CHAPTER 2

BRANCHES OF ACCOUNTING
Financial Accounting – is a branch of Accounting Research – is a branch of
Accounting that deals primarily with the accounting that deals with continued
traditional recording of financial transactions research studies relating to professional
which would eventually result to the growth and advancement in the field of the
preparation of financial statements that will Accountancy that will result to the discovery
serve the information needs of various of new accounting procedures, principles
users. and standards that are tailored-fit to our
Management Accounting – is a branch of global economy.
accounting that focuses on the gathering of
financial and informative data intended for CHAPTER 3
use by management.
Government Accounting – is a branch of USERS OF ACCOUNTING INFORMATION,
Accounting that deals with the proper FORMS AND TYPES OF BUSINESS
custody of public funds in both national and ACCORDING TO ACTIVITIES
local government such as cities, provinces,
municipalities and barangays The users of accounting forms and types of
Auditing – is a branch of accounting – that business organization:
is divided into two types (Internal and
External auditing). The former sees to it A. EXTERNAL USERS
that the established accounting procedures 1. Investors – shareholders need information
are being followed throughout the year. The whether they should invest or not.
latter is performed by an independent 2. Employees – about the stability and
professional accountant or a CPA who profitability of the enterprise
renders an opinion on the fairness of 3. Lenders – to determine whether their loans
financial statements being examined and interest thereon will be paid
Tax Accounting – is a branch of accounting 4. Suppliers and Other Trade Creditors –
that deals with the inherent power of state to enable them to determine whether amounts
collect taxes owing to them will be paid on maturity
Cost Accounting – is a branch of 5. customers – interest on continuance of an
Accounting that is primarily concerned with enterprise when they have long term
gathering , accumulation and control to involvement with or are dependent on the
determine the cost of production of goods enterprise
and services and setting-up of selling price 6. Government and their Agencies –
thereafter. require information to regulate the activities of
Accounting Education – is a branch of the enterprise, determine taxation policies and
accounting that deals primarily with as a basis for national income and similar
upgrading the quality of teaching in statistics
accounting education through attending the 7. Public – providing the information about
required Continuing professional the trends and recent developments in the
Development (CPD) as prescribed by the prosperity of the enterprise and the range of its
Board of Accountancy. activities
B. internal users – these are users who are Partnership is based on contract. Persons
actually involved in the daily operation of the who are capable of entering into contract
business such as board directors, chief financial and desire to form a partnership business
manager and officers . Plant managers and should draw an agreement which maybe
supervisors who use financial information to oral or written.
help plan and control decisions
2 kinds of Partnership
FORMS AND TYPES OF BUSINESS
ORGANIZATION 1. General Professional Partnership
- is a kind of partnership that is formed by
4 FORMS OF BUSINESS ORGANIZATION professionals in the exercise of their profession
such as accountants, lawyers, doctors,
1. SINGLE OR SOLE PROPRIETORSHIP– engineers. Etc.
simplest form of business organization where
capital is owned and managed by one person 2. Co-Partnership or Non-General
called Proprietor. Whatever happens to the Professional Partnership- is formed for the
business, whether it succeeds or fails, the owner purpose of engaging in trade or business and is
has to bear it all including any unpaid obligations taxed like a corporation, hence subjected to
that the business may have incurred 30% income tax rate based on its taxable net
income.
Advantages
- easy to form and easy to stop the operation Characteristics of partnership
- does not need a bigger capital to start
- sole decision maker Mutual Agency – every partner has the
- nobody to share in case of profit authority to act for the partnership and
- tax advantage become binding if such act is within his
Disadvantages express or implied authority.
- Absorb losses by himself Co-ownership – when a property is
- owner mixed his personal and business invested by a partner, such property is no
assets longer owned by him but by the partnership
- unlimited personal liability and because partners are co-owners, each
- difficulty of raising capital and everyone of them acquired equity over
such investment equivalent to their profit
2. PARTNERSHIP- Article 1767 of the New Civil and loss sharing agreement.
code define as a contract whereby two or more Limited life – partnership exist on contract
persons bind themselves to contribute money, drawn by the partners and can be
property or industry to a common fund with the terminated anytime the partners so desire
intention of dividing the profits among causing the partnership to dissolve
themselves. Unlimited Liability – it has unlimited liability
Two or more person may also form a because the partnership’s creditors can run
partnership for the exercise of profession. after the personal assets of the partners
Contributions to a common fund may
consists of money, real or personal and
tangible property. Contributions to industry
maybe physical or mental.
Classification of Partner as to contribution "Powers, attributes and properties as
Capitalist partner – a partner who authorized by law"– it means that as juridical
contributes money or property to the person created by operation of law, a corporation
partnership can enjoy only the powers, attributes and
Industrial partner – a partner who properties expressly organized by law and incident
contributes only his personal services to the to its existence.
partnership. He shares in profit on what is Corporation is..
just equitable but not in losses. The biggest and the most complicated form of
Capitalist-Industrial Partner – a partner business organization. This organized by at least 5
who contributes not only money and but not more than 15 natural persons called
property but services as well. incorporators and the corporate charter that is
being registered with the SEC is called Articles Of
Advantages Incorporation which is filed together with the by-
- Better management laws.
- Bigger amount of Capital
- Exempted from payment of Income tax Its corporate capital called Share Capital which
- The interest of one partner cannot be is divided into units called Shares and each
transferred to a new partner without the consent share has designated value called Par Value.
of other partners.
2 classes of capital:
Disadvantage Ordinary shares
- Unlimited liabilities Preference shares
- Misunderstanding and dispute may arise
among partners *owners of the shares of stock are called
- Limited source of capital compared to Shareholders
corporation
- Possible divisiveness in reaching a decision Advantages
- Limited life of existence Greater source of capital
Shareholders are not liable to corporate
3. CORPORATION - It is an artificial being obligations in excess of their contribution
created by operations of law of having the right Death of any of the shareholders will not
of successions and the powers, attributes and dissolve the corporation because of the
properties expressly authorized by law or transferability of shares
incident to its existence The created governing body is composed of
“top calibered” shareholders who direct the
"It is an artificial being" - separate entity and corporate affairs
distinct from the individual owners Disadvantage
"It is created by operations of law"– it means It is not easy to organize because of
it cannot come into existence by a mere complicated legal requirements
agreement of parties Limited credit line maybe extended by creditors
"Enjoys the right of succession" – it is not to a corporation because creditors cannot run
affected by death, withdrawal, incapacity, after the personal assets of the shareholders in
insolvency of individual shareholders or sell of case a corporation cannot pay its obligation
shares of stocks by old to new shareholders Management of corporation is vested on Board
without dissolving the corporation of Directors
Subject to strict government control
4. COOPERATIVES

Republic act no.9520 known as the Philippine

cooperative code of 2008 defines a cooperative as
an autonomous and duly registered association of
persons, with common bond of interest, who
voluntarily joined together to exercise their social,
economic and cultural needs and aspiration by
making equitable contributions to the capital
required, patronizing their products and services
and accepting a fair share of the risks and benefits
of the undertakings in accordance with universally
accepted cooperative principles.

A cooperative is formed by 15 or more natural

persons who are Filipino citizens, legal age, having
a common bond of interest and are actually
residing or working in the intended area of
operation, may organize a primary cooperative
under this code

Advantages
Equality of each members
Tax free
Limited liability.

Disadvantages
Decision must come from the general assembly
which will result to division of the house

Types of business activities

Service concern – derived its income from
services rendered to clients
Merchandising concern – the business is
engaged in buying goods or commodities or any
form of finished products and sells them at profit
Manufacturing concern – the business is
engaged in buying of raw materials and supplies to
be processed or manufactured
Agriculture – business engaged in planting crops
and sells its products either in raw or finished form
in profit
Hybrid companies – involves in more than one
type of activity which are manufacturing,
merchandising and service.
CHAPTER 4

ACCOUNTING CONCEPT AND PRINCIPLE PERIODICITY OR TIME-PERIOD CONCEPT

Considering the length of time involved in its
What are accounting concepts or operations, it is very impractical for the owner to
assumptions? wait until the business stops to operate before
The preparation of financial statements is he would be able to know the results of
guided by concepts or assumptions. operations, financial condition and cash flow of
Accounting concepts or assumptions are the the business. The life of the business is then
very foundations of Generally Accepted divided into equal periods wherein at the end of
Accounting Principles (GAAP). Without these each period, financial statements are prepared.
accounting assumptions, there could be no These period are being referred to as
uniformity in the practice of accounting in accounting period
which can only result to having distorted and
meaningless financial statements. ACCOUNTING PERIOD
1 month – where FS (Financial statement)are
ACCOUNTING ENTITY CONCEPT prepared at the end of every month. We call this
This assumes that from the accounting point on a “Monthly Basis”. This is the shortest
of view, the business is considered as “an accounting period
entity that is separate and distinct from the 3 Months – end of every 3 months or called
owner or management” “Quarterly Basis
When the owner puts in money, property or 6 Months – at the end of every 6 months. We
both into business, these become “not his call this “SemiAnnual Basis”
personal assets anymore but rather the 12 Months – at the end of every 12 months. We
assets of the business already” call this on a “Yearly or Annual Basis”
A clear distinction between business The length of Accounting period chosen
transactions and personal affairs. Business is depends on the need of the owner for financial
business as what they say. information about his business.
Other term business entity concept Fiscal Period --The Accounting period of less
than a year is called Fiscal Period and the
GOING-CONCERN OR CONTINUITY statements are prepared are referred to as
CONCEPT interim financial statements
The business has a continuous life of
existence. When it starts, it is assumed that it Annual Accounting Period - The owner has 2
will continue to operate for an indefinite annual accounting periods to choose from as far
period of time rather than for it to liquidate as periodic reporting of financial statements
For example, the company acquires a statements are concerned, these are:
machine costing P250,000 with an estimated
life of 10 years. Under the going concern Calendar Year – accounting period will begin
concept, the 250,000 should be spread over on January and will end on December 31 on the
the life of the asset. If there is a strong belief same year.
or doubt that the company would not be able Fiscal year – the accounting period will begin
to survive 6 years after, then t should stop on the first day of any month of the year except
depreciating the asset starting the 7th year. January and will end of the 12th month
completing the one year period. ex. If a period
begins on July 1, 20A will end on June 30B
UNIT MEASURE OR STABLE MONETARY
UNIT CONCEPT For example, in December 20A, X Company
Under this assumption, peso is considered to made sales of merchandise amounting to
have a stable value which means that 200,000 to Y company. Y company made
purchasing power of peso is steady payments in two installments
regardless of inflation rates. Thus, the 1 st installment – 50,000 in December 20A
function of accounting is to “account for the 2 nd instalment -150,000 in January 20B
peso only and not for the change in its
purchasing power”
For example, the company acquires land
worth 150,000 last year, two years later, the
value of the land is 250,000 already. At what
amount the land account should appear in the
statement of financial position? The value of
the land would still be 150,000. It is not
affected by inflation rate of peso

ACCRUAL BASIS CONCEPT Another example. The company has incurred a

Income should be recognized in the period it rental Expense of 10,000 in December 20A.
is earned regardless of when cash is The company pays rent expense on January 5
received. Expenses should be recognized in 20B;
the period these are incurred regardless of
when the expenses are paid. We call these Try to see how will these transactions be recorded
accrual of income and expenses. under accrual and cash basis accounting in
Accrual basis of accounting results to having December 20A
a more accurate, meaningful and reliable
financial statement which are truly “test
meters” of the past business transactions.
Both cash and collectible income which we
termed as Accounts Receivable and
Generally Accepted Accounting Principles
expenses that are paid in cash and unpaid
(GAAP) - The preparation of financial statements is
expenses which termed as Accounts Payable
governed and guided by Generally Accepted
are recognized in the period they are earned
Accounting Principles (GAAP). Principles are
and incurred.
uniform set of accounting rules, procedures,
The recognition of accrued income, deferred
practices and standards that are followed in
income, accrued expenses and accrued
preparing the financial statement. They served as
income which are the essence of accrual
“ground rules” that guide accounting practitioners in
basis are present.
recording (identifying, analyzing and measuring)
In contrast, cash basis of accounting
and reporting financial information of a business.
recognizes income only when actual cash is
received and recognizes expenses only when
actual cash is paid. In other words, this is a
comparison of cash receipts and cash
payments
 CHAPTER 5

CRITERIA FOR A PRINCIPLE TO BECOME

5 MAJOR ACCOUNTS
GENERALLY ACCEPTABLE
Assets
Liabilities
Principle of Relevance- That the resulting
Owner’s Equity
information is meaningful and useful to those
Income
who need to know something about the status
Expenses
of a certain organization.
Principle of Objectivity- That the resulting
BALANCE SHEET / STATEMENT OF FINANCIAL
information is not influence by the personal
POSITION (Permanent Accounts)
bias or judgement of those who furnish it. It
connotes reliability and trustworthiness
1. ASSETS- resources controlled by the
Principle of Feasibility - That it can be
enterprise as a result of past transactions and
implemented without undue complexity or
events and from which future economic benefits
cost.
are expected to flow to the enterprise. These are
Cost Principle - This principle requires the
things of value that are owned.
assets should be recorded at original
acquisition cost and not what management 2 Classification of an ASSET:
thinks they are worth of as reporting data. 1.CURREN ASSET – refer to all assets that
Objectivity Principle- This principle requires are expected to be realized , sold or
that accounting records should be based on consumed within the enterprise’s normal
reliable and verifiable data as evidence of operating cycle.
transaction. They must be recorded A. Cash- account title to describe money.
accurately With in paper or in coins and money
Materiality Principle - this principle dictates substitute like check, postal money orders,
practicability to rule over theory in bank drafts and treasury warrants. Account
determining the valuation of an item. To title is:
determine whether the item is material or not, Cash on Hand - When cash is within the
it is a matter of professional judgment on the premise of the business
part of the accountant. Cash in Bank - if deposited in the bank
Matching Principle- This is combined B. Cash Equivalents – defines as short
concept of Revenue Recognition and term, highly liquid investment that are
Expense Recognition Principles. Revenue readily convertible to known amounts of
should be recognized when earned and cash and which are subject to an
expense should be recognized when incurred insignificant risk of changes in values
during the same period as revenue is earned. because of changes in interest rates.
Consistency Principle-This principle C. Petty Cash Fund – an account title for
requires that accounting methods and money that is separately placed inside the
procedures should be applied in uniform box and set aside for petty or small
basis from period to period to achieve expenses.
comparability in the financial statement D. Notes Receivable – this is a
Adequate Disclosure Principle- This promissory note that is received by the
principle requires that financial statements
should be free from any material misstements;
that if there is any, proper disclosure should
be made.
 2. LIABILITIES- – defined as financial obligation of
the business to its creditors. It represent the claim of
H. Inventories – these are assets which the creditors over the assets of the enterprise. It is
are 1. held for sale in the ordinary course something that you OWED.
of business; 2. in the process of
production for such sale; or in the form of 2 Classification of LIABILITIES:
materials or supplies to be consumed in 1.CURRENT – financial obligations which are
the production process or in the rendering expected to be settled in the normal course
of services. of the operating cycle 2, due to be settled
within the year from the Statement of
Supplies inventory or unused supplies – Financial Position date.
an account title for cost of stationery and 2.NON-CURRENT
other supplies purchased for use but are left A. Accounts Payable – account title for a
on hand and still unused. financial obligation of the enterprise that
constitutes an oral or verbal promise to pay.
Prepaid Expenses – account title for B. Notes Payable (short-term)- same as
expenses that are paid in advance but are not Accounts Payable in nature but only the
yet incurred or have not yet expired such as obligation is evidenced by a promissory note
Prepaid Rental, prepaid Insurance, Prepaid C. Accrued Expense – expenses incurred
Interest, Prepaid Advertising, etc. by the enterprise but are not yet paid.
D. Unearned income- income collected or
2.NON-CURRENT ASSETS received in advance but services have not
been rendered yet.
Property and Equipment –defines property 2. NON-CURRENT LIABILITIES
and equipment as tangible assets which are A. Notes Payable (Long-term) – same
held by an enterprise for use in production or nature with that of Notes Payable (short-
supply of goods and services, for rental to term) but only, this requires payment for more
others or for administrative purposes and than a year.
which are expected to be used during more B. Mortgage Payable – a financial
than one period, such as obligation of the enterprise which requires a
fixed or tangible property to be pledged as
Land – account title for the site where the collateral to ensure payment
building used as office or store is
3. OWNER’S EQUITY OR CAPITAL - This is the
constructed.
residual interest in the assets of the enterprise after
Building – account title for a finished
deducting all its liabilities. It is expressed in the
construction owned by the business where
equation as Assets less Liabilities equals Owner’s
operations and transactions took place.
Equity or Capital. It is increased when there is profit
Equipment – includes calculators,
or additional contributions by the owner and
typewriters, adding machines, computers,
decreased when there is Loss or withdrawal by the
steel filling cabinet.
owner.
Furniture & Fixtures – include chairs,
Withdrawal – the owner’s withdrawal is
tables, counters, display cases and the
likewise indicated by the use of the owner’s
like.
name with word drawing.
Accumulated Depreciation- this is an
Income and Expense Summary – this is the
asset offset or contra-asset account. This
temporary account created at the end of the
is called Valuation account.
accounting period where Income and Expenses
are temporary closed to this account.
INCOME STATEMENT / STATEMENT OF Depreciation Expense – for the portion of the
COMPREHENSIVE INCOME (Temporary cost of property and equipment or fixed assets
Accounts) that has expired based on rational and
systematic allocation procedure
INCOME OR REVENUE - These refers to the Taxes and Licenses – for the amount paid for
proceeds from services rendered by a servicing business permits, licenses and other
firm, income from use by other entities of the government dues except the Income Tax paid
resources of the enterprise like royalties income, which is not Allowable by law as a deduction
rent income, interest income, etc. it also includes Insurance Expense – account title for the
proceeds from sale of merchandise. expired portion of the insurance premium paid
Service Income – account title used for all Utilities expense – the account title for
types of income derived from rendering of telephone, light and water bills J. Interest
service. expense – an expense incurred from borrowed
Professional Income – the account title used money
for all types of income earned from the practice Miscellaneous expense – any amount paid as
of their profession. expense which is not significant enough to
Rental Income – income earned on rental. warrant a particular classification.
Interest Income – income received by the Gas & Oil – the account title for gasoline,
business arising from an amount of money diesoline, lubricants, grease, fluids, lube oils,
borrowed by a customer and usually covered etc. for use by company vehicles
by a promissory note.
Miscellaneous Income – income earned by THE CHART OF ACCOUNTS
the business which is not the main line of its -This is the list of account titles arranged from
activity and could not be clearly classified Assets, Liabilities, Owner’s Equity, Income and
Expenses prepared beforehand to guide
EXPENSES – gross outflow of economic benefits bookkeeper and accountant of what specific titles
during the period arising in the course of ordinary are to be used in describing the exchange of values
activities of an enterprise when those outflow in a transaction. This list of account titles is called
result in decrease in equity, other than those “Chart of Accounts”
relating to distribution to owners.

Supplies Expense – represent cost of

supplies that were used and consumed that
bears specific titles as Office supplies
expense, store supplies expense. Shop
supplies expense, etc.
Rent Expense – for the amount paid incurred ACCOUNTING EQUATION:
for use of property, usually premises. “ Asset = Liabilities + Owner’s Equity
Repairs and Maintenance – for expenses “A= L+OE”
incurred in repairing or servicing the buildings,
machineries, vehicles equipment, etc., which Owner’s Equity = Assets - Liabilities
are owned by the business "OE= A - L"
Salaries Expense – compensation given to
employees of a business E. Uncollectible
Accounts – for the anticipated loss that the
business may incur arising from uncollectible
accounts.