Accounting for Service Business

History of Accounting

Accounting has a long history. Some scholars claim that writing arose in order to record information. Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and materials used in building structures like the great pyramids.

Accounting developed as a result of the information needs of merchants in the city-states of Italy during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book contained primarily principles of mathematics and incidentally a set of accounting procedures. The pace of accounting development increased during the Industrial Revolution as the economies of developed countries began to mass-produce goods. Until that time, merchandise was priced based on managers’ hunches about cost but increased competition required merchants to adopt more sophisticated accounting system.

In the nineteenth century, the growth of corporations especially those in the railroad and steel industries, spurred the developed of accounting. Corporate owners were no longer necessarily the managers of their business. Managers had to create accounting systems to report to the owners how well their businesses were doing.

Government played a role in leading more development in the field of accounting when it started using the income tax. Accounting supplied the concept of income. Also, government at all levels has assumed expanded roles in health, education, labor and economic planning. To ensure that the information that it uses to make decisions is reliable, the government has required strict accountability in the business community.

At the beginning of the third millennium, there would still be significant developments in the field of accounting. The great challenge of globalization and the effects of new technologies (e.g. super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and
pattern in this field. More and better accounting information are now being required and therefore, accounting, being the means used in communicating business and financial information, must also evolve into a more efficient level.

Accounting as “Language of Business”

The primary objectives of the business are:

1. To generate profits
2. To properly manage limited and scarce resources

With these objectives, a business must prepare financial reports and interpret these reports as an aid in decision-making. In making decisions, accounting is used as a tool for communication.

Definition 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.

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.

• Identifying – this accounting process is the recognition or nonrecognition of business activities as “accountable events” (Valix, 2005).

There are 3 types of transactions:

1. Business transaction – transactions which are recorded in the financial books. Example is investment of the owner.
2. Personal transaction – transactions which are not recorded in the financial books. Example is purchase of house and lot of a business owner using his personal money.
3. Neither business nor personal transaction – Business events that are not recorded in the financial books. Examples are hiring of employees, death of the owner, entering into a contract etc.

• Measuring – this accounting process is the assigning of Peso amounts to the accountable economic transactions and events (Valix, 2005)
• Communicating – is the process of preparing financial statements and interpreting the results thereof
• 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.
• Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.

Difference between Bookkeeping and Accounting

Bookkeeping – recording of transactions, preparing financial reports

Accounting – analyzing financial reports, decision-making

Branches of Accounting

1. Financial Accounting – is primarily concerned with the recording of business transactions and the eventual preparation of financial statements (Valix, 2005).
2. Cost Accounting – is primarily concerned with proper accumulation of costs such as materials, labor and overhead, proper costing of inventories and study of different costing methods.
3. Management Accounting – is the preparation of financial reports and management research intended for management use and interpretation of these reports and researches. Examples of financial reports are Sales reports, Cost of Production reports, Budgets etc. Example of management research is evaluation of a business process and management consulting.
4. Taxation – deals with the study of provisions of the law with regard to Philippine taxation system and proper computation of taxes such as income tax, value-added tax, withholding tax and other taxes.
5. Auditing – basically deals with the examination of the financial statements by an independent party (auditor) to ascertain whether such financial statements are in conformity with Philippine Accounting Standards.

Forms of Business Organizations

According to ownership

1. Sole-proprietorship – owned by only one person called sole-proprietor
2. Partnership – owned by 2 or more persons called partners
3. Corporation – owned by 5 or more persons called shareholders

According to activity

1. a. Service – renders services to the public such accounting firms, law firms, consulting firms, SPA, medical clinics, dental clinics, schools, etc.
2. b. Merchandising – buys and sells merchandise to the public
3. c. Manufacturing – buys raw materials and converts them into finished goods to be sold to the public

Government Agencies and Professional Bodies

1. Bureau of Internal Revenue (BIR) – agency in charge of proper collection of taxes from the public
2. Securities and Exchange Commission (SEC) – agency in charge of accumulating audited financial statements of organizations, regulating companies issuing securities such as stocks and bonds to the public, and monitoring companies in the insurance industry. This agency also facilitates the registration of partnerships and corporations.
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines – agency in charge of regulating Philippine bank operations, setting Philippine monetary policies etc.
4. Philippine Stock Exchange (PSE) – agency in charge of monitoring securities transactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) – agency in charge of facilitating registration of sole-proprietorship businesses and regulating consumer commodity transactions.
6. Commission on Audit (COA) – agency in charge of auditing government-related transactions
7. Board of Accountancy (BOA) – is an accounting body in charge of administering licensure examination for accountants
8. Professional Regulation Commission (PRC) – government agency in charge of issuing licenses to successful examinees in board exams
9. Philippine Instititute of Certified Public Accountants (PICPA) – Professional organization of accountants in the Philippines
10. City Hall and Baranggay – these political subdivisions issues business permits and collects business taxes.

Financial Statements

Shows the results of the recording of the business transactions and are expressed in terms of assets, liabilities, equity, income and expenses.

Six (6) Components:

• Balance Sheet / Statement of Financial Position – Presents the financial condition of the business through its assets, liabilities and capital / owner’s equity
• Income Statement – Presents the financial performance of the business through its income and expenses
• Statement of Changes in Owner’s Equity – Presents the changes in capital such as additional investments, withdrawals, net income and/or net loss
• Statement of Cash Flows – Presents the cash inflows and outflows of the business through its operating, investing and financing activities
• Statement of Comprehensive Income – Presents gains and losses that were not presented in the Income statement. Examples are Unrealized gain on sale of trading securities, Foreign exchange gain on translation etc.
• Notes to the Financial Statements – Presents the details of the line items in the Balance Sheet and Income Statement

Generally Accepted Accounting Principles (GAAP) – Refers to rules, procedures, practice and standards followed in the preparation and presentation of financial statements (Valix, 2005).
Financial Reporting and Standards Council (FRSC) – The council establishes and improves accounting standards that will be generally accepted in the Philippines (Valix, 2005)

Users of the Financial Statements

Internal Users

1. Management
2. Employees

External Users

1. Investors
2. Creditors / Lenders
3. Suppliers / Vendors
4. Government
5. Public

Basic Accounting Concepts / Assumptions

1. Entity – Under this concept, the business enterprise is viewed as separate from the owners, managers, and employees of the business (Valix, 2005)
2. Time period – This concept requires that the indefinite life of an enterprise is subdivided into time periods which are usually of equal length (Valix, 2005). Calendar year is a 12-month period that ends on December 31, otherwise it is called Natural business year or Fiscal year (Valix, 2005)
3. Monetary unit – This concept assumes that financial transactions be measured in terms of money or currency of the Philippines
4. Cost – This concept requires that assets should be recorded initially at original acquisition cost (Valix, 2005)
5. Adequate disclosure – This concept requires that all significant and relevant information leading to the preparation of financial statements should be clearly reported (Valix, 2005)
6. Materiality – This concept relates to the significance of an item to the overall presentation of the financial statements. Information is material if its omission could influence the economic decision of the users of the financial statements (Valix, 2005)
7. Accrual – This concept requires the income earned must be recognized in the financial statements whether cash is received or not. This concept also requires the expenses incurred must be recognized in the financial statements whether cash is paid or not. Because of this concept, organizations are preparing adjusting journal entries to recognize accrued income and accrued expenses. Accrued income refers to income earned but not yet received. e. Accrued expense refers to expense incurred but not yet paid.
8. Consistency – This concept requires that the accounting methods and practices should be applied on a uniform basis from one time period to another (Valix, 2005).
9. Comparability – There are 2 kinds of comparability: Comparability within an enterprise and Comparability between enterprises (Valix, 2005). Comparability within an enterprise is the quality of information that allows comparisons within a single enterprise from one time period to the next (Valix, 2005). Comparability between enterprises is the quality of information that allows comparisons between two or more enterprises engaged in the same industry (Valix, 2005)
10. Going Concern – This concept assumes that business will operate indefinitely and there is no intention of liquidating or closing down the business
11. Revenue recognition – Same as accrued income concept
12. Expense recognition – Same as accrued expense concept
13. Matching – This concept requires that costs and expenses incurred in earning a revenue should be reported in the same period when the revenue or income is earned (Valix, 2005)
14. Conservatism -Under this concept, when alternatives exist, the alternative which has the least effect on net income or owner’s equity should be chosen (Valix, 2005). Conservatism is synonymous with Prudence. Prudence is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such as assets or income are not overstated and liabilities or expenses are not understated (Valix, 2005)
15. Objectivity – This concept requires that financial transactions that were recorded be supported by business documents