Accounting and Business

"The Business of Accounting is Business itself."

In order to understand accounting better, one must understand how business works, for it is business and its affairs are the focus of accounting and its process. 

Business, Definition

It is an organization, whether natural or artificial beings, that engages in commercial activities the objective of which is to earn profit.

Characteristic of Business

1.    Organization – a unit of people that are structured and managed in pursuing a goal. In business, the goal is to earn profit. Owners, employees, customers, suppliers and other parties coordinate with each other to provide goods and services in exchange for a certain type of benefits, most of the time, profit.

2.    Natural beings refers to humans while artificial beings refers to corporation or entities that are created by law having almost the same rights as natural or human beings.

3.    Commercial activities pertain to the exchange of goods and/or services between parties. 

4.    Objective of Business

1.    Earn Profit

2.    Increase Value

3.    Sustain Operation

Types of Business

1.    Service – this business is about offering to customer or clients for a fee services based on acquired skills or know-how like accountants, doctors, lawyers, and engineers, or based on talent like artists, singers, musician, and painters or letting other people use facilities or resources like taxi or bus, hotels, etc.  

2.    Merchandising – this business is about acquiring goods and selling the same at an amount higher than its acquisition cost. Examples of merchandising businesses are department store, grocery store and dealership like the car and motorcycle stores. Merchandising business can be either a wholesaler or a retailer.

a.    A wholesaler is one that directly purchases its goods from manufacturers and sells the same to retailers.

b.    A retailer is one that buys from a wholesaler and sells to consumers.

3.    Manufacturing – this business is about acquiring raw materials (ingredients), converting such by mixing, boiling, cutting, sewing, painting, etc. into finished products to be sold to customers. Manufacturers could be a clothing company like Giordano, an automobile producer like Toyota and Mitsubishi, a bakeshop and other types of factory-based companies.

Kinds of Business Organization

1. Sole or Single Proprietorship – a business being owned by only one person.

Advantages

1. It is simple to start
2. Least regulated form of business organization
3. The owner keeps all the profit

Disadvantages

a.    Small funds available

b.    For legal purposes, the owner has unlimited liability over the debt of the business.

c.    The life span of the business is connected with the life of the owner.

d.    Transfer of ownership is pretty complex.

2. Partnership – By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. (Art. 1767) Two or more persons may also form a partnership for the exercise of a profession (1665a) (R.A. 386 or the Civil Code of the Philippines)

Advantages

1. Relatively easy and inexpensive to form
2. More funds available as compared to sole proprietor
3. More skills and expertise that will contribute in the business operation.

Disadvantages

a.    For legal purposes, still, the owner’s has unlimited liability over the debt of the business.

b.    Each partner is an agent of the business and any action of one will be binding to the business.

c.    All partners share in gains and losses and are divided depending of the agreement stated in the articles of co-partnership.

d.    The life of the partnership is also dependent to the life, decisions, and relationship of the partners.

3. Corporation - is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec 2, BP 68: Corporation Code of the Philippines)

Advantages

1. Ownership can be readily transferable
2. Unlimited life of the business
3. Can easily raise funds if needed
4. Limited Liability for the owners

Disadvantages

a.    Starting up is pretty complicated due to the many legal requirements.

b.    Double taxation

c.    There is specific elected and chosen people in-charge of running the affairs of the business.

Business and its Stakeholders

These are the people that have economic interest in a business, either directly or indirectly, but not limited to:

1. Owners/Investor – directly connected to the business for providing the initial funds.
2. Managers - the group of people who make operating decisions for the business which includes when and where to sell the products, what is the price of the product, extent of financing needs, etc.
3. Creditor – directly connected with the business for supplying additional funds when the business is lacking, provided, if it passes financial evaluation and other policy requirements.
4. Supplier – interested in the affairs of the business since their profitability will be affected if the businesses, as customers, will be closing down.
5. Customer – interested in the affairs of the business because of their dependence in its products or services.
6. Employees - use skills and knowledge in achieving the goals of the business in exchange for compensations and other benefits.
7. Government Agencies - regulate the conduct of businesses in our territory for the sake of the welfare of the public, making sure no harmful services and products are being traded and prices that are just are being used in a transaction.
8. Financial Analyst and advisor – concerned with the business’ welfare since they advices people who are willing to invest based on the recommendation reach after careful evaluation.
9. Financial Press and reporting agencies – investigate businesses and published the result of such investigation for reference of the general public.

Business Activities

These are re measurable amount of worked perform in an entity, the objective of which is to earn profit.

1.    Economic Activities

a.    Production – the process of converting economic resources into outputs of goods and services that are intended to have greater utility that the required inputs.

b.    Income Distribution – the process of allocating rights to the use of output among individuals and groups in society.

c.    Exchange – the process of trading resources or obligations for other resources or obligations.

d.    Consumption – the process of using the final output of the production process.

e.    Saving – the process of setting aside rights to present consumption in exchange for rights to future consumption.

f.     Investment – the process of current inputs to increase the number of resources available for future output as opposed to immediately consumable output.

2.    Financial Activities

a.    Financing – are activities that result in the size and composition of the contributed and earned capital compared to borrowed capital.

b.    Investing – are the acquisition and disposal of the different resources and investments that are not considered as cash equivalent.

c.    Operating – are the principal revenue-producing activities of the business and other activities not considered as investing or financing activities

Business Documents

These are used to facilitate the occurrence of business transactions. It serves as proof that a particular event has transpired and will be the source of accounting data to be used for the production of financial report; hence it is sometimes called as source document.

1.    Official Receipts – is written acknowledgement that money was received for the purpose that is indicated.

2.    Purchase/Sales Order Slip – when the slip is issued by the buyer to a seller, it is called a purchase order slip, when the slip is constructed by the seller from the buyer’s order, it is called a sales order. It contains the information about the buyer, the description, quantity, and sometimes the amount of the goods or services being acquired.

3.    Sales Invoices – is a document given by a seller indicating the description, quantity, price per unit and the total amount due of the products and/or services being acquired by a buyer.

4.    Check Vouchers – is a document that initiates the payment process. It indicates the name and address of the payee, the amount to be paid, and the reason for paying. It also serves as a remittance advice when it is signed by the payee after receiving the check.

5.    Petty Cash Vouchers – is usually a small form that is used as evidence that payment is made using a petty cash fund (Petty Cash Fund is cash set aside for small expenses like transportation & postage)

6.    Promissory Note – is a legal instrument in which the maker writing a promise to pay a determinate sum of money to the payee either at a fixed determinable future period or on demand of the payee, under specific terms.

7.    Delivery Receipts – a document evidencing that the buyer has received the goods delivered by the seller.

8.    Billing Statements – a document issued by a seller to its customers pertaining to the issued sales invoices not yet paid by the customers.

9.    Payroll Register – a document showing all the employees of the business, their gross salaries, salary deductions and the net pay for a particular period.