Fundamentals of

Accounting
Course Material No. 2

Eugine John F. Blanco

Course Instructor
2 FUNDAMENTALS OF ACCOUNTING• NU LAGUNA

Business Fundamentals
& Accounting
Principles 1
LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
• Understand the concept of business, business models, business types
• Overview of
Business and forms of business organizations

• Review the types of business according to activities

Unit Outline
• Types of Business
Organizations • Give examples of businesses in their respective communities and identify

• Identify the advantages and disadvantages of the forms of business

• Forms of Business
Organizations • Enumerate the principles of accounting; differentiate each principle; and

apply the accounting principle in a business setting

• Accounting
Concepts and
Principles
RESOURCES NEEDED
For this lesson, you would need the following resources:

Accounting books and other references as uploaded in the files

section in MS Teams.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 3

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.

• Go to the website of SM Investments Corporation, once of the

Philippines’ largest conglomerates.
• Read through the company’s history and business profile.
• Relate your readings to our topic and share your thoughts with the
class.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 5

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

For a business to be successful, it needs to develop a product or service that customers

will pay for. It can be a new product or service that meets specific needs. It can also be a
better product or service. A business requires investments to be able to pay for the
infrastructure, equipment, and personnel. Only a skillful combination of these elements
can a business generate a revenues or sales.
6 FUNDAMENTALS OF ACCOUNTING• NU LAGUNA

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

Types of Business Organizations

Below are some types of businesses:

Type Activity Examples
Service This type of business offers Barber shops and beauty
professional skills, advice parlors, repair shops, banks,
and consultations. accounting and law firms

Merchandising This type of business buys at Grocery stores, book stores,

wholesale and later sells the sari-sari stores, hardware
products at retail. They stores
make a profit by selling the
merchandise or products at
prices that are higher than
their purchase costs. This is
also known as “buy and sell”
Manufacturing This type of business buys shoe manufacturing
raw materials and uses them businesses, car manufacturing
in making a new product, plants, food and beverage
therefore combining raw
materials, labour and
expenses into a product for
sale later on.

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

Forms of Business Organizations

There are three (3) forms of business organization: single or sole proprietorship, partnership,
and corporation. The following table shows a comparison among the three:

Form Characteristic / Feature Advantage Disadvantage

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.

Corporation • A corporation is a business • Can easily raise • It is relatively

organized as a separate legal additional funds by complicated to set up.
entity (artificial person) under selling shares of • Subject to several
the corporation law with stocks to the public. legal restrictions as
ownership divided into • Shareholders are not listed in the
transferable shares of stocks personally liable for Corporation Code of
• It is the law (Corporation Code of the debts of the the Philippines
the Philippines) that creates a corporation. The
corporation. extent of their
• The corporation begins its liability is limited to
existence from the date the their equity
 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 9

Articles of Incorporation is (ownership) in the

approved by the Securities and corporation.
Exchange Commission (SEC).
• The SEC (Securities and Exchange
Commission) is the government
agency primarily tasked to
regulate private corporations in
the Philippines.
• The owners are called
stockholders or shareholders.
• The word
‘Corporation/Incorporation/Corp
./Inc.’ appears in the name of
the entity.
• The voting rights of a
shareholder is generally based
on the percentage of ownership.
• The management of the business
is delegated by the shareholders
to the Board of Directors
• The ownership is divided into
shares and the value of one
share may be denominated at a
smaller amount, for example at
PHP10 per share.
• The proof of ownership is
evidenced by a stock certificate.

Accounting Concepts and Principles

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

6. Cost principle – accounts should be recorded initially at cost.

• When Jollibee buys a cash register, it should record the cash register at its
price when they bought it.
• When a company purchases a laptop, it should be recorded at the price it
was purchased.
7. Accrual Accounting Principle – revenue should be recognized when earned
regardless of collection and expenses should be recognized when incurred
regardless of payment. On the other hand, the cash basis principle in which
revenue is recorded when collected and expenses should be recorded when paid.
Cash basis is not the generally accepted principle today.
• When a barber finishes performing his services, he should record it as
revenue. When the barber shop receives an electricity bill, it should record
it as an expense even if it is unpaid.
8. Matching principle – cost should be matched with the revenue generated.
• When you provide tutorial services to a customer and there is a
transportation cost incurred related to the tutorial services, it should be
recorded as an expense for that period.
9. Disclosure principle – all relevant and material information should be reported.
• SM Group acquired a majority stake of another property; it should be
reported in the financial statements.
10. Conservatism principle – also known as prudence. In case of doubt, assets and
income should not be overstated while liabilities and expenses should not be
understated.
• In case of doubt, expenses should be recorded at a higher amount.
Revenue should be recorded at a lower amount.
11. Materiality principle – in case of assets that are immaterial to make a difference
in the financial statements, the company should instead record it as an expense.
• A school purchased an eraser with an estimated useful life of three years.
Since an eraser is immaterial relative to assets, it should be recorded as an
expense.

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

Business Partnership Service

Business Model Corporation Manufacture
Business Type Accounting Merchandising
Profit Business Type Accounting Principles
Sole Proprietorship Business Form Accounting Concepts

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

Ballada, W. et al (2021). Basic Financial Accounting and Reporting Made Easy

(23rd edition). Manila: DomDane Publishers & Made Easy Books
Label, W. (2016). Accounting for Non-Accountants (3rd ed.). Naperville: Sourcebooks.