Review of Accounting Process Handout - SHS20191

Children of Mary Immaculate College (CMIC) Grade 11

P Define Accounting

The Accounting Standards Council (ASC) defines accounting as follows:

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.

The Committee on Accounting Terminology of the American Institute of Certified Public Accountants (AICPA) defines accounting as
follows:
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of moneym transactions and events
which are in part a least of a financial character and interpreting the results thereof.

The American Accounting Association (AAA) in its Statement of Basic Accounting Theory defines accounting as follows:
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by
users of the information.

P What is the overall objective of accounting?

The overall objective of accounting is to provide quantitative financial information about a business that is useful to statement users
particularly owners and creditors in making economic decisions.

The primary task of an accountant as to supply financial information so that the statement users could make informed judgment and better decision.

P History of Accounting

- The first accounting book was written by Cotrugli in Naples and the modern double entry bookkeeping system could be traced from the book prepared in 1494 by an Italian
mathematician, Fr. Luca Pacioli, entitled Summa 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 the other Asian countries. Records of goods being bartered were likewise kept by the traders.

P Forms of Businesses

- Sole Proprietorship - This is a business, set up and managed by one person. Most small businesses such as beauty parlors, dress shops, barbershops and bakeries are sole proprietor-
owned.

Advantages
a. Only a 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.

Disadvantages
a. Difficult to expand the business and sell different products or services because of low capital and only one owner-manager.
 b. it has no indefinite life. Owner may just one day want to close it, or become incapacitated or die.
c. Owner has unlimited liability. It means that if the business is unable to pay its debt, the bank or creditor can attach the owner's personal properties.

-
Partnership - This is a business owned by two or more persons called partners who contribute money property and talent into a common fund for the purpose of sharing profit among
themselves. Most often the partners are also the managers. Professionals such as lawyers, accountants, engineers and doctors usually put up a partnership or consultancy firm.

Advantages
a. Ease in managing the business and in attracting clients because of more owners involved.
b. Management is more efficient 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 proprietors, have unlimited liability.

-
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 a Board of Directors elected by the shareholders from among themselves.

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. Can exist for an indefinite period of time with a legal life of 50years, which can be renewed by the SEC for another 50years, it can exist for an indefinite period of time.
d. More stable than a partnership because it is not affected by the withdrawal of a shareholder. A shareholder who wants to wthdraw from corporation simply sells the shares owned to
others or can even sell the shares back to the corporation.
e. Higher amounts of profit may be obtained because of its large amount of resources which also means higher return on investment for shareholders or investors.

Disadvantages
a. A shareholder, unlike a sole proprietor or a partner, has no unlimited liability. There is therefore a higher risk involved on corporate debt because in the event of insolvency corporate
creditors cannot attach personal properties of shareholders.
b. It is subject to more legal and tax requirements.
c. Abuse of power by the Board of Directors could certainly affect the welfare of the corporation and its shareholders.

P Types of Business Operations

- Service Business - is one which provides service, for a fee, to clients or customers.
- Merchandising Business - is one which buys and sells goods or merchandise
- Manufacturing Business - buys raw materials, converts these into finished products and then sells the finished products to customers.

References:
a Simplified Accounting for Business
By: Zenaida Vera Cruz Manuel & Maribel Vera Cruz Manuel
b Fundamentals of Partnership and Corporation
By: Joffre M. Alajar & Virgilio Reyes