Business Fundamentals & Accounting Principles
Business Fundamentals & Accounting Principles
Accounting
Course Material No. 2
Business Fundamentals
& Accounting
Principles 1
LEARNING OUTCOMES
TABLE OF CONTENTS
Starting Point
Pretest 4
Before you start, try answering the following
questions. Overview of Business
5
1. What’s your understanding of a business?
Types of Business
_________________________________________
2. Why do you think accounting is important to
7 Organizations
business?
Forms of Business
________________________________________
3. Do you have plans of putting up a business in the
8 Organizations
future? If so, what type of business do you want to
enter into?
Accounting Concepts
________________________________________
9 and Principles
11 Lesson Summary
Key Terms
12
Post Test
12
References
12
4
Business FUNDAMENTALS OF ACCOUNTING• NU LAGUNA
Fundamentals &
Accounting
Principles
In this lesson, you will be
introduced to the concept
of business, business
models, business types and
forms of business
organizations. You will also
understand accounting
principles and concepts and
its relevance to businesses.
Overview of Business
What is a business?
• A business is an organization in which basic resources (inputs), such as materials
and labor, are assembled and process to provide goods or services (outputs) to
customers.
• The objective of a business is to earn a profit.
• Profit is the difference between the amounts received from customers for goods
and services and the amounts paid used to provide the goods and services.
Business Model
A business model is an outline of how a company plans to make money with its product
and customer base in a specific market. At its core, a business model explains four things:
• What product or service a company will sell
• How it intends to market that product or service
• What kind of expenses it will face
• How it expects to make a profit
The figure above illustrates how a business is structured to provide a customer proposition.
The business model is built on 5 activities:
1. First, the investors provide the required capital for the business. The cash
investment will be held in a bank account.
2. The cash in the business can be:
• converted into another type of asset that will be used in the business (e.g.
equipment) or sold (e.g., inventory)
• spent on costs such as salaries, rentals and utilities.
3. The combination of the above resources (e.g., inventory and equipment) provides
the basis for producing the products or services.
4. The sale of a product or service generates an asset called a receivable. This asset
once collected will produce cash inflow for the business.
5. If there’s an existing debt from the banks, the cash inflow from the collections will
be used to provide the debt providers with interest on their loans to the company.
The rest of the cash can be sent back to the cycle by being converted in o other
assets or spent on operating costs (back to stage 2).
The model illustrates the way money flows around a business and provides the basis of
accounting. To manage a business effectively, it is important to know how the cash has
been spent and how profitable the products or services have been to the business. The
availability of accounting information helps management to make judgments on how to
improve the performance of the business.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 7
There are businesses that may be classified under more than one type of business. A
bakery, for example, combines raw materials in making loaves of bread (manufacturing),
sells hot pandesal (merchandising), and caters customers’ orders in small coffee table
servings of ensaymada and hot coffee (service).
8 FUNDAMENTALS OF ACCOUNTING• NU LAGUNA
There are three (3) forms of business organization: single or sole proprietorship, partnership,
and corporation. The following table shows a comparison among the three:
Single / Sole • This is a business wholly owned • The owner keeps all • The owner keeps all
Proprietorship by a single individual. the profits. the profits.
• It is the easiest and the least • The owner makes all • The owner makes all
expensive way to start a the decisions. the decisions.
business and is the most • It is easy to form and • It is easy to form and
common form of business operate. operate.
organization.
Partnership • A form of business owned by • Higher capital • The profits are divided
two or more persons. because two or among the partners.
• The details of the arrangement more persons will • A partner can be held
between the partners are contribute to the liable for the acts of
outlined in a written document common fund. the other partners.
called articles of partnership. • It is easy to operate • In a lawsuit, the
• Profits are divided among like a sole/single personal properties of
partners based on their agreed proprietorship. the partners can be
sharing. held beyond their
• The owner is called a partner. contributions and may
be used to answer for
any liability of the
partnership.
Last time, we were able to learn that Accounting is considered the language of business.
In order for business entities to determine their financial performance, accounting is
needed. There are different forms of business entities according to its organization and
operations. A business can be organized as a sole proprietorship, a partnership or
corporation. A business can be operated as a service, merchandising and manufacturing
entity. Sometimes we want to determine our performance compared to similar
companies, however, since there are a lot of ways and assumptions to present financial
reports, we need to have a generally accepted rule for accounting.
10 FUNDAMENTALS OF ACCOUNTING• NU LAGUNA
1. Business entity principle – a business enterprise is separate and distinct from its
owner or investor.
• If the owner has a barber shop, the cash of the barber shop should be
reported separately from personal cash.
• The owner had a business meeting with a prospective client. The expenses
that come with that meeting should be part of the company’s expenses. If
the owner paid for gas for his personal use, it should not be included as
part of the company’s expenses.
2. Going concern principle – business is expected to continue indefinitely.
• When preparing financial statements, you should assume that the entity
will continue indefinitely.
3. Time period principle – financial statements are to be divided into specific time
intervals.
• Philippine companies are required to report financial statements annually.
• The salary expenses from January to December 2021 should only be
reported in 2032.
4. Monetary unit principle – amounts are stated into a single monetary unit.
• Jollibee should report financial statements in pesos even if they have a
store in the United States.
• McDonalds should report financial statements in dollars even if they have
a branch here in the Philippines
5. Objectivity principle – financial statements must be presented with supporting
evidence.
• When the customer paid Jollibee for their order, Jollibee should have a
copy of the receipt to represent as evidence.
• When a company incurred a transportation expense, a voucher should be
prepared as evidence.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 11
LESSON SUMMARY
In this lesson, you were able to understand the concept of business, business models,
business types and forms of business organizations. You were also introduced to different
accounting principles and its relevance and application to business organizations.
12 FUNDAMENTALS OF ACCOUNTING• NU LAGUNA
KEY TERMS
POSTTEST
POST TEST
1. Give 5 examples of Philippine companies for each of the following business type:
a. Service
b. Merchandising
c. Manufacturing
2. If you are going to start a business in the future, what form and type of business
organization should you enter into? Explain.
MS Forms link to be sent later. Prepare for Seatwork/Quiz next Synchronous Session.
REFERENCES