Republic of the Philippines

North Eastern Mindanao State University

MAIN CAMPUS
Tandag City, Surigao del Sur, 8300
Website: https://www.nemsu.edu.ph/

DEPARTMENT OF BUSINESS MANAGEMENT

Subject: iACCTG 1
Description: PARTNERSHIP AND CORPORATION ACCOUNTING
Time/Day 5:30pm to 8:30 pm (Mon, Tue, Thur, and Fri)

INTRODUCTION

Accounting has evolved, as in the case of medicine and law, in response to the social and economic
needs of society. As business and society become more complex, accounting develops new concepts and
techniques to meet the ever-increasing needs for financial information. Without such information, many
complex economic developments and social programs may never have been undertaken.

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

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

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

DEFINITIONS OF ACCOUNTING

Accounting is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making economic decisions (Statement of
Financial Accounting Standards No. 1, "Basic Concepts and Accounting Principles Underlying Financial
Statements of Business Enterprises" (Manila: Accounting Standards Council, 1983), par. 1).

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

information about an economic entity (Statement of Financial Accounting Concepts No. 1, "Objectives of
Financial Reporting by Business Enterprises" (Norwalk, Conn.: Financial Accounting Standards Board, 1978),
par. 9).

Accounting is the process of identifying, measuring and communicating economic information, to

permit informed judgments and decisions by users of the information (American Accounting Association, "A
Statement of Basic Accounting Theory" (Evanston, III.: American Accounting Association, 1966), par. 1;
Accounting Principles Board, Statement No. 4, "Basic Concepts and Accounting Principles Underlying
Financial Statements of Business Enterprises" (New York: AICPA, 1970), par. 40)..

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

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results thereof (American Institute of Certified Public Accountants, "Review and Resume", Accounting
Terminology Bulletin No. 1 (New York: AICPA, 1953), par. 9).

TYPES OF BUSINESS

Although the fundamental business model does not vary, there are infinite ways of applying it to
provide the range of products and services that make up the business world. However, the range of products
and services can be summarized in seven broad categories, they are as follows:

Type Activity Structure Examples

Services Selling people's Hiring skilled staff and selling their time. ▪ Software
time development
▪ Accounting
▪ Legal
Trader Buying and Buying a range of raw materials and ▪ Wholesaler
selling products manufactured goods and consolidating ▪ Retailer
them, making them available for sale in
locations near to their customers or online
for delivery.
Manufacturer Designing Taking raw materials and using equipment ▪ Vehicle
Products, and staff to Assembly
aggregating convert them into finished. ▪ Construction
components and ▪ Engineering
assembling ▪ Electricity, Water
finished Food and drink
products ▪ Chemicals
▪ Media
▪ Pharmaceuticals

Raw Materials Growing or Buying blocks of land and using them to ▪ Farming
extracting raw provide raw materials. ▪ Mining
materials ▪ Oil
Infrastructure Selling the Buying and operating assets (typically large ▪ Transport
utilization of assets); selling (airport
infrastructure occupancy often in operator,
combination with services. airlines, trains,
ferries and
buses)
▪ Hotel
▪ Telecoms
▪ Sports facilities
▪ Property
Management
Financial Receiving Accepting cash from depositors and paying ▪ Bank
deposits, lending them interest; using the money to provide ▪ Investment
and investing loans to borrowers, charging them fees and House
money a higher rate of interest than the depositor
receive.
Insurance Pooling Collecting cash from customers; Investing ▪ Insurance
premiums of the money to pay losses experienced by few
many to meet customers.
claims of a few

FORMS OF BUSINESS ORGANIZATIONS

Any of the above types of activities may be performed by a business organization be it a sole
proprietorship, a partnership or a corporation. A business generally assumes one of the three forms of
organization. The accounting procedures depend on which form the organization takes.

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1. Sole Proprietorship. This business organization has a single owner called the proprietor who generally is
also the manager. Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and
accountants) businesses and retail establishments. The owner receives all profits, absorbs all losses and
is solely responsible for all debts of the business. From the accounting viewpoint, the sole proprietorship
is distinct from its proprietor. Thus, the accounting records of the sole proprietorship do not include the
proprietor's personal financial records.

2. Partnership. A partnership is a business owned and operated by two or more persons who bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves. Each partner is personally liable for any debt incurred by the partnership.
Accounting considers the partnership as a separate organization, distinct from the personal affairs of
each partner.

3. Corporation. A corporation is a business owned by its stockholders. It is an artificial being created by

operation of law, having the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The stockholders are not personally liable for the
corporation's debts. The corporation is a separate legal entity.

HOW IMPORTANT IS ACCOUNTING IN BUSINESS?

Accounting provides business owners and management with information essential to the efficient
conduct and evaluation of its activities. It gathers data that are financial in character, stores these data in the
books of accounts, and transforms them into a more meaningful source of information concerning the
financial position, performance, and cash flows from business operations as well. It is then, that financial
statements are communicated to various users (e.g. investors, etc) and analyzed and interpreted by the
accountants who are the only expert professionals in this field.

WHAT ARE FINANCIAL STATEMENTS?

The books of accounts when transformed into report form become a “financial statement”.

There are six (6) basic financial statements:

1. Statement of Financial Position or the Balance Sheet

- This shows the financial position of an enterprise as of a particular date.

o It shows the Assets, Liabilities, and Owner’s Equity and answers the following questions:

o How much the business owns? (referring to Assets)

o How much the business owes? (liabilities)

o How much is the business net worth? (owner’s equity)

2. Statement of Comprehensive Income or the Income Statement

o This shows the performance of the enterprise for a given period of time. The performance of the
enterprise is primarily measured in the level of income earned by the enterprise through effective and
efficient utilization of its resources.

o It shows the Revenues, Expenses, and Operating Results which could either be a “Profit” or “Loss”
and answers the following questions:

o Does the business make a profit?

o Does the business incur a loss?

3. Statement of Changes in Equity

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 o This summarizes the changes in equity for a given period of time. The beginning equity of the owner
is increased by the additional investment and profit. Correspondingly, it is decreased by withdrawal
and loss.

4. Statement of Cash Flows

o This is the statement of cash receipts and cash disbursements. Only these are being classified into
the following activities.

a) Operating

b) Investing

c) Financing

5. Notes to Financial Statements

The notes to the financial statements communicate information necessary for a fair presentation of financial
position and results of operations that is not readily apparent from, or not included in, the financial
statements themselves.

6. Financial Statement Analysis

Financial statement analysis is the process of analyzing a company’s financial statements for decision-
making purposes. External stakeholders use it to understand the overall health of an organization and to
evaluate financial performance and business value. Internal constituents use it as a monitoring tool for
managing the finances.

THE ELEMENTS OF FINANCIAL STATEMENTS

A. ELEMENTS OF FS IN THE STATEMENT OF FINANCIAL POSITION

1. Assets – are defined as “resources controlled by the enterprise as a result of past transactions and
events which future economic benefit are expected to flow the enterprise.

Examples:

- Cash and cash equivalents

- Accounts receivable
- Prepaid expenses
- Inventory
- Marketable securities
- Land
- Property, plant, and equipment (PPE)
- Intangible Assets

2. Liabilities – are defined as “present obligations of an enterprise arising from past transactions or
events, the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

Examples:

- Accounts Payable
- Salaries / Wages Payable
- Interest Payable
- Loans Payable

3. Owner’s Equity- is defined as “the residual interest in the assets of the enterprise after deducting
all its liabilities. It is increased when there is profit or additional contributions and decreased when
there is loss or withdrawals by the owner.

Examples:

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 - Owner’s Equity (Sole Proprietorship)
- Partnership Equity (Partnership)
- Shareholders’ Equity (Corporation)
- Net Assets (Non – Profit Organization)
- Withdrawals (Deduction to the Owner’s Equity)

ELEMENTS OF FS IN THE STATEMENT OF FINANCIAL PERFORMANCE

1. Revenues – are defined as “the gross inflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those inflows result in increase in equity, other
than those relating to contributions from owners.”

Revenue is the money generated from normal business operations, calculated as the average sales price
times the number of units sold. It is the top-line figure from which costs are subtracted to determine net
income. Revenue is also known as sales on the income statement.

Examples:

- Sales
- Rent revenue
- Dividend revenue
- Interest revenue
- Service Revenue

2. Expenses – are defined as “the gross outflow of economic benefits during the arising in the course of
ordinary activities of an enterprise when those outflow result in a decrease in equity, other than those
relating to distribution to owners”

Examples:

- Rent Expense
- Insurance Expense
- Salaries Expense
- Supplies Expense

Sample Problem # 1
Identify the following elements of the Financial Statement as Assets, Liabilities,
Owner’s Equity, Revenues, or Expenses.

Accounts What element of FS?

1. Cash in Bank
2. Time Deposit (3 years term)
3. Land
4. Water Utility Expense
5. Marites, Capital
6. Loss in Investment
7. Shreholders’ Equity
8. Sales
9. Inventories
10. Prepaid Load
11. Internet Connection Fee
12. Marilou and Marites, Capitals
13. Sales Discounts
14. Electric Expense
15. Accounts Payable
16. Sales Returns
17. Investments, long – term
18. Notes Payable, 3 months
19. Marites, Withdrawals

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 20. Income from Investments

THE BASIC ACCOUNTING EQUATION

- For Statement of Financial Position / Balance Sheet

ASSETS = LIABILITIES + OWNER’S EQUITY

- For Statement of Financial Performance

REVENUES - EXPENSES = NET PROFIT (LOSS)

Sample Problem # 2:

No. Assets Liabilities Owner’s Equity

1 P100,000.00 ???? P60,000.00

2 ???? P500,000.00 300,000.00

3 P250,000.00 P50,000.00 ????

Sample Problem # 3:

No. Revenues Expenses Net Profit (Loss)

1 P50,000.00 P45,000.00 ????

2 P100,000.00 P150,000.00 ????

3 ???? P100,000.00 P20,000.00

4 ???? P150,000.00 (P30,000.00)

5 P100,000.00 ???? (P120,000.00)

6 P100,000.00 ???? P30,000.00

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