POA_LEC1: Chapter 1- Wk. 1

Definition, Relevance and Purpose of Accounting

• Accounting 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. (Ballada)

• Accounting evolves in response to society’s social and economic needs, mirroring other professions such as medicine and law.

  • As business complexity increases, new accounting concepts and techniques are developed to supply ever-growing demands for financial information.

  • Without timely, credible accounting information, many large-scale economic projects or social programs would never be attempted because decision-makers could not gauge feasibility or allocate resources rationally.

• In a market economy, information produced by accounting supports efficient allocation of scarce resources.

  • Well-informed choices lead to outcomes that better satisfy market participants’ needs and goals.

• Accounting is relevant to all walks of life and is indispensable in business operations.

  • It measures business activities, processes data into reports, and communicates results to internal and external decision-makers.

  • Because it converts complex activity into comprehensible reports, accounting is called “the language of business.”

  • "The language of business" because it simplifies complex business actions into understandable information.

  • Learning accounting is similar to learning a new language; you first need to understand the basic concepts before you can use it effectively.

• Practical consequences of accounting knowledge

  • No firm can operate long without knowing how much it earns or how much it spends.

  • Accounting makes owners and managers “scorekeepers”: they monitor profitability, solvency, and operational performance.

  • Personal finance applications: budgeting, education funding, car amortization, evaluating business loans, calculating income taxes, and managing investments all rely on the accounting information system.

• Inventory: Can be converted into cash or revenue

  • refers to the goods and materials a business holds for the purpose of resale or production.

• Inputs: economic events (sales, purchases, wages, investments, taxes, etc.).

• Processing: classification, measurement, summarization, and interpretation.

• Outputs: financial statements, managerial reports, tax returns, budgets, forecasts.

• Users

  • Internal: management, employees, boards of directors.

  • External: investors, creditors, regulators, tax authorities, and the general public.

• Ethical dimension: providing reliable, unbiased, and relevant information is critical; misstatements can misallocate resources and erode public trust.

Evolution of Accounting (Conceptual Overview)

• Studying accounting history enhances pedagogy, policy, and practice.

  • History clarifies present-day norms and enables more accurate forecasting of future needs.

• Definition: Accounting history examines the evolution of thought, practice, and institutions in response to environmental and societal change, plus the reciprocal effect accounting exerts on that environment.

Primitive Accounting & Early Record-Keeping

• Earliest evidence (~$8500\,\text{B.C.}$)

  • Clay tokens (cones, disks, spheres, pellets) in Mesopotamia represented commodities such as sheep, oil, bread, clothing.

  • Tokens stored in sealed clay balls (bullae) that were broken upon delivery—functionally the first bills of lading.

  • Transition: impressed symbols on wet clay tablets replaced physical tokens, a development some scholars mark as the birth of writing.

• Geographic spread

  • Record-keeping practices disseminated along trade routes to China, Babylonia, Greece, Egypt, and beyond.

• Babylonian contributions

  • During the 1st Dynasty (2286–2242 B.C.), the Code of Hammurabi required merchants to issue sealed memoranda of agreed prices.

  • A scribe (precursor of the modern accountant) inscribed the transaction on a clay mound; parties added "signatures" before drying the clay.

  • Kiln-drying used for important or permanent records.

  • Around $3600\,\text{B.C.}$, tablets documented wage payments, demonstrating early payroll accounting.

• Egyptian application

  • Pharaohs tracked labor and material costs while constructing pyramids, illustrating governmental use of cost accounting.

• Taxation link

  • Earliest written tablets frequently recorded agricultural inflows (e.g., bushels of grain) and the king’s taxable share.

• Factors enabling bookkeeping in antiquity

  1. Invention of writing.

  2. Introduction of Arabic numerals.

  3. The decimal system.

  4. Diffusion of algebraic knowledge.

  5. Availability of inexpensive writing materials (e.g., clay, papyrus).

  6. Rise in general literacy.

  7. Existence of a standard medium of exchange (money).

Forms of Business

1. Sole Proprietorship

• Definition: A business owned and managed by one person.

• Key Features:

  • Easy to form and dissolve

  • Owner has unlimited liability

  • Profits go to the owner

  • Often used for small businesses, sari-sari stores, freelancers

2. Partnership

• Definition: A business owned by two or more persons who agree to contribute money, property, or industry to a common fund.

• Key Features:

  • Governed by the Civil Code of the Philippines

  • May be general (all partners share liability) or limited (some partners have limited liability)

  • More capital than sole proprietorships

  • Requires a Partnership Agreement

• Two Types: Merging and Acquisition

• Types of Partners: Capitalist Partner, Industrial Partner, Dormant Partner (no more performing or contributing), Silent Partner, Secret Partner

3. Corporation

• Definition: A business organization that is created by law and exists as a separate legal entity from its owners (called stockholders or shareholders).

• Key Features:

  • Owners have limited liability

  • Can continue to exist regardless of ownership changes

  • Can raise large amounts of capital

  • Requires registration with the Securities and Exchange Commission (SEC)

  • Governed by the Revised Corporation Code (RA 11232)

Types of Business

Merchandising Business

• A business that buys finished goods from suppliers or manufacturers and sells them to customers at a profit—without changing the product.

  • Example: A bookstore buys books from a publisher and sells them to customers at a higher price.

Manufacturing Business

• A business that produces products by converting raw materials into finished goods using labor, machines, and processes.

  • Example: A shoe factory buys leather, rubber, and thread, then produces shoes and sells them to stores or customers.

Florentine & Venetian Contribution (Italy)

Luca Pacioli (Fra Luca Pacioli)

• Father of Accounting

  Topic	Details
  Name	Luca Pacioli
  Nationality	Italian
  Known for	Formalizing double-entry bookkeeping
  Book	Summa de Arithmetica (1494)
  Title	Father of Accounting
  Legacy	Foundation of modern accounting system

Basic Principles Under GAAP

4 Steps of Accounting

1. Recording/Gathering of Data - journalizing business transactions

2. Classifying - posting the journal to ledger

3. Summarizing - preparing financial statement

4. Interpreting - assessing the status and progress of the business

Uses of Accounting

1. For Assessing Profitability

2. For Assessing Liquidity and Solvency

   • Liquidity is how quickly and easily a business can convert its assets into cash to meet immediate financial obligations.

   • Liquidity is the ease with which a company can settle its current obligations using its current assets. It reflects the firm's ability to operate smoothly without cash flow problems. (Ballada)

     • Example: Cash (Most Liquid), Bank Deposits (Very Liquid), Inventory (Less Liquid), Accounts Receivable (Liquid), Land & Buildings (Not Liquid).

   • Solvency is the ability of a company to settle its total obligations as they fall due in the long term. It ensures that the business can survive in the future. ( Ballada).

     • Solvency is the capacity of a business to pay off all its debts—both short-term and long-term—using its total assets.

       Aspect	Liquidity	Solvency
       Time Focus	Short-term (now to 1 year)	Long-term (over 1 year)
       Concern	Paying bills and expenses soon	Paying off total debt over time
       Measured by	Current Ratio, Quick Ratio	Debt-to-Equity Ratio, Solvency Ratio

3. For Assessing Capital Intensity

   • Capital Intensity refers to how much investment in fixed assets (like machines and buildings) a business needs to operate compared to labor or other costs.

4. For Planning, Organizing, and Controlling

5. For Tax Purposes and Government Compliance

Incorporators

• The one creating the business

• person or entity who originally forms or sets up a corporation by signing and filing the Articles of Incorporation.

Two Types of Stock

The two main types of stock are common stock and preferred stock.

• Common Stock: This represents ownership in a corporation and gives shareholders voting rights at shareholder meetings.

  • Common stockholders have a residual claim on the company's assets and earnings, meaning they are paid after bondholders and preferred stockholders.

• Preferred Stock: This also represents ownership but typically does not come with voting rights.

  • Preferred stockholders usually receive fixed dividend payments before common stockholders and have priority over common stockholders in receiving payment in the event of a company's.

Shareholder and Stockholder

• A stockholder/shareholder is anyone who owns part of a corporation by holding its shares of stock.

• Shareholder> Share> Owner

• Stockholder> stock> Stock Market

TRAIN Law (Tax Reform for Acceleration and Inclusion)

• officially Republic Act No. 10963, implemented in the Philippines on January 1, 2018

• To simplify and make the tax system fairer, support inclusive growth, and generate additional revenues for the government's “Build, Build, Build” infrastructure and social services programs

• Minimum wage per day: 695 PHP

• Once the business is earning 20,873 or 21,000+ per month, the business must pay its tax.

Graduated Income Tax Rates (2025 – Sole Proprietors)

4 Types of Accounting Information

Users of Accounting

1. Investors

2. Managers

3. Suppliers

4. Lenders

5. Gov. and Agencies

6. Employees

7. Customer

8. Public