HISTORY OF ACCOUNTING FORMS OF BUSINESS ORGANIZATION

In 1458, Benedetto Cotrugli invented the double-entry 1. Sole Proprietorship

accounting system, which revolutionized accounting. 2. Partnership
3. Corporation
Double-entry accounting is defined as any bookkeeping
system that involves a debit and/or credit entry for Other types of organizations that are common today:
transactions. Limited Liability Company (LLCs)

Luca Bartolomes Pacioli - This is a hybrid form of business that have

characteristics of both a corporation and a partnership.
- Father of Accounting and Bookkeeping
An LLC is not incorporated; hence, it is not considered
- Born in 1445 in Tuscany
a corporation. But, the owners enjoy limited liability
- Italian mathematician and Franciscan monk
like in a corporation. An LLC may elect to be taxed as a
- invented a system of record keeping that
sole proprietorship, a partnership, or a corporation.
used a memorandum, journal, and ledger,
wrote many books on accounting. Cooperative.
- A cooperative is a business organization owned by a
He wrote Summa de Arithmetica, Geometria, Proportioni
group of individuals and is operated for their mutual
et Proportionalita
benefit. The persons making up the group are called
("The Collected Knowledge of Arithmetic, Geometry, members. Cooperatives may be incorporated or
Proportion, and Proportionality") in 1494, which included unincorporated. Some examples of cooperatives are:
a 27-page treatise on bookkeeping. water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.
His book was one of the first published using the historical
Gutenberg press, and the included treatise was the first
known published work on the topic of double-entry
bookkeeping.

One chapter of his book, "Particularis de Computis et

Scripturis" ("Details of Calculation and Recording”), on
the topic of record keeping and double-entry accounting,
became the reference text and teaching tool on those
subjects for the next several hundred years. The chapter
educated readers about the use of journals and ledgers;
TYPES OF BUSINESS OPERATIONS
accounting for assets, receivables, inventories, liabilities,
capital, income and expenses; and keeping a balance 1. Service Business
sheet and an income statement. - provides intangible products (products with no
physical form).
- offer professional skills, expertise, advice, and
BUSINESS, ITS MOTIVE AND ROLE IN SOCIETY
other similar products.
There are other roles that business plays in our society: a
service provider; product provider; job provider and
2. Merchandising Business
revenue source for the economy. The taxes that these
- buys products at wholesale price and sells the
businesses pay to the government are being used to
same at retail price. They are known as "buy
construct public schools, hospitals, roads and bridges
and sell" businesses.
which improves the lives of its citizen while creating more
- Examples: grocery stores, convenience stores,
job opportunities.
distributors, and other resellers.
ROLE OF ACCOUNTING IN BUSINESS
Accounting refers to the systematic and detailed 3. Manufacturing Business
recording of financial transactions of a business. - buys products with the intention of using them
as materials in making a new product. Thus,
Accounting is called the “language of business”.
there is a transformation of the products
It is a means of communicating financial information
purchased. A manufacturing business
about the business.
combines raw materials, labor, and overhead
costs in its production process.

There are several businesses that are engaged in different

type of operations. Example is a hotel business that has a
restaurant inside the hotel. The hotel's primary business
is service for the rooms income, but for the hotel's
restaurant it is a merchandising and manufacturing
(processing) type of operations. This type of business that
is engaged in more than one type of operations is called
"hybrid" type of business.
DEFINITION OF ACCOUNTING USERS OF FINANCIAL INFORMATION

- accounting comes from the word “account” which 1. Primary or Internal Users:
is synonymous to a record, narration, or journal.
a. Owner/s – the owners provide capital for the
- the word account as a description of facts,
business. Owners are interested in knowing
conditions, or events; and to furnish a justifying
whether their capital is earning or losing.
analysis or explanation. (Merriam Webster
dictionary) b. Management – the management is interested in
- “Accounting is a service activity…” knowing the position and performance of the
- “Its function is to provide quantitative information, business. The financial statements serve as the
primarily financial in nature about economic initial source of information in planning the course
entities…” of actions by the management.
- “that is useful in making economic decisions, in
making reasoned choices among alternative courses c. Employees – the demand for salary increase,
of action.” benefits, bonus and better working conditions of
- “the art of recording, classifying, and summarizing employees depend upon the profitability of the firm
in a significant manner and in terms of money, and to its financial position. For this reason,
transactions and events which are, in part of least employees are interested in financial statements of
financial character, and interpreting the results the business.
thereof.” As financial information is a means to 2. Secondary or External Users:
communicate the financial condition and
performance of an entity to its users in making a. Creditors and Financial Institutions – the Creditors
sound decisions, accounting is referred to as “the are the persons who supply goods on credit, or
language of business”. bankers or lenders of money. The creditors are
interested to know the financial soundness of the
The American Institute of Certified Public Accountants company before granting credit.
(AICPA) provided the following definition for accounting:
“Accounting is a service activity. Its function is to provide b. Investors – the prospective investors are interested
quantitative information, primarily financial in nature, to see the progress and prosperity of the firm by
about economic entities that is intended to be useful in reviewing the financial statements. This is to
making economic decisions, in making reasoned choices safeguard the investment.
among alternative courses of action.” c. Government – the government is interested in the
FINANCIAL STATEMENTS financial statements to know the earnings for the
- Shows where a company’s money came from, where purpose of taxation.
it went and where it is now. d. Customers – in situations wherein customers are
dependent on the product of the firm, they become
interested in the financial statements. This is to ensure
that the customer’s production will not be affected in
the event that the firm closed its operations.

e. Vendors and Suppliers - are users of accounting

information as they need to decide whether to trade
1. Statement of Financial Position (balance sheet) is a with the business, and in particular whether or not to
progress report showing a list of assets, liabilities and provide credit terms. They are concerned with the
owner’s net worth. ability of a business to make payment of invoices on
the due dates
2. Statement of Comprehensive Income (Income
Statement) is a performance report of revenues against f. Employees - are stakeholders in the business and
costs and expenses. It shows the net income or profit that want to know their employer or potential employer is
the owner has generated during a period. financially stable, and is able to continue to provide
remuneration, employment opportunities, and
3. Statement of Cash Flows is a cash report showing
retirement benefits
where we got and where we used the money. Was it used
in operation, investing or financing activities? g. Competitors - Competitors will make use of publicly
available accounting information in order to assess the
4. Statement of Changes in Owner’s Equity (Net Worth).
level of competition they face.
This is a progress report that shows how the capital/
owner’s investment had increased or decreased for a h. Public - The public use corporate financial
given period as a result of additional investments, profit information, particularly the annual financial
and any withdrawals the owner have made. statements, to gather information about a business
and its activities during the year.
5. Notes to the Financial Statements are explanatory
notes supplemental to the four basic statements that
provides additional information so that the users can
understand what information it is trying to convey.
FIELDS OF PROFESSIONAL PRACTICE CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Section 4 of the Philippine Accountancy Act of “A distinguishing mark of the accountancy profession is its
20041 enumerate the Scope of Practice of Accountancy, acceptance of the responsibility to act in the public
though not really limited to the following: interest.”

Practice of Public Accountancy - a person, be it his/her The International Code of Ethics for Professional
individual capacity, is a partner or a staff member in an Accountants (“Code”)1 sets out fundamental principles of
accounting or auditing firm; a qualified person to render ethics, reflecting the profession’s recognition of its public
professional services as a certified public accountant, or interest responsibility. The fundamental principles are
offering or rendering, or both, to more than one client on (directly cited from the Code):
a fee basis or otherwise, services such as
Integrity – to be straightforward and honest in all
 The audit or verification of financial transactions and professional and business relationships.
accounting records
Objectivity – not to compromise professional or business
 Preparation of financial reports to be used by
judgments because of bias, conflict of interest or undue
stockholders for publication or credit purposes, or to
influence of others.
be filed with a court or government agency, or used
for any other purpose Professional Competence and Due Care – to:
 The design, installation, review and revision of
accounting systems and controls Attain and maintain professional knowledge and skill at
 Preparation and/or review of income tax return when the level required to ensure that a client or employing
related to accounting and auditing procedures; organization receives competent professional service,
representing clients before government agencies on based on current technical and professional standards and
tax and other matters related to relevant legislation; and
 accounting Act diligently and in accordance with applicable technical
 Professional assistance in matters relating to and professional standards.
accounting procedures and the presentation of
financial information Confidentiality – to respect the confidentiality of
information acquired as a result of professional and
Practice in Commerce and Industry – persons involved in business relationships.
decision making requiring professional knowledge in the
science of accounting, as well as the aspects of finance Professional Behavior – to comply with relevant laws and
and taxation; or when he/she represents his/her regulations and avoid any conduct that the professional
employer before government agencies on tax and other accountant knows or should know might discredit the
matters related to accounting; or when such employment profession.
or position requires that the holder thereof must be a A professional accountant shall comply with the Code.
certified public accountant. There might be circumstances where laws or regulations
Practice in the Government – a person who holds, or is preclude an accountant from complying with certain parts
appointed to, a position in an accounting professional of the Code. In such circumstances, those laws and
group in government or in a government-owned and/or regulations prevail, and the accountant shall comply with
controlled corporation, including those performing all other parts of the Code.
proprietary functions, where decision making required Generally Accepted Accounting Principles (GAAP)
professional knowledge in the science of accounting, or
where a civil service eligibility as a certified public GAAP helps govern the world of accounting according to
accountant is a prerequisite. general rules and guidelines. It attempts to standardize
and regulate the definitions, assumptions, and methods
Practice in Education/Academe – persons in an used in accounting across all industries. GAAP covers such
educational institution which involve teaching of topics as revenue recognition, balance sheet classification,
accounting, auditing, management advisory services, and materiality.
accounting aspect of finance, business law, taxation and
other technically related subjects; provided, that the The ultimate goal of GAAP is to ensure a
position of either the dean or the department chairman or company's financial statements are complete, consistent,
its equivalent that supervises the Bachelor of Science in and comparable. This makes it easier for investors to
Accountancy program of an educational institution is analyze and extract useful information from the
deemed to be in practice of accountancy in the company's financial statements, including trend data over
academe/education and therefore must be occupied only a period of time. It also facilitates the comparison of
by a duly registered CPA. financial information across different companies.
Basic Examples of Generally Accepted Accounting
Principles

1. Business entity Principle

- Distinct and separate

2. Going concern Principle

- Continue to exist indefinitely

3. Monetary Measurement Principle

- Money value

4. Exchange Price or Cost Principle

- Actual value/cost/price

5. Objectivity Principle
- Based on supporting documents

6. Reporting period (at least annually)

- Calendar and fiscal accounting periods

7. Accrual or Matching Principle

- Sales revenue is recognized when earned
- Expenses are recognized when incurred
whether paid or not.

8. Consistency Principle
- Ensure comparability and consistency

9. Conservatism Principle
- Accurate presentation of revenues and
expenses
- Sound assumptions on estimates.

10. Materiality Principle

- Financial information with significant impact
must be reported in a correct way.

11. Full disclosure principle

- Disclosure of information of future events that

have material impact on the financial

statements.

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