SHS 11 ABM

Module

FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS & MANAGEMENT1
2 SEMESTER SCHOOL YEAR 2020-2021
ND

(QUARTER 1: WEEK 2)
NAME:_______________________________________________________________________

ADDRESS:____________________________________________________________________

CONTACT:____________________________________________________________________

MS. ASNAIRAH M. DARAGANGAN, LPT.

____________________________ _______________
Teacher’s signature Student’s signature

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Fundamental of Accountancy,
Business & Management 1

Contents
Title Page
Objectives/ Learning Competencies

CHAPTER 2
BRANCHES OF ACCOUNTING

The story of numbers........................................................................................................... 7

Introduction......................................................................................................................... 7
Financial Accounting........................................................................................................... 8
Management Accounting..................................................................................................... 9
Government Accounting...................................................................................................... 11
Auditing............................................................................................................................... 12
Tax Accounting................................................................................................................... 13
Cost Accounting.................................................................................................................. 14
Accounting Education......................................................................................................... 15
Accounting Research........................................................................................................... 16
LEARNING ACTIVITIES............................................................................................... 17

EVALUATION.................................................................................................................. 17

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OBJECTIVES

At the end of this chapter, the students should be able to:

A. Differentiate the branches of accounting:

B. Explain the kind or type of services rendered in each of these branches;

C. Make a list of businesses within the community on the types of accounting services
they require; and

CHAPTER 2: BRANCHES OF ACCOUNTING

The Story of Number

What do you usually picture in your mind when you hear the words investigation, crime,
or evidence? You probably see images from popular criminal dramas such as Sherlock Holmes.
These programs typically present a crime scene which the main character tries to solve.
Investigators use fingerprints, bloodstains, DNA samples, and other clues to find the criminal.

We are easily hooked with these kinds of shows because we feel that we are part of the
team solving the case. We, more often than not, derive joy from solving mysteries.

But did you know that such mystery-solving activities can also involve accounting?
That's right! A field of accounting called forensic accounting deals with activities that solve
cases of theft and fraud. Forensic accounting combines accounting, auditing, and investigative
skills in conducting investigations. Unlike the criminal dramas that focus on murders, forensic
accounting is used to study the numbers of a company to find any inconsistency and to unearth
wrongdoings of Company employees.

In 2001, the fall of Enron, a large American energy company, sent shockwaves to the
financial markets around the world. In a gist, the company's misrepresentation of its earnings and
its modification of its balance sheet to show favorable performance led to its downfall and
subsequent bankruptcy. Forensic accounting played a role in understanding the causes of Enron's
demise.

Accounting is a broad field of study. It ranges from the usual recording of company
transactions to the case-solving activities mentioned in' this featured story. In the discussion in
this chapter, you will learn that accounting has more to offer.

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Introduction

Aside from the accounting process mentioned in Chapter 1 (i.e., identification recording -
communication), accountants can offer other services. In this chapter, we will tackle the different
branches of accounting and the different services provided by these branches.

There are eight branches of accounting as follows:

1. Financial accounting

2. Management accounting

3. Government accounting

4. Auditing

5. Tax accounting

6. Cost accounting

7. Accounting education

8. Accounting research

Each branch has its own functions and use. We will discuss these branches one by one.

Financial Accounting

Financial accounting is a branch of accounting primarily handling the recording of

financial transactions of a business. The financial transactions are later summarized into
standardized accounting reports, more popularly known as the financial statements, for the
benefit of internal and external users.

Financial statements should provide information useful to a wide range of users in their
economic decisions. This is the main reason why accounting standards such as the Philippine
Financial Reporting Standard (PFRS) and the Philippine Accounting Standards (PAS) are
created. The PFRS and PAS supply guidelines on how companies should prepare their financial
statements. Standardized financial statements allow the users to compare the results of operations
of different companies regardless of size and nature.

Imagine a person, Aira, who plans to invest her savings in Petron, Shell, or Chevron.

Before she makes her decision, it is only rational for her to compare the three oil companies and
see which one will most likely be the most profitable investment. Even if Petron, Shell, and
Chevron belong to the same industry, different presentations of the company’s financial
statements will make it hard for Aira to choose which company she would invest in. A

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standardized way of presenting financial statements enhances the comparability of different

companies.

Likewise, standardized financial statements are also useful for creditors. Besides
enhancing comparability, standardized financial reports improve the understandability of the
company's financial statements. Creditors will be able to assess the riskiness of a company
through the well-presented financial statements.

As stated above, financial accounting caters to the need of both internal and external
users. However, it is evident that financial accounting's main goal is to provide the information
needs of external users that have no capability to request information directly from management.

General Purpose Financial Statements

Are the financial statements prepared to accommodate the information needs of persons
who have no capability to request or acquire information directly from the Company?

If the answer is yes, the financial statements are called general purpose financial
statements. Otherwise, the financial statements are called special purpose financial statements.

Primary Users of General Purpose Financial Primary Users of Special Purpose Financial
Statement Statements

 Investors  Top management (e.g., Board of

 Creditors directors of a company, CEO, CFO,
 Shareholders/Stockholders COO)
 Government Agencies  Department managers (e.g., sales
 Auditors manager, production manager)
 Other interested outside parties  Other internal parties

Predominantly, external parties use general purpose financial statements to evaluate the
performance of the company. On the other hand, specific purpose financial statements are
utilized by internal parties to guide them in the decision-making process for the company.

Management Accounting

Management accounting is a branch of accounting which focuses on the preparation of

financial reports used by managers in their day-to-day decision-making. Reports generated using
management accounting are for internal users only. As such, management reports need not
follow accounting standards such as the PFRS and PAS. Additionally, unlike financial reports
that are generated quarterly, semi-annually, or annually, management reports can be done daily,
weekly, or whenever managers require a specific report. Management reports typically contain

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information regarding the amount of cash on hand, the level of sales revenue for a particular
period, costs incurred, or even the comparison of actual results with budgeted amounts.

Aside from the frequency and the intended users of reports, management accounting
differs from financial accounting in the nature of information produced. Financial accounting
summarizes financial information gathered within a specified period. Thus, financial accounting
provides information that is historical. Meanwhile, management accounting information is
forward-looking. It contains forecasted information used by managers in planning.

Roles of Management Accountants

According to the Chartered Institute of Management Accountants (CIMA), chartered

management accountants perform the following roles:

 Advise managers about the financial implications of projects

 Explain the financial consequences of business decisions

 Formulate business strategy

 Monitor spending and financial control

 Conduct internal business audits

 Explain the impact of the competitive landscape

 Bring a high level of professionalism and integrity to the business

It is emphasized that management accounting is used in deciding how the business should
act going forward. The use of management accounting provides value to the business since it
assists the company in selecting only those activities that deliver benefits more than the related
costs.

Management Accounting Skill Set

In addition to strong accounting fundamentals, management accountants should also

possess the following strategic business and management skills:

 Analysis. Management accountants should be able to analyze information and use

it to make business decisions.

 Strategy. Management accountants should be able to formulate business strategies

that will increase the company's wealth and create value for the company's
shareholders.

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 Risk. Management accountants should be able to identify risks that can potentially
have detrimental effects to the company. At the same time, management
accountants should give recommendations on how to manage such risks.

 Planning. Management accountants should be able to apply accounting

techniques in the planning and budget creation phase of a business.

 Communication. Management accountants should be able to identify what

information the management needs and also explain the numbers to non- financial
managers.

Ethical Code

Even though management reports do not follow the requirements imposed by accounting
standards like the PFRS and PAS, management accountants are still expected to follow the
CIMA code of ethics.

Government Accounting

According to Section 109 of Presidential Decree 1445, government accounting is defined

as an accounting system which "encompasses the process of analyzing, recording, classifying,
summarizing, and communicating all transactions involving the receipt and disposition of
government fund and property and interpreting the result thereof.

Section 110 of the same decree lays down the objectives of government accounting:

1. To provide information concerning past operations and present conditions

2. To provide a basis for guidance for future operations
3. To provide for control of the acts of public bodies and offices in the receipt, disposition,
and utilization of funds and property
4. To report on the financial position and the results of operations of government agencies
for the information and guidance of all persons concerned.

Government accounting is used by all government agencies (e.g., DepEd, DPWH, and
BIR). Due to the specialized nature of government transactions, stricter controls should be put in
place to prevent the misuse of the country's resources. The creation of the New Government
Accounting System (NGAS) aims to address this concern.

New Government Accounting System (NGAS)

As citizens of the Philippines, we are very much concerned on the stewardship of the
government of public resources. We do not want the country's funds to be used for personal
reasons by erring public officials. Instead, we want these funds to be used for public projects that
will benefit many constituents.

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One of the main features of the NGAS is that it enhances responsibility accounting in all
agencies. Simply stated, responsibility accounting relates financial results to a particular
responsibility center (i.e., agency). If there is a problem with the handling of funds by the DPWH,
for example, people in that agency will be the ones accountable. This system of placing
accountability in each agency discourages misappropriation and misuse of public funds.

Government Accounting Process

Government accounting starts after the declaration of the General Appropriations Act
(GAA). The GAA is the enacted budget of the country for the upcoming year. The GAA has the
force of law and it states how much an agency can spend for the year. If it is indicated that
P500M is available for the DPWH to implement its projects, the agency cannot spend more than
this amount.

The government accounting process involves the Commission on Audit (COA), the
Department of Budget and Management (DBM), the Bureau of Treasury (BTr), and all other
government agencies.

The COA is responsible for the keeping of the government's general accounts. Think of
our government as one big, non-profit organization. The COA is tasked to keep and update the
accounting books of the whole organization. Moreover, the COA disseminates accounting rules
and regulations to be used by all agencies.

In accordance with Section 2, Chapter 1, Title XVII, Book IV of the Administrative Code
of the Philippines, "The Department of Budget and Management shall be responsible for the
formulation and implementation of the National Budget with the goal of attaining our national
socio-economic plans and objectives. The Department shall be responsible for the efficient and
sound utilization of government funds and revenues to effectively achieve the country's
development objectives.

The BTr is responsible for the safekeeping of the national funds. It serves like a bank
where the funds are kept. Although its main role is the safekeeping of funds, the BTr is also
responsible for the management and control of the disbursements of such funds.

Furthermore, the agency is also responsible in maintaining accounts of financial

transactions of all natural government agencies.

Auditing

Financial statements prepared by a company are often the only source of information an
interested outside party has regarding the results of the company's operations. Information
included in the financial statements greatly influences the decisions made by the users. Because
of this, there seems to be a conflict of interest between the users and the source of the financial
statements.

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The users of the financial statements want information about the company that is truthful,
reliable, and relevant. In making their economic decisions, users want to use information that
depicts the current condition of the company. On the other hand, management (or any other party
preparing the financial statements) usually wants to present information indicating good results.
Some managers will even falsify or manipulate the records of financial transactions just to show
decent results. This is exactly what happened in Enron as featured in our featured story.

With the users' need for truthful, reliable, and relevant information and the management's
tendency to manipulate results, how do financial statements provide value to interested parties?
The answer is auditing.

Auditing is an unbiased examination and evaluation of the financial statements of an

organization (Investopedia.com). Auditing is a process that includes numerous steps to determine
whether or not a company's financial statements are presented truthfully Accountants that
perform the auditing procedure are specifically called auditors. Auditors aside from having the
competence to perform their roles, should also be independent from the company being audited.
Independent auditors have no connection with the company an employee of the company is the
one who examines and evaluates the financial statements, the fear of the users that the results are
manipulated will not be alleviated.

An audit of the financial statements improves their credibility. Financial statements that
underwent the process of auditing are called audited financial statements. A set of the financial
statements will only be useful to users after it has gone through the process or auditing. Audited
financial statements are accompanied by the auditor's opinion. The auditor’s opinion will be the
basis whether or not the financial statements are prepared truthfully and without any material
errors.

Tax Accounting

Taxes are the lifeblood of the government. Without the taxes the citizens pay, the
government cannot perform its functions. Thus, it is imperative that the collection of taxes be
unhindered.

The recording of financial transactions mentioned in Chapter 1 follows specific

guidelines provided by the PFRS and PAS. Tax accounting records some financial transactions
in a different manner. It adheres to some guidelines in the PFRS and PAS, but it is not required
to implement everything written in such standards. Tax accounting follows the pronouncements
of the National Internal Revenue Code (NIRC). The NIRC is to tax accounting as the PFRS and
PAS are to financial accounting.

To illustrate the difference, let us look at a particular example. Starbucks offers its
customers a card that you can use to pay for your orders. The process is simple. You ask the
cashier to load the card; you pay for the amount of load; and then your card will reflect the

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balance available for you to use. You can use the card for future transactions with Starbucks.
Under the PFRS and PAS, Starbucks will not recognize the amount you paid as revenue until
you use the balance in your card in the future. Under the NIRC, Starbucks recognizes the
revenue when the company received the payment from you. Thus, if Starbucks recognizes the
revenue, it is taxable.

There are still many differences between tax accounting (NIRC) and financial accounting
(PFRS and PAS). The discussion of such differences is not within the scope of this book. What is
important to note is that tax accounting enables the taxing authorities to collect taxes that differ
from the amount due computed using the financial accounting standards. Another key difference
lies in the type of report generated. Financial accounting generates reports known as the financial
statements while tax accounting produces tax returns to be filed to the appropriate government
agencies.

Cost Accounting

Cost accounting is a branch of accounting that provides information for management

accounting and financial accounting (Horngren et al. 2011). For example, cost accounting helps
measure the cost of a bicycle for a bicycle-selling company. This information supports
management in deciding how many bicycles to produce, the selling price of the bicycle, or
valuing the inventory of bicycles in the company's financial statements.

Terms Used in Cost Accounting

These are just some of the terms used in cost accounting. For the purposes of this book,
you only need to understand these basic cost concepts. The application of cost accounting is not
within the scope of this book.

 Cost the resource sacrificed to achieve an objective (e.g, money, resources, time,
etc.)

 Cost object - anything that you wish to find the cost of (e.g, cost of a pair of jeans,
cost of a pair of Jordan XI shoes)

 Cost driver - an activity that is a cause of the incurrence of costs (e.g, the number
of working hours is related to the amount of salaries a company pays)

 Direct cost- costs that can economically be traced to a cost object (e.g, materials,
labor, etc.)

 Indirect cost - costs that cannot be traced to a cost object (e.g., costs of supplies
used in the factory, salary of supervisor overseeing factory operations, etc.)

 Fixed cost-costs that do not change within a relevant range of activity (e.g., rent
of a factory building, insurance costs, etc.)

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 Variable cost costs that change as the level of activity or production t (e.g,
materials cost, labor cost, selling cost, etc.)

Accounting Education

The Bachelor of Science in Accountancy (BSA) in the Philippines is normally a 5-year

program composed of subjects in accounting, audit, administration, and business laws and
taxation. Although the subjects usually highlight the business environment, the scope of the
topics in BSA also covers other fields such as banking and finance, government, non- profit
organizations, and the academe. Students of the course are also trained to create and understand
computerized accounting systems to cope with the rapidly changing technology.

Most schools use a combination of diverse teaching techniques to explain accountancy to

students. Some of these methods are classroom discussions, case analysis, individual and group
reporting, feasibility studies, and lectures from renowned individuals in the field.

Other schools require students to undergo an internship program equivalent to one subject.
This is to enable the students to have a feel of the application of accounting in real life.

Admission Requirements for BSA

According to the Commission on Higher Education (CHED), the standards of admission

to any BSA program should be sufficiently rigorous and demanding. Only universities which can
demonstrate the capability to teach accountancy in a sufficiently high level are allowed to do so.
Requirements at each school are different, but the common requirements include:

 Must be a high school graduate

 Must have a college entrance examination of above average or depending on the specific
rating set by the school

 Aside from the college entrance examination, must pass the separate aptitude test specific
for BS in Accountancy

 Must pass the interview conducted by the college admission officer

 Some schools require a high school QPA of 85% and above with no grade less than 80%
in all subjects.

 There are schools who require students to have an 8596 or higher average rating in the
National Secondary Assessment Test (NSAT).

 As set by CHED, all schools must conduct an English Proficiency examination to all BS
in Accountancy applicants.

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 Admission for Philippine Educational Placement Test (PEPT) passers mainly depends on
the school's discretion since some colleges and universities offer only selected courses.

Board Exam

Before a BSA graduate can practice accountancy, he/she needs to pass the Certified
Public Accountant Licensure Examination. The CPA Licensure Exam is a comprehensive test
Composed of seven subjects. Each subject will be taken within 3 hours so the exam will be for
21 hours all in all. A candidate should achieve a general average of at least 75% with no rating
below 60% in any of the seven subjects in order to pass the exam.

Accounting Research

Accounting research, as the name suggests, is a branch of accounting that deals with the
creation of new knowledge. Combining the models produced by the hard sciences in research
and testing with financial statements, stock prices, surveys, and experiments, we can gain a
specific perspective and basis on the following:

 Deciding and implementing new accounting and auditing standards

 Presenting unusual economic transactions in the financial statements

 Learning how new tax laws impact clients and employers

 Discerning how the accounting profession affects the capital markets through
academic accounting research

Researchers in the accounting field also apply the scientific method like their
counterparts in the sciences. With the constantly evolving field of accountancy, it is expected
that accounting research will continue to play a vital role in the future.

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LEARNING ACTIVITIES

Individual Activity

Think of at least five companies that operate within the Philippines. The companies you
select should not come from the same industry. Identify the branches of accounting being used
by these companies. Prepare a 5-10 minute report to be presented in class documenting your
research.

EVALUATION

Discussion Questions

1. Explain briefly the function of government accounting. Why do government agencies

follow a different set of guidelines in preparing their financial statements?

2. Discuss the current status of accounting education in the Philippines.

3. Explain the function of cost accounting. What are its main uses?

4. What is auditing? How does it help the whole economy of the country?

5. Discuss the function of tax accounting. What is its primary purpose?

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