Introduction to Accounting

Fundamentals of Accountancy, Business and Management 1

Ms. Mica Collen P. Isidro

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SENIOR HIGHSCHOOL FABM 1
Unit 1
INTRODUCTION

TOPIC OR
Module 1: Introduction to Accounting
LESSON NAME
COVERAGE
WEEK 1: Dec.13 – 17, 2021
DATES
The learners shall be able to:
MOST
 define accounting
ESSENTIAL
 describe the nature of accounting
LEARNING
 narrate the history/origin of accounting
COMPETENCY  define external users and gives examples
define internal users and give examples
Fundamentals of Accountancy, Business and Management 1
Rex Banggawan, CPA, MBA
Darrel Joe Asuncion, CPA, MBA
RESOURCES
Basic Accounting
WIN Ballada, CPA, MBA
Susan Ballada, CPA

LESSON OUTLINE

A B C

INTRODUCTION TO
ENRICHMENT TITLE AND MATERIALS
ACCOUNTING

D E F

PRACTICE EXERCISE LESSON RECAP SOLVING PROBLEM

ENRICHMENT
Define accounting.
1. Is my business earning?
2. How much daily or monthly sales do I need in order to recover my fixed cost?
3. Do I need to hire additional workers to help me with my production?
4. Can I afford to set up a new store in another place? Where do I get the funds?
5. Can I afford to pay a bank loan?

TITLE AND MATERIALS

 Title of the Lesson: Introduction to Accounting

 Materials for discussion:

o MS PowerPoint
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SENIOR HIGHSCHOOL FABM 1
INTRODUCTION TO ACCOUNTING
DEFINITIONS 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.” (Statement of Financial
Accounting Standards No. 1, “Basic Concepts and Accounting Principles Underlying Financial Statements of
Business Enterprises” Manila: Accounting Standards Council, 1983, par. 1)
“Accounting is an information system that measures, processes and communicates financial information about
an economic entity” (Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by
Business Enterprises” Norwalk, Conn: Financial Accounting Standards Board, 1978, par. 9)
“Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information (American Accounting Association)
“Accounting is an 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”
(American Institute of Certified Public Accountants)

IDENTIFYING – this involves selecting economic events that are relevant to a particular business transaction
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:
• Sales of bread and other bakery products
• Purchases of flour that will be used for baking
• Purchases of trucks needed to deliver the products

RECORDING – this involves keeping a chronological diary of events that are measured in pesos. The diary
referred to in the definition are the journals and ledgers which will be discussed in future chapters.

COMMUNICATING – occurs through the preparation and distribution of financial and other accounting reports.

NATURE OF ACCOUNTING
According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-scope-of-accounting.html):
“Accounting is a systematic recording of financial transactions and the presentation of the related information
to appropriate persons.” Based on this definition we can derive the following basic features of accounting:

 Accounting is a service activity. Accounting provides assistance to decision makers by providing them
financial reports that will guide them in coming up with sound decisions.
 Accounting is a process: A process refers to the method of performing any specific job step by step
according to the objectives or targets. Accounting is identified as a process, as it performs the specific
task of collecting, processing and communicating financial information. In doing so, it follows some
definite steps like the collection, recording, classification, summarization, finalization, and reporting of
financial data.
 Accounting is both an art and a discipline. Accounting is the art of recording, classifying, summarizing
and finalizing financial data. The word ‘art’ refers to the way something is performed. It is behavioral
knowledge involving a certain creativity and skill to help us attain some specific objectives. Accounting
is a systematic method consisting of definite techniques and its proper application requires skill and
expertise. So by nature, accounting is an art. And because it follows certain standards and professional
ethics, it is also a discipline.
 Accounting deals with financial information and transactions: Accounting records financial transactions
and data, classifies these and finalizes their results given for a specified period of time, as needed by
their users. At every stage, from start to finish, accounting deals with financial information and financial
information only. It does not deal with non-monetary or non-financial aspects of such information.
 Accounting is an information system: Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes and communicates financial information of any
entity. This discipline of knowledge has evolved to meet the need for financial information as required
by various interested groups.

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SENIOR HIGHSCHOOL FABM 1
THE HISTORY OF ACCOUNTING
Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of
men. Accounting started as a simple recording of repetitive exchanges. The history of accounting is often seen
as indistinguishable from the history of finance and business.

Following is the evolution of accounting:

1. The Cradle of Civilization
Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to
Central and South America. The oldest evidence of this practice was the “clay tablet” of
Mesopotamia which dealt with commercial transactions at the time such as listing of accounts
receivable and accounts payable.
2. 14th Century - Double-Entry Bookkeeping
The most important event in accounting history is generally considered to be the dissemination of
double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy. Pacioli
was much revered in his day, and was a friend and contemporary of Leonardo da Vinci. The Italians
of the 14th to 16th centuries are widely acknowledged as the fathers of modern accounting and
were the first to commonly use Arabic numerals, rather than Roman, for tracking business
accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a
detailed chapter on double-entry bookkeeping.
3. French Revolution (1700s)
The thorough study of accounting and development of accounting theory began during this period.
Social upheavals affecting government, finances, laws, customs and business had greatly
influenced the development of accounting.
4. The Industrial Revolution (1760-1830)
Mass production and the great importance of fixed assets were given attention during this period.
5. 19th Century – The Beginnings of Modern Accounting in Europe and America
The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria
granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the
Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain
came to the U.S. to audit British investments. Some of these accountants stayed in the U.S., setting
up accounting practices and becoming the origins of several U.S. accounting firms. The first
national U.S. accounting society was set up in 1887. The American Association of Public
Accountants was the forerunner to the current American Institute of Certified Public Accountants
(AICPA).
In this period rapid changes in accounting practice and reports were made. Accounting standards to
be observed by accounting professionals were promulgated. Notable practices such as mergers,
acquisitions and growth of multinational corporations were developed. A merger is when one
company takes over all the operations of another business entity resulting in the dissolution of
another business. Businesses expanded by acquiring other companies. These types of transactions
have challenged accounting professionals to develop new standards that will address accounting
issues related to these business combinations.
6. The Present - The Development of Modern Accounting Standards and Commerce
The accounting profession in the 20th century developed around state requirements for financial
statement audits. Beyond the industry's self-regulation, the government also sets accounting
standards, through laws and agencies such as the Securities and Exchange Commission (SEC). As
economies worldwide continued to globalize, accounting regulatory bodies required accounting
practitioners to observe International Accounting Standards. This is to assure transparency and
reliability, and to obtain greater confidence on accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain competitive,
businesses everywhere feel the need to operate globally. The trend now for accounting
professionals is to observe one single set of global accounting standards in order to have greater
transparency and comparability of financial data across borders.

THERE ARE TWO BROAD CATEGORIES OF USERS OF FINANCIAL INFORMATION: INTERNAL

AND EXTERNAL USERS.

INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan, organize, and run
the business. These users are directly involved in managing and operating the business. These include
marketing managers, production supervisors, finance directors, company officers and owners.

Internal users (Primary Users) of accounting information include the following:

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SENIOR HIGHSCHOOL FABM 1
Management
Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position and take appropriate measures to
improve the company results. Sufficiency of cash to pay dividends to stockholders; pricing decisions

Employees
Information need: profit for the period, salaries paid to employees
Decisions supported: job security, consider staying in the employ of the company or look for other employment
opportunities

Owners
Information need: profit or income for the period, resources or assets of the business, liabilities of the business
Decisions supported: considerations regarding additional investment, expanding the business, borrowing funds
to support any expansion plans.

Accounting information is presented to internal users usually in the form of management accounts, budgets,
forecasts and financial statements. This information will support whatever decision of the internal users.

EXTERNAL USERS
External users are individuals and organizations outside a company who want financial information about the
company. These users are not directly involved in managing and operating the business. The two most
common types of external users are potential investors and creditors. Potential Investors use accounting
information to make decisions to buy shares of a company. Creditors (such as suppliers and bankers) use
accounting information to evaluate the risks of granting credit or lending money. Also included as external
users are government regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of
Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security System (SSS), and
Local Government Units (LGUs).

External users (Secondary Users) of accounting information include the following:

Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors
according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders
of finance such as banks.

Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.
Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a
reasonable return on their investment before they commit any financial resources to a company.

Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a
stable source of supply in the long term.

Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information
is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely
on such information in forming their decisions.

PRACTICE EXERCISE
Answer the following questions:

 Explain why accounting is known as the “language of business?”

 Define accounting and explain the concepts learned from its definition.
 Discuss the nature of accounting
 Who is the father of Accounting?
 What is the first book written as a revolutionary change in the field of Accounting?
 What is double entry system in bookkeeping?

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SENIOR HIGHSCHOOL FABM 1
LESSON RECAP
 Accounting is a system that identifies, records, and communicates relevant economic events to
interested users.
 Nature of accounting: Accounting is a process; an art; deals with financial information and transactions;
a means, not an end; and an information system.
 Functions of accounting in business: Keeping systematic record of business transactions; protecting
properties of the business; communicating the results to various parties interested in or connected in
the business; and meeting legal requirements.
 History of accounting: From its early development in Mesopotamia to the modern accounting system
used in the present day.
 Internal users of accounting information are those who are involved in planning, organizing and running
the business. They need more detailed information on a timely basis in order to support their decisions.
Examples of these internal users are managers, employees and owners.
 The external users of accounting information are those individuals or organizations outside a company
who are interested in its financial information. Examples of these external users are potential investors,
suppliers and government agencies.

SOLVING PROBLEMS
Part I: Definition, Nature and Function of Accounting
1. The Basic purpose of accounting is _____________.
a. To provide the information that the managers of an economic entity need to control its
operations.
b. To provide information that the creditors of an economic entity can use in deciding whether to
make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making rational
economic decision.
2. It means recognition or non-recognition of accountable events.
a. Identifying
b. Recording
c. Measuring
d. Communicating
3. It means putting an amount on the accountable events
a. Identifying
b. Recording
c. Measuring
d. Communicating
4. Who is known as father of accounting?
a. Lucas Asuncion
b. Luca Pacioli
c. Conrado T. Valix
d. Joel Tan Torres
5. This paper-like material was used for record-keeping and administration, such as tax receipts and court
documentation, although literature, religious texts and music were also recorded.
a. Abacus
b. Papyrus
c. Barter System
d. Code of Hammurabi

Part II: Users of accounting information

The following are users of financial statements: Identify the users either external users or internal users.

1. Customers
2. Bureau of Internal Revenue
3. Labor Union
4. Marketing manager
5. Production Supervisor

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SENIOR HIGHSCHOOL FABM 1
6. Securities and Exchange Commission
7. Store managers
8. Suppliers
9. Vice President for Finance
10 Prospective investors
.

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