Chapter 2

• A system is composed of several parts with interrelated functions. If one part of the system is dysfunctional, the operation of the whole system is expected to be adversely affected.
• The financial system at the socictal environment or regional level is principally responsible for the flow of money or funds from the lender to the borrower. The financial system controls,regulates, and facilitates the saving, borrowing.
• Financial institutions, based on the financial services provided, are generally classified as follows: 1. depository institutions 2. financial intermediarics 3. investment institutions
• Depository institutions are financial institutions that accept deposits (savings, current,and time deposits) from individuals and corporate entities, extend loans to borrowers, transfer funds, and manage funds for investment purposes.
• Depository institutions include the following; 1. banks 2. savings and loan association 3. trust companies. 4. credit unions
• Banks are institutions authorized to operate and regulated by the BSP undet the General Banking Law of 2000. They accept deposits and bills payment, provide loans, and facilitate the transfer of funds domestically or abroad.
• Universal bank is considered the biggest bank in terms of assets, loan portfolio,and revenue. It has the widest scope of banking activities authorized by the BSP and usually has the most number of branches nationwide and abroad.
• Commercial bank. It is a type of bank that provides commercial loans and offers investment products in addition to the regular banking service of accepting deposits. Compared to a universal bank, it has more limited banking services. These banks represent the single largest group of banks in terms of resources and financial services in the Philippines.
• Thrif bank as defined in Republic Act No. 7906, include savings and mortgage banks, private development banks, and stock savings, loan associations, and microfinance thrift banks that are organized under existing laws for the following purposes: a. accumulating and investing the savings of depositors

  b. providing working capital to businesses engaged in agriculture, scrvice, and housing

  c. providing diversified financial services to individuals and small and medium enterprises
• Rural bank and coperative bank. Rural and cooperative banks are organized and operating in rural areas. They are intended to promote and expand thé rural cconomy by providing the people with basic financial services.
• Rural banks and cooperative banks differ from cach other by ownership. Rural banks are privately owned and managed while cooperative banks are organized and owned by cooperatives or a federation of cooperatives.
• Islamic Bank. The Islamic Bank, which has been created and organized under R.A. No.6848, aims to promote and accelerate the socio-economic development of the Autonomous Region of Muslim Mindanao by performing banking, financing, and investment operations and to establish and participate in agricultural, commercial, and industrial ventures based on the Islamie concept of banking.
• Savings and Loan Association. A savings and loan association, sometimes referred to as a financing and mortgage loan company, is a financial institution that is engaged in the business of accumulating the savings of its members and stockholders, and using such accumulations for loans or investments in sccurities of productive enterprises.
• The savings and loan association, which can be stock or non-stock, is created and regulated under R.A. No. 3779, as amended by R.A. No. 4378.
• Trust Companies. A trust company is a legal business entity, usually a major division of a universal or commercial bank, that acts as a fiduciary agent or trustee on behalf of an individual person or corporate entity for the purpose of management, administration, and final transfer of property to the beneficiary.
• Credit Unions. A credit union is a financial depository institution that is mainly controlled and operated by its members for the following purposes: a. extending credit to members b. offering competitive interest rates. c. promoting the concept of thrift d. providing other types of financial services
• Credit unions exist to help and extend financial assistance to members by pooling and accumulating funds from all the members. The funds amassed from the membership fees shall be made available for borrowing by the members who are in need. Only those who have accounts with the credit union are considered members and owners.
• A financial intermediary is a type of financial institution that acts as the middleperson between two parties--the investors and thé borrowers. Financial intermediaries raise and accumulate money from investors and offer the accumulated money to individuals or corporate entities in need of financial assistance.
• Mutual Funds. Mutual funds accumulate money by selling shares of stocks of bonds of publicly-listed corporations to individuals or corporate investors. The funds from the proceeds of the sale are pooled together and channeled to the borrowers.
• Pension Fund. A pension fund is set up by a business for the purpose of paying the pension requirements of all private-sector employees who retire from the business organization upon rcaching their retirement age.
• Insurance Companies. An insurance company acts as a financial intermediary by pooling together the proceeds of insurance policies sold to the public and investing the accumulated funds in high-yield maturing securities from investment houses. Most of the money accumulated by insurance companies from insurance premiums is lent in either medium- or long-term loan to companies engaged in commercial real estate.
• An investment institution is a company engaged in buying sccurities of other companies which are listed in the stock exchange for investment purposes only. Hence, the buying and selling of financial securitics are not the primary business activities of an investment institution. In other words, an investment institution or company simply holds on to the securities it acquired from other companies. Financial securities are held up to the time of their mr 9/17 This financial institution earns income from holding the securities in the form of interesr or dividends.
• Market refers to the place where the sellers and the buyers of goods or services mect. In the market, the major business happening is the selling-buying activity, in which exchange occurs. The exchange process indicates that the seller and the buyer agree on the exchange price.
• Financial market refers to the place where the selling-buying activity occurs to ttade cquity securities such as bonds and stoçks, currencies, derivative securitics, notes, and mortgages. The selling-buying transaction happcning in the financial market is called trading activity, The kinds of financial transactions and financial securities traded determine the types of financial market.
• The capital market is a financial market where stocks and bonds are issued for mediam- and long-term periods. Stocks are treated as equity securities while bonds are technically considered debt sccuritics. Investors who hold stocks receive return from their investments in the form of dividends while those who hold bonds earn income in the form of interest.
• The financial market is classified as money market when the financial securities being ttàded have a petiod of less than one year. This type of financial security is called short-term security. Since short-term securities are not intended to be held for more than one year, theyare also referred to as trading securities.
• The term highly liquid or readily marketable implies that there are available sellers and buyers of the financial securities.
• The primary market is a financial market where a corporation can issue new shares of stock. Stock corporation that need fresh capital can raise the required funds by issuing new shares of stock. The primary market facilitates the raising of the required amount when the investors directly buy the new shares from the issuing corporation.
• The secondary market is a financial market where financial sccurities are traded between or among investors. In the secondary market, there is no issuance of new shares from thecorporation.
• A public market is a market in which the financial securities of publicly-listed corporation are traded following a standardized contract agreement and procedures. A corporation is classified as publicly-listed when its shares are available for sale to the public. Basically, a public market is an organized financial market.
• Financial instruments refer to contracts that give rise to the formation of financial assets of one entity and at the same time the creation of a financial liability or an cquity instrument in another entity.
• Accounting


  A service activity whose function is to provide quantitative information primarily financial in nature about economic entities that is intended to be useful in making economic decisions and in making reasoned choices among alternative courses of action
• Accounting


  • It is an art
  • It is financial in nature
  • It is a process
  • It is an information system
• Functions of accounting


  • Maintenance of systematic records
  • Communication of financial results of an entity
  • Accounting as the language of business
  • Meeting legal requirements
  • Protecting the assets or resources of a business
  • Providing assistance to management
• Accounting can be traced to ancient civilizations like Mesopotamia, Babylon, Assyria, and Samaria


  More than 7,000 years ago
• Had access to detailed financial information as evidenced by the deeds of the divine Augustus

  Roman Empire
• Merchants kept track of their businesses and trades through record-keeping methodologies

  Goryeo dynasty of Korea
• Luca Bartolomeo de Pacioli

  The father of accounting, published a book in 1494 that described the accounting methods used by Italian merchants, including the double-entry bookkeeping system
• The double-entry bookkeeping system is where in every business transaction, two accounts are always affected
• The evidence of the usage of the double-entry bookkeeping system has been in the book of Luca Pacioli