Study sheet: Accounting and Business Fundamentals

📋 Course Outline

1. MSME Categories and Economic Role
2. Purpose and Scope of Accounting
3. GAAP Principles and Acceptance
4. Basic Accounting Assumptions
5. Financial Statements and Equations
6. Assets and Liabilities
7. Equity, Revenues and Expenses
8. Expenses, Losses, and Profit
9. Expense Account Classifications
10. Accounting Equation Applications
11. Accounting Periods and Reporting
12. Qualitative Financial Information
13. Accounting Information Specializations
14. Users and Business Activities
15. Business Forms and Capital

📖 1. MSME Categories and Economic Role

🔑 Key Concepts & Definitions

• MSMEs : the acronym for Micro, Small and Medium Enterprises

📝 Essential Points

• MSMEs account for 99% of total business enterprises in the country and provide employment for 61% of the country's labor force.

• On May 23, 2008, President Gloria Macapagal-Arroyo signed R.A. 9501 into law, requiring banks and lending institutions to allocate at least 10% of their total loan portfolio to MSMEs.

• The three MSME categories are:

  • Micro enterprises: assets before financing of P3M or less and not more than 9 workers
  • Small enterprises: assets above P3M to P15M and 10 to 99 workers
  • Medium enterprises: assets above P15M to P100M and 100 to 199 workers

💡 Memory Hook

MSMEs = Micro, Small and Medium Enterprises

📖 2. Purpose and Scope of Accounting

🔑 Key Concepts & Definitions

• Breakeven point : the situation in which total costs and expenses equal total sales or revenues, so the business makes neither profit nor loss

★ Must-know

• Accounting gathers financial data, identifies data relevant to decisions, processes and analyzes the data, and transforms it into reports for management decisions.

📌 A business earns a profit when total income exceeds total expenses, incurs a loss when total expenses exceed total income, and reaches breakeven when total income equals total expenses.

• Books of accounts record business transactions, and the financial data recorded in them are processed into financial statements.

Further detail

• An accountant determines profit and taxes, prepares financial reports, devises systems to safeguard business property, and analyzes and interprets financial statements for management.

💡 Memory Hook

Records → information → better business decisions

📖 3. GAAP Principles and Acceptance

🔑 Key Concepts & Definitions

• Generally Accepted Accounting Principles : a uniform set of accounting rules, procedures, practices and standards used to prepare financial statements

★ Must-know

• An accounting principle is relevant when its information is meaningful and useful, objective when it is unbiased, reliable and verifiable, and feasible when it can be implemented without undue complexity or cost.

• Before a principle becomes generally accepted, it must be established by a standard-setting body with worldwide or universal acceptance or have substantial authoritative support from accounting bodies and the financial community.

• The cost principle records assets at original acquisition cost, whereas fair value measurement uses current value; for example, land bought for P1 million remains recorded at P1 million even if its later value is P2.5 million under the cost principle.

• The matching principle recognizes revenue when earned and the corresponding expense when incurred in the same period as the revenue.

Further detail

• In the Philippines, GAAP development is formalized through the Philippine Financial Reporting Standards Council, whose Philippine Accounting Standards are a primary source of GAAP.

📌 The consistency principle requires accounting methods and procedures to be applied uniformly from period to period, but PAS No. 1 permits justified and disclosed changes or changes required by a new PAS or interpretation.

💡 Memory Hook

Objectivity seeks reliable evidence, whereas feasibility limits complexity and cost

📖 4. Basic Accounting Assumptions

🔑 Key Concepts & Definitions

• Accounting entity : the assumption that treats the business as separate and distinct from its owner or management, so only business transactions are recorded in the business books

★ Must-know

• The five basic accounting assumptions are:
  • accounting entity
  • going concern
  • time period
  • unit of measure
  • accrual basis

Further detail

• When an owner contributes money or property to a business, those resources become assets of the business rather than personal assets of the owner.

💡 Memory Hook

Entity, going concern, time, unit, accrual

📖 5. Financial Statements and Equations

🔑 Key Concepts & Definitions

• Financial statements : structured representations of an entity's financial position and financial performance that provide useful information about financial position, performance and cash flows for economic decisions
• Balance sheet : a financial statement that shows an enterprise's financial position as of a particular date through assets, liabilities and owner's equity
• Income statement : a financial statement that shows enterprise performance for a given period through revenues, expenses and the resulting profit or loss

★ Must-know

• The six basic financial statements are:
  • statement of financial position at the end of the period
  • statement of comprehensive income for the period
  • statement of changes in equity for the period
  • statement of cash flows for the period
  • notes comprising significant accounting policies and explanatory information
  • statement of financial position at the beginning of the earliest comparative period in specified retrospective cases

Further detail

📐 Formula — The expanded accounting equation is $Assets = Liabilities + Owner's\ Equity + Revenue - Expenses - Withdrawals$.

💡 Memory Hook

Balance sheet shows position at a date, whereas income statement shows performance over a period

📖 6. Assets and Liabilities

🔑 Key Concepts & Definitions

• Assets : resources controlled by an enterprise as a result of past transactions and events from which future economic benefits are expected to flow and whose cost can be reliably measured
• Liabilities : present obligations arising from past transactions or events whose settlement is expected to cause an outflow of economic resources from the enterprise
• Accumulated depreciation : a contra-asset valuation account shown as a deduction from property and equipment

★ Must-know

📌 Current assets are expected to be realized, sold or consumed within the normal operating cycle, while non-current assets are all assets not classified as current; when the operating cycle is unclear, it is assumed to be twelve months.

📌 Current liabilities are expected to be settled in the normal operating cycle or within one year from the balance sheet date, whereas non-current liabilities are payable for more than one year.

Further detail

• Examples of intangible assets include:
  • patents
  • copyrights
  • franchises
  • trademarks

💡 Memory Hook

Assets provide future benefits, whereas liabilities require future outflows

📖 7. Equity, Revenues and Expenses

🔑 Key Concepts & Definitions

• Owner's equity : the residual interest in an enterprise's assets after deducting all liabilities
• Revenue : the gross inflow of economic benefits during a period from ordinary activities that increases equity, excluding owner contributions

★ Must-know

📌 Owner's equity increases through profit or additional owner contributions and decreases through loss or owner withdrawals.

• Profit is the excess of revenues over expenses, while a loss occurs when expenses exceed revenues.

Further detail

• Common income statement account titles include:
  • service income
  • professional income
  • rental income
  • interest income
  • interest expense
  • rent expense
  • salaries expense
  • depreciation expense
  • amortization expense
  • taxes and licenses

💡 Memory Hook

Revenue and profit increase equity; expenses, losses and withdrawals decrease it

📖 8. Expenses, Losses, and Profit

🔑 Key Concepts & Definitions

• Expenses : The gross outflow of economic benefits during the period arising from ordinary business activities that decreases equity, except for distributions to owners.
• Interest Expense : The expense incurred from borrowed money and separately deducted from operating income before arriving at net income.

📝 Essential Points

📌 Losses are decreases in assets or increases in liabilities arising from activities or events outside the ordinary course of business, whereas expenses arise from ordinary business activities.

📌 Profit is the excess of revenues over expenses, whereas a loss occurs when expenses exceed revenues.

💡 Memory Hook

Profit comes from revenues exceeding expenses; loss comes from expenses exceeding revenues.

📖 9. Expense Account Classifications

🔑 Key Concepts & Definitions

• Depreciation Expense : The portion of the cost of property, equipment, or other fixed assets that has expired through rational and systematic allocation.
• Amortization Expense : The expired or expensed portion of an intangible asset.

📝 Essential Points

• Taxes and licenses include amounts paid for business permits, licenses, and other government dues, but income tax paid is not allowable by law as a deduction.

• Insurance expense records the expired portion of an insurance premium paid, while utilities expense records telephone, light, and water bills.

• Miscellaneous expense records an expense that is not significant enough to warrant a particular classification.

📖 10. Accounting Equation Applications

★ Must-know

📐 Formula — The basic accounting equation is $A = L + OE$, where assets equal liabilities plus owner's equity.

📐 Formula — The expanded accounting equation is $A = L + OE + R - D - E$, where revenue increases equity, while drawings and expenses decrease equity.

📌 Owner's equity increases through additional investments and profits and decreases through withdrawals and losses from operations.

Further detail

• To determine an unknown accounting value, apply the basic accounting equation by rearranging it to solve for the missing asset, liability, or owner's equity amount.

💡 Memory Hook

Assets = Liabilities + Equity; equity changes through investment, profit, and withdrawals.

📖 11. Accounting Periods and Reporting

🔑 Key Concepts & Definitions

• Going-Concern Assumption : The assumption that a business will continue operating for an indefinite period after it begins operations.
• Accounting Period : An equal interval into which the continuous life of a business is divided so that financial statements can be prepared and communicated periodically.
• Going-concern assumption : states that a business has a continuous life and is expected to continue operating for an indefinite period
• Periodicity assumption : divides the continuing life of a business into equal accounting periods at the end of which financial statements are prepared

★ Must-know

• Accounting periods may be:
  • Monthly for 1 month
  • Quarterly for 3 months
  • Semi-annual for 6 months
  • Annual for 12 months

📌 An accounting period of less than one year is a fiscal period, and the resulting financial statements are interim financial statements.

📌 A calendar year runs from January 1 to December 31 of the same year, a fiscal year begins on the first day of any month except January and ends on the last day of the twelfth month, and a natural business year ends during the business's slack season.

Further detail

📌 Financial statements are prepared at the end of each accounting period because waiting until the business ceases operations would be impractical for determining operating results and financial condition.

💡 Memory Hook

Monthly → quarterly → semi-annual → annual.

📖 12. Qualitative Financial Information

🔑 Key Concepts & Definitions

• Understandability : means that financial statements are presented so users with reasonable knowledge of business, economics, and accounting and reasonable diligence can understand them
• Reliability : means that financial information is free from material error and bias, fairly presented, and capable of providing confidence to interested parties
• Relevance : means that financial statements help users make informed economic decisions through materiality, predictive value, feedback value, and timeliness

📝 Essential Points

• The characteristics supporting reliability are:
  • faithful representation
  • neutrality
  • conservatism or prudence
  • completeness
  • substance over form

📌 Comparability allows financial statements to be compared with those of similar companies, while consistency requires a selected accounting method or practice to be followed from period to period.

💡 Memory Hook

Reliability protects faithful reporting; relevance supports decisions

📖 13. Accounting Information Specializations

★ Must-know

• Financial accounting describes an entity's financial resources, obligations, and activities and produces general-purpose reports on financial position and operating results.

📌 Internal auditing checks whether accounting procedures and management policies are followed and measures operating efficiency, whereas external auditing is performed by an independent professional who gives an opinion on the fairness of financial statements.

Further detail

• Management accounting designs, installs, and improves accounting systems intended to help management operate the business.

• Tax accounting prepares income tax returns, determines taxes payable, and plans transactions to minimize the income tax burden.

• Cost accounting collects, allocates, and controls the costs of producing goods and services, while government accounting concerns the proper custody of public funds in national and local governments.

📖 14. Users and Business Activities

★ Must-know

• Investors use financial statements to decide whether to buy, hold, or sell investments and to assess the enterprise's ability to pay dividends.

• Lenders and suppliers use financial statements to determine whether loans, interest, and amounts owed will be paid when due or at maturity.

• The main business activities are:

  • service concerns
  • merchandising
  • manufacturing
  • agriculture
  • hybrid companies

Further detail

• Employees seek information about enterprise stability and profitability and its ability to provide remuneration, retirement benefits, and employment opportunities.

• Government agencies use financial information to regulate enterprises, determine taxation policies, and compile national income and similar statistics.

📖 15. Business Forms and Capital

🔑 Key Concepts & Definitions

• Sole proprietorship : a business owned and capitalized by one proprietor who bears all business results and unpaid obligations; its capital account is called owner's equity
• Partnership : a business whose capital is provided by two or more partners who agree on investments, profit and loss sharing, and settlement upon a partner's death or withdrawal; its capital account is called partners' equity
• Corporation : a complex business organization formed by persons or entities, with capital called share capital divided into ordinary and preferred shares and equity called shareholders' equity
• Cooperative : operates similarly to a corporation, is registered through Articles of Cooperation with the Cooperative Development Authority, and gives members voting rights on a one-member, one-vote basis

📝 Essential Points

• A corporation's retained earnings consist of beginning retained earnings plus profit for the year minus dividends declared and paid, and retained earnings are also termed accumulated profits or losses.

• A cooperative allocates its balance as follows:

  • 10% to the General Reserve Fund
  • 10% to the Cooperative Education and Training Fund
  • 7% to the Optional Fund
  • 3% to the Community Development Fund
  • 70% to interest on share capital and patronage refund

💡 Memory Hook

One owner, several partners, many shareholders, or cooperative members

📊 Synthesis Tables

Main Financial Statements

Statement	What it shows	Time reference
Balance sheet	Assets, liabilities and owner's equity	As of a specific date
Income statement	Revenues, expenses and profit or loss	For a given period
Statement of changes in owner's equity	Changes caused by investment, profit, withdrawal or loss	For a given period
Statement of cash flows	Cash flows of the entity	For a given period

Business Organization Capital Structures

Organization	Owners	Capital or equity account
Sole proprietorship	One proprietor	Owner's equity
Partnership	Two or more partners	Partners' equity
Corporation	Shareholders	Shareholders' equity
Cooperative	Members	Members' equity