FINANCE - the word finance is derived from the CLASSIFICATION OF FINANCE

latin word finer, meaning “to end” or “to pay.”

A. As to Form of Negotiation
 a field that is concerned with the allocation
(investment) of assets and liabilities  Direct Finance - is involved in direct
(known as elements of the balance borrowing. It involves lending to ultimate
statement) over space and time, often under
conditions of risk or uncertainty. borrowers. A person may obtain a loan from
 Finance can also be defined as the science of another person to serve his needs.
money management.
 In direct finance, the security acquired
(called direct security) by the surplus unit
OTHER DEFITINIONS OF FINANCE (lender) is the same security issued by the
1. Shetty et al. (1995) - viewed finance as the deficit unit (borrower).
operational or practical side of economics,
 DIRECT SECURITY - is a financial
the practical science of the production and
distribution of wealth. Production is instrument a deficit unit issues and sells to a
acquisition while distribution is utilization. surplus unit with or without the help of a
2. Saldana (1997 - added that finance, as a
market specialist like the financial
discipline, is concerned with identifying,
evaluating, and managing sources and use of intermediaries.
cash in order to increase the value of the
business enterprise to its present owners.
3. Medina (2007) - defined finance as the
study of acquisition and investment of cash  Indirect Finance - involves financial
for the purpose of enhancing value and
intermediaries in the real sense of the word.
wealth.
 This means that financial intermediaries
(called secondary security) act as
FINANCE is the function of: middlemen when they buy securities for
• allocating available funds resale or simply facilitate the sale from
• acquiring needed funds; and the original issuers to the final buyers.

• utilizing these funds to achieve set of goals.

 The transaction that happens when
deficit units borrow with the use of
financial intermediaries

 The securities involved are indirect

securities or secondary securities, and
the transaction happens in the indirect
market or the intermediation market.
 B. As to User
• Public Finance - deals with the revenue and
expenditure patterns of the government.
- It is concerned with government affairs
managing the government’s sources and
uses of funds.

- Government expenditures for infrastructure

like building streets, schools, bridges,
among others and payment of government
employees are government spending and
thus public finance.
• Private Finance - is a method of providing
funds for major capital investments, where
private firms are contracted to complete and
manage public projects.

Private Finance is divided further into:

a. PERSONAL FINANCE - refers to finance
conducted by individuals/consumers. A
family spending for their food, clothing,
shelter, recreation, education, among others
is personal finance.

b. FINANCE OF NON-PROFIT
ORGANIZATIONS - involves those
conducted by charitable, civic, religious
organizations, among others. These
organizations are not for profit, meaning
they do not aim to gain profit or increase in
wealth.

c. BUSINESS FINANCE - deals with

financing for business firms or for
commercial use, the goal of which is to
make profit.

- Businesses either produce goods and

services for sale or buy goods and sell the
same. Where to obtain capital for a
particular company and where to use it are
concerns of business finance.
TYPES OF BUSINESS ORGANIZATIONS  They finance those who need money, and
1. Service they sell securities and other products for
 Engaged in rendering service. purchase of those who have excess funds as
 Could be rendering personal service like investments.
barber shops, tailoring, dressmaking shops,  Financial intermediaries also belong to this
massage clinics and spas, laundry shops etc. classification.
 Professionals like lawyers, accountants, • Financial Intermediaries – they
doctors, dentists also render service. bring together those who provide
funds and those who need funds.
 Finance companies obtain funds by issuing
2. Trading and Merchandising
 Engaged in buying and selling merchandise. commercial papers (stocks and bonds) or by
 What they buy, they sell. borrowing from banks. They use the funds
 Sari-sari stores, appliance stores, by lending to individuals and businesses.
construction and hardware supplies stores  Banks, lending institutions, credit companies,
and supermarkets are trading companies pawnshops, savings and loan associations,
 Even people who do “buy and sell” are credit unions and even moneylenders
doing trading. provide capital or lend money/grant loans.
 Even intellectual properties are traded  Insurance companies may also be classified
including films, TV shows, brand name, under the banking and finance category
corporate identity and a celebrity (often because insurance companies collect
known as the merchandising side of the premiums (money) which they invest that
entertainment business) become their main source of income.

3. Manufacturing 5. Mining or Extractive Industry / Mining

 Those which buy raw materials and process Companies
 Mining companies extract natural resources
the same to convert them into finished
like oil, gas, gold, copper, cement, among
products which they sell.
others.
 These companies deplete these natural
4. Banking and Finance resources; hence, while fixed assets are
 Firms that use money as its main object of
depreciated, natural resources are said to be
business (product) belong to the banking and
depleted.
finance classification.
*Depleted -
 Money and credit are their products
decrease seriously or exhaust the abundance
or supply of.
 Dividends given to mining company and leather and sheep for meat and wool);
stockholders may either be dividends out of breeding farms for pigs and goats; orchard
earnings or return of capital called for harvesting different kinds of fruits;
liquidating dividends because their basic commercial kernels for various nuts and nut
products are depleted. products including corn.
 Caltex (Philippines) Inc., Trans-Asia Oil and - In essence, even mining and quarrying are
Energy Development Corporation, Nido genetic industries.
Petroleum Philippines Pty. Ltd., etc.

6. Construction Companies
 Build houses, buildings, schools, roads,
bridges and other infrastructure.
 Similar to manufacturing as they start with
materials like cement, steel, gravel, sand,
wood and build a totally different product.

7. Genetic Industries
 Businesses involved in the production or
multiplication and reproduction of certain
species of plants and animals, either for sale
or for production of bio products like wool,
leather, medicinal herbs, among others.
 Such production, multiplication or
reproduction aim to create wealth, i.e., to
earn profit, as is the goal of all business
enterprises.
- Agriculture or farming for growing crops;
forestry for timber and lumber; fishing and
pisciculture (where fishes are grown in
ponds, canals and rivers); shrimp and prawn
culture; plant nurseries (where plants are
grown for sale); poultry farming, where
birds are raised for meat and aggs; animal
husbandry (where cattle are raised for milk
 BUSINESS STRUCTURES CHARACTERISTICS OF PARTNERSHIP
(AS TO OWNERSHIP) 1. Mutual agency
2. Voluntary association
3. Based on contract
1. SOLE PROPRIETORSHIP 4. Limited life
- Business unit owned and controlled by a 5. Unlimited liability
single individual. 6. Division of profit
- Simplest form under which one can operate 7. Co-ownership of contributed assets.
a business.
Advantages of Sole Proprietorship: LIMITED LIFE:
1. Ease of formation a. Death/withdrawal of a partner
2. Needs only a minimum capitalization b. Insolvency of a partner
3. Sole decision maker c. Incapacity of a partner
4. Easy to terminate d. Termination of the project or purpose
Disadvantages of Sole Proprietorship: e. Termination of the period specified in the
contract
1. Unlimited liability f. Admission of a partner
2. Limited access to capital
3. Limited skills, talents and capabilities
4. Inability to attract or retain good employees Advantages of Partnership:
5. Limited term of existence
6. Difficulty in measuring success 1. Ease of formation
7. Personal problems may hinder 2. Allows pooling of financial resources
operation/success 3. Allows pooling of skills, expertise and
experience of partners
4. Less government control, supervision and
2. PARTNERSHIP intervention
- Formal arrangement in which two or more
parties cooperate to manage and operate a
business TYPES OF PARTNERSHIP AS TO LIABILITY
- A legal form of business operation between OF PARTNERS
two or more individuals who share
management and profits A. GENERAL PARTNERSHIP
- Involves two or more owner carrying out a
NATURE OF PARTNERSHIP business purpose.
- General partners share equal rights and
1. Easier form of corporation responsibilities in connection with
2. It allows the pooling of resources for some management of the business
common purposes. - Any individual partner can bind the entire
3. It may compose of two partners only or group to a legal obligation.
dozens.
4. It is contractual in nature because it is
formed through a contract between or
among the partners. B. LIMITED PARTNERSHIP
- One in which there is at least one, but not all,
limited partner.
- There should be at least one general partner
to assume unlimited liability.
CORPORATION – An artificial body or being 7. Corporate Officers - Entrusted with the
organized in accordance with the provision of law implementation of all policies and rules of the
in which ownership is divided into shares of stocks. corporation.

CHARACTERISTICS OF A CORPORATION INCORPORATION AND ORGANIZATION

OF A CORPORATION
1. Separate legal existence 4.
Limited liability of stockholders There are three steps in the organization of a
corporation. These are:
2. Created by operation of law 5.
Continuity of existence 1. Promotion - refers to the bringing together of the
incorporators & persons interested in forming a
3. Transferable units of ownership 6.
corporation and procuring subscriptions or capital
Centralized management by the board of directors
for the corporation.

ADVANTAGES OF A CORPORATION
2. Incorporation - the process of formally
1. Legal capacity to act as a legal entity organizing the corporation.
(artificial being)
The steps involved are:
2. Limited liability of stockholders
3. Transferability of shares a. Registration of business name with SEC
4. Continuity of life of the corporation b. Drafting and execution of the Articles of
5. Greater ability to acquire funding Incorporation by the incorporators
6. Greater ability to acquire talents, skills and c. Execution of sworn affidavits and bank
expertise. deposit certificate
d. Filing of the Articles of Incorporation with
the securities and exchange commission
PARTIES TO A CORPORATION e. Issuance by the securities and exchange
commission of the certificate of
1. Corporators - Those who compose the incorporation
organization whether they are stockholders or
members.
2. Incorporators - Often referred to as “founders” of 3. Formal Organization and Commencement of
the corporation; who originally organized the Business Operations
corporation.
Formal Organization and Commencement of
3. Stockholders/Shareholders - Are owners of Business Operation consist of the following steps:
shares of stocks in a stock corporation.
a. Adoption of By-laws
4. Members - Are corporators of a non-stock b. Election of the Board of Directors
corporation. c. Election of Officers
d. Commencement of Business Operations
5. Promoters - Promote or find potential
incorporators who may be interested in the
formulation of the corporation.
By laws - refer to the rules of action adopted by the
6. Board of Directors - Responsible for the corporation for its internal government and for the
formulation of the overall policies for the government of its officers, stockholders, and
corporation. members.
 CLASSIFICATIONS OF CORPORATIONS 2. Foreign Corporations
 Public Corporations – A corporation is considered foreign
- A corporation whose shares are traded to countries other than the one from which it obtains
and among the general public. its charter.
• Resident Foreign Corporation
• Non-resident Foreign Corporation
 Private Corporations
- A corporation founded by and composed of
private individuals principally for a
nonpublic purpose, such as manufacturing, 3. Multinational Corporations
banking, and railroad corporations – extends their operations in other
countries.

A. As to Purpose D. As to Number of Persons Composing the

Corporation
1. For profit (civil)
1. Corporation Sole
2. Non-profit
– is a legal entity consisting of a
3. Charitable single ("sole") incorporated office, occupied
by a single ("sole") natural person.
4. Foundation
2. Corporation Aggregate
– is a separate legal entity formed by
B. As to How Membership Is Represented several individual persons.
1. Stock Corporations
- a corporation in which the capital is contributed by
E. As to Legal Right to Corporate Existence
the shareholders and divided into shares represented
by certificates. 1. De jure Corporation
a. Open Corporations – A business that has complied
with all the requirements of its state
– these are corporations of which incorporation statute and is legally
stocks are available for purchase by the general allowed to do business as a corporation.
public.
2. De facto Corporation
b. Closed Corporations
– is a corporation in fact but not in
- these are corporations, ownership of which law.
is limited to selected persons.
2. Non-stock Corporations
F. As to Relation to Other Corporations
– is a group organized for purposes other
than generating profit and in which no part of the 1. Parent or Holding Corporations
organization's income is distributed to its members,
directors, or officers – This is the original corporation
from which another corporation, called
C. As to the State of Incorporation sister company.
1. Domestic Corporations 2. Sister Corporation
– A corporation is domestic in the – This is the corporation whose share
state/country from which it obtains its of stock are owned in majority by the
charter. parent of holding company.
  Corporate Capital
– is the mix of assets or resources a
company can draw on in financing its
business
 Classes of Shares/ Kinds of Stock
Shares of stock may be classified into:
1. Value on the stock certificate
a. Par value shares
b. No-par value shares
(1) with stand value
(2) without stated value

2. Rights to dividends
a. Common shares
b. Preferred shares
(1) as to assets
(2) as to dividends
(a) cumulative
(b) non-cumulative
(c) participating
(d) non-participating

 Organization Expense
– is the initial cost incurred to create a
company.
 Cooperative
– is a group of people who come
together and voluntarily cooperate for
their mutual, social, economic, and
cultural benefit.