TYPES OF BUSINESS QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

 Service Business - provides intangible products (products with no Fundamental qualitative characteristics

physical form). Service type firms offer professional skills, expertise,
advice, and other similar products. Examples of service businesses are: Relevance - Information that is capable of making a difference in the
salons, repair shops, schools, banks, accounting firms, and law firms. decisions of users in their capacity as capital providers.
 Merchandising Business – They buys products at wholesale price and Predictive value - Information about an economic phenomenon that has
sells the same at retail price. They are known as "buy and sell" value as an input to the processes used by capital providers to form their
businesses. They make profit by selling the products at prices higher own expectations about the future.
than their purchase costs. A merchandising business sells a product Conformity value – Information should be helpful to decision makers who
without changing its form. Examples are: grocery stores, convenience are validating, making updates, adjustments or corrections to past
stores, distributors, and other resellers. predictions.
 Manufacturing Business - Buys products with the intention of using Materiality - Information is material if omitting, misstating or obscuring it
them as materials in making a new product. Thus, there is a could reasonably be expected to influence decisions that the primary users of
transformation of the products purchased. A manufacturing business general purpose financial reports
combines raw materials, labor, and overhead costs in its production Faithful representation – Information must contain factual transactions and
process. The manufactured goods will then be sold to customers. other events it purports to represent. To be a perfectly faithful
 Hybrid Business – are companies that may be classified in more than representation. It would be complete, neutral and free from error.
one type of business. A restaurant, for example, combines ingredients Completeness- Financial reports must contain all necessary information that
in making a fine meal (manufacturing), sells a cold bottle of wine would influence economic decision.
(merchandising), and fills customer orders (service). Neutrality - Absence of bias intended to attain a predetermined result or to
induce a particular behavior.
FORMS OF BUSINESS ORGANIZATION Information is neutral when it is fair or free from bias toward a desired result
or behavior.
1. Sole Proprietorship - is a business owned by only one person. It is easy to Free from error – Information must be free from material error to faithfully
set-up and is the least costly among all forms of ownership. The owner embody the representation contained therein.
faces unlimited liability; meaning, the creditors of the business may go after
the personal assets of the owner if the business cannot pay them. The sole Enhancing qualitative characteristics
proprietorship form is usually adopted by small business entities. Comparability - Quality of information that permits users to identify
2. Partnership – is a business owned by two or more persons who contribute similarities in and differences between two sets of economic phenomena.
resources into the entity. The partners divide the profits of the business Verifiability - helps assure users that information faithfully represents the
among themselves. In general partnerships, all partners have unlimited economic phenomena it purports to represent.
liability. In limited partnerships, creditors cannot go after the personal assets Direct Verification - means verifying an amount or other
of the limited partners. representation through direct observation,
3. Corporation - is a business organization that has a separate legal Indirect verification - means checking the inputs to a model,
personality from its owners. Ownership in a stock corporation is represented formula or other technique and recalculating the outputs using the same
by shares of stock. methodology.
4.Cooperative - is a business organization owned by a group of individuals Understandability - quality of information that allows users to comprehend
and is operated for their mutual benefit. The persons making up the group its meaning.
are called members. Cooperatives may be incorporated or unincorporated. Timeliness - Having information available to users before it loses its capacity
Some examples of cooperatives are: water and electricity (utility) to influence decisions.
cooperatives, cooperative banking, credit unions, and housing cooperatives.
BASIC ASSUMPTIONS IN ACCOUNTING
FUNCTIONS OF ACCOUNTING
1.Economic Entity Assumption - Indicates that personal and business record
 Recording (in journal book)
keeping should be separately maintained.
 Classifying (ledger)
2.Going Concern Assumption – Assumes that the entity will continue
 Summarizing (worksheet)
operating indefinitely for a period of time. Rationale why plant assets are not
 Analyzing and Interpreting reported at liquidation value.
 Communicating Objectivity – All documents used in record keeping must be
 Protecting the property of the business i evidenced by a source document that identifies the actual cost incurred.
 Preparing legal requirements Historical Cost – Helps to attain objectivity by considering only the
purchase price as the value of an asset. Once recorded, it remains
ACCOUNTING CYCLE
unchanged.
1.Identification of transactions 3.Monetary Unit Assumption – Assumes that money is the common
2.Journalizing the transaction. (recording in journal) denominator in measuring economic entity.
3.Posting from the Journals to General Ledger. 4.Periodicity (Time Period) Assumptions - Separates financial information
4.Preparing the Unadjusted Trial Balance. into time periods for reporting purposes.
5.Recording Adjusting Entries. Time Period – called an accounting period, it classified as either:
6.Preparing the Adjusted Trial Balance. Calendar year - 12 months period which starts from Jan.1 to Dec.
7.Preparing Financial Statements. 31 of the accounting period
8.Recording Closing Entries. Fiscal year – With 12 months but starts from any month other
9.Preparing a Post-Closing Trial Balance. than January.
10. Recording Reversing Entries. Interim Period – Business period within an accounting period. (weekly,
monthly, quarterly, semi-annual)
5.Accrual-Basis Assumption –Provides information about past transactions
and other future economic events that are most useful to users in making of
economic decisions.
BASIC PRINCIPLES OF ACCOUNTING
Measurement Principle
1.Cost Principle – also known as historical cost principle. Indicates that fair
value changes subsequent to purchase are not recorded in the accounts.
2.Fair Value Principle - Permits the use of fair value valuation in certain
situations.

BASIC FINANCIAL STATEMENTS

Financial Statements – formal reports prepared by accountants.

1.Statement of Financial Position – also known as the Balance Sheet shows

the financial condition of the business entity at any given time.
Elements: ASSETS, LIABILITIES & EQUITY
2.Statement of Comprehensive Income – also known as Income Statement it
shows the operating performance of the business entity for a given period.
Elements: Revenues and Expenses
3.Statement of Changes in Equity – (Capital Statement) – shows the
movements in the various elements of the capital for a certain period.
4. Cash Flow Statement – Explain the changes of cash and cash equivalents
during an accounting period.
a. Operating – the inflows and outflows of cash from the normal
operating activities of the business.
b. Investing – the inflows and outflows of cash from the sale or
purchase of assets other than inventory.
c. Financing – the inflows and outflows of cash from the owners
and creditors of the enterprise.
5. Notes to the Financial Statements