Chapter 1 Introduction to Accounting Accounting has the following two broad functions in a

Accounting is a process of identifying, recording and business:

communicating economic information that is useful in 1.provide external users with info for investment and
making economic decisions. credit decisions
2. internal users useful in managing the business.
Essential elements of the definition of accounting
1. Identifying-analyzes "accountable event" or "non- Users of accounting information are broadly classified
accountable event." into two, namely:
-"Accountable events" (or 'economic events') are those 1. Internal users - those who are directly involved in
that affect the assets, liabilities, equity, income… managing the business
-Sociological and psychological matters are outside the a. Business owners
scope of accounting. b. Board of directors
2. Recording- recognizes accountable events c. Managerial personnel
journalizing. 2. External users- those who are not directly involved
-classifies the effects of the event on the "accounts." in managing the business.
"posting." (tabular or t-chart) a. Existing and potential investors b. Lenders
➤ Account is the basic storage of information in c. Government agencies f. Public
accounting, e.g., "cash," "land," "sales," etc. d. Non-managerial employees e. Customers
3. Communicating summarizes the information
processed in the accounting system in order to produce Types of accounting information classified as to users'
meaningful reports. needs
-Accounting information is communicated to 1. General purpose accounting information meet the
interested users through accounting reports, the most common needs of most statement users. It is provided
common form of which is the financial statements. by financial accounting for external users.
2. Special purpose accounting meet the specific needs
Nature of accounting of particular statement users. It is provided by
Accounting is a process with the basic purpose of management accounting for internal users.
providing information about economic activities that is
intended to be useful in making economic decisions. Brief history of accounting (Wala nako giapil)
Fra Luca Pacioli is considered as the father of modern
Types of information provided by accounting accounting. “double entry recording"
1. Quantitative information-expressed in numbers,
2. Qualitative information- expressed in words or Common Branches of Accounting
descriptive form. -is found in the notes to financial 1.Financial reporting is the provision of financial
statements as well as on the face of the other information about an entity that is useful to external
components of financial statements. users
3. Financial information- money also quantitative info -Primary objective of financial reporting To provide
information about an entity's* economic resources
Accounting as science and art (assets), claims to those resources (liabilities and
1. As a social science, body of knowledge (systematic) equity), and changes in those resources (income,
2. As a practical art, creative skills and judgment. expenses and other changes).
-Secondary objective of financial reporting To provide
Accounting as an information system consists of an information useful in assessing the entity's
input, a process, and an output. Similarly, in an management stewardship (i.e., how efficiently and
accounting system, the inputs are the identified effectively the entity's management has discharged its
accountable events; the processes are recording, responsibilities to use the entity's economic resources).
classifying and summarizing; and the output is the ("The term 'entity' refers to the 'reporting entity. A
accounting report that is communicated to the users. reporting entity is one that is required, or chooses, to
prepare financial statements, for example a 'business.'
Bookkeeping and Accounting --Government employees are required to prepare and
➤ Bookkeeping process of recording the accounts or submit their personal financial statement called the
transactions of an entity. ends with trial balance. 'SALN' or Statement of Assets, Liabilities and Net
➤ Accounting, covers the whole process of worth.)
identifying, recording, and communicating information 2. Management accounting involves the
to interested users. accumulation and communication of information for
use by internal users
Functions of Accounting in Business 3. Government accounting refers to the accounting
Accounting as "language of business" because it is for the government and its instrumentalities, focusing
fundamental to the communication of financial attention on the custody of public funds
information.
4. Auditing involves the inspection of an entity's contribute capital and cooperate in order to achieve
financial statements or business processes to ascertain certain goals.
their correspondence with established criteria. Another concept of a cooperative is that members need
5. Tax accounting is the preparation of tax returns and to patronize the cooperative's goods or services. In the
rendering of tax advice, such as the determination of example above, the member farmers shall hire delivery
tax consequences of certain proposed business trucks from the cooperative rather than from other
endeavors. businesses. If the cooperative earns profit (net surplus),
6. Cost accounting is the systematic recording and a farmer can recover his costs through patronage
analysis of the costs of materials, labor, and overhead refunds. Patronage refund pertains to the profit that a
incident to the production of goods or rendering of cooperative returns to its owners. It should be noted
services. that a member who has not patronized any of the
7. Accounting education refers to teaching accounting services of the cooperative for an unreasonable period
and accounting-related subjects in an organized of time may be removed from the cooperative upon the
learning environment. majority vote of the board of directors. সাঁট এ
8. Accounting research pertains to the careful -A cooperative also has juridical personality similar to
analysis of economic events and other variables to a corporation. The founding members of a cooperative
understand their impact on decisions. Board topic shall not be less than 15 individuals. However, a
cooperative can have as many members as its by-laws
Forms of Business Organizations permit.
A business is an activity where goods or services are -A cooperative is registered with the Cooperative
exchanged for money. A person who is engaged in Development Authority (CDA).
business is called an entrepreneur or businessman.
Types of Business According to Activities
Businesses in the Philippines are organized in one of -A service business is one that offers services as its
the following: (DISADVANTAGE AND main product rather than physical goods.
ADVANTAGE NOT INCLUDED) -A merchandising business (or trading business) is
1. Sole proprietorship-owned by only one individual, one that buys and sells goods without changing their
most common and simplest form of a business physical form.
organization. Business owner "sole proprietor." -A manufacturing business is one that buys raw
-A sole proprietorship is registered with the materials and processes them into final products.
Department of Trade and Industry (DTI). Some businesses, called hybrid businesses, engage in
2. Partnership-owned by two or more individuals more than one type of activity. For example, a
contract divide among themselves the earnings restaurant uses ingredients to cook a meal
therefrom. Business owners partners. (manufacturing), sells Coca-Cola drinks
-A partnership is registered with the Securities and (merchandising), and serves food to customers
Exchange Commission (SEC). (service). Nevertheless, a hybrid business is classified
3. Corporation- owned more than one individual, into one of the major types based on the activity that is
created by operation of law. Ownership in a most in line with the business' purpose. Restaurants are
corporation is represented by shares of stocks. The expected to fill-in customer orders and provide dining
owners are called stockholders or shareholders. services, thus, they are more of a service-type
-A corporation is an artificial being or a juridical business.
person, meaning in the eyes of the law, a corporation is
like a person, separate from its owners. Therefore, a PROBLEM 1: TRUE OR FALSE
corporation can transact on its own, have its own 1. All events involving an entity are recorded in the
properties, incur its own obligations, and sue or be books of accounts.
sued. 2. Sociological and psychological matters are within
-The incorporators (i.e., founders) of a corporation the scope of accounting.
shall not be more than 15. However, a corporation 3. Accountable events are recorded in the books of
can have as many stockholders as its authorized accounts through a process called "journalizing.
capitalization permits. 4. Measuring is the phase in accounting where
-A corporation is registered with the Securities and financial statements are prepared and provided to
Exchange Commission (SEC). interested users.
4. Cooperative-owned by more than one individual. 5. The basic purpose of accounting is to provide
However, a cooperative is formed in accordance with information about economic activities that is intended
the provisions of The Philippine Cooperative Code of to be useful in making economic decisions
2008. The owners of a cooperative are called 6. As a practical art, accounting requires the use of
members. creative skills and judgment.
-From the root word "cooperate," a cooperative is an
association of individuals who joined together to
7. Bookkeeping refers to the whole process of Users of accounting information
identifying recording, and communicating information 2. Which of the following is considered an internal
to interested users user of financial information?
8. Investment and credit decisions are most likely to be a. Rank and file employees of the reporting entity
made by internal users of financial information. b. Stockholders of the entity who are not directly
9. Financial accounting is concerned with the involved in managing the entity
preparation of information geared towards the common C. Lenders and other creditors
and specific needs of external users only. d. The entity's management
10. Financial statements are the structured
representation of an entity's financial position and 3. What type of information needs of users do general
results of its operations. purpose financial statements cater to?
a. common needs b. specific needs
PROBLEM 2: TRUE OR FALSE c. a and b d. caring needs
1. A "reporting entity" (or simply 'entity') is one that is
required, or chooses, to prepare financial statements. 4. Which of the following is least likely to be a
2. Accounting information is expressed only in decision made by an external user of the financial
numbers but never in words. information of an entity?
3. You are planning on investing in the shares of stocks a. whether to buy, hold or sell investment in stocks
of ABC Inc. You then downloaded ABC Inc.'s financial b. whether to extend loan or other forms of credit
statements from the internet to help you analyze C. whether to obtain additional financing
whether the current market price of ABC Inc.'s shares d. all of these are decisions that external users make
are undervalued or overvalued. In this regard, you are
considered an internal user of financial statements. Branches of accounting
4. The output in the financial accounting process is the 5. This branch of accounting deals with the preparation
financial statements. of general purpose financial statements.
5. In a partnership or a sole proprietorship, the owners' a. General accounting b. Management accounting
liability for business' debts is limited only to the c. Financial accounting d. Auditing
amount the owner has contributed to the business.
6. Unlike bookkeeping, accounting requires the 6. General purpose financial statements are intended to
interpretation of the significance of the information meet
processed. a. all the information needs of all users internal alike..
7. In most cases, the start-up capital for a external and
manufacturing b. the common needs of both external and internal
business is more significant compared to a service users.
business. C. the common needs of external users, primarily
8. The corporate form of business organization investors, lenders and other creditors
provides the highest degree of continuity. d. both the common and specific needs of external
9. A business that converts raw materials into final users.
products is called a merchandising business.
10. Auditing is the branch of accounting that involves Forms of business organizations
the inspection of an entity's financial statements or
business processes to ascertain their correspondence 7. This type of business organization is created by a
with established criteria. contractual agreement between two or more
individuals.
PROBLEM 3: FOR CLASSROOM DISCUSSION a. corporation c. partnership
Definition, nature and function of Accounting b. cooperative d. sole proprietorship

1. Which of the following does not properly describe Types of business according to activities
accounting?
a. It is a process by which useful information is 8. Which of the following refers to a manufacturing
generated. business?
b. It is a social science. a. buying and selling of goods in their original form
C. It requires the application of creative skills and b. sale of a skill-set and not necessarily a physical
judgment. object
d. It is often referred to as the "language of the soul." c. ability or potential to mass-produce
d. absence of ability to stock goods for future sale

Advantages and disadvantages of the different types of

business
9. A disadvantage of a partnership is 9. An internal user's economic decisions least likely
a. better decisions - "two heads are better than one." include which of the following?
b. business risk is assumed by more than one owner. a. Whether or not to increase the sale price of a
c. unlimited life. product.
d. unlimited liabilities of the partners. b. Whether or not to extend credit to a business.
C. Whether to increase or decrease the production of a
10. This type of business organization has the tendency certain product.
to become monopolistic. It can hamper the economy d. Whether to increase the salaries of existing
by funneling wealth to only few individuals (i.e., the employees or to hire additional employees.
organization's top owners) restricting the redistribution
of wealth to the majority of the members of the 10. The focus of financial accounting is the preparation
society. of
a. Cooperative c. Partnership a. general purpose financial statements.
b. Sole proprietorship d. Corporation b. special purpose financial statements.
a and b c. a d. journals and ledgers.
PROBLEM 4: MULTIPLE CHOICE
PROBLEM 5: MULTIPLE CHOICE
1. It is the phase in accounting where an event is
determined whether or not it is to be recorded in the 1. The Philippine Financial Reporting Standards
books of accounts. (PFRSs) are most relevant to which branch of
a. Accountable event c. Measuring accounting?
b. Identifying d. Communicating a. Taxation b. Financial accounting
c. Management accounting d. b and c
2. These are events that affect the assets, liabilities,
equity, income or expenses of a business. 2. These are the end product of the accounting process
a. Accountant's events c. External events and the means by which information gathered and
b. Internal events d. Accountable events processed are periodically communicated to users.
a. Financial statements b. Accountable events
3. It is the basic storage of information in accounting c. Journals and Ledgers d. Accountant
a. Cash c. Account
b. Vault d. Memory Card 3. The primary objective of financial reporting is
a. to provide information about an entity's economic
4. Accounting information is communicated to resources.
interested users most commonly through b. to provide information useful in assessing the
a. financial statements. c. Journals entity's management stewardship.
b. statement of accounts. d. Call and text c. to comply with the PFRSs.
d. to provide information about an entity's economic
5. Information expressed in numbers is called resources (assets), claims to those resources (liabilities
a. Quantitative information c. Financial information and equity), and changes in those resources (income,
b. Qualitative information d. Numerical information expenses and other changes).

6. Accounting is fundamental to the communication of 4. Mr. George, an accountant, prepared a report

financial information. Thus, accounting is often showing all the past due accounts of the business,
referred to as collection trends, financial ratios and analyses. Mr.
a. a practical art. c. the "language of the soul." George stamped the word "confidential" on all the
b. a social science. d. "language of business." pages of the report because the report is intended for
management's use only. The preparation of the report
7. Which of the following is considered an internal is most likely to be within the purview of which branch
user? of accounting?
a. Investors c. Creditors a. Financial accounting b. Cost accounting
b. Management d. Rank and file employees c. Management accounting d. Tax accounting

8. It refers to accounting information designed to meet 5. Mr. Clouds owns a car dealership. Mr. Clouds buys
the common needs of most statement users. used cars, refurbish them and then sells them. Mr.
a. General purpose information Clouds is the only owner of the business. <List A>
b. Special purpose information What form of business origination is Mr. Clouds' car
c. Common information dealership and <List B> what type of business activity
d. All of these is Mr. Clouds' engaged in?
<List A>
a. Sole proprietorship b. Sole proprietorship
c. Partnership d. Corporation b. ask if your friend's business is properly registered
with government regulatory agencies, e.g., Securities
<List B> and Exchange Commission 'SEC'. Ask if you can
Service Trading Trading Manufacturing examine the related registration documents.
C. obtain an objective understanding of your friend's
6. Inventory, warehousing and distribution costs are business and its ability to give you a house and lot. Ask
the least worry of a business that engages in what type if your friend owns a house and lot. If he or she
of business activity? answers "No," there is a small chance that he or she
a. Service b. Merchandising or Trading could give you one.
c. Manufacturing d. None of these d. say LOL. In your mind, you are thinking "I am an
accounting student. You cannot fool me with your
Use the following information for the next two scam."
questions: You want a new laptop computer and a good
internet connection in market your products on PROBLEM 6: CASE STUDY
Facebook. The problem isyou are short of cash. So,
you went to Papa to get a loan but he said, "No way, Instructions:
Jose!"
1. Interview someone who has a business. He or she
7. Which of the following would most likely persuade can be a relative, a friend, a neighbor (e.g., an owner of
Papa to give you the loan? a sari-sari store nearby), or anyone (e.g., an owner of a
a. Cry like a spoiled brat while running up and down food stall in your school's canteen).
the stairs.
b. Look at Papa with teary eyes while wiping the liquid 2. Let him or her tell you a story on how his or her
dripping from your nose. business came to be. (Important: Listen, and listen
c. Get Mama on your side. well. Do not interrupt while he or she tells you his or
d. Show Papa your projected financial statements, her story. Notice any spark of passion in his or her
explain to him your business plan and confidently eyes.)
assure him that you will pay back the loan.
3. Summarize his or her story and pass it to your
8. Papa's decision on whether to extend you a loan is a teacher for grading. At the minimum, your summary
decision made by a(an) should include the wing:
a. external user. b. internal user. Write to Raquel Navia
c. wise man. d. kuripot man.

9. You are a business owner. It came to your attention

that some of your products are overstocked, while
some are frequently out-of-stock. Warehousing costs
have been increasing and you are losing potential
sales. To come up with a right mix of products to store
in your warehouse, what should you do?
a. Fire your sales personnel.
b. Fire your warehouse custodian.
c. Cry like a little baby; face pressed on a pillow.
d. Obtain an accounting record of your sales per
product line and identify which products are sold faster
than the others. Stock more of those products and stock
less of the products that take longer to sell.

10. Your friend offered you a business proposal.

According to your friend, the initial investment is
$10,000. You will ge some products 2 skin whitening
soaps and 1 bottle of dishwashing liquid. If you get
other investors to invest and those other investors get
other investors and those "other" other investors get
some more investors, you will receive a house and lot!
(Wow!) As a business learner, you should do any of the
following except

a. give your parent's hard earned money to your friend.