BASIC FINANCIAL ACCOUNTING AND REPORTING

1. WHY IS ACCOUNTING OFTEN REFERRED TO AS THE LANGUAGE OF BUSINESS?

Accounting is relevant in all walks of life, and it is absolutely essential in the world of business.
Accounting is the system that measures business activities, processes that information into reports
and communicates the result to decision-makers. Accounting quantifies business communication. For
this reason, accounting is called the language of business. The task of learning accounting is very
similar to the task of learning a new language.

2. WHAT IS GLOBALIZATION? TO YOUR MIND, WHAT BENEFITS WILL IT BRING TO

YOU? 

Globalisation The process of increased integration and co-operation of different national economies.

It involves national economies becoming increasingly inter-related and integrated.

Benefits of globalisation
 Free trade is a way for countries to exchange goods and resources. This means countries can
specialise in producing goods where they have a comparative advantage (this means they can
produce goods at a lower opportunity cost). When countries specialise there will be several
gains from trade:
a) Lower prices for consumers
b) Greater choice of goods, e.g food imports enable a more extensive diet.
c) Bigger export markets for domestic manufacturers
d) Economies of scale through being able to specialise in certain goods
e) Greater competition

 Free movement of labour. Increased labour migration gives advantages to both workers and
recipient countries. If a country experiences high unemployment, there are increased
opportunities to look for work elsewhere. This process of labour migration also helps reduce
geographical inequality. This has been quite effective in the EU, with many Eastern European
workers migrating west. Also, it helps countries with labour shortages fill important posts. For
example, the UK needed to recruit nurses from the Far East to fill shortages.However, this
issue is also quite controversial. Some are concerned that the free movement of labour can
cause excess pressure on housing and social services in some countries. Countries like the
US have responded to this process by actively trying to prevent migrants from other countries.

 Increased economies of scale. Production is increasingly specialised. Globalisation enables

goods to be produced in different parts of the world. This greater specialisation enables lower
average costs and lower prices for consumers.

 Greater competition. Domestic monopolies used to be protected by a lack of competition.

However, globalisation means that firms face greater competition from foreign firms.
  Increased investment. Globalisation has also enabled increased levels of investment. It has
made it easier for countries to attract short-term and long-term investment. Investment by
multinational companies can play a big role in improving the economies of developing
countries.

Costs of globalisation
 Free trade can harm developing economies
Developing countries often struggle to compete with developed countries; therefore it is argued free
trade benefits developed countries more. There is an infant industry argument which says industries
in developing countries need protection from free trade to be able to develop. However, developing
countries are often harmed by tariff protection, which western economies have on
agriculture. Paradox of Free Trade

 Environmental costs
One problem of globalisation is that it has increased the use of non-renewable resources. It has also
contributed to increased pollution and global warming. Firms can also outsource production to where
environmental standards are less strict. However, arguably the problem is not so much globalisation
as a failure to set satisfactory environmental standards.

 Labour drain
Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold
onto their best-skilled workers, who are attracted by higher wages elsewhere.

 Less cultural diversity

Globalisation has led to increased economic and cultural hegemony. With globalisation there is
arguably less cultural diversity; however, it is also led to more options for some people.

 Tax competition and tax avoidance

Multinational companies like Amazon and Google, can set up offices in countries like Bermuda and
Luxembourg with very low rates of corporation tax and then funnel their profits through these
subsidiaries. This means they pay very little tax in the countries where they do most of their business.
This means governments have to increase taxes on VAT and income tax. It is also seen as unfair
competition for domestic firms who don’t use the same tax avoidance measures.
The greater mobility of capital means that countries have sought to encourage inward investment by
offering the lowest corporation tax. (e.g. Ireland offers very low tax rate). This has encouraged lower
corporation tax, which leads to higher forms of other tax.

3. TO YOUR MIND, WHY IS BUSINESS ETHICS IMPORTANT? CITE SOME ETHICAL

DILEMMAS.

Business ethics is more than just a concept used to enhance the image of a corporation; ethics
are the very foundation of success. Business ethics should be applied from the very moment a firm
opens its doors. Business ethics actually consists of the actions of individuals working within
businesses. Customers, management, and employees all appreciate honest
and ethical practices. Business ethics are vital because they help maintain a great reputation, help
avoid significant financial and legal issues, and they ultimately benefit everyone involved. Ethics is
especially important in preparing financial reports because users of these reports must depend on the
good faith of the people involved in their preparation. Users have no other assurance that the reports
are accurate and fully disclose all relevant facts. Imagine trying to carry on a business or invest
money if you could not depend on the individuals you deal with to be honest. If managers, customers,
investors, co-workers, and creditors all consistently lied, effective communication and economic
activity would be impossible. Information would have no credibility. 

Ethical dilemmas include:

1. White collar crime- embezzlement, fraud, theft, bribery, kickbacks and other schemes.
2. Whistle-blowing- extreme situation call for extreme measures.
3. Conflicts of interest- a person plays two conflicting roles in a situation.
4. Fiduciary responsibilities- trust to professional abilities
5. Sexual harassment- amounted to professional suicide.
6. Discrimination- based on race, religion, ethnicity, gender, age, marital status, or sexual
preference is to be avoided on both legal and ethical grounds. 

4. WHAT ARE THE THREE FORMS OF BUSINESS ORGANIZATION? DEFINE EACH

BRIEFLY.

 SOLE PROPRIETORSHIP- has a single owner called the proprietor who generally is also the
manager. Small service-type business. The owner receives all profits, absorbs all loses and is
solely responsible for all debts of the business. It is distinct from its proprietor. Thus, the
accounting records of the sole proprietorship do not include the proprietor's personal financial
records.
 PARTNERSHIP- business owned by two or more persons who bind themselves to contribute
money, property or industry to a common fund, with the intention of the dividing the profits
among themselves. Each partner is personally liable for any debt incurred. Separate
organization distinct for personal affairs of each partner.
 CORPORATION- business owned by its stockholders. It is an artificial being created by
operation of law, having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence. Separate legal entity.

5. WHAT ARE MSMES? WHAT PURPOSES DOES IT SERVE FOR ECONOMIC

DEVELOPMENT?
Big business may be the country's top taxpayers and highest paying employers. Collectively,
though, micro, small and medium enterprises (MSMEs) provide employment for 61% of the country's
labor force. Accordning to the National Statistics Office, MSMEs in 2010 accounted for 99.6% of the
total business enterprises at 777,687. The 99.6% is broken down as follows: micro enterprises,
91.6% and SMEs, 8%. 
In terms of economic output, MSMEs account for only 32%. Then, 68% of the economy's total
output can be attributed to the largest 0.4% of Philippine enterprises, 3,023 out of total 777,687 firms
counted in 2010. But MSMEs hold the key to our economic progress, the challenge lies in being able
to increase the productivity of the MSMEs; also, there's a nee md to fudther increase their number
and in the process help create more jobs. 
 Micro - those with assets, before financing, of P3.0million or less and employ not more than
nine workers.
 Small- those with assets, before financing, of above P3.0million to 15miliion and employ 10 to
99 workers.
 Medium-those with assets, before financing, P15million to P100million and employ 100 to 199
workers.
More than ever, the government should promote and build and entrepreneurial culture and
environment to spark an entrepreneurial revolution among the Filipino youth.

6. WHAT ARE THE TYPES OF BUSINESS? DISTINGUISH THEM.

 SERVICES- sellings people time
 TRADER- buying and selling products. Wholesaler and retailers.
 MANUFACTURE- designig products, converting. 
 RAW MATERIALS- growing or extracting raw materials. 
 INFRASTRUCTURE- selling the utilization of infrastructure.
 FINANCE- receivingdeposits, lendng and investing money,
 INSURANCE- pooing the premiums of many to meet claims of a few. 

7. GIVE THE THREE DEFINITIONS OF ACCOUNTING.

 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
decisions. 
 Accounting is an information system that measure, processes and communicates financial
information about an economic entity.
 Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the information. 

8. ENUMERATE AND DISTINGUISH THE FOUR PHASES OF ACCOUNTING.

Broadly speaking, there are four steps, or phases, which take place in accounting. These are:
 Identification and Record
 Sorting and Classification
 Summarizing and Presentation
 Interpretation

In the first stage, the accountant will need access to all financial records and paperwork the
business or individual. This may include receipts, invoices and vouchers. From these articles, the
accountant can create a log containing every financial transaction of the business or individual.  From
this log, the accountant can get an idea of how much money is being spent and earned. An
accountant is not permitted to create and log transactions which have not happened. Also, an
accountant should not omit delete records from the log. Instead, they should make amendments to
records in the log, along with the reason why the amendment was needed.
 In the second stage, all the transactions in the log must be sorted and categorized into different
groups. First of all, as stated above, the accountant must identify whether each transaction
represents income or expenditure. After this has been identified, the account must link the transaction
with the appropriate field within the business or the individual's life. For example, within the
expenditure category, you may have groups for expenses such as travel, marketing and production.
In the third stage, the accountant must communicate a summary of the figures they have found,
and how they found them. Computer software may be used to create texts such as graphs, charts,
spreadsheets and invoices, as well as having the information clearly presented in a written article.
The final stage requires that the account works closely with the business or individual in order to
make them more efficient and increase their profit. For example, there may be particular areas of
expenditure which the account feels are too high, and need to be reduced. They will then work with
the company or individual in order to come up with methods and processes to reduce these areas of
expenditure.

The four phases of accounting are as follows:

 Recording
Recording is the first phase of accounting in which all monetary information is recorded in order to
make a record that can be used for various needs. Accounting records are used for taxes, budgeting,
reporting and business plans.

Without recording the monetary transactions it will be hard to determine where a business or person
has spent their money. Accounting is used in personal and business situations. 

During the recording phase, transactions have to be classified into categories. This is for tax
purposes. In taxation there are different categories that can provide savings.

 Classifying
In order to determine how much one spent in each of the categories one has to classify the records.
For example in a business, office supplies can be deducted from the taxes. Dining and entertainment
can also be used as a deduction. 

 Summarizing
After the recording phase and the classification stage comes summarizing the various categories into
a linear sheet of information that is easier to read. From this one can discover how much was spent,
what was kept, what was paid out, where and other information. 

The summarizing stage makes the interpretation of the data that much easier. One has to be able to
interpret the data to find out what may be changed, what has changed, and where the person or
company is going financially. Often in the interpretation things such as where one can budget better
or where one needs to find money for the next year can be found. 

 Interpreting 
If you look at it from a business standpoint there may be equipment that is needed so interpreting the
data can help find the extra money for the equipment. It can also be used as a phase to determine
stock information.

The four phases of accounting are recording, classifying, summarizing and interpreting. Some people
who work in finance often say that communication, although it is not officially one of the accounting
phases, it should still be considered an important step. This means that good communication must be
observed during all four phases of the accounting cycle to help things run as smoothly as they
possibly can.

• The first phase of accounting is recording which can also be called bookkeeping. During this phase,
any financial transactions that have taken place over the financial period, whatever time frame that
may be, must be chronologically recorded in a systematical way. The accounting period can either be
each month, quarterly or at the end of every year.  The correct books and databases must also be
used.
• The second phases of accounting is classifying, which means that all financial items and
transactions must be sorted, organized and grouped under certain names, categories and account
depending on the nature of the transaction for example, travel expenses. 
• The third phrase is summarizing means that all data has to be summarized at the end. It is essential
that this summarized data is easy to understand for people who work within the accounting
department and for people who are not, as these files may be read by people from all departments
within the company. Visual aids such as charts and graphs may also be used alongside the data
presented.
• The final stage of accounting is interpreting which is where people look at the data that has been
recorded, classifiedand summarized and they interpret that data. By doing this, the people examining
the data will be able to reach informed decisions about the financial status of a company. This data
will also be used to come up with future financial plans for the business.

9. WHY HAS A RECORDING SYSTEM, THE DOUBLE-ENTRY, DEVISED IN MEDIEVAL

TIMES LASTED FOR SO LONG?
There are two main reasons:
 it provides an accurate record of what has happened to a business over a specified period of
time; and
 Information extracted from the system can help owner or the manager operate the business
much more effectively.

10. DISCUSS THE CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING

PRINCIPLE.
The GAAP usually depends on how well it meets three criteria:
 Relevance- to the extent that it results in information that it meaningful and useful to those
who need to know something about a certain organization.
 Objectivity- to the extent that the resulting information is not influenced by the personal bias
or judgement of those who furnish it. It connotes reliability and trustworthiness and verifiability.
  Feasibility- to the extent that it can be inplemented without undue complexity or cost. These
criteria confict witg one another. In some cases, the most relevant solution may be the least
objective and least feasible. 

11. WHAT DOES THE TERM GAAP MEAN? 

It encompass the conventions, rules and procedures necessary to define accepted accounting at a
partocular time. 

12. WHAT IS MEANT BY THE CONCEPT OF STABLE MONETARY UNIT? IS THIS

ASSUMPTION REALISTIC? WHY IS IT USED IN ACCOUNTING?
The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively
stable. It allows accountants to add and subtract peso amounts as though each peso has the same
purchasing power as any other peso at any time. This is the basis for ignoring the effects of inflation
in the accounting records.

13. WHAT IS PERIODICITY CONCEPT? WHY IS IT IMPORTANT FOR BUSINESS ENTITIES

TO PROVIDE PERIODIC INFORMATION?
An entity's life can be meaningfully subdivided into equal time periods for reporting purposes. It will be
aimless to wait for the actual last day of operations to perfectly measure the entity's profit. This
concept allows the users to obtain timely information to serve as a basis on making decisions about
furmture activities. For the purpose of relorting to outsiders, one year is the usual accounting period.

14. WHAT IS MATERIALITY?

Financial accouting is only concerned with information that is significant enough to affect evaluations
and decisions. Materiality depends on the size and nature of the item judged in the particular
circumstances of its omission.