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Lesson 1

Introduction to Accounting and Business

Lesson Objectives:

At the end of the lesson, the students are expected to:

 Enumerate the importance of accounting, its definition and history.

 Identify the different areas, career fields, accounting associations and professional regulatory bodies.

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DISCUSSION OF CONTENT

HISTORY OF ACCOUNTING

The earliest bookkeeping records were used to keep track of pyramids and palaces being constructed especially in
Babylonia (present-day Iraq) and Egypt. A record was kept of the number of slaves who worked for Kings and Pharaohs.
They also recorded the materials used and the number of days it took for the work to be finished. A listing of people were
also kept and the amount of taxes were required to pay.

Bookkeeping records were found as early as 2000 B.C. in Assyria (modern Northern Iraq, Northeastern Syria and
Southeastern Turkey). In the 15th century, records were also kept in the trading ports of Greece where the number of days
spent for as trading voyage were listed, and the number and value of cargoes shipped and unloaded for a particular
voyage. Servants were usually entrusted by their merchant-masters to keep track of their properties (assets) and the debts
(liabilities) they owed especially after a particular voyage.

The first accounting books was written by Cotrugli in Naples and the modern double entry bookkeeping system
could be traced from the book prepared in 1914 by an Italian mathematician, Fr. Luca Pacioli, entitled Suma de
Aritmetica.

In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper was called Tenedor de
Libro. Before the Spaniards came, trade was already flourishing between the Philippines and other Asian countries.
Records of goods being bartered were likewise kept by the traders.

FORMS OF BUSINESS ORGANIZATION

The three common forms of businesses in the Philippines are:

1. Sole Proprietorship

– This is a business, set up and managed by one person.

– The sole proprietorship has no separate legal personality from its owners.
– Examples are small businesses such as beauty parlors, dress shops, barbershops, bakeries, retail stores, etc.

Advantages:
a. Only small amount of capital is needed.
b. Its operation can be managed easily by the proprietor.
c. The owner or proprietor gets all the profits.
d. Only a minimum requirement to legally operate is needed (DTI Registration, Barangay Clearance and
Mayor’s Permit only).

Disadvantages:
a. Difficult to expand the business due to low capital
b. No indefinite life. Owner may just want to close it one day or become incapacitated or die.
c. Owner has unlimited liability. If the business is unable to pay its debt, its creditors can go after the owner’s
personal properties.

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2. Partnership

– This is a business owned by two or more persons called partners who contribute money, property and
profession into a common fund for the purpose of sharing profits among themselves.
– Common examples are Professional Partnerships of CPAs, Lawyers, Engineers, Doctors, etc.
– They are registered with the Securities & Exchange Commission (SEC).

Advantages:
a. Ease in managing the business and in attracting clients because of more owners involved.
b. Management is more effective because of division of responsibilities among partners.

Disadvantages:
a. No indefinite life since disagreements could easily arise because of many owners involved.
b. Partners, like sole proprietor, have unlimited liability.

3. Corporation

– A business organized as a separate legal entity from the owners. It means that it can conduct business by itself
– enter into contracts, buy and sell properties and stocks. An investor simply buys shares of stocks in a
corporation and become a shareholder. It is managed by the Board of Directors (for Stock) or Trustees (for
Non-Stock) elected by the shareholders from among themselves.
– The New Corporation Code of the Philippines allows a One-Person Corporation.
– They are registered with the Securities & Exchange Commission (SEC).

Advantages:
a. More capital can be raised because of the large number of shareholders.
b. Can afford to hire experts who can efficiently manage and operate the business.
c. It has perpetual existence.
d. More stable than partnership because it is not affected by withdrawal of a shareholder. A shareholder who
wants to withdraw from the corporation simply sells the shares owned to others or can even sell the shares
back to the corporation.
e. Higher amount if profits may be obtained because of its large amounts of resources which also means higher
return of investment for the shareholders or investors.

Disadvantages:
a. A shareholder, unlike a sole proprietoror a partner, has no unlimited liability. Therefore, there is a higher risk
involved on corporate debts because in the event of insolvency (assets are not enough to cover liabilities),
corporate creditors cannot go after personal properties of shareholders or investors.
b. Has the most legal and tax requirements compared to Sole Proprietorship and Partnership.
c. Abuse of power by the Board of Directors/Trustees could certainly affect the welfare of the corporation and
its shareholders.

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ACCOUNTING AS A BUSINESS LANGUAGE

Accounting is bridge between the company and the statement user. From the business activities which accounting
accumulates, reports will be prepared and vital information are communicated to the users. Accounting speaks in a
language that enables readers to understand what is happening in a business, if it is doing in terms of finances, before
readers or users make decision.

ACCOUNTING DEFINED

Accounting is a service activity whose function is to prepare financial reports that will provide relevant
information about the business. It is difficult for users to make financial decisions that are not supported by factual data.
These facts are contained in the accounting reports.
Accounting may also be defined as the process of recording, classifying and summarizing transactions and events
which are financial in nature and interpreting the result thereof.

USERS OF FINANCIAL INFORMATION

Users of Financial Statements are called stakeholders. A stakeholder is a person or entity who has a “stake” or
interest in the business. Aside from the owners or investors, the other stakeholders are the managers, lenders/creditors,
suppliers, employees, government and customers.The table below shows the concerns of each stakeholders:

INTERNAL STAKEHOLDERS
Owner or Investor The one who puts in capital (such as money or property) in a business endeavor. To minimize the risk of
losing money, an owner or investor must read the financial reports and seek answers to the following
questions:

1. Is the business profitable?

2. Has it accumulated sufficient financial wealth to remain stable?
Manager Responsible for running the business. Financial reports make it possible to evaluate performance of the
business.

1. Are the plans being implemented beneficial to the business?

2. Is the business operating profitably?

Remember a losing business depletes wealth and is a reflection of inefficient management?

EXTERNAL STAKEHOLDERS
Employee The employee wants:
1. Higher wages
2. Benefits
3. Good working conditions
4. Security of tenure

The employees will evaluate the financial report to determine the ability of the business grant these
demands. Remember, a losing business cannot afford to give higher salaries and more benefits.

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Lender or Creditor A lender or creditor assesses the paying ability of the business-borrower by reading the financial reports.

1. Will the business be able to pay its debts when it falls due?
2. Does it have liquid assets (cash assets or easily convertible to cash)?
Supplier A supplier offers goods or services on cash basis or on credit term. If it offers on credit:

1. Will the business be able to pay

Government The government seeks to answer the following questions by reading the accounting reports:

1. Is the business paying the right taxes?

2. Is it filing all the required documents?

The government through its tax agents, the Bureau of Internal Revenue investigates tax returns and assesses
truthfulness of the reported profits as well as the tax liability paid by the business.
Customer The customer assesses the company’s ability to continuously supply the goods they need at the right price
and right quality.

CAREER FIELDS IN ACCOUNTING

In a recent business report, demand for jobs in the Accounting Profession (esp. CPAs) has been increasing even in
the overseas. This may be due to the fact that all companies have an Accounting Department and would be difficult to
operate without financial information. Although most companies are transitioning to technological advancement through
computerized accounting system, areas that need analysis and decision-making still need human intervention.

In the Philippines, below are four (4) major fields in the Accounting Profession:

1. Public Practice
- Accountants who work in the Accounting/Audit Firm.
- Examples are External Audit Associate, Audit Supervisor, Audit Manager, Audit Firm Partner and
Managing Partner, etc.

2. Government
- Accountants who work in the government sector.
- Examples are Local Government Bookkeeper & Accountant, Treasury Accountant, COA Auditor, BIR
Examiner & Assessor, etc.

3. Academe/Education
- Accountants who teaches in review center or educational institutions.
- Examples are Accounting & Business Professor, Accountancy Director or Dean, CPALE Reviewer,
Textbook Author, etc.

4. Commerce& Industry
- Accountants who work in the private sector.
- Examples are Company Accounting Staff, Accounting Supervisor, Accounting Manager, Comptroller,
Financial Controller,VP for Accounting/Finance, Chief Finance Officer, Internal Auditor, Tax
Accountant, Financial/Business Analyst, Fund Manager, Stock Broker, Bank Manager, etc.

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Aside from the CPA title, accounting professionals can also obtain other titles such as Certified Internal Auditor
(CIA), Certified Internal Control Auditor (CICA), Certified Management Accountant (CMA), Certified Fraud Examiner
(CFE), Certified Information Systems Auditor (CISA), Chartered Financial Analyst (CFA), etc.Moreover, CPAs in the
Philippines can also practice their profession in the ASEAN region without securing a separate title.

ACCOUNTING ASSOCIATIONS

All Professionals are registered members of their respective professional associations, a few of which are the
following:

 Philippine Institute of Certified Public Accountants (PICPA) – the only accredited professional accountancy
organization (APO) recognized by the Philippine Professional Regulatory Commission.
 Association of Certified Public Accountants in Public Practice (ACPAPP)
 Association of Government Accountants of the Philippines (AGAP)
 National Association of Certified Public Accountants in Education (NACPAE)
 Association of Certified Public Accountants in Commerce & Industry (ACPACI)
 Institute of Internal Control (IIC)– Philippine
 Institute of Management Accountants (IMA) – Philippines
 Association of Certified Fraud Examiners (ACFE) – Philippines Chapter
 Institute of Financial Consultants (IFC)– Philippines
 Financial Executives Institute of the Philippines (FINEX)
 CFA Society Philippines

PROFESSIONAL REGULATORY BODIES

The practice of any profession requires an agency that will regulate the operation and implement guidelines in the
practice of the profession. It is also tasked to prepare and conduct examinations that will license the practice. Accounting
and all other professions are governed by the following regulatory bodies:

 Professional Regulation Commission (PRC)–this is a government body mandated to regulate and supervise the
practice of the professionals (except Lawyers) who constitute the highly skilled manpower in the country.
 Securities and Exchange Commission (SEC) – it regulates the business operations specifically that of
partnership, corporations and other entities seeking a license or franchise to operate in the Philippines. Foreign
companies doing business in the country are included as well.
 Bangko Sentral ng Pilipinas (BSP)–it regulates the operations of all banks and other financial institutions in the
Philippines and is tasked to control price of goods and products, promote and maintain peso stability, and monitor
importations and exportations of products.
 Bureau of Internal Revenue (BIR)–it exacts tax and license compliance from people and business entities
earning income. The taxpayers are required to fill up ang submit periodic tax returns and pay for licenses, fees and
taxes.
 Department of Trade and Industry (DTI)–serves as the primary coordinative, promotive, facilitative and
regulatory arm of the government for the countries trade, industry and investment activities. It acts as a catalyst
for intensified private sector activity to accelerate and sustain economic growth through a comprehensive

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industrial growth strategy, a progressive and socially responsible liberalization and deregulation program, and
policies designed for the expansion and diversification of both domestic and foreign trade. They also govern
business operations of sole proprietorships.
 Local Government Units (LGUs) – an LGU grants permits and licenses to operate a business. Once in a while,
they visit the business establishment to check if it has complied with local rules and regulations.

SUMMARY OF THE LESSON

 Accounting is the language of business.

 Fr. Luca Pacioli is the Father of modern double entry accounting system.
 Accounting in the Philippines was introduced by the Spaniards.
 The forms of business organization are Sole Proprietorship, Partnership and Corporation.
 Accounting is a service activity that provides relevant financial information to the business’ stakeholders.
 Stakeholders are persons that have interest in the business.
 Accounting professionals can diversely choose careers in Public Practice, Government, Academe and Commerce
& Industry.
 Accountants and other professionals are generally governed by Professional Regulation Commission while
businesses are governed by Securities and Exchange Commission, Bangko Sentral ng Pilipinas, Bureau of
Internal Revenue, Department of Trade and Industry and Local Government Units.

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