1.
Definition and Nature of Accounting
Accounting is a service activity. Its function is
to provided quantitative information, primarily
financial in nature, about economic entities
that is intended to be useful in making
economic decisions.
Stakeholders parties who have interest in
an entity whether direct or indirect.
1) External users – they are
group/individuals who are not directly
concerned with the day-to-day operation
but indirectly related to the said entity.
Creditors, investors, prospective
creditors and investors, government and
the public.
2) Internal users – the management
personnel in all levels within an entity
who are responsible for planning and
control of the operations.
They have access to the day-to-day
operations of the entity.
They make decisions that affect the
internal operations of the entity.
Financial report – general-purpose financial
statements.
Users of Financial Information
1. Investors
2. Lenders
3. Suppliers and other trade creditors
4. Employees
5. Customers
6. Government and their agencies
7. Public
Accounting Process
Refers to the procedures or series of
steps undertaken to come up with the
information reported in the FS.
Accounting Cycle
Recording phase – collecting
information about economic
transactions.
1. Documentation
2. Journalizing
3. Posting
Summarizing phase
4. Preparing a trial balance
5. Compiling adjusting data
6. Preparing a work sheet/end-of-period
spreadsheet
7. Preparing the FS
8. Adjusting and closing the books
9. Preparing a post-closing trial balance
10. Reversing the accounts
Partnership is defined in Article 1767 of the
Civil Code of the Philippines as “a contract
whereby two or more persons bind
themselves to contribute money, property, or
industry into a common fund with the
intention of dividing profits among
themselves.”
Characteristics of a Partnership
1. Mutual agency. Any partner may act as
agent of the partnership in conducting its
affairs.
2. Unlimited liability. The personal assets
(assets not contributed to the partnership) of
any partner may be used to satisfy the
partnership creditors’ claims upon
liquidation, if partnership assets are not
enough to settle the liabilities to outsiders.
3. Limited life. A partnership may be
dissolved at any time by action of the
partners or by operation of law.
4. Mutual participation in profits. A partner
has the right to share in partnership profits.
5. Legal entity. A partnership has legal
personality separate and distinct from that of
each of the partners.
6. Co-ownership of contributed assets.
Property contributed to the partnership are
owned by the partnership by virtue of its
separate legal personality.
7. Income tax. Partnerships, except general
professional partnerships (i.e., those
organized for the exercise of profession like
CPAs, lawyers, engineers, etc.) are subject
to the 30% income tax.
Advantages of Partnership
1. It is easy and inexpensive to organize, as
it is formed by a simple contract between two
or more persons.
2. The unlimited liability of the partners
makes it reliable from the point of view of
creditors.
3. The combined personal credit of the
partners offers better opportunity for
obtaining additional capital than does a sole
proprietorship.
4. The participation in the business by more
than one person makes it possible for a
closer supervision of all the partnership
activities.
5. The direct gain to the partners is an
incentive to give close attention to the
business.

2.
6. The personal element in the characters of
the partners is retained.
Disadvantages of a Partnership
1. The personal liability of a partner for firm
debts deters many from investing capital in a
partnership.
2. A partner may be subject to personal
liability for the wrongful acts or omissions of
his/her associates.
3. It is less stable because it can easily be
dissolved.
4. There is divided authority among the
partners.
5. There is constant likelihood of dissension
and disagreement when each of the partners
has the same authority in the management of
the firm.
Classes of Partners
1) As to contribution
a) Capitalist partner – one who
contributes capital in cash (money) or
property.
b) Industrial partner – one who
contributes industry, labor, skill, talent
or service.
c) Capitalist-industrial partner – one
who contributes cash, property, and
industry.
2) As to liability
a) General partner – one whose liability
to third persons extends to his
separate (private) property.
b) Limited partner – one whose liability
to third persons is limited only to the
extent of his capital contribution to the
partnership.
3) As to management
a) Managing partner – one who
manages actively the business of the
partnership
b) Silent partner – one who does not
participate in the management of the
partnership affairs.
4) Other classifications
a) Liquidating partner – one who takes
charge of the winding up of
partnership affairs upon dissolution
b) Nominal partner – one who is not
really a partner, not being a party to
the partnership agreement, but is
made liable as a partner for the
protection of innocent third persons
c) Ostensible partner – one who takes
active part in the management of the
firm and is known to the public as a
partner in the business
d) Secret partner – one who takes active
part in the management of the
business but whose connection with
the partnership s concealed or
unknown to the public.
e) Dormant partner – one who does not
take active part in the management of
the business and is not known to the
public as a partner; he is both a silent
and a secret partner.
Partnership Contract
A partnership is created by an oral or a
written agreement. Since partnerships are
required to be registered with the Office of
the Securities and Exchange Commissions,
it is necessary that the agreement be in
writing.
Opening Entries
If the asset contributed is in the form of cash,
it is recorded on the partnership books at
face value; If the asset contributed is in the
form of property or non-cash asset, it is
recorded at agreed value, or in the absence
of an agreement, at fair market value. When
industry is contributed into the partnership, a
memorandum entry is prepared.
Partnership Formation
• Formation a: two or more persons form a
partnership for the first time all partners
are new in the business.
• Formation b: a sole proprietor and an
individual form a partnership
• Formation c: two or more sole proprietors
form a partnership
The following rules will be helpful in making
the necessary adjusting entries:
• Debit asset and credit capital for
increases in asset values
• Debit capital and credit asset for
decreases in asset values
• Debit capital and credit liabilities for
increases in liability balances
• Debit liabilities and credit capital for
decreases in liability balances

3.
• In the case of contra asset accounts, the
following rules shall apply:
• Debit contra asset account and credit
capital for increases in asset values
• Debit capital and credit contra asset
account for decreases in asset values
Corporation
A 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. (Section
1, Corporation Code of the Philippines.)
Characteristics Of a Corporation
1. Separate legal entity – artificial
being. A corporation is an artificial being
with a personality that is separate from
that of its individual owners. Thus, it may,
under its corporate name, take, hold or
convey property to the extent allowed by
law, enter into contracts, and sue or be
sued.
2. Created by operation of law. A
corporation is generally created by
operation of law. The mere agreement of
the parties cannot give rise to a
corporation.
3. Right of succession. A corporation
has the right of succession. Irrespective
of the death, withdrawal, insolvency, or
incapacity of the individual members or
shareholders, and regardless of the
transfer of their interest or share capital,
a corporation can continue its existence
up to the period of time stated in the
articles of incorporation but not exceed
fifty years.
4. Powers, attributes, properties
authorized by law. A corporation has
only the powers, attributes and properties
expressly authorized by law or incident to
its existence. Being a mere creation of
law, a corporation can only exercise
powers provided by law and those
powers which are incidental to its
existence.
5. Ownership divided into shares.
Proprietorship in a corporation is divided
into units known as share capital. The
buyers of this share capital are called
shareholders or stockholders and are
considered owners of the business.
6. Board of directors. Management of
the business is vested in a board of
directors elected by the shareholders.
The board of directors is the governing
body or decision-making body of the
corporation. The Corporation Law
provides that the number of directors be
not less than five but not more than
fifteen.
Advantages Of a Corporation
1. The corporation enjoys continuous
existence because of its power of
succession.
2. The corporation has the ability to
obtain a strong credit line because of
continuity of existence.
3. Large scale business undertakings are
made possible because many individuals
can invest their funds in the enterprise.
4. The liability of its Investors or
shareholders is limited to the extent of
their investment in the corporation.
5. The transfer of shares can be affected
without the need for prior consent of other
shareholders.
6. Its smooth operation is guaranteed
because of centralized management.
Disadvantages of a Corporation
1. It is not easy to organize because of
complicated legal requirements and high
costs in its organization.
2. The limited liability of its shareholders
may weaken its credit capacity.
3. It is subject to rigid governmental
control.
4. It is subject to more taxes.
5. Its centralized management restricts a
more active participation by shareholders
in the conduct of corporate affairs
Classes of Corporation
1) As to Membership Holdings
a) Stock corporation – a private
corporation in which the capital is
divided into shares of stock and is
authorized to distribute corporate
earnings to holders on the basis of
shares held. The owners of a stock
corporation are called stockholders or
shareholders.
b) Non-stock corporation – a private
corporation in which capital comes
from fees paid by individuals
composing it. The owners of non-
stock corporation are called
members.

4.
2) As to Purpose
a) Public corporation – a corporation
that is organized to govern a portion
of the state (e.g. municipalities,
provinces)
b) Private corporation – a corporation
that is organized for a private benefit,
aims on end.
c) Quasi-public corporation - a private
corporation which is given a franchise
to perform functions of a public
character. Classified under this type
are the so-called public utility
corporations such as MERALCO and
PLDT.
5) As to Compliance of Law
a) De jure corporation – a corporation
which exists in both law and fact. It
exists in law because it has complied
with all the legal requirements; it
exists in facts because it actually
operates as a corporation.
b) De facto corporation – a corporation
which only exists only in fact but not
in law. It does not exist in law
because of non-compliance with
certain legal requirements.
4) As to Law of Creation
a) Domestic corporation – a corporation
that is organized under Philippine
laws.
b) Foreign corporation – a corporation
that is organized under the laws of
other countries.
5) As to Extent of Membership
a) Open corporation – a corporation
whose ownership is widely held by
many investors, usually a private
stock corporation.
b) Closely-held corporation or family
corporation – a private corporation in
which 50% or more of its stock owned
by five (5) persons or less.
Other types of corporations include
parent or holding corporations,
subsidiary corporations,
ecclesiastical corporations and lay
corporations which are themselves
classified into other groups.
Components of Corporators
1. Incorporators – they are the
persons who originally formed the
corporation and whose names
appear in the Articles of
Incorporation, they must be natural
persons as distinguished from
artificial persons.
2. Corporators – they are the
persons who compose the
corporation whether as shareholders
or members.
3. Stockholders or shareholders –
they are the corporators of a stock
corporation.
4. Members – they are the
corporators of a non-stock
corporation.
5. Promoters – they are the persons
who undertake to (a) form a company
based on a given project, (b) set it
going, and (c) take the necessary
steps to accomplish the purpose for
which the corporation is organized.
6. Subscribers – they are the
persons who have agreed to take the
original, unissued shares but will pay
at a later date. They may be
incorporators or not and they may
eventually become shareholders the
moment the full payment of their
subscriptions is made.
7. Underwriters – they are those
who undertake to dispose of the
shares to the general public.