INTRODUCTION TO ACCOUNTING

Module Objectives:
At the end of the module, the students must be able to:
a. Define Accounting and its nature;
b. Explain the functions of accounting in business;
c. Narrate the origin and history of accounting;
d. Differentiate the different branches of accounting;
e. Differentiate the forms of business organization.

ACCOUNTING, DEFINED

“Accounting as an Art”- Accounting is the art of recording, classifying, and 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 (American Institute of Certified Public
Accountants- AICPA).

It is a service activity, its function is to provide quantitative information, primarily financial in

nature, about economic entities, that is intended to be useful in making economic decisions
(Accounting Standards Council- ASC).

Accounting is the process of identifying, measuring and communicating economic information to

permit informed judgment and decision by users of financial information (American Accounting
Association- AAA).

Note: The most comprehensive definition is the one given by AICPA. It defines the entire process
within which the “accounting cycle” is observed.

NATURE OF ACCOUNTING

1. Accounting is a service activity- the main purpose of accounting to is to provide financial

information which are useful for decision makers.
2. Accounting is an art- It entails a behavioral knowledge which requires creativity and skill on
the part of those who will carry out the accounting process or cycle.
3. Accounting is a process- There are series of steps that need to be observed. Certain tasks
are needed to be done first before going to the next step. It is important to note that financial
information undergoes a delicate and specific step in order to protect their integrity.
4. Accounting only involves quantitative information- only business transactions involving money
are taken into account or those events which are in part at least of a financial character.

THE ACCOUNTING CYCLE AND FUNCTIONS OF ACCOUNTING

1. Identifying and Measuring accountable transactions and events.

The process of identifying involves the assessment of whether a transaction is considered a

“Business Transaction or Accountable Event”. An event or transaction is accountable if:

a. It is in a sum certain in money;

b. It has a two-fold effect on the accounting; and
c. It affects at least one accounting element (Asset, Liability, or Capital).

The process of measuring involves the determination of the monetary amounts at which the
transactions are recorded in the books of the business.

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 Note: In accordance with the Monetary Unit Principle, the amounts must be in terms of the
Philippine Currency.

2. Recording business transactions.

Recording involves the process of “Journalizing”. It is the chronological (the transaction which first
took place must be first to appear in the journal) recording of transactions and or events in
the book of the business. The book of the business is called the “Journal or The Book of Original
Entry”.

A journal shall look like this:

Date Particulars PR Debit Credit

2020
Mar. 31 Cash 01 P 1,000,000-
Kenny, Capital 13 P 1,000,000-
To record investment by
the owner

Apr. 1 Supplies 4 20,000-

Cash 01 20,000-
To record purchase of
supplies

3. Classifying transactions and events.

The process of classifying involves the grouping of similar transactions and positing them to
their respective ledger accounts. Ex. All cash transactions must be posted to “Cash Ledger”.
The process is called “Posting to the Ledger” and the tool used is called “Ledger”.

A ledger shall look like this:

Account Title: Cash Account No. 01

Date Debit Date credit
Mar. 31 P 1,000,000- Apr. 1 P 20,000

4. Summarizing transactions and events.

The process of summarizing involves the preparation of trial balance and a worksheet. In
particular, an Unadjusted Trial Balance is prepared in order to determine the correct
ending balances of each accounts. A Worksheet on the other hand, is prepared as a tool to
reflect corrections and adjustments made and aid in the preparation of financial statements.

5. Communicating or reporting the results to users of financial information.

The process of communicating involves the preparation of Financial

Statements. The following are the types of Financial Statements:

a. Income Statement/ Statement of Comprehensive Income (SCI)- Shows the financial information
related to the operations of the business: Income, Other Comprehensive Incomes, Expense,
Other Comprehensive Expenses, and Net income/ Net Loss.

Income- refers to any increase in the capital other than those invested or contributed by the
owner/s. Increases from the normal operations of the business.

Expense- refers to any decrease in the capital other than those drawn by the owner/s.

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 Net Income= Income- Expense; where Income>Expense Net
Loss= Income-Expense; where Income<Expense

b. Statement of Changes in Owners Equity (SCOE)- Shows the changes in the capital or
equity account through: Investments by the owner, Withdrawals by the owner, Net Income,
and Net Loss.

Investments or Contributions- refers to the increment in the capital caused by the

owner/s. Example: Kenny invested P 1 Million Pesos in his business. This will increase the
capital of the business and the increase is brought about by Kenny, the owner.

Withdrawals or Drawings- refers to the decrement in the capital caused by the owner/s.
Example: Kenny used withdrew and used P 50,000 pesos for the hospitalization expense of his
dog. The withdrawal by Kenny would necessarily decrease the capital of the business.

c. Balance Sheet/ Statement of Financial Position (SFP)- Shows the financial position (Liquidity or
Solvency) of the business through its economic resources which may be brought about by
debts or equity accounts: Asset= Liability + Capital.

Asset- refers to the resources of the business, resulting from past transactions, and are expected to
bring economic benefits for the business.

Liability- refers to the debts or obligations of the business, resulting from past transactions, and
are expected to bring economic disadvantage to the business on the event that these
obligations become due.

Capital- refers to the residual interest of the owner after all liabilities of the business are settled.

Note: The business is liquid if it has enough assets to cover for its short-term obligations. On
the other hand, the business is solvent if it has enough assets to pay for its long-term
obligations.

d. Statement of Cash Flows(SCF)- Shows the changes in the cash account brought about by actual
cash inflows and cash outflows.

Cash inflow- refers to the transactions which increased the cash account.

Cash outflow- refers to the transactions which decreased the cash account.

e. Notes to Financial Statements- Shows additional disclosure of certain information related to

the first four Financial Statements.

6. Interpretation of Financial Information.

The process of interpretation involves the analysis of financial information to give meaning for
such figures and become more useful for certain decisions made in the business or by other
external users of financial information. (This will be discussed in FABM 2 and Business Finance)

SUMMARY OF THE ACCOUNTING PROCESS

A. IDENTIFYING
1. Identifying Business Transactions.
2. Measuring Business Transactions.

B. RECORDING
1. Journalizing Business Transactions.

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 C. CLASSIFYING
1. Posting the accounts to their respective ledgers.

D. SUMMARIZING
1. Preparation of Unadjusted Trial Balance.
2. Identifying and correcting errors.
3. Preparing adjusting entries.
4. Preparation of Adjusted Trial Balance.
5. Preparation of Worksheet.

E. COMMUNICATING
1. Preparation of Financial Statements.
2. Preparation of Closing Entries.
3. Preparation of Post-closing Trial Balance.

THE HISTORY OF ACCOUNTING

The need for accounting started because people needed to:

1. Record business transactions because people have the normal tendency to forget things.
2. Know if they were successful financially.
3. Know how much asset they owned and how much liability they owed.

For some, the first name that might come to mind when referencing early accounting history
is Luca Pacioli. Pacioli described double-entry bookkeeping in his “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita” back in 1494. While that may sound like a long time
ago, accounting may have roots that trace back even earlier. Accounting has been around for
centuries. It’s a critical part of the business, record-keeping, and life in general. The first record of
accounting occurred thousands of years ago in Mesopotamia and has evolved into the intricate
element of business and life that it is today. Below is an informative guide that explores a short
history of how accounting has evolved over thousands of years.

Earliest Record of Accounting

The earliest accounting records were found over 7,000 years ago among the ruins of
Ancient Mesopotamia. At the time, people relied on accounting to keep a record of crop and herd
growth. They used accounting techniques that are still used today to determine if there was a
surplus or shortage after crops were harvested each season.

Accounting History During the Roman Empire

Later, during the reign of the Roman Empire, accounting continued to evolve much
further. “The Deeds of the Divine Augustus” is an account of Emperor Augustus’ financial
dealings. It listed such quantities as distributions to the people, grants of land, building of
temples, money to military veterans, religious offerings, and money spent on theatrical shows
and gladiator events. This discovery hints at the scope of accounting information available to the
emperor, which he then probably used for planning and decision-making purposes. Roman
historians also recorded public revenues, the amount of money in the state treasury, taxes, slaves,
freedmen, and more.

Luca Pacioli’s Contribution to the Accounting Profession

In 1494, Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita,
which included a twenty-seven-page treatise on bookkeeping titled, Particularis de Computis et
Scripturis (Details of Calculation and Recording) on the subjects of record keeping and double-
entry accounting. Pacioli’s book became the reference text and teaching tool on the subjects of
bookkeeping and accounting for the next several hundred years. This was the first time that
symbols for plus and minus appeared in a printed book. This book was the first known published
work on the topic of double-entry bookkeeping. Summa Arithmetica was also the first known book
printed in Italy to contain algebra.

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 Accounting basics are also mentioned in the New Testament of the Bible in the Book of
Matthew as well as in other religious texts such as the Qur’an.

Accounting During the Middle Ages

During the Middle Ages, bartering was the primary form of money-changing, but when
Europe changed to a monetary economy is the 13th Century, merchants began relying on
bookkeeping to keep a record of multiple transactions. This is when double-entry bookkeeping got
its start, which is when a debit and credit value is entered for each transaction by the
accountant. Merchants at the time used accounting as an ad-hoc ordering system. It provided
them with constant information about their businesses that they could use in decision-making to
grow their business as they saw fit. This laid the foundation of how we use and understand
accounting today.

Debit (DR) vs. Credit (CR)

Both of the terms debit and credit have Latin roots. The term debit comes from the word
debitum, meaning "what is due," and credit comes from creditum, defined as "something
entrusted to another or a loan."

When you increase assets, the change in the account is a debit, because something must
be due for that increase (the price of the asset). Conversely, an increase in liabilities is a credit
because it signifies an amount that someone else has loaned to you and which you used to
purchase something (the cause of the corresponding debit in the assets account).

The terms debit and credit signify actual accounting functions, both of which cause
increases and decreases in accounts, depending on the type of account. That's why simply using
"increase" and "decrease" to signify changes to accounts wouldn't work.

When it comes to the DR and CR abbreviations for debit and credit, a few theories exist.
One theory asserts that the DR and CR come from the Latin past participles of debitum and
creditum, which are debere and credere, respectively. Another theory is that DR stands for "debit
record" and CR stands for "credit record." Finally, some believe the DR notation is short for "debtor"
and CR is short for "creditor."

Accounting Methods Today

Nowadays, there are accounting standards, auditing regulations, and ethical standards for
accountants to follow. Accountants and their peers handle the monetary ebb and flow of the
economy. Obviously, they are not the only people responsible for this, but they play a huge role.
Each business, company, corporation, government, and an individual must use at least basic
accounting principles during their life, and often during their daily activities. It’s an important
element of business and over thousands of years has evolved into what we know as in modern
accounting today.

WATCH:https://www.youtube.com/watch?v=OoTc3wLTqkk (Luca Pacioli: The Father of Accounting)

BRANCHES OF ACCOUNTING
Accounting is divided into several branches to better serve the needs of different users with
varying information needs. These branches sometimes overlap and they are often closely
intertwined. Throughout time, accounting expanded to the following different fields of
specializations:

1. Financial Accounting
Financial accounting is the broadest branch and is focused on the needs of external (outside)
users and is primarily concerned with processing historical data. Although financial
accounting generally meets the needs of external users, internal users of accounting
information also use this information for their decision-making needs. Financial accounting is
primarily concerned with the recognition, measurement and communication of economic
activities. This information is communicated in a complete set of financial statements that
are reported periodically. These financial statements are standardized and general to ensure
understand ability and comparability with financial statements of other enterprises. Financial
accounting conforms to
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 accounting standards called generally accepted accounting principles (GAAP). Examples of
these financial reports include the balance sheet (statement of financial condition), income
statement (the profit and loss statement, or P&L), and statement of cash flows.

2. Management (or Managerial) Accounting

Management accounting emphasizes the preparation and analysis of accounting information
within (internal) the organization. The objective of managerial accounting is to provide timely
and relevant information for those internal users of accounting information, such as the
managers and employees in their decision-making needs. Oftentimes, these are sensitive
information and are not distributed to those outside the business. Example of the said sensitive
information are prices, plans to open up branches, and customer list. Managerial accounting
involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business
decisions, and similar areas.

3. Cost Accounting (Sometimes considered as a subset of management accounting)

Cost Accounting is the process of accounting for costs from the point at which its expenditure
is incurred or committed to the establishment of the ultimate relationship with cost units. It is
the recording, presentation, and analysis of manufacturing costs. Cost accounting is very
useful in manufacturing businesses since they have the most complicated costing process.
Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations. Cost accounting will also help the
owner set the selling price of his products. For example, if the cost accounting records show
that the total cost to produce one can of sardines is ₱50, then the owner can set the selling
price at ₱60.

4. Government Accounting
Government accounting is the process of recording, analyzing, classifying, summarizing,
communicating and interpreting financial information about the government in aggregate and
in detail reflecting transactions and other economic events involving the receipt, spending,
transfer, usability and disposition of assets and liabilities. This branch of accounting deals
with how the funds of the government are recorded and reported.

5. Auditing
There are three types of auditing: external, internal, and government auditing.
a. External auditing refers to the examination of financial statements by an independent CPA
(Certified Public Accountant) with the purpose of expressing an opinion as to fairness of
presentation and compliance with the generally accepted accounting principles (GAAP).
The audit does not cover 100% of the accounting records but the CPA reviews a selected
sample of these records and issues an audit report.

b. Internal auditing deals with determining the operational efficiency of the company
regarding the protection of the company’s assets, accuracy and reliability of the
accounting data, and adherence to certain management policies. It focuses on evaluating
the adequacy of a company's internal control structure by testing segregation of duties,
policies and procedures, degrees of authorization, and other controls implemented by
management.

Internal Audit is subdivided into Operational Audit and Compliance Audit. Operational Audit
also known as management audits and performance audits is the examination of all or part of
an organization for the purpose of determining the effectiveness and/or efficiency of its
operations. On the other hand, Compliance Audit is performed to determine whether the
auditee is following specific procedures or rules set down by some higher authority. This may
be performed for both private businesses and a government unit.

c. Government Auditing involves the determination of whether government funds are being
handled properly and in compliance with existing laws and whether programs are being
conducted efficiently and economically. In the Philippines, government audit is usually
performed by the Commission on Audit (COA).

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6. Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns. It also involves determination of income tax and other taxes, tax
advisory services such as ways to minimize taxes legally, evaluation of the consequences of
tax decisions, and other tax-related matters. Tax accounting has also expanded to tax
auditing with the purpose of checking the organization’s compliance with established tax
laws, rules and regulations to ascertain their exposures to penalties and violations.

7. Accounting Education
This branch of accounting deals with developing future accountants by creating relevant
accounting curriculum. Accounting professionals can become faculty members of educational
institutions. Accounting educators contribute to the development of the profession through
their effective teaching, publications of their research and influencing students to pursue
careers in accounting. Accounting teachers share their knowledge on accounting so that
students are informed of the importance of accounting and its use in our daily lives.

8. Accounting Research
Accounting research focuses on the search for new knowledge on the effects of economic
events on the process of summarizing, analyzing, verifying, and reporting standardized
financial information, and on the effects of reported information on economic events.
Researchers typically choose a subject area and a methodology on which to focus their
efforts. The subject matter of accounting research may include information systems, auditing
and assurance, corporate governance, financials, managerial, and tax. Accounting research
plays an essential part in creating new knowledge. Academic accounting research
"addresses all aspects of the accounting profession" using a scientific method. Practicing
accountants also conduct accounting research that focuses on solving problems for a client or
group of clients. The Accounting research helps standard-setting bodies around the world to
develop new standards that will address recent issues or trend in global business

9. Fund Accounting
This is used by non-stock non-profit organization including government. This is an art of
recording, classifying, controlling and ensuring that funds are used in accordance with the
specifications set by the donors.

Funds are usually distinguished into types:

a. General Fund- fund used for day to day operations of the entity.
b. Special Fund- fund that is segregated for a certain purpose such as funds for victims of
typhoon Yolanda and COVID19 frontliners.

The purpose of segregating these funds is to help the entity in maintaining control of its
resources and to measure success in attaining its various objectives.

10. Forensic Accounting

Forensic Accounting is the action of identifying, recording settling, extracting, sorting,
reporting, and verifying past financial data or other accounting activities for settling current or
prospective legal disputes or using such past financial data for projecting future financial data
to settle legal disputes.

It focuses on the analysis and investigation of financial evidence as testimonies on court for the
computation of damages to affected parties.

11. Accounting System

Accounting system involves the development, installation, implementation, and monitoring of
accounting process. It includes the employment of business forms, accounting personal
direction, and software management.

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USERS OF FINANCIAL INFORMATION (based on relation to the business)
CLASSIFICATION
USERS PURPOSE FOR USING ACCOUNTING INFORMATION
OF USERS
Investors and Investors and stockholders need information on risk and return
Stockholders for their investments. Accounting information aids in whether
they buy, hold or sell investments in the business.
Creditors/ Creditors need information to help them in assessing the
External Users Lenders business ability to repay its loan and interest when they fall
due.
- individuals and Suppliers Similar with creditors, suppliers assess the business ability to
organizations repay its obligation upon maturity.
outside a Government Generally, Accounting information is for the purpose of
company who and its taxation and licensing. They usually need information for
want financial agencies the regulation of the activities of the business, determine
information about future taxation policies and as a basis for computation of
the company. country’s
These users are not national income and other similar statistics.
directly involved in Public May provide the public with the trends and recent
managing and developments in the prosperity of the company. This is
operating the important especially when the company makes substantial
business contribution to a local economy by providing employment
and patronizing products and raw materials from local
suppliers.
Customers Customers assess whether the business will continue
inexistence. This is especially needed where customers have a
long-term involvement with, or dependent on, the business.
Internal users Owners Accounting information is needed to assess whether their
- individuals inside capital investment are profitable or not, and whether to grant
a company who or not additional compensation to their employees.
plan, organize, Managers Accounting Information assists the managers in carrying
and run the out their day to day functions. Mangers need to face
business. These regular decisions.
users are directly Employees Employees need to know the stability and profitability of
involved in their company. They are interested in the ability of their
managing and employer to provide remuneration, employment
operating the opportunities, retirement and other benefits. Accounting
business. information is also needed by the Labor Unions as
basis for negotiating
additional compensation for their member-employees.

USERS OF FINANCIAL INFORMATION (based on the Conceptual Framework*)

PURPOSE FOR USING
CLASSIFICATION OF USERS USERS
ACCOUNTING INFORMATION
Primary Users Existing and potential investors
-the main users to whom the Creditors/ Lenders
general purpose financial Refer to the table above
reports are directed
Users other than primary users Includes the management,
employees and others not
included as primary users of the
financial statements.

* Conceptual Framework is a structure assumptions, principles or rules developed by accounting

standard-setting bodies such as the International Accounting Standards Board (IASB) in the UK
and Financial Accounting Standards Board (FASB) of the US, which guides the preparation of
financial statements that are relevant and useful to users of financial information.

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SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS
Internal users of accounting information are those who are involved in planning, organizing and
running the business. They need more detailed information on a timely basis in order to support
their decisions. Examples of these internal users are managers, employees and owners.

The external users of accounting information are those individuals or organizations outside a
company who are interested in its financial information. Examples of these external users are
potential investors, suppliers and government agencies.

Internal and external users can also be classified as primary or secondary users. Primary users are
the direct receivers of the general financial statements. The other users are classified under
secondary users.

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship
A sole proprietorship is a business owned by one person, called the proprietor, who invests his
money or capital in the business.

Advantages:
a. Ease of Formation. It is the easiest form of business organization to form because only
one person decides when to engage in business.
b. Flexibility and string internal control. The owner is directly involved in business
operations enabling him to quickly respond to business conditions.
c. Ease of dissolution. Since only one person decides when to dissolve or stop the business,
it is very easy to dissolve the business.

Disadvantages:
a. Unlimited liability. The owner is personally responsible for the debts of the business.
Personal assets are at risk to satisfy business debts.
b. Less credit desirability and less capital raising capacity. The size of the business and extent
of its operation entirely depends upon the personal resources of the proprietor which is
usually limited.
c. Limited talent. Business success is entirely dependent upon the business acumen of the
proprietor.
d. Risk of mixing personal and business accounts resulting in an informal accounting of accounts.
e. Limited life. A proprietorship business is automatically dissolved upon the death of the owner.
f. Unlimited liability. In law, the business and the proprietor are considered one and the
same. Business creditors can run after him if the business gets bankrupt. Big businesses
usually start as sole proprietorship.

Examples of sole proprietorship include small businesses like Sari-Sari stores, Ukay-Ukay stores (or
surplus stores), etc.

2. Partnership
Two or more persons own a single business. The owners are called partners. Partnership is
created by the mere agreement of the partners. From then, the partners contribute resources
and industry into the common fund and divide the profits of the venture among themselves
based on their agreement.

Advantages:
a. Ease of formation. A mere agreement between partners creates a partnership.
b. Higher ability to raise funds with more owners; hence, better credit and capital
raising capacity.
c. Tax exemption of some partnerships.

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 Disadvantages:
a. Unlimited liability. This is applicable to general partners who are liable in the
partnership’s unpaid debts to the extent of their personal assets. All partners are general
partners unless otherwise designated in the partnership agreement.
b. Limited life. The death, retirement, admission of a new partner or change in the
partnership agreement dissolves the partnership.
c. Partners are jointly liable to the actions of other partners because partnership is based on
mutual agency.
d. Instances of personal disagreements can occur and may spill over business matters.

The most common examples of partnerships are professional firms like Sycip, Gorres, Velayo
and Co. and Punongbayan and Araullo accounting firms.

3. Corporation
The Revised Corporation Code of the Philippines (RA 11232) under section 10 states that “any
person, partnership, association or corporation, singly or jointly with others but not more than
fifteen (15) in number, may organize a corporation for any lawful purpose or purposes”.
Corporations raise capital by issuing certificates of ownership called ”stocks” or “shares” to
interests persons. A person who bought these shares from the corporation is a shareholder. A
shareholder is a part owner of a corporation to the extent of the number of his shares.

For example, if Mr. JP owns 1,000 of the 10,000 shares of LAGAO Corporation, Mr. JP is
considered to own 1/10th (1,000/10,000) of the corporation.

Legally, a corporation is considered as a separate person with a separate identity from that of
its shareholders, when the corporation goes bankrupt, the shareholders would not be held
liable to creditors.

Profits of the corporations are distributed to shareholders in the form of “dividends”. Each
shareholder will receive a proportional amount of dividend depending on the number of
shares he has in the corporation.

Advantages:
a. Continuity of operations. In law, corporations have a life of up to 50 years, extendable to future
years.
b. Transferability of shares. A shareholder may sell his shares to another person without
unnecessarily dissolving the corporation. Shares may even be passed on as inheritance to
future generations. Hence, death of the shareholder does not extinguish his business interest
to the corporation.
c. Greater source of funds. A corporation can issue shares for additional financing. This is
particularly true with listed corporations or those sanctioned by the law to sell stocks to
the public.
d. Limited liability. The owners or shareholders are liable only to the extent of their subscriptions.
The creditors of the corporation cannot run after the personal assets of the shareholders in
the event of any unpaid liabilities of the corporations.

Disadvantages:
a. Formal formation requires more resources and is more difficult to organize.
b. Subject to heavier taxation.
c. Control is defined by ownership
d. Heavier regulations. Corporations are subject to stricter rules and regulations before
their issuance of securities to the public. They are also required to submit numerous
government reports.

Examples of corporation are big companies like San Miguel Corporation, Philex Mining
Corporation, SM Prime Holdings Corporations, television giants like ABS-CBN and GMA and
many others.

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4. Cooperatives
Firm owned, controlled, and operated by a group of users for their own benefit. Each member
contributes equity capital, and shares in the control of the firm on the basis of one-member,
one- vote principle (and not in proportion to his or her equity contribution).

Examples of Cooperatives are Tabuk Multi-Purpose Cooperative, Baguio Colleges Foundation

Credit Cooperative, Highland Miners Marketing Cooperative, Davao City Free Farmer’s
Cooperative, and many others.

5. Mutual Funds
Mutual funds are businesses that pool money from various investors. The manager of the fund
who is usually an investment expert invests the money of the fund to income producing
properties such as:
a. Real properties to earn rentals or appreciation in value
b. Stocks to earn dividends
c. Bonds, bank deposits and commercial papers or notes to earn interest

Interested investors buy ownership into the funds via units of participations. The units of
participations usually have fluctuating value depending on the value of the assets that the
mutual fund holds.

Types of Business According to Activities

1. Service Business
Service business is one of who renders services for a fee. Service business includes printer
rentals, restaurants, machine shop, repair shop, laundry, computer shop, banks, and transport
operators such as bus, taxi and jeepneys. Law and accounting firms are also service
businesses.

Short term service arrangements – services to clients is rendered instantly or up to a few days
1. Restaurants
2. Machine and repair shop
3. Laundry shop
4. Computer shop
5. Transport operators
6. Hotel operators

Long terms service arrangements – service engagement extends beyond months to years
1. Construction
2. Bank financing
3. Residential or commercial leasing

The income earned by the servicing firms is usually called service revenue or service fees.

2. Merchandising Business
Merchandising business buys from suppliers and sells merchandise to customers. It includes
realty business who sells capital goods (real properties) such as lots, house and lots and
commercial spaces, security dealers to various customers. Merchandising business may
either be a small business just like sari-sari store or it may be a big business just like SM Department
store, Puregold or Ace Hardware.

3. Manufacturing Business
Manufacturing business produces goods for sale. They buy raw materials and convert them to
finished products ready for sale.

Examples of manufacturing companies are furniture factories, breweries like San Miguel
Corporation, bakeries, book publishers like Real Excellence Publishing, beverage producers
like Coca-Cola Philippines and many others.

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4. Agricultural Business
Agricultural businesses grow crops, fish and animals for sale.

Examples of agricultural companies are Banana industry just like Ban Wan Company in
Davao, the pineapple industry just like Dole Philippines in Bukidnon and many others.

5. Power Generating Enterprises

These businesses produce energy by harnessing the forces of nature such as heat, wind,
biomass, water current to create electricity. These businesses differ from the others in the
sense that they produce an intangible product – energy. In law, the selling of electricity is
considered a form of service business.

Examples of power generating enterprises are Therma Marine Inc., Hedcor Inc., and Aboitiz
Power.

6. Wasting Asset Enterprises

These businesses explore natural resources such as precious metals, natural gas, timber
deposits, fish and other marine resources for exhaustion. The distinction between generation
and wasting asset enterprises is that the output of a generation company is intangible while
the output of a wasting asset enterprise is tangible. The distinction of a wasting asset
enterprise with an agricultural business is the absence of agricultural growing like land tilling,
animal feeding, and establishment of an environment conducive for animal or crop growth.

Examples of wasting asset companies are Philex Mining Corporation, Lepanto Mining
Corporation, Philippine National Oil Company Exploration Corporation and many others.

REFERENCES:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Fremont College. History of accounting. Retrieved from https://fremont.edu/history-of-
accounting/
• Investopedia (2020, January 9). Why Do Accountants Use Debit (DR) and Credit
(CR)?.Retrieved from https://www.investopedia.com/ask/answers/04/072304.asp
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South
Triangle, Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books, Inc.

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