Business
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A person or organization engaged in the regular conduct of commercial,
industrial or professional activities, whether for profit or not, in order to fulfill a
purpose, goal, mission or cause.
The regular conduct or pursuit of a commercial activity or an economic activity,
including transactions incidental thereto, by any person regardless of whether or
not the person is engaged therein is a non-stock, non-profit private organization
or government entity. (Sec 105, NIRC)
Business
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Person or organization
Regular conduct
Commercial, industrial or professional activities
Lawful transactions
Whether for profit or not
To fulfill a purpose, goal, mission or cause
Forms of Business Organization
These are the basic forms of business ownership:
1. Sole Proprietorship
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a business owned by only one person
usually adopted by small business entities
easy to set-up and requires low capital
owner faces unlimited liability
not easy to transfer ownership
2. Partnership
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a business owned by two or more persons
the partners contribute resources into the entity
the partners divide the profits among themselves.
generally, all partners have unlimited liability. In limited partnerships,
creditors cannot go after the personal assets of the limited partners.
3. Corporation
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a business organization that has a separate legal personality from its owners
usually adopted by large business organizations
can generate large amounts of capital from investments
not easy to set-up and organize
ownership is usually represented by shares of stock.
owners (stockholders) enjoy limited liability but have limited involvement in
the company's operations.
easy to transfer ownership
Basic Types of Business
There are major types of businesses:
1. Service Business
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a business that provides intangible products (products with no physical form)
for a fee
offers professional skills, expertise, advice, and other similar products.
examples are: repair shops, beauty care, health and recreation,
transportation, communication, consulting, professional, medical and other
service companies.
2. Merchandising Business
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a business that buys products and sells the same at a higher price for a
profit.
known as "buy and sell" businesses.
sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other
resellers.
3. Manufacturing Business
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a business that buys materials and converts them into a new product.
combines raw materials, labor, and overhead costs in its production process,
and sells the manufactured goods to customers.
4. Mixed/Hybrid Business
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companies that can be classified in more than one type of business.
example: A restaurant, combines ingredients in making a fine meal
(manufacturing), sells a cold bottle of wine (merchandising), and fills
customer orders (service).
Not considered engaged in business:
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Government agencies and instrumentalities
Pure compensation employment (local or abroad, private or government)
Directorship in a corporation
Gratuitous transfer of properties by succession or donation
Isolated or casual transactions by persons not engaged in trade or business
Considered engaged in business:
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Freelancers, agents and consultants
Broadcast media talents and artists
Legal Requirements in Organizing a Business
1. Register Business Name and Entity
Depending on the form of the business, it must register with the following government
agencies:
1. Sole Proprietorship - Department of Trade and Industry (Business Name
Registration)
2. Partnership or Corporation - Securities and Exchange Commission (Registration
System)
3. Cooperative - Cooperative Development Authority (Registration System)
2. Secure Business Permits and Licenses
Depending on the nature of its activities, the business must secure its permits and
licenses in the city or municipality where it conducts its business. Generally the following
will be obtained:
1. Business Permit or Professional Tax Receipt - from the City or Municipal
Government Unit
2. Fire Safety Inspection Certificate - from the Bureau of Fire Protection
3. Barangay Clearance and Community Tax Certificate - from the barangay where
the business is operating
4. Employer Registration - SSS, HDMF, PHIC, DOLE (if applicable)
3. Comply with BIR Requirements:
The business entity must also comply with the following requirements of the Bureau of
Internal Revenue:
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Business registration
Issuance of receipts and invoices
Keeping of tax and accounting records
Withholding of taxes on certain payments
Filing and payment of taxes
However profitable or noble the purpose of the business may be, the failure of the
business entity to comply with any of these requirements might lead to penalties, fines,
surcharges or, at worst, closure of the business.
After the registration and securing all the necessary certificates and permits, the
company needs to maintain its accounting records.
Definition of Accounting
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).
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 (Accounting Standards Council).
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information
(American Accounting Association).
Accounting is an information system that measures, processes and
communicates financial information about an identifiable economic entity.
Accounting
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a service activity, a process
to provide financial information
about economic entities
for the use of interested users
to make economic decisions or informed judgements
Purpose of Accounting
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to provide financial information about the business that will be useful in
making economic decisions of the users of the information
Financial Statements
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Statement of Financial Position (Balance Sheet)
Statement of Financial Performance (Income Statement)
Statement of Changes in Owner's Equity
Statement of Cash Flows
Notes to the Financial Statements
Users of Accounting Information
Internal Users (within the business organization)
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Owners
Managers
Employees
Officers
Internal Auditors
External Users (outside the business organization)
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Customers
Suppliers
Creditors
Investors
External Auditors
Government Agencies
Industrial Organizations
Public
Branches of Accounting
1. Financial Accounting – production of reports and records of financial transactions
for the general public
2. Management Accounting – information for internal users
3. Tax Accounting – determination of the right amount of taxes to be paid
4. Auditing – providing or rendering of opinions on the quality of information
provided in the financial statements
Bookkeeping – within accounting (large body of knowledge)
Bookkeeping is the recording of financial transactions and is part of the process of
accounting in business (Financial Accounting 2003, Weygandt; Kieso; Kimmel). It is
largely concerned with the implementation of the accounting procedures manual and
maintenance of the accounting records. Bookkeeping is the procedural implementation
of Accounting.
Bookkeeper is the person who keeps and maintains the books of accounts of the
business organization. The bookkeeper is responsible for recording the transactions of
the business.
Functions of a Bookkeeper
General Accounting
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Verify deposit of cash collections
Verify petty cash disbursements
Prepare bank reconciliation
Record transactions in the journals
Post to the subsidiary and general ledgers
Reconcile general and subsidiary ledgers
Prepare a draft of the Trial Balance
Assist the Accountant in the closing of the accounts and finalization of the
financial statements.
Maintain proper filing and retrieval of accounting records
Accounts Receivable – recording of revenues, sales and collections
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Record sales invoices
Record cash receipts from customers
Record sales returns, account adjustments and credit memos from suppliers
Create and issue Statement of Accounts to customers
Reconcile accounts receivable ledger balance with unpaid customer invoices.
Maintain Accounts Receivable Subsidiary Ledger
Prepare Accounts Receivable reports
Accounts Payable
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Record purchase invoices
Record payments to suppliers
Record purchase returns, account adjustments and debit memos from suppliers
Receive Statement of Accounts from suppliers
Reconcile accounts payable ledger balance with unpaid customer invoices.
Maintain Accounts Payable Subsidiary Ledger
Prepare Accounts Payable reports
*should be well-trained to compute freight charges, discounts (freight and cash)
*should manage limited cash of the company – should pay the payables that will falldue (prioritize the accounts to be paid; suggest to the accountant)
Inventory Accounting
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Record receipts of inventory from suppliers. (coming-in inventory)
Record release of inventory to customers (coming-out inventory)
Record inventory returns and adjustments
Prepare purchase requests and Inventory issuance slips
Reconcile physical count of inventory to ledger balances – done periodically
Maintain inventory subsidiary ledgers
Prepare Inventory reports – to be submitted to supervisor
*should plan and control the movement or the coming and selling of inventory,
especially depreciable inventories.
The Bookkeeper may also be assigned to handle other functions, such as:
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Property control and monitoring
Payroll preparation
Remittance of statutory deductions and reports
Tax bookkeeping
Treasury and banking
Audit assistance
Managerial and administrative functions.
The scope and variety of functions depends on the nature, type, size, organization
structure of the business and other factors.
Due to the importance of his or her functions, the Bookkeeper must possess the
knowledge, abilities and temperaments required to properly fulfill his or her duties and
functions. One of the knowledge requirements would be the basic knowledge in
Accounting.
The Accounting Cycle
Recording
1. Identification of Accountable Transactions. Business transactions or events are
analyzed and identified whether they are accountable or not.
2. Journalizing. The accountable transactions are recorded in the book of original
entry known as the journal. The transactions are recorded chronologically using the
appropriate accounts and amounts.
3. Posting. The transactions from the journal are classified in the book of final entry
known as the ledger. The ledger classifies the transactions effecting the increases and
decreases for each account.
Summarizing
4. Trial Balance. The summary of accounts balances from the ledger is prepared in
the list of accounts known as the trial balance. This is the proof that the ledger debit
balances and credit balances are equal and is in balance.
5. Adjusting Entries. Adjusting journal entries are made at the end of the accounting
period to assign revenues to the period in which they are earned and expenses to the
period in which they are incurred.
Reporting
6. Financial Statements. The following financial statements are prepared: statement
of financial position, statement of financial performance, statement of changes in equity,
statement of cash flows and the notes to the financial statements. These financial
statements provide useful information to interested parties for their decision-making.
7. Closing Entries. The temporary nominal accounts are eliminated from the accounts
by recording and posting the closing entries. This will prepare the accounting records
for the next accounting period.
8. Post-Closing Trial Balance. After the closing entries are posted, the post-closing
trial balance is prepared to check that the debit and credit balances of the remaining
accounts are correct.
Optional
9. Recording of Reversing Entries. At the beginning of the next accounting period,
selected adjusting journal entries made at the previous accounting period are reversed
to “normalize” the recording of the related actual transactions.