Unit 1

Introduction to Accounting and

Forms of Business Organization
What is Accounting?

There are many definitions of accounting that have been issued by different organizations
and publications. The following are some of those definitions:

1. “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
financial character, and interpreting the results thereof.” – American Institute of
Certified Public Accountants (AICPA)

2. 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 decision.” – Accounting Standards Council (ASC), succeeded by
Financial Reporting Standards Council (FRSC).

3. Accounting is the process of identifying, measuring, and communicating

economic information to permit informed judgments and decisions by the users of
the information. (American Accounting Association)

From the definitions above, we can have the following processes and phases of accounting:

1. Identifying – this is the process of recognition or nonrecognition of business

activities as accountable events.

2. Measuring – this is the process of assigning amounts or value to the accountable

economic transactions and events.

3. Communicating – this is the process of preparing and distributing accounting

reports to potential users of accounting information. This process includes the
following phases:

a) Recording – also called journalizing, involves the routine and mechanical

process of committing to writing business transactions and events on the
books of accounts in a chronological sequence in accordance with established
accounting rules and procedures.

b) Classifying – this involves sorting or grouping of similar and interrelated

transactions and events into their respective classes. This is performed by
posting accounts to ledge

c) Summarizing – this involves the preparation of financial statements, which

includes the balance sheet (statement of financial position), income
statement, statement of equity, statement of cash flows and accompanying
notes to the financial statements.

d) Interpretation – this involves analyzing the liquidity, solvency, stability and

profitability of an entity.

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What is the purpose of Accounting?

The purpose of accounting is to provide financial information to users (e.g. business

owners, management, government, employees etc.) so that they could make informed
judgment and better decision. This is the very reason why Accounting is called as the
“Language of Business”.

In a business perspective, a business owner would have to keep track of the transactions
his business has entered into. He also needs to keep track of his level of income, expenses,
debts and resources.

The owner won’t be able to do all those tasks especially if he has no background in
accounting. This is where recording comes in with the help of a bookkeeper or an
accountant. The job of an accountant doesn’t just stop at recording but he also has to help
the business with the other three (3) functions.

Eventually, when the process is over, the accountant will prepare reports known as
Financial Statements. These are reports that summarize the resources (assets),
obligations (liabilities), capital, income and expenses of the business. By using the financial
statements, it will be easier for the business owner to have an understanding of how the
business is doing—whether the business is profiting or losing and whether it is in good
financial status or not.

Who Uses Accounting Data?

Accounting aims to supply financial information to the following users to assist them in
making better decisions.

a) Owners and management (proprietor, partners, stockholders and officers).

b) Investors
c) Employees and labor unions
d) Lenders or creditors
e) Suppliers
f) Customers
g) Government agencies (BIR, SEC, LGU, PSE and other regulatory agencies)
h) The public

What is the difference between Accounting and Bookkeeping?

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that

records the routine economic activities of a business. Accounting includes bookkeeping but
goes well beyond it in scope. Accountants analyze and interpret financial information,
prepare financial statements, conduct audits, design accounting systems, prepare special
business and financial studies, prepare forecasts and budgets, and provide tax services.

Accounting Bookkeeping
Collecting, recording, summarizing and
Collecting and recording financial data
interpreting
Conceptual Procedural/ mechanical part of accounting
WHY of Accounting HOW of Accounting
The practice of accountancy can only be done by Can be done by properly trained
Certified Public Accountants Non-Accountants

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Forms of Business Organization

Sole Proprietorship

This is also called “single proprietorship” and is the

simplest form of business among the four. The owner
is called the “proprietor” who manages the affairs of
the business.

Since there is only one owner, all the risks and

rewards in relation to the business are borne or
harvested by the sole owner—that is, if there are
profits, all of which will go to the sole owner. If there
are losses, the owner alone will bear it. In addendum,
there is only one capital account that is called “owner’s equity/owner’s capital”.

Partnership

Under Article 1767 of the Civil Code:

“By the contract of PARTNERSHIP two or

more persons bind themselves to contribute
money, property, or industry to a common
fund, with the intention of dividing the
profits among themselves.”

Emphasis has to be put on the phrase “two or

more”. This means that more than two
people can form a partnership business and
not just two (2) individuals. In fact, there is
actually no set limit as to the number of
partners.

In a partnership business, more resources can be gathered since more than one person will put
up the capital. Business decisions, however, are not made by any single individual since the
business is anchored upon mutual trust and confidence among partners.

Partners are those people who are making the agreement among themselves on how profits
and losses will be divided. A partner may contribute money, property or a combination of both
and even talent/ managerial ability (industry).

The capital account is called “partner’s capital”.

2.1 Corporation

This business is formed by at least five (5) but not

more than fifteen (15) natural persons who are
called the “incorporators”. The charter of this
form of business is expressed in the so called
“Articles of Incorporation” which, along with its
by-laws, is registered with the Securities and
Exchange Commission (SEC).

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Ownership of this business is evidenced by the so called “share certificate” and those who hold
shares of the corporation are called “shareholders/ stockholders”. The capital account is called
“shareholders’ equity”.

This type of business is more complex than sole proprietorship and partnership. However,
recent developments have paved way for the recognition of a one-person corporation (OPC)
subject to certain conditions.

A corporate business can actually merge with or acquire other businesses for purposes of
expansion and to eliminate competition. It has to be noted that a corporation cannot be
established for the practice of a profession. Therefore, a group of CPAs cannot form a
corporate business for rendering accounting and other related services (but it is allowed in a
Partnership business).

Cooperative

This is formed by fifteen (15) or more

natural persons who are Filipino citizens of
legal age, having a common bond of
interest and are actually residing or working
in the intended area of operation.

A cooperative’s charter is called “Articles

of Cooperation” and is registered with the
Cooperative Development Authority (CDA).
From among its members, a Board of
Directors (BoD) is elected and the General
Assembly is its highest policy-making body.
The capital account is called “members’
equity”.

References:

https://businesstips.ph/what-is-accounting/

https://taxacctgcenter.ph/knowing-basic-business-accounting-non-accountants-
philippines/

https://courses.lumenlearning.com/suny-finaccounting/chapter/accounting-defined/

HBL Module by Chavez & Malquisto

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