FUNDAMENTALS OF

ABM 1
LESSON OBJECTIVES:
Define Accounting
Describes its nature and functions in
business.
Recognize the importance of the
nature of accounting in every business
transaction
WHAT IS ACCOUNTING?

Accounting- is the systematic process

of measuring and reporting relevant
financial information about the
activities of an economic organization
or unit.
Other definitions of Accounting
Accounting – defines as the art of
recording, classifying, and summarizing in a
significant manner and in terms of money,
transactions, and events, which are in at
least of financial character, and
interpreting the results thereof. (AICPA)
NATURE OF ACCOUNTING
 Systematic Process wherein a series of actions
that produce something or that lead to a particular
result
 Art which is a skill acquired by experience, study
and observation
 Service Activity wherein its function is serving.
 ASPECTS OF ACCOUNTING
 Recording is writing down of business transactions chronologically in
the books of account as they transpire
 Classifyingis sorting similar and related business transactions into the
three categories of which are assets, liabilities, and equity.
 Summarizing is preparing the financial statements from the
transactions recorded in the books of account that are designed to
meet the information need of its users.
 Interpretingis representing the qualitative and quantitative financial
information about the business transactions in a language
comprehensible to the users of financial statements.
THE BUSINESS ENVIROMENT
Explains the Users of Financial Information
Know the different types of Business
Organizations
Know the legal requirement in the formation
of the business, and
Classify the different types of business
operations.
USERS OF FINANCIAL INFORMATION
Internal users- are the primary
users of financial information who
are inside the reporting entity and
are directly involved in managing
the company’s daily operations.
INVESTORS/ OWNERS/ STOCKHOLDERS- These
parties provide the financial resources to keep the
business going.
MANAGEMENT- Organizational managers use
financial information to set goals for their
companies.
EMPLOYEES- Although the employees are not
directly involved in the decision making of the
company, they are nonetheless interested in the
financial information of the company to determine
if they have a future in the company.
EXTERNAL USERS
External users are secondary
users of financial information
who are parties outside the
company.
 FINANCIAL INSTITUIONS/ CREDITORS- Before extending
credit, Financial institutions use financial information to
determine the capacity of the business organization to pay
its obligations and their interests at the appropriate time.
 GOVERNMENT- Financial information is important for tax
purposes and in checking of compliance with Securities and
Exchange Commission(SEC) requirements.
 POTENIAL INVESTORS- Before making an investment or
extending credit, potential investors or creditors may not
only be interested in the company’s current financial
position and results of operations, but also in the company
financial history.
TYPES OF BUSINESS ORGANIZATIONS
LEGAL REQUIREMENTS IN THE
FORMATION OF A BUSINESS
 The sole proprietorship is the easiest business to register. It
is registered with the Department of Trade and
Industry(DTI) under its Bureau of Trade Regulation and
Consumer Protection.
 Fora Partnership, The business is registered with the
Securities and Exchange Commission(SEC). Upon submission
of the ff. documents.
 A. proposed Articles of Partnership
 Name Verification Slip
 Bank Certificate Deposit and etc.
For Corporation, The ff. are the incorporation documents
required to be filed with the Securities and Exchange
Commission(SEC)
a. Articles of Incorporation
b. By- Laws
c. Treasurer’sAffidavit which should state compliance with
the authorized subscribed and paid – up capital stock
requirements.
d. BankCertificate which should state that the paid up
capital portion of the authorized capital stock has been
deposited to the issuing bank.
For Cooperative, the business is registered with the
Cooperative Development Authority(CDA) upon
submission of the ff.
Economic Survey
Notarized Articles of Cooperation and By-Laws
Bonds of accountable Officers.
Notarized sworn statement of the treasurer
certifying that the required subscription and
payment of the authorized share capital and paid –
up capital have been fulfilled.
THREE TYPES OF BUSINESS
ACTIVITIES/ OPERATIONS
Service- is a type of business operation
engaged in the rendering of services. A
service type of business earns based on the
skills or quality of service it offers.
Example: Dental Clinic, Barber Shop, Laundry
Services, Legal Services, Accounting Firms, and
etc.
TRADING/ MERCHANDISING
Is a type of business engaged in the
buying and selling of goods.
Merchandising includes the process of
managing and marketing the products
sold to its customers.
Ex. Grocery and Sari- Sari Store
MANUFACTURING
Is engaged in the production of items to
be sold. It involves the purchasing and
converting of raw materials to finished
goods.
Ex. Shoe Factory, Food Processing and
etc.
FUNDAMENTAL CONCEPTS
 1. ENTITY CONCEPT- Regards the business enterprise as
separate and distinct from its owners and from other business
enterprises.
 2. PERIODICITY- Is the concept behind providing financial
accounting information about the economic activities of an
Enterprise for a specified time periods.
a. Calendar Year- A twelve- month period that starts on
January 1 and end on Dec. 31
b. Fiscal Year- A twelve- month period that starts on any
month of the year. May starts on April 1 and ends its fiscal year
on March 31, of the current year.
Basic Accounting Principles
 1. OBJECTIVITY PRINCIPLE- States that all business
transactions that will be entered in the accounting
records must be duly supported by verifiable evidence.
 2. HISTORICAL COST- Means that all properties and
services acquired by the business must be recorded at
their original acquisition cost.
 3.ACCRUAL PRINCIPLE- States that income should be
recognized at the time it is earned such as when goods
are delivered or when services have been rendered.
4. ADEQUATE DISCLOSURE- Stated that all material
facts that will significantly affect the financial
statements must be indicated.
5. MATERIALITY- Means that the financial reporting
is only concerned with information significant
enough to affect decisions.
6. CONSISTENCY- Means that approaches used in
reporting must be uniformly employed from period
to period to allow comparison of results between
time periods. Any changes must be clearly
explained.