COURSE MODULE 1

Basic 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.

Four (4) Constructive or Mechanical Phases of Accounting:

1. Recording- putting business transactions into writing. Technically referring to

journalization.

2. Classifying- sorting or grouping of similar things and segregating them from others of
different nature.

3. Summarizing- expressed in terms of financial statements and reports already prepared

in condensed form.

4. Interpreting- the process that supplies answer to questions about the profitability,
stability, solvency & liquidity of an enterprises

a) Profitability- is the ability of the enterprises to generate profits from its operations.

b) Stability – refers to the ability of the enterprises to stay viable.

Example : generate profits for the owners, sustain operations and pay for long term
financial obligations

c) Solvency - should means that the enterprises is capable of paying its short term
obligation.

d) Liquidity – refers to the enterprises having sufficient cash

The Role of Accounting in Business and Why It’s Important

Why Is Accounting Important?

Accounting plays a vital role in running a business because it helps you track income and
expenditures, ensure statutory compliance, and provide investors, management, and
government with quantitative financial information which can be used in making business
decisions.

There are four key financial statements generated by your records.

● The income statement provides you with information about the profit and loss

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● The balance sheet gives you a clear picture on the financial position of your business
on a particular date.

● The cash flow statement is a bridge between the income statement and balance sheet
and reports the cash generated and spent during a specific period of time.

● Statement of changes in owners equity

It is critical you keep your financial records clean and up to date if you want to keep your
business afloat. Here are just a few of the reasons why it is important for your business,
big or small!

It Helps in Evaluating the Performance of Business

Your financial records reflect the results of operations as well as the financial position of
your small business or corporation. In other words, they help you understand what’s going
on with your business financially. Not only will clean and up to date records help you keep
track of expenses, gross margin, and possible debt, but it will help you compare your
current data with the previous accounting records and allocate your budget appropriately.

It Ensures Statutory Compliance

Laws and regulations vary from state to state, but proper accounting systems and
processes will help you ensure statutory compliance when it comes to your business.

The accounting function will ensure that liabilities such as sales tax, VAT, income tax, and
pension funds, to name a few, are appropriately addressed.

It Helps to Create Budget and Future Projections

• Budgeting and future projections can make or break a business, and your financial
records will play a crucial role when it comes to it.

• Business trends and projections are based on historical financial data to keep your
operations profitable. This financial data is most appropriate when provided by
well-structured accounting processes.

It Helps in Filing Financial Statements

• Businesses are required to file their financial statements with the Registrar of
Companies. Listed entities are required to file them with stock exchanges, as well
as for direct and indirect tax filing purposes. Needless to say, accounting plays a
critical role in all these scenarios.

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Importance of Business Record Keeping

An up-to-date database is one of the most useful resources which can help you when it
comes to planning new marketing and sales strategies. Unfortunately, most businesses
fail to tap into this resource effectively.

Other business records which must be kept include documents which provide a record of
your business transactions, or which enable these transactions to be tracked and verified
through the accounting system from start to finish. These include invoices, receipts, cash
register tapes, banking records, cheque butts.

The essence of good record keeping is good bookkeeping. Efficient bookkeeping will save
you time and money in the long run.

Proper business record keeping provides the business a real advantage over the
competition in different ways.

● It helps you to manage your accounts, interests, taxes and working costs effectively.

● Tells about cash in hand

● Act as resource for new strategies

● Helps in finding solutions for business issues.

● Tells about the customer service and employee efficiency.

● Helps in monitoring company growth rate and profit.

● How your business performs against your competitors.

● Tells about hidden and unexpected costs.

● And most of all it is the most resourceful adviser whenever your business is in serious
trouble.

Today's database management and recording keeping solutions make record keeping a
simple task. These systems help in digitalizing the whole business data and arrange and
keep them in most convenient manner. Now you do not require paper work, large storing
facilities become a thing of the past.

Having your business records up to date is also important when it comes time for your
business to access the right business loans. Most financiers today will want to be able to
get a good understanding of how your business is travelling before lending you money.
If you have accurate, current records this will show the financier that you have your

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business under control and will also give them a great insight into how finance ready your
business is. This can also help you when setting up your loan pre-approval.

Users of Financial Statements:

Internal users - refer to managers who use accounting information in making decisions
related to the company's operations.

External users - on the other hand, are not involved in the operations of the company
but hold some financial interest. The external users may be classified further into users
with direct financial interest – owners, investors, creditors; and users with indirect financial
interest – government, employees, customers and the others.

Eight (8) Users of Financial Statements:

1. Owners and investors

Stockholders of corporations need financial information to help them make decisions on

what to do with their investments (shares of stock), i.e. hold, sell, or buy more.

Prospective investors need information to assess the company's potential for success and
profitability. In the same way, small business owners need financial information to
determine if the business is profitable and whether to continue, improve or drop it.

2. Management

In small businesses, management may include the owners. In huge organizations,

however, management is usually made up of hired professionals who are entrusted with
the responsibility of operating the business or a part of the business. They act as agents
of the owners.

The managers, whether owners or hired, regularly face economic decisions – How much
supplies will we purchase? Do we have enough cash? How much did we make last year?
Did we meet our targets? All those, and many other questions and business decisions,
require analysis of accounting information.

3. Lenders

Lenders of funds such as banks and other financial institutions are interested in the
company’s ability to pay liabilities upon maturity (solvency).

4. Trade creditors or suppliers

Like lenders, trade creditors or suppliers are interested in the company’s ability to pay
obligations when they become due. They are nonetheless especially interested in the
company's liquidity – its ability to pay short-term obligations.
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5. Government

Governing bodies of the state, especially the tax authorities, are interested in an entity's
financial information for taxation and regulatory purposes. Taxes are computed based on
the results of operations and other tax bases. In general, the state would like to know how
much the taxpayer makes to determine the tax due thereon.

6. Employees

Employees are interested in the company’s profitability and stability. They are after the
ability of the company to pay salaries and provide employee benefits. They may also be
interested in its financial position and performance to assess company expansion
possibilities and career development opportunities.

7. Customers

When there is a long-term involvement or contract between the company and its
customers, the customers become interested in the company’s ability to continue its
existence and maintain stability of operations. This need is also heightened in cases where
the customers depend upon the entity.

For example, a distributor (reseller), the customer in this case, is dependent upon the
manufacturing company from which it purchases the items it resells.

8. General Public

Anyone outside the company such as researchers, students, analysts and others are
interested in the financial statements of a company for some valid reason.

Four (4) types of Business Organization:

1. Sole or Single Proprietorship- a business owned and whose capital is provided by one
individual.

2. Partnership- a contract whereby two or more persons bind themselves to contribute

money, property or industry into a common fund with the intention of dividing profit
among themselves.

3.Corporation- an artificial being created by operation of law having the right of

succession and the powers , attributes expressly authorized by law or incident to its
existence.

4.Cooperative – is a duly registered association of persons, with a common bond of

interest, who have voluntarily joined together to achieve a lawful common social or
economic end; making equitable contributions to the capital required and accepting a fair

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share of the risks and benefits of the undertaking in accordance with the universally
accepted cooperative principles.

Five (5) Types of Business concerns:

1. Service Concern – the business derived its income from services rendered to clients.
In the case of professional services like Accountants, Lawyers, Doctors, Dentists, etc, or to
customers in the case of non-professional services like Laundry, Shop, Vulcanizing, Car
Repair Shop, Janitorial Services, etc.

2. Merchandising Concern- the business is engaged in buying goods and commodities

or any form of finished products and sells these at a profit. It might be a retail or wholesale
basis.

Example : Grocery, Hardware, Bookstore

3. Manufacturing Concern- the business is engaged in buying raw materials and

supplies to be processed or manufactured, converting them into finished product for sales
at a profit.

Example : Process foods, manufacturing of electronic devices

4. Hybrid - are those involved in more than one type of activity which are manufacturing,
merchandising, and services.

Example : Hotel, Mall, Restaurant

5. Agriculture - the business is engaged in planting crops, livestock’s and sells its
products either in raw materials or finished form at a profit.

Example : Poultry, fish pound, Horticulture, Piggery

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