Accounting, Business, and

Management (ABM 1)
 A business requires investments to enable it to pay for the
infrastructure, equipment and personnel. Only after a skillful
combination of these elements can a business generate a
revenue stream.
 The model illustrates how a business is structured to provide a customer proposition. The business
model is built on five activities:

•1. First, the investors provide the required capital for the business. The cash investment will then 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); or spent on operating costs such as salaries, rentals and utilities.
•3. The combination of business resources 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 a cash inflow for the business.
•5. If there's an existing debt from banks, the cash inflow from 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 into other assets or spent on operating costs (back to stage 2). In the normal course of
business, this whole process will earn profits on which tax will have to be paid. Any profit after tax can
continue to be reinvested in the cycle or paid out to the owners as a "return" on their investments.
Types of Business
 FORMS OF BUSINESS ORGANIZATIONS

• Sole Proprietorship. This business organization has a single owner called the proprietor who
generally is also the manager. Sole proprietorships tend to be small service-type (e.g. physicians,
lawyers and accountants) businesses and retail establishments.
• Partnership. A partnership is a business owned and operated by two or more persons who bind
themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
• Corporation. A corporation is a business owned by its stockholders. It is an artificial being created
by the operation of law, having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
 ACTIVITIES IN BUSINESS ORGANIZATIONS

•Financing Activities
Organizations require financial resources to obtain other resources used to produce goods and
services. They compete 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.
•Investing Activities
Managers use capital from financing activities to acquire other resources used in the transformation
process-that is to transform resources from one form to a different form, which is more valuable to
meet the needs of the people.
•Operating Activities
Operating activities involve the use of resources to design, produce, distribute the market goods and
services. Operating activities include research and development, design and engineering, purchasing,
human resources, production, distribution, marketing and selling, and servicing.
 PURPOSE AND PHASES OF ACCOUNTING
The accounting function is part of the broader business system, and does not operate in isolation. It
handles the financial operations of the business but also provides information and advice to other
departments. Business transactions are the economic activities of a business. Recording these
historical events is a significant function of accounting. Accounts are produced to aid management in
planning; control and decision-making and to comply with regulations. Before the effects of
transactions can be recorded, they must be measured. In order that accounting information will be
useful, it must be expressed in terms of a common financial denominator-money. Money serves as
both a medium of exchange and a measure of value. To measure a business transaction, the
accountant must decide when the transaction occurred (recognition issue), what value to place on the
transaction (valuation issue) and how the components of the transaction should be classified
(classification issue). By simply measuring and recording transactions, the resulting information will be
of limited use. To be useful in making decisions, the recorded data must be classified and
summarized. Classification reduces the effects of numerous transactions into useful groups or
categories. Summarization of financial data is achieved through the preparation of financial
statements. These summarize the effects of all business transactions that occurred during some
period. After going through the preceding phases, it is imperative that the result of the summarization
phase be interpreted or analyzed to evaluate the liquidity, profitability and solvency of the business
organization. Accounting provides the decision-makers with information to make reasoned choices
among alternative uses of scarce resources in the conduct of business and economic activities.
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally Accepted Accounting Principles are uniform set of accounting rules, procedures, practices,
and standards that are followed in preparing the accountant's reports- financial statements.

Some of the Generally Accepted Accounting Principles that are followed and are still applicable for use
are:

1. Cost Principle - this principle requires that assets should be recorded at original or acquisition cost.
Example, if we buy a land today, say the cost is 1 Million, three years after, the current value of the
land is approximately 2.5 Million. What will prevail in the record is the 1 Million and not the 2.5 Million
because cost is definite and verifiable. The value exchanged at the time land is acquired generally can
be objectively measured. This principle draws controversy but despite this, cost continues to be used
in the accountant's reports because of its reliability. However, the Philippine Financial Reporting
Standards (PFRS) sacrifice’s reliability and verifiability in favor of fair value measurement.
•Objectivity Principle - this principle requires that accounting records should be based on reliable and
verifiable data as evidence of transactions.
•Materiality Principle - this principle dictates practicability to rule over theory in determining the valuation
of an item. To determine whether the item is material or not, it is a matter of professional judgment.
 
•Matching Principle - this is the combined concept of Revenue Recognition and Expense Recognition
Principles. Revenue should be recognized when earned and corresponding expense should be
recognized when incurred during the same period as revenue is earned.
Proper matching of revenue and expense are called for. Example, revenues and expenses are
recognized only when they are earned and incurred in the same year. In other words, you could not
deduct the expenses incurred in 2013 from the revenues earned in 2014. It is a violation of this principle.
 
•Consistency Principle - this principle requires that accounting methods and procedures should be
applied on a uniform basis from period to period to achieve comparability in the financial statements.
However, per PAS No.1, Presentation of Financial Statements, it allows changes if justifiable and
disclosed in the financial statements, that is, when there is a significant change in the nature of the
business operation.
 
•Adequate Disclosure Principle - this principle requires that financial statements should be free from any
material misstatement; that if there is any, proper disclosure should be made.
 BASIC ACCOUNTING ASSUMPTIONS

• Accounting Entity - this assumes that from the accounting point of view, the business is considered
as "an entity that is separate and distinct from the owner or management".
• Going Concern – The Financial Statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for the foreseeable future.
• The time period principle (or time period assumption) is an accounting principle which states that a
business should report their financial statements appropriate to a specific time period.
• Unit of Measure - The unit of measure concept is a standard convention used in accounting, under
which all transactions must be consistently recorded using the same currency.
• Accrual Basis Assumption – the effects of other transaction and other events are recognized when
they occur and not as cash is received or paid.
 Why we need to prepare Financial Statements?

The objective of financial statements is to provide information about the financial condition and
operating results of an enterprise that is vital in making sound economic decisions.
 (6) complete set of Financial Statements, which are as follows:

1. Statement of Financial Position or Balance Sheet

2. Income Statement or Statement of Comprehensive Income (Statement of Financial Performance)
3. Statement of Changes in Equity Owner's Equity for Single Proprietorship Partner's Equity for
Partnership C. Shareholder's Equity for Corporation d. Member's Equity for Cooperatives
4. Statement of Cash Flows
5. Notes, comprising a summary of significant accounting policies and other explanatory information
and;
6. A Statement of Financial Position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in
each financial statements or when it reclassifies items in financial statements.
 Elements of Statement of Financial Position

Balance Sheet or Statement of Financial Position is a statement which shows the financial
condition of the business as of a given date. It shows the Assets, Liabilities, and Owner's Equity
which are called "Accounting Values".
These accounting values are considered as "Permanent Accounts".

1. Statement of Financial Position or Balance Sheet

2. Income Statement or Statement of Comprehensive Income (Statement of Financial Performance)
3. Statement of Changes in Equity Owner's Equity for Single Proprietorship Partner's Equity for Partnership C. Shareholder's Equity for Corporation d. Member's Equity for Cooperatives
4. Statement of Cash Flows
5. Notes, comprising a summary of significant accounting policies and other explanatory information and;
6. A Statement of Financial Position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in each financial statements or when it reclassifies items in financial statements.
•Assets - In layman's language these are things of value or rights that are owned and used by the
business in the conduct of its operations such as cash, and cash equivalents, merchandise inventory,
supplies inventory, prepaid expenses, accounts collectible by the business which we termed as
"Receivable", furniture and fixtures, machinery and equipment, building, land, etc .. It also includes
patents, copyrights, franchise, goodwill, trademarks, etc.

•Liabilities - In layman's language these refer to debts or financial obligations of the business that are
payable in cash or in some kind of assets such as Accounts Payable, Notes Payable, Salaries
Payable, Mortgage Payable, etc.

•Owner's Equity - In layman's language, this refers to money or value of property put by the
proprietor into the business to start with which refers to "Initial Investment". Owner's Equity will be
increased by profit and decreased by losses.
The Owner’s Equity presents what is left for the business after considering the Liabilities to the Assets
of the Company.
Question

What the Business Owns? Assets

What the Business Owed? Liabilities
What is left for the Business? Owner’s Equity
 Basic Accounting Equation

(A – L = OE) Assets – Liabilities = Owner’s Equity

or

(A = L + OE) Assets = Liabilities + Owner’s Equity

Let us say,

Assets is amounting to P 90,000, and Liabilities amounting to P 70,000.

How much is the Owner’s Equity?

Owner’s Equity – P 20,000

Presented here is the Statement of Financial Position of a Service Type Company.
At all times, the Total Assets must Equal to the Total
Liabilities plus Owner’s Equity as expressed in the equation;

Assets = P 995, 150

Liabilities = P 133,000
Owner’s Equity = P ?
The Statement of Financial Position provides us what
information?

•How much the Business Owns?

•How much the Business Owes?
•How much is left for the Business?
 Income Statement or Statement of Financial
Performance
-is a statement which shows the “results of operation” of the business for a given
period of time.
The performance of the enterprise is primarily measured in terms of the level of
income earned by the enterprise through effective and efficient utilization of its
resources.

The elements directly related to the measurement of performance in the income

statement are the income and expense.
Components of Income Statement

Revenue P xxx,xxx
- Expenses xxx,xxx
= Profit/Loss P xxx,xxx
Income Statement

The information presented in

income statement is usually
considered as the most
important information provided
by the financial accounting
because profitability is a
paramount concern to those
interested in the economic
activities of the enterprise.
As an entrepreneur, our
goal is to maximize our
profit.
The business makes “profit” if the
revenue earned is bigger than the
expenses incurred. “Loss” if the
expenses incurred is bigger than the
income earned during the period.  
The relationship of the Statement of Financial
Performance (Income Statement) and the Statement of
Financial Position (Balance Sheet)
The Profit earned for a period is then
reflected to the Balance Sheet as it
increases the Owner’s Equity.
 EXPANDED ACCOUNTING EQUATION
The statement of changes in financial position usually reflects income
statement elements and changes in balance sheet elements.

ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
A = L + OE 

 Assets = Liabilities + Owner’s Equity (+Revenue-Expenses)

Using the Equation,
Assets = Liabilities + Owner’s Equity (+Revenues – Expenses)
Assets = P 995,150
Liabilities = 133,000
Owner’s Equity = 840,000
Revenues = 80,000
Expenses = 57,850

Assets = Liabilities + Owner’s Equity

(+Revenues – Expenses)

P 995,150 = P 133,000 + P 840,000

+ 80,000 (Revenue)

- 57,850 (Expenses)

P 862, 150
Statement of Changes in Owner’s Equity
- Is a financial statement that summarizes the changes in equity for a
given period of time. The beginning equity is increased by the
additional investment and profit, and it decreases by a withdrawal or
loss.
Examining the
Statement of Changes
in Equity
Owner’s Equity at the End P 862,150
Less: Owner’s Equity at the Beginning 850,000
Increase in Owner’s Equity P 12, 150

The increase in Owner’s Equity by P 12,150 is accounted for as follows:

Profit for the Month (Increases Owner’s Equity) P 22,150

Less: Owner’s Withdrawal (Decreases Owner’s Equity) 10,000
Net Increase in Owner’s Equity P 12,150
 Elements of Financial Statements and Account Titles
Used
The following are the commonly used Account Titles
ASSETS- Classified into two: Current Assets and Non-Current Assets
Current assets – refers to all assets that are expected to be realized, sold or consumed within the enterprise’s normal
operating cycle.
Cash- the account title to describe money, either in paper or in coins and money substitutes like check, postal
money orders, bank drafts and treasury warrants. (Cash on Hand, Cash in Bank)
Petty cash fund- the account title for money placed and set aside for petty or small expense.
Cash equivalents- short term and highly liquid instruments that are readily convertible into cash and they
present insignificant risk of changes in values because of changes in interest rates.
Notes receivable- this is a promissory note that is received by the business from the customer arising from
rendering of services, sale of merchandise, etc.
Accounts receivable- the account title for amounts collectible arising services rendered to a customer or client on credit
or sale of goods to customers on account.
Estimated uncollectible accounts – this is an asset offset or a contra asset account.
Accrued income- the amount of income earned but not yet collected.
Advances to employees – the account title for amounts collected from employees allowing them to make cash advances
which are deductible against their salaries or wages.
Inventories – these are assets which are held for sale in the ordinary course of business; in the process of production for
such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Prepaid expenses- this are paid in advance but are not yet incurred or have not yet expired such as prepaid rental, prepaid
insurance, prepaid interest, prepaid advertising, etc.
Unused supplies – account title for cost of stationery and other supplies purchased for use but are left on hand and still
unused.
Non-Current Assets- these are all other assets not classified as current should be classified as non-current assets.
Property Plant and Equipment – are tangible assets which are held by an enterprise for use in production or supply of
goods and services, for rental to others, or for administrative purposes, and are expected to be used during more than
one period.
Land – account title for the site where the building used as office or store is constructed.
Building – account title for finished construction owned by the business where operations and transactions took
place.
Machinery and equipment- includes calculators, typewriters, adding machines, computers, steel filing cabinets
and the like.
Furniture and fixtures- includes chairs, tables, counters, display cases and the like.
Accumulated depreciation- this is an asset offset or contra-asset account.
Intangible assets- these are identifiable non-monetary assets without physical existence.
 
Liabilities
Current liabilities- are financial obligations of the enterprise which are expected to be settled in the normal
operating cycle; due to be settled within one year from the balance sheet date.
Accounts payable- a financial obligation of an enterprise that constitutes an oral or verbal promise to pay.
Notes payable- an account payable in nature but only the obligation is evidenced by a promissory note.
Accrued expenses- these are expenses incurred by the enterprise but are not yet paid.
Unearned income- this is an account title for an income collected or received on advance and is not yet
considered as “earned”.
Non-current liabilities- are financial long-term obligations of the enterprise which are due and payable for more
than one year. This usually occurs in a corporate form of business organization.
Notes-payable (long-term) – same nature with the notes payable short-term but only, requires the payment for
more than a year.
Mortgage payable- a financial obligation of the enterprise which requires a fixed or tangible property to
be pledged as a collateral to ensure payment.
 
Owner’s Equity or Capital – is the residual interest in the assets of the enterprise after deducting all its liabilities.
It is increased when there is profit or additional contribution by the owner.
Withdrawal- is the withdrawal of the value of the company’s capital.
Income and Expense Summary- this is a temporary account created at the end of the accounting period where
Income and expenses are temporarily closed to this account.
 
 INCOME or REVENUE RELATED ACCOUNT TITLES

Sales-refers to the account title for merchandise sold either in cash or on account
Sales return and Allowances-this is a reduction from sales account for goods that were sold but were returned by the
buyer for bad order or not conforming with the order.
Sales Discounts-refers to discounts given to buyers for early payment of merchandised purchased on account or
payment within the discount terms.
Service Income-In general, this is the account title used for all types of income derived from rendering of service.
Professional Income-the account title generally used by professionals for income earned from the practice of their
profession or may be specified as “Accounting” or “Auditing Fees Income” for accountants, “Legal Fees Income” for
lawyers, Dental Fees Income for dentists, Medical Fees Income for Doctors, etc.
Rental income-for incomed earned n buildings, space or other properties owned and rented out by the business as the
main line of its activity.
Interest Income-for income received by the business arising from an amount of money borrowed by the customer
and is usually covered by a promissory note.
Miscellaneous Income-for incomed earned by the business which is not the main line of its activity and could not
clearly classified.
 
 INCOME or REVENUE RELATED ACCOUNT TITLES

COST AND EXPENSES COSTS

Cost of Sales or Cost Good Sold-refers to cost to produce and sell the merchandise (under the inventory system).
Freight-In – refers to transportation cost incurred in buying goods.
Purchases-the account title for “merchandise” purchased under the periodic inventory system.
Purchase Returns and Allowances-refers to cost of merchandise that were purchased but returned to the suppliers
for bad order or does not conform with the specifications (Periodic perpetual inventory System).
Purchase Discounts- refers to discount availed for early payment of merchandise purchased.
 
 INCOME or REVENUE RELATED ACCOUNT TITLES
EXPENSES
Freight-out – refers to transportation cost of merchandise sold.
Supplies Expenses-this represents cost of supplies that were used and consumed that bears specific titles as office
supplies expense, store supplies expense, shop supplies expense, etc.
Rent Expense- for the paid or incurred for use of property, usually premises.
Repairs and Maintenance -for expenses incurred in repairing or servicing the buildings, machineries, vehicles,
equipment, etc., which are owned by the business.
Salaries Expense- for the compensation given to employees of a business.
Uncollectible Accounts- for the anticipated loss that that the business may incur arising from uncollectible accounts.
Depreciation Expense- for the portion of the cost of property and equipment or fixed assets that has expired based
on rational and systematic allocation procedure.
Taxes and Licenses- for the amount paid for business permits, licenses and other government dues except the
“Income Tax” paid which is not allowable by law of a deduction.
Insurance Expense- account title for the expired portion of the insurance premium paid.
Utilities Expense- the account title for telephone, light and water bills.
Miscellaneous Expense- any amount paid as expense which is not significant enough to warrant a particular
classification.
 Definition of Accounting

"It is an art of recording, classifying, summarizing in a significant manner and in terms of money,
transactions, and events which are, in part at least, of a financial character, and interpreting the results
thereof." - AICPA
•Recording - this is the phase of accounting which involves the routine and mechanical
process of writing down the business transactions and events in the books of accounts in a
chronological manner called "Journalizing".
•Classifying - this is the phase of accounting which involves sorting or grouping of similar
transactions and events into their respective kind and classes.
•Summarizing - this is the phase of accounting which involves the completion of the financial
statements and the accounting requirements as well.
•Interpreting - this is the phase of accounting which involves the "analytical and interpretative
works".
Accounting Cycle
The Accounting Cycle refers to a series of sequential steps or procedures performed to accomplish
the accounting process. The steps in the cycle and their aims follow:

•Step 1 – Identification of events to be recorded

•Step 2 – Transactions are recorded in the Journal
•Step 3 – Journal Entries are Posted to the Ledger
•Step 4 – Preparation of Trial Balance
•Step 5 – Preparation of the Worksheet including Adjusting Entries
•Step 6 – Preparation of Financial Statements
•Step 7 – Adjusting Journal Entries are Journalized and Posted
•Step 8 – Closing Journal Entries are Journalized and Posted
•Step 9 – Preparation of a Post-closing Trial Balance
•Step 10 – Reversing Journal Entries are Journalized and Posted

This cycle is repeated in each accounting period. The first three steps in the accounting cycle are
accomplished during the period. The fourth to ninth steps generally occur at the end of the period. The
last step is optional and occurs at the beginning of the next period.
 Step 1 – Identification of events to be recorded

BOOKKEEPING
•  
•Bookkeeping is the process of recording "systematically" the business transactions in a
"chronological manner". It is systematic because "it follows procedures and principles".
•It is chronological because the transactions are recorded in "order of the date of occurrence".

BUSINESS TRANSACTIONS
•  
Business transactions are exchanges of equal monetary values. This definition implies the following
concept of understanding:
1. For every value received, another value is given away as an exchange;
2. These values are measured in terms of pesos which are presumed to be equal. 
In every transaction, there is a Value Received, called Debit and Value Parted with, called Credit.