more individuals pooling their

resources together as common fund. The partners are normally involved in the
management and operation of the business.

3. Corporation – a business required to have five to fifteen incorporators. Section 2 of

the Corporation Code of the Philippines defines corporation as “an artificial being
created by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incident to its existence”.

4. Cooperative – a business that is owned by a group of individuals who also serve

as benefactors to the business endeavor. A cooperative usually requires at least
fifteen members to function.

LO2. ADVANTAGES AND DISADVANTAGES OF THE TYPES OF BUSINESS

1. Sole Proprietorship
Advantages Disadvantages
✓ You are the boss and you keep all the ✓ You assume all the risk of loss.
profits.
✓ Decision making is simple because ✓ You take all responsibility and rely
you have complete control over the mostly on yourself in making
business. decisions.
✓ Relatively easier and less costly to ✓ It is more difficult to raise capital
form because there are fewer formal because you rely mostly on your
business requirements. personal assets and loans to
initially finance the business.
✓ Lower extent of government ✓ You are personally liable for the
regulation and relatively lower taxes. debts and obligations of the
business.

2. Partnership
Advantages Disadvantages
 ✓ Better business decisions can be ✓ Making business decisions may
made because “two heads are give rise to conflict among the
better than one.” partners.
✓ You share the business risk and the ✓ You don’t keep all the profits
responsibility of running the business because you need to share them
with your partners. with your partner/s.
✓ Compared to corporations and ✓ Limited life, in the sense that a
cooperatives, a partnership is easier partnership can be easily
to form because only a contractual dissolved by the withdrawal,
agreement between the partners is retirement, death or sanity of one
needed. of the partners.
✓ Greater capital compared to a sole ✓ Lesser capital compared to a
proprietorship. corporation.
✓ Relatively lower extent of ✓ A partnership (other than a
government regulation compared to general professional partnership)
corporations. is taxed like a corporation.
✓ Unlimited liability.

3. Corporation
Advantages Disadvantages
✓ Limited liability. ✓ More difficult and more costly to
form.
✓ Greater capital and ease in raising ✓ Greater extent of government
additional funds because a regulation and higher taxes.
corporation can issue shares to a
wider extent of investors.
✓ Unlimited life.

4. Cooperative
Advantages Disadvantages
✓ Generally exempt from paying taxes. ✓ Susceptible to corruption.
✓ Limited liability. ✓ Restrictions on the transfer of a
member’s shares.
✓ Unlimited life.

LO3. TYPES OF BUSINESS ACCORDING TO ACTIVITIES

1. Service Business – 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.
Advantages Disadvantages
 ✓ You don’t need to worry about ✓ You may not have a flexible
inventory, warehousing and personal time.
distribution costs.
✓ You may only need a small capital. ✓ Service businesses normally suffer
first from decline in demand
during times of economic
difficulty.
✓ You are perceived as an expert in ✓ Your business’ success depends
your chosen field. on your credibility.

2. Merchandising Business (trading business) – is one that buys and sells goods
without changing their physical form.
Advantages Disadvantages
✓ Compared to a manufacturing firm, ✓ You need to have a retail store to
you may need a much lower start-up display your goods.
capital.
✓ You can take advantage of price ✓ Less flexibility in managing costs.
fluctuations.
✓ Lower cost of quality. ✓ Keeping track of inventory is
tedious.

3. Manufacturing Business – is one that buys raw materials and processes them into
final products.

Advantages Disadvantages
✓ You have a high growth potential. ✓ You need a high start-up capital.
✓ You have the opportunity to establish ✓ Conceptualizing a viable
a brand that could last longer than manufacturing business is difficult.
your lifetime.
✓ You may not need to have a ✓ Warehousing and logistics costs
strategically located retail store to can be high.
display your products.
✓ You can have a better pricing policy. ✓ You rely on raw materials.
✓ Self-satisfaction is high. ✓ You need to be a continuously
innovative and abreast of
changes in technology.