Acc Module 1 Accounting Vs Bookkeeping

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Introduction to Accounting

A business is an organization engaged in the trade of goods, services, or both to consumers,


generally to earn profit and increase the wealth of the owners. It can be classified according to
nature or according to legal form.

Types of business according to nature:

1. Service company – the product offering of this type of business is more on the services
and less on goods. These companies generate profits by charging a fee. Examples
include professional fees for accountants, doctors, and lawyers. Transportation
companies such as bus companies, delivery companies, and airline companies charge
fees for the transportation of individuals or goods from one location to another.
Educational institutions such as schools, colleges, universities and review centers, charge
tuitions fee for the lecture and other educational services rendered.

2. Merchandising company – this is sometimes referred to as a trading business or a retail


company, buys goods from suppliers and sells them to customers at a profit, without
alteration or modification to the product. Examples include department stores, book
stores, drug stores, hardware stores.

3. Manufacturing company – is sometimes referred to as production company, buys a type


of goods called raw materials from suppliers. These raw materials are then converted into
finished goods by the manufacturing company before selling them to the customers.
Examples include toy factories, appliances, or automotives.

Types of business according to legal forms:

1. Sole proprietorship – this from of business has only one owner called the proprietor. This is
the most legal form of business.

Advantages
a. Sole control over operations
b. Easy to establish as there are less requirements mandated by law as compared to
other forms of businesses.
c. No sharing of profits
d. Income from business is tax as personal income
e. Able to discontinue operations at will

Disadvantages
a. Assumption of unlimited personal liability
b. Does not have the benefit of a second opinion in decision making
c. No sharing in the losses
d. Difficulty raising investment capital
e. Life of business is dependent on the owners.

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Unlimited personal liability means proprietor may be compelled to use his/her
personal assets to pay the company’s debts, despite the owner and the company
being separate entity.

2. Partnership – it stems from an agreement between two or more persons (known as


partners) through a contract of co-partnership. The bind themselves to contribute
money, property, or industry, to a common funds with the intention of dividing the profits
among themselves.

Advantages:
a. Has the benefit of an opinion in decision making
b. Relatively easy to establish as there are less requirements mandated by law
c. More investment capital is available
d. Partners pay only personal income tax
e. Partners share in the loss

Disadvantages:
a. Prone to disagreement in the decision making
b. Partners assume unlimited personal liability
c. Partners share in the profit
d. Change in ownership requires dissolution of partnership.

3. Corporation – are covered by the Revised Corporation Code. A corporation as an


artificial being created by law. The persons who originally organized the corporation shall
be known as the incorporators and any person who invests in the corporation becomes
an owner known as stockholders. The management of corporation is centralized in the
corporation’s board of directors.

Advantages:
1. Stockholders has limited liability
2. Can raise the most investment capital
3. Life of the business is unlimited
4. Ownership is easily transferrable without the need to dissolve the business and without
the consent of other stakeholders.

Disadvantages:
a. Earnings from investment in corporations are taxed twice – corporate income tax
and final tax on dividend income.
b. Difficult to establish as it is more expensive to start up
c. Difficult to establish as it is closely regulated by the government agencies

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What is Accounting?

Accounting can commonly be described as the language of business – through the information
it delivers, it seeks to communicate a variety of ideas to different users of financial information.

Its function is to provide quantitative information intended to be useful in making economic


decision.

According to the AICPA (American Institute of Certified Public Accountants), accounting can
also be defined as the art of recording, classifying, and summarizing significant manners in terms
of money, transactions, and events which are, in part at least, of financial character, interpreting
the results thereof.

According to AAA (American Accounting Association), accounting is the process of identifying,


measuring, and communicating economic information to permit informed judgement and
decisions by users of information.

Process of accounting

a. Identifying – the company must identify economic events relevant to its business. The
economic events may include sale of goods to customers, provision of services to clients,
purchase of supplies from a vendor, manufacturing of products and many others.

b. Measuring – once the economic events are identified, it must measure those events in
order to provide a history of its financial activities. It is the quantifying of an economic
events into the financial terms by using monetary unit.

c. Communicating – after measuring the economic events, the company then


communicates the collected information to the users of financial information. This is done
through the use of Financial Statements.

Accounting vs Bookkeeping

Bookkeeping – mainly related to identifying, measuring, and recording financial transactions.


The objective is simply to keep a record of all financial transaction of business; therefore, the
management of a business cannot make a decision by solely relaying on the data provided by
bookkeeping.

Accounting – is the process of summarizing, interpreting, and communicating financial


transaction which were classified in the ledger account.

Bookkeeping is part of accounting.

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Importance of Accounting

1. Keeps a record of business transactions


Accounting is important as it keeps a systematic record of the organization’s financial
information. Up-to-date records help users compare current financial information to historical
data. With full, consistent, and accurate records, it enables users to assess the performance of a
company over a period of time.

2. Facilitates decision-making for management


Accounting is especially important for internal users of the organization. Internal users may
include the people that plan, organize, and run the organization. The management team needs
accounting in making important decisions. Business decisions may range from deciding to
pursue geographical expansion to improving operational efficiency.

3. Communicates results
Accounting helps to communicate company results to various users. Investors, lenders, and other
creditors are the primary external users of accounting information. Investors may be deciding to
buy shares in the company, while lenders need to analyze their risk in deciding to lend. It is
important for companies to establish credibility with these external users through relevant and
reliable accounting information.

4. Meets legal requirements


Proper accounting helps organizations ensure accurate reporting of financial assets and
liabilities. Tax authorities, such as the Bureau of Internal Revenue (BIR), use standardized
accounting financial statements to assess a company’s declared gross revenue and net
income. The system of accounting helps to ensure that a company’s financial statements are
legally and accurately reported.

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