INTRODUCTION OF ACCOUNTING
Business
A person or organization engaged in the regular conduct of commercial,
industrial or professional activities, whether for profit or not, in order to
fulfil a purpose, goal, mission or cause.
The regular conduct or pursuit of a commercial activity or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person is engaged therein is a non-stock,
non-profit private organization or government entity
Business
Person or organization
Regular conduct
Commercial, industrial or professional activities
Lawful transactions
Whether for profit or not
To fulfil a purpose, goal, mission or cause
Forms of Business Organization
These are the basic forms of business ownership:
1. Sole Proprietorship
a business owned by only one person
usually adopted by small business entities
easy to set-up and requires low capital
owner faces unlimited liability
not easy to transfer ownership
2. Partnership
a business owned by two or more persons
the partners contribute resources into the entity
The partners divide the profits among themselves.
Generally, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the
limited partners.
3. Corporation
a business organization that has a separate legal personality from
its owners
usually adopted by large business organizations
can generate large amounts of capital from investments
not easy to set-up and organize
Ownership is usually represented by shares of stock.
Owners (stockholders) enjoy limited liability but have limited
involvement in the company's operations.
easy to transfer ownership
Basic Types of Business
There are major types of businesses:
1. Service Business
a business that provides intangible products (products with no
physical form) for a fee
offers professional skills, expertise, advice, and other similar
products.
examples are: repair shops, beauty care, health and recreation,
transportation, communication, consulting, professional, medical
and other service companies.
2. Merchandising Business
a business that buys products and sells the same at a higher price
for a profit.
known as "buy and sell" businesses.
sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and
other resellers.
3. Manufacturing Business
a business that buys materials and converts them into a new
product.
combines raw materials, labor, and overhead costs in its production
process, and sells the manufactured goods to customers.
4. Mixed/Hybrid Business
companies that can be classified in more than one type of business.
example: A restaurant, combines ingredients in making a fine meal
(manufacturing), sells a cold bottle of wine (merchandising), and
fills customer orders (service).
Not considered engaged in business:
Government agencies and instrumentalities
Pure compensation employment (local or abroad, private or government)
Directorship in a corporation
Gratuitous transfer of properties by succession or donation
Isolated or casual transactions by persons not engaged in trade or
business
Considered engaged in business:
Freelancers, agents and consultants
Broadcast media talents and artists
Legal Requirements in Organizing a Business
1. Register Business Name and Entity
Depending on the form of the business, it must register with the following
government agencies:
Sole Proprietorship - Department of Trade and Industry (Business
Name Registration)
Partnership or Corporation - Securities and Exchange
Commission (Registration System)
Cooperative - Cooperative Development Authority (Registration
System)
2. Secure Business Permits and Licenses
Depending on the nature of its activities, the business must secure its
permits and licenses in the city or municipality where it conducts its
business. Generally the following will be obtained:
Business Permit or Professional Tax Receipt - from the City or
Municipal Government Unit
Fire Safety Inspection Certificate - from the Bureau of Fire
Protection
Barangay Clearance and Community Tax Certificate - from the
barangay where the business is operating
Employer Registration - SSS, HDMF, PHIC, DOLE (if applicable)
3. Comply with BIR Requirements:
The business entity must also comply with the following requirements of
the Bureau of Internal Revenue:
Business registration
Issuance of receipts and invoices
Keeping of tax and accounting records
Withholding of taxes on certain payments
Filing and payment of taxes
However profitable or noble the purpose of the business may be, the failure of
the business entity to comply with any of these requirements might lead to
penalties, fines, surcharges or, at worst, closure of the business.
After the registration and securing all the necessary certificates and permits, the
company needs to maintain its accounting records.
Definition of Accounting
Accounting is the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events which are,
in part at least of a financial character, and interpreting the results thereof
(American Institute of Certified Public Accountants).
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 (Accounting Standards
Council).
Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by users of
the information (American Accounting Association).
Accounting is an information system that measures, processes and
communicates financial information about an identifiable economic entity.
Accounting
a service activity, a process
to provide financial information
about economic entities
for the use of interested users
Purpose of Accounting
to provide financial information about the business that will be useful in
making economic decisions of the users of the information
Financial Statements
Statement of Financial Position (Balance Sheet)
Statement of Financial Performance (Income Statement)
Statement of Changes in Owner's Equity
Statement of Cash Flows
Notes to the Financial Statements
Users of Accounting Information
Internal Users (within the business organization)
Owners
Managers
Employees
Officers
Internal Auditors
External Users (outside the business organization)
Customers
Suppliers
Creditors
Investors
External Auditors
Government Agencies
Industrial Organizations
Public
Branches of Accounting
1. Financial Accounting
2. Management Accounting
3. Tax Accounting
4. Auditing
Bookkeeping
Bookkeeping is the recording of financial transactions and is part of the
process of accounting in business (Financial Accounting 2003, Weygandt;
Kieso; Kimmel). It is largely concerned with the implementation of the
accounting procedures manual and maintenance of the accounting
records. Bookkeeping is the procedural implementation of Accounting.
Bookkeeper is the person who keeps and maintains the books of accounts of
the business organization. The bookkeeper is responsible for recording the
transactions of the business.
Functions of a Bookkeeper
General Accounting
Verify deposit of cash collections
Verify petty cash disbursements
Prepare bank reconciliation
Record transactions in the journals
Post to the subsidiary and general ledgers
Reconcile general and subsidiary ledgers
Prepare a draft of the Trial Balance
Assist the Accountant in the closing of the accounts and finalization of the
financial statements.
Maintain proper filing and retrieval of accounting records
Accounts Receivable
Record sales invoices
Record cash receipts from customers
Record sales returns, account adjustments and credit memos from
suppliers
Issue Statement of Accounts to customers
Reconcile accounts receivable ledger balance with unpaid customer
invoices.
Maintain Accounts Receivable Subsidiary Ledger
Prepare Accounts Receivable reports
Accounts Payable
Record purchase invoices
Record payments to suppliers
Record purchase returns, account adjustments and debit memos from
suppliers
Receive Statement of Accounts from suppliers
Reconcile accounts payable ledger balance with unpaid customer invoices.
Maintain Accounts Payable Subsidiary Ledger
Prepare Accounts Payable reports
Inventory Accounting
Record receipts of inventory from suppliers.
Record release of inventory to customers
Record inventory returns and adjustments
Prepare purchase requests and Inventory issuance slips
Reconcile physical count of inventory to ledger balances
Maintain inventory subsidiary ledgers
Prepare Inventory reports
The Bookkeeper may also be assigned to handle other functions, such as:
Property control and monitoring
Payroll preparation
Remittance of statutory deductions and reports
Tax bookkeeping
Treasury and banking
Audit assistance
Managerial and administrative functions.
The scope and variety of functions depends on the nature, type, size,
organization structure of the business and other factors.
Due to the importance of his or her functions, the Bookkeeper must possess the
knowledge, abilities and temperaments required to properly fulfill his or her
duties and functions. One of the knowledge requirements would be the basic
knowledge in Accounting.
The Accounting Cycle
Recording
1. Identification of Accountable Transactions. Business transactions or
events are analyzed and identified whether they are accountable or not.
2. Journalizing. The accountable transactions are recorded in the book of
original entry known as the journal. The transactions are recorded
chronologically using the appropriate accounts and amounts.
3. Posting. The transactions from the journal are classified in the book of
final entry known as the ledger. The ledger classifies the transactions
effecting the increases and decreases for each account.
Summarizing
4. Trial Balance. The summary of accounts balances from the ledger is
prepared in the list of accounts known as the trial balance. This is the
proof that the ledger debit balances and credit balances are equal and is
in balance.
5. Adjusting Entries. Adjusting journal entries are made at the end of the
accounting period to assign revenues to the period in which they are
earned and expenses to the period in which they are incurred.
Reporting
6. Financial Statements. The following financial statements are prepared:
statement of financial position, statement of financial performance,
statement of changes in equity, statement of cash flows and the notes to
the financial statements. These financial statements provide useful
information to interested parties for their decision-making.
7. Closing Entries. The temporary nominal accounts are eliminated from
the accounts by recording and posting the closing entries. This will
prepare the accounting records for the next accounting period.
8. Post-Closing Trial Balance. After the closing entries are posted, the
post-closing trial balance is prepared to check that the debit and credit
balances of the remaining accounts are correct.
Optional
9. Recording of Reversing Entries. At the beginning of the next
accounting period, selected adjusting journal entries made at the previous
accounting period are reversed to “normalize” the recording of the related
actual transactions.
