Business

Financial Structure of a Business

- any lawful economic activity which is concerned
with making goods available as well as rendering of Based on the Framework of Accounting, the financial
useful services to those who want them. position or structure of a business entity is based on
three elements – assets, liabilities, and owner’s equity
Kinds of Business Operations
while its financial performance is based on two
elements called revenues and expenses.
1. Service – one which provides services, for a fee,
to clients or customers.
2. Merchandising/Trading – one which buys and
sells goods or merchandise. Accounting Equation
3. Manufacturing – buys raw materials, forms into
a finished product and then sells this to Assets = Liabilities + Owner’s Equity
customers.

Statement of Financial Position

Forms of Business Organization
The Statement of Financial Position is a list of assets,
Sole Proprietorship – Form of organization where there liabilities and owner’s equity of a business. This
is only one owner, the proprietor. statement informs the users of the wealth and
Partnership – two or more persons who binds themselves obligations accumulated by the business. It was
to contribute money, property, or industry to a formerly called Balance Sheet.
common fund, with the intention of dividing the
profit among themselves.
Recognition of Income
Corporation – an artificial being created by the operation
Also called the realization principle, it
of law, having the right of succession and the
recognizes revenue when it is earned regardless of
powers, attributes and properties expressly
collection.
authorized by law or incident to its existence.

Recognition of Expenses

Accounting – service activity which function is to Expenses are recognized in association with the
provide quantitative information, primarily financial earnings of specific income items within a specific
in nature, about economic entities that is intended to period of time. This is also called the “Matching
be useful in making economic decisions. Principle” since there can be no revenue earned
without some sacrifice (in the form of expense) made
by the business. Recognition of expenses follows the
Phases of Accounting same rules as recognizing revenues, that is, payment in
cash or property is generally not a requirement.
1. Recording
2. Classifying
3. Summarizing Accrual Concept against Cash Concept
4. Interpreting
An Accrual Concept requires that revenues and
Basic Financial Statements expenses be recognized based on the time period they
relate or based on the occurrence of the revenue and
1. Income Statement expense rather than on whether cash is received. In
2. Statement of Financial Position (Balance Sheet) contrast, Cash Concept recognizes revenue only when
3. Statement of Owner’s Equity
cash is collected and expenses only when cash is paid.
4. Statement of Cash Flow
5. Notes to Financial Statements