Personal Copy/Hand Outs

Fundamentals Accountancy, Business and Management 1

Nature of the Business and Types of Business Organization
In general, a business is an organization in which basic resources (inputs), such as materials and labor are
assembled and processed to provide goods or services (outputs) to costumers. The objective of most businesses is to
maximize profits. Profit is the difference between the amounts received from customers for goods or services provided
and the amounts paid for the inputs used to provide the goods or services. Some businesses operate with an objective
other than to maximize profits. The objective of such non – profit Business is to provide some benefit to society, such as
medical research or conservation of natural resources. In other cases, governmental units such as cities operate water
works or sewage treatment plants on a non – profit basis. We will focus in this text on businesses operating to earn a
profit. Keep in mind, though, that many of the same concepts and principles apply to non – profit business as well.
There are (3) three different types of businesses that are operated for profit: manufacturing, merchandising
and service businesses. Each type of business has unique characteristics.
Service businesses provide services rather than products to customers.
- A type of business operations engaged in rendering services
Example: Laundry shop, Barber shop, Dental clinic
Merchandising businesses also sell products to customers. However, rather than making the products, they purchase
them form the other businesses (such as manufacturers). In this sense, merchandisers bring products and customers
together.
- A type of business operations engaged in the buying and selling of goods
Example: supermarket, sari – sari store pharmacy
Manufacturing businesses change or process basic inputs into products that are sold to individual customers.
- Is a type of business operations engaged in the processing and production of goods to be sold. It involves in
purchasing and converting raw materials into finished goods.
Example: tuna cannery, pineapple cannery, shoe factory

The three (3) legal forms of business organizations are sole proprietorship, partnership, corporation or limited liability
corporation

A sole proprietorship is owned by one individual. This individual owns the firm’s entire asset and is responsible for all its
liabilities. From the legal point of view, the owner of a proprietorship is not separable from the business and is
personally liable for all debts of the business.
Advantages
● Ease of Entry and exit
● Full ownership and control
● Tax savings
● Few Government Regulations
Disadvantages
● Unlimited liability – the owner is personally liable to all business debts. Assets of the owner can be claimed by
the creditors if the business is in default on its obligations.
● Limited in raising capital – resources may be limited depending on the owner’s capability to raise fund and his
ability to borrow money from financial institutions.
● Lack of continuity – ceases upon the death or retirement of owner.
A partnership is owned by two or more individuals. It is a legal arrangement in which two or more persons agree to
contribute capital or services to the business and divide the profits or losses among themselves.
Advantages
● Ease of formation
● Additional source of capital
● Management base
● Tax implication – like the sole proprietorship, it does not pay income taxes. Income or loss of business is
distributed among the partners in accordance with the partnership and each partner reports his her portion
whether distributed or not on a personal income tax.
Disadvantages
● Unlimited Liability – the partner is personally liable to all business debts. Assets of the partners can be claimed
by the creditors if the business is default on its obligations.
● Limitations is raising capital – resources may be limited depending on the partner’s capability to raise fund and
his ability to borrow money from financial institutions.
● Difficulty of transferring ownership – it is difficult for a partner to liquidate or transfer ownership. It varies
depending on the conditions set forth on the partnership agreement.
A corporation is an artificial being created by operations of law, having the right of succession and the power attributed
and properties expressly authorized by law or incident to its existence. (Section 1, Corporation Code of the Philippines)
Advantages
● The corporation’s power of succession enables it to enjoy continuous existence.
● The continuity of corporate existence enables it to obtain strong credit line.
● Large scale business undertakings are made possible because many individuals can invest their funds in the
enterprises.
● The liability of its investors or shareholders is limited to the extent of their investment in the corporation
● The transfer of shares can be affected without the need for prior consent of other shareholders.
● Its smooth operation is guaranteed because of centralized management.
Disadvantages
● It is not easy to organize because of complicated legal requirements and high costs in its organization
● The limited liability of its shareholders may weaken credit capacity
● It is subject to rigid governmental control.
● Its centralized management restricts a more active participation by shareholders in the conduct of corporate
affairs.
Business organizations operate with the objective of maximizing its profits. It requires information primarily
financial information in order to make sound decisions for its different organizational activities. The three (3) types of
organizations activities are as follows:
1. Operating Activities pertain to the organization’s core business activities, such as manufacturing, distributing,
marketing and selling a product or service. These activities should provide the majority of a company’s cash flow
and will largely determine whether a company is profitable
2. Investing Activities involve the selection and management including disposal and replacement of long term
resources that will be used to develop, produce and sell goods and services. Investing activities include buying
land, equipment, buildings and other resources that are needed in the operation of the business and selling
these resources when they are no longer needed.
3. Financing Activities of an organization requires financial resources to obtain other resources use to produce
goods and services. They complete for these resources in financial markets. Financing activities are the methods
an organization uses to obtain financial resources from financial markets and how it manages these resources.
Primary sources of financing for most businesses are owners and creditors, such as banks and suppliers.
Repaying the creditors and paying a return to the owners are also financing activities.
 Analyzing Business Documents
1. To ensure that an entity’s accounting records meet the entity’s accounting, fiscal control and financial
reporting needs, the entity’s accounting records and source document should be:
a. Thoroughly examined and verified as to legitimacy such that supplier’s invoice must have its
accompanying approved purchase orders and delivery receipts are checked by the concerned
departments.
b. Accountable forms such as cash/ check voucher, official receipts, sales invoices. Purchase order,
delivery receipts, checks, petty cash voucher must be pre-numbered to facilitate control over
missing documents and to aid in locating documents when they are needed at a later date.
c. Document must be processed as soon as it is received to reduce the likelihood of error.
d. Only authorized personnel are allowed to receive payments from customers and an official receipt
must be issued for all sales transactions. At the end of the day, cash and check collections must be
reported and deposited to the bank on the next day. No cash from the collection must be used for
payment of bills and other expenses.
e. For cash payment to suppliers, cash/check vouchers should have the required documents attached
as evidence of payment due to them such as supplier’s invoices, bill invoices, purchase orders,
delivery receipts among others. Checks are prepared payable only to the account of supplier. Only
authorized personnel can approve the cash/check voucher.
f. Bank statements are to be received unopened by authorized personnel only. A review of the
contents for inconsistent check numbers, signatures, cash balances and payees and endorsements
are made. A designated person is responsible for the reconciliation of each account no later than 7
days upon receipt of the statement.
g. Expenses that are minimal can be paid through the petty cash fund.
h. Purchases are done only when the concerned departments have submitted their request and are
verified as to quantity, specification and prices. Approved purchase orders are given to accredited
suppliers only.
i. Payroll is prepared by the payroll master. Timesheets are prepared by the assigned personnel and
submitted semi-monthly and must include specific time spent. It must be signed by the employee
and approved by his immediate supervisor before submission to the payroll master for the
preparation of the payroll. Payroll can either be paid in cash or through a payroll system or can be
withdrawn at the bank’s ATM anytime.
2. When documents gathered are examined, checked and verified, these documents can now be used to
record the transactions for the business entity. However, transactions must be carefully analyzed using the
fundamental accounting equation. That is –
ASSETS = LIABILITIES + OWNER’S EQUITY
Asset is defined as the economic resources of the entity.

Liabilities are obligations of the business entity to outside creditors.

Owner’s Equity is the claim of the owners.

3. Policies and procedures on the Accounting Manual must be properly observed especially for processing
payments that are of significant value which may require the approval of the authorized personnel.
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Basic Accounting Equation
⮚ Every business has different transactions. Each transaction is recorded into the books of the business entity.
However, only transactions that can be measured in monetary value are the ones that can be used to record in
the books of the business.
⮚ Source documents are very important in the business such as sales invoices, official receipts, delivery receipts,
purchase orders.
⮚ For transactions involving the purchase of an item, it is usually supported by the purchase order of the company
and the sales invoice or official receipts coming from the suppliers.
⮚ For transactions involving sales, the company’s own sales invoices – cash or credit and official receipts are the
primary evidence of a sales transaction which is usually recorded in the books of the business as either service
revenue or sales.
 ⮚ The individual business unit is the business entity for which economic data are needed. This entity could be an
automobile dealer, a department store, or a grocery store. The business entity must be identified, so that the
accountant can determine which economic data should be analyzed, recorded, and summarized in reports.
⮚ The business entity concept is important because it limits the economic data in the accounting system to data
related directly to the activities of the business. In other words, the business is viewed as an entity separate
from its owners, creditors, or other stakeholders. For example, the accountant for a business with one owner (a
proprietorship) would record the activities of the business only, not the personal activities, property, or debts of
the owner.
⮚ The unit of measure concept requires that economic data can be recorded. Money is a common unit of
measurement for reporting uniform financial data and reports.
⮚ The cost concept is the basis for entering the exchange price, or cost of an item in the accounting records.
⮚ The resources owned by a business are its assets. Examples of assets include cash, land, buildings, and
equipment. The rights or claims to the properties are normally divided into two principal types: (1) the rights of
creditors and (2) the rights of the owners. The rights of creditors represent debts of the business and are called
liabilities.
⮚ The rights of the owners are called owner’s equity. The relationship between the two may be stated in the form
of an equation, as follows:
Assets = Liabilities + Owner’s Equity
This equation is known as the accounting equation. It is usual to place liabilities before owner’s equity in the
accounting equation because creditors have first.

The accounting equation can be expanded as

ASSET = LIABILITIES + CAPITAL/EQUITY + REVENUE – EXPENSES

Revenue is amount earned by the business during its operation while the Expenses are the cost incurred
associated with the revenue earned by the business.

⮚ Note that the assets are on the left side of the equation opposite the liabilities and owner’s equity. This
explains why increases and decreases in assets are recorded in the opposite manner (“mirror image”) as
liabilities and owner’s equity are recorded. The equation also explains why liabilities and owner’s equity must
follow the same rules of debit and credit.
⮚ The logic of debiting and crediting is related to the accounting equation. Transactions may require additions
to both sides, subtractions from both sides, and an addition and subtraction on the same but in all cases the
equality must be maintained.

Debits and Credits

⮚ Accounting is based on a double-entry system which means that the dual effects of a business transaction are
recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must be
one or more accounts debited and one or more accounts credited. Each transaction must affect at least two
accounts. The total debits for a transaction must always equal the total credits.
⮚ An account is debited when an amount is entered on the left of the account and credited when an amount is
entered on the right side. The abbreviations for debit and credit are Dr. and Cr. respectively.
⮚ The account type determines how increases or decreases in it are recorded. Increases in assets are recorded as
debits (left side of the Account) while decreases in assets are recorded as credits (on the right side). Conversely,
increases in liabilities and owner’s equity are recorded by credits and decreases are entered as debits.
⮚ The rules of debit and credit for income and expense accounts are based on relationship of these accounts to
owner’s equity. Income increases owner’s equity and expenses decreases owner’s equity. Hence, increases in
income are recorded as credit and decreases as debits. Increases in expenses are recorded as debits and
decreases credits.
⮚ Each accounting elements have different account titles that will be used by the business entity in accordance
with the industry practice.
⮚ The following are the common account titles used by the business:
 ASSET LIABILITY EQUITY REVENUE EXPENSES

Cash Accounts Payable ABC, Capital Service Revenue Purchases

Accounts Loans Payable ABC, Drawing Sales Purchase Returns

Receivable and Allowances

Notes Receivable Interest Payable Ordinary Share Sales returns and Purchase Discount
Allowances

Office Supplies Salary Payable Preference Share Sales Discount Freight In

Inventory Rent Payable Retained Earnings Interest Income Freight Out

Prepaid Expense Additional Paid-In Bad Debt Expense

Share

Land Income Summary Salaries and Wages

Expense

Building Rent Expense

Equipment Interest Expense

Furniture and Depreciation

Fixture Expense

Office Equipment Transportation

Expense

Accumulated Office Supplies

Depreciation Expense

Allowance for Telecommunication

Doubtful Accounts Expense

Taxes and Licenses

Expense

Utility Expense

Insurance Expense

Interest Expense

Miscellaneous
Expense

Accounting Events and Transactions

⮚ An accounting event is an economic occurrence that causes changes in an enterprise’s assets, liabilities and/or
equity. Events may be internal actions, such as the use of equipment for the production of goods and services. It
can also be an external event, such as the purchase of raw materials from a supplier.
⮚ A transaction is a particular kind of event that involves the transfer of something of value between two entities.
Examples of transactions include acquiring of assets from owner(s), borrowing of funds from creditors and
purchasing or selling of goods and services.
Charts of Accounts
⮚ A listing of all accounts and their account numbers in the ledger. The chart is arranged in the financial statement
order, that is, assets first, followed by liabilities, owner’s equity, income and expenses. The account should be
numbered in a flexible manner to permit indexing and cross referencing.
 FM TRADING
CHART OF ACCOUNTS

ASSETS
110 Cash REVENUE
120 Accounts Receivable 410 Laundry Revenue
130 Laundry Supplies 411 Sales
140 Prepaid Rent 412 Sales Returns and Allowances
150 Land 413 Sales Discount
160 Building
161 Accu. Depreciation – Building COST OF SALES
170 Furniture and Fixtures 510 Purchases
171 Accu. Depreciation – F/F 511 Purchase Returns and Allowances
180 Laundry Equipment 512 Purchase Discount
181 Accu. Depreciation – Laundry Equip. 513 Freight In

LIABILITIES EXPENSES
210 Notes Payable 514 Interest Expense
220 Accounts Payable 515 Salaries Expense
230 Unearned Consulting Revenues 516 Miscellaneous Expense
240 Insurance Payable 517 Rent Expense
518 Office Supplies Expense
OWNER’S EQUITY 519 Depreciation Expense – Building
310 F, Capital 520 Depreciation Expense – F/F
311 F, Withdrawals 521 Depreciation Expense – Laundry Equipment
320 Income Summary

The normal balance for Liabilities, Equity and Income is CREDIT

 The following are the account titles and their normal balances:
ACCOUNT TITLES

ASSETS DEBIT (+) CREDIT (-)

CASH ● Investment of owner ● Withdrawal of owner

● Service performed for Cash ● Payment of bill / expense
● Collection of an account ● Purchase of asset
● Sold Goods / Merchandise for Cash ● Payment of liability
● Paid for purchases for cash
● Paid merchandise for cash
● Paid supplies for cash

Accounts Receivable ● Service performed on account ● Collection made to customer on

● Sold goods / merchandise of credit account
or on account

Notes Receivable ● Received a Promissory Note ● PN is already paid

Office Supplies ● Purchase / bought /acquire office ● Used / consumed of office

supplies for use supplies

Prepaid Expenses ● Paid in advance ● Recognition of the expense /

consumed portion

Property, Plant and Equipment ● Purchase / Acquired / bought a PPE ●

● Investment of owner of any owner of
⮚ Land
any PPE.
⮚ Building
⮚ Equipment
⮚ Furniture and Fixtures

ACCOUNT TITLES DEBIT (-) CREDIT (+)

CONTRA - ASSET

Allowance for Bad Debts ● Allocation for bad debts

Accumulated Depreciation May happen if adjustments are need ● Allocation of depreciation on the
PPE

ACCOUNT TITLES DEBIT (-) CREDIT (+)

LIABILITY AND CAPITAL

Accounts Payable ● Payment of an account ● Purchase / Acquisition of an asset

● PN is issued for the accounts payable on account.
● Received a bill and did not
immediately pay
● Purchase goods / merchandise on
account
● Record unpaid expenses

Notes Payable ● Payment made on the PN ● Issued a PN for an account

Unearned Revenues ● Recognition of a revenue earned ● Received an advance payment for

a service

Loans Payable ● Payment of a loan ● Acquired a loan from a bank or

 financial institution

X, Capital ● Permanent withdrawal of owner ● Investment of owner

● Net Loss (Expenses is greater than ● Additional Investment
Income) ● Net Profit (Income is greater than
Expenses)

ACCOUNT TITLES DEBIT (-) CREDIT (+)

REVENUE

Revenue ● ● Performance of a service whether

for cash or on account

Sales ● ● Sold goods / merchandise for

cash
● Sold goods / merchandise on
account / on credit

ACCOUNT TITLES DEBIT (-) CREDIT (+)

CONTRA REVENUE ACCOUNT

Sales Returns and allowances ● Records goods returned

● Record refund on goods sold

Sales Discount ● Record cash discounts for goods sold

ACCOUNT TITLES DEBIT (-) CREDIT (+)

EXPENSES

Purchases ● Record goods / merchandise ●

bought / acquired for cash
● Record goods / merchandise
bought / acquired on account / on
credit

Freight In ● Record Freight Charges for goods

PURCHASED

Purchased Discount ● Record discount availed for early

payment

Salaries Expense ● Bill received for cash or on account

● Recognition of an expense for it was
Rent Expense
consumed, expired
Supplies Expense

Insurance Expense

Depreciation Expense

Utilities Expense

Interest Expense

Freight Out ● Freight charges for goods sold to

customer

ACCOUNT TITLES DEBIT (-) CREDIT (+)

CONTRA – EXPENSES

Purchase returns and ● Record goods returned bought for

allowances cash
● Record goods returned bought on
credit / on account

Purchase Discounts ● When paying an account within the

discount period

Below is the step on how to use the matrix.

1. The matrix comprises the common account titles used in a business.
2. There is the column for the debit and credit.
3. To know what side increases and decreases for each account title, you have to know their NORMAL
BALANCES. The normal balances of the accounts increases every time a transaction is recorded.
4. For Example for CASH – Debit (+) meaning the normal balance is DEBIT that every time you DEBIT cash it will
increase its balance.