FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

(FABM)

2ND SEM 3RD QUARTER

LESSON 1 DEFINITION AND NATURE OF ACCOUNTING

IN A STORY CALLED BUSINESS, ACCOUNTING IS KNOWN AS ITS LANGUAGE AND THE ACCOUNTANT IS
THE STORYTELLER

Mahinhin sold 2 pairs of shoes to Maganda for Php.350.00 each. She bought it from the supplier for
Php.250.00 each.

1. How much is Mahinhin’s total sales? Answer: Php.700.00.( 350x350)  sold to Maganda
2. How much is the total cost for the two pairs of shoes? Answer: Php500.00. Bought from supplier
3. How much is Mahinhin’s total profit? Answer: Php.200.00 (700-500)

(ABOVE IS AN EXAMPLE OF SIMPLE ACCOUNTING)

 The word “accounting” comes from the French word “computer” meaning to count or score.
Other accounting terms are derived from Latin, such as ”debit” –“he owes” and “credit” – “he
trust”

ACCOUNTING DEFINED

“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 financial character, and interpreting
the results thereof.” - American Institute of Certified Public Accountants (AICPA)

“Accounting is the process of identifying, measuring, and communicating economic information to

permit informed judgment and decision by user of the information” – American Accounting Association
(AAA)

“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 decision.” -
Financial Reporting Standards Council (FRSC)

Accounting is a system that helps business track events that affect them. This process involves
identifying the events that affect a business, recording these, and communicating the summarized
results within a particular period to interested parties.
THERE ARE 3 IMPORTANT ACTIVITIES IMPLIED BY THE GIVEN DEFINITIONS

 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.
 RECORDING – This involves keeping a chronological diary of events that are measured in pesos
and cents. The diary referred to in the definition are the journals and ledgers which will be
discussed in the future chapters.
 COMMUNICATING – This occurs through the preparation and distribution of financial and other
accounting reports it also includes the analysis and interpretation of data for the users.

NOTE: The accounting process includes the bookkeeping function, but it only involves the recording of
economic events. It is therefore just one part of the accounting process.

NATURES OF ACCOUNTING:

 Accounting is a service activity. Accounting aids 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.
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 a means and not an end. Accounting is a tool to achieve specific objectives. It is
not the objective itself. Imagine that you dream to go to Paris someday. Accounting can be
thought of as the plane that will bring you to your destination.
 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.
LESSON 2: HISTORY OF ACCOUNTING

Theodore Roosevelt once said, “The more you know about the past, the better prepared you are for
the future.” In order to understand the accounting that we are practicing today and to adapt to future
developments, it is a must to know how it all started.

Accounting started as a simple recording of repetitive exchanges and has evolved in response to various
social and economic needs of men.

HISTORY OF ACCOUNTING

Evidences show that accounting dates back to as the ancient civilizations. The following section narrates
the evolution of accounting.

 Jericho
 The first accountant known was “Jerry of Jericho”. He was someone who needed to
keep track of what was stored in the temple or king’s granary.
 Egypt
 Dr. Gunter Dreyer of the German Institute of Archaeology recently discovered numerous
inscribed bone labels attached to bags of oil and linen in the tomb of King Scorpion I at
Abysdos, Egypt.
 The labels dated back 5300 years are the world’s earliest known writing. It describes
inventory owners, amounts, and suppliers.
 In ancient Egypt, the accountant was called the “eyes and ears” of the king.
 “Zero” was not yet invented.
 Sumeria and Mesopotamia
 Token system expanded. This was used as evidence of transactions.
 Clay “envelopes” or tablets dated from around 4000 BC in Sumeria.
 Complex tokens evolved about 3700 BC.
 Use of linens, notches, and other markings used as abstract representations of wealth
and the development of numbers.
 These evolved into cuneiform.
 Use of sealing tablets.
 Babylonia
 59 symbols were built from just two symbols.
 Greece
 The public economy of the Athenians had a highly developed system of accounting and
auditing.
 Accounts were kept by clerks and controlled by “checking clerks”
 Accountability was assured by public exposure of accounts on stone.

 Rome
 Practices of private life led to public accounting process
 Transactions were first entered in a “day book” (memorandum or “adversaria” in Latin).
 Monthly, the entries were transferred to the ledger (“condex tabulae”). The codex could
be used in court to substantiate contracts and claims.
 In government, there was separation of responsibilities.
 Use of tally sticks started.
 China, India, and Greece – Invention of Money
 Coins appeared to be a simultaneous but independent development at about the same
time in China, India, and Greece.
 63BC – 14AD
 The Roman government kept detailed financial information of the deeds of Emperor
Augustus regarding the stewardship of Roman resources.
 This is evidenced by Res Gestae Divi Augusti (The Deeds of the Divine Augustus)
 In 23BC, Augustus prepared a rationarium (account) which listed public revenues, the
amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials), and in
the hand names of the publican (public contractors); and that it included the names of
the freedmen and slaves from whom a detailed account could be obtained.
th
 14 Century
 The year Luca Pacioli, the Father of Accounting was born.
 He wrote the book entitled “Summa de Arithmetica, Geometria: Proportioni et
Proportionalita”.
 One section of the book was devoted to methods of recording merchant transactions,
including ideas about double-entry bookkeeping.
th
 17 Century (The French Revolution)
 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
 Rise of cost accounting
 Josiah Wedgewood – Entrepreneur and Cost Accountant
th
 18 Century
 William Seward Burroughs invented and patented the first workable adding machine in
1885 in St. Louis, Mo.
 Production increased dramatically after 1900.
th
 19 Century
 The beginning 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).

 Present
 At present times, accounting standards are already available to guide accountants in
their practice of the profession. Some of these standards are the GAAP, IFRS/PFRS and
the IAS/PAS. These standards are continually developed and improved to suit and
accommodate the changing needs of businesses and various organizations.
 The most notable development in the present is the increased dependence on
digitalization and smart technologies, continued globalization of the accounting
profession, and the imposition of increased regulations on the profession.

LESSON 3: USERS OF FINANCIAL INFORMATION

There is a saying “No man is an island”. There is no known business that is established just to transact
with itself. Every business is influenced by a certain internal and external factors. Internal parties are
those who are directly involved in the operations of the business. There are also parties, although
outside of the company, who have stake or interest in the business.

In order to build a lasting relationship, communication is key. In business communicating accounting

information to these different parties empowers them to make better economic decisions.

FINANCIAL INFORMATION
INTERNAL USERS EXTERNAL USERS
MANAGEMENT CUSTOMERS
EMPLOYEES CREDITORS
OWNERS POTENTIAL INVESTORS
GOVERNMENT
ACADEME
GENERAL PUBLIC

 EXTERNAL USERS – Are parties outside of the organization but affect and are affected by the
organization. They are communicated with accounting information usually in the form of
financial statements. The purpose of financial statements is to cater for the needs of such
diverse users of accounting information in order to assist them in making sound financial
decisions.
 CUSTOMERS – they are the main source of income of businesses and they acquire goods
and services for a fee. Customers have interest in the accounting information for
assessing the financial position of a business, especially when they have a long term
involvement with, as it enables to maintain a steady source of business.
 CREDITORS – they are the providers of additional funds when the initial investment of
owners is exhausted and lend resources to businesses usually in the form of money.
Creditors are interested in accounting information because it enables them to
determine the credit worthiness of the business. The credit terms and standards are set
on the basis of the financial health of a business, so, it helps them to analyze by using
the accurate information accordingly.
POTENTIAL INVESTORS – they are the providers of additional funds when the initial
investments or owners are exhausted and they invest resources in the business hoping
to earn decent returns. They need the information because they are concerned with the
risk inherent in investing and the returns. Since it is important to assess the feasibility of
making investments in the company, they need to analyze before they provide any
financial resources to the company.
 GOVERNMENT – this is an external user whose primary role is to regulate businesses
and studies financial statements to determine amount of taxes payable. Government
wants to know earnings or sales for a particular period for the purpose of taxation.
 ACADEME – they use accounting information primarily for academic purposes. The
academe is not confined in the accountancy field but for other fields of study like
banking and finances, entrepreneurship, and economics similarly make use of financial
statements.
 GENERAL PUBLIC – the general public is the last group considered to be an external
user. Citizens and residents of the country even though they do not plan to transact
with the business. They use financial statements to gauge the condition of the economy.
By analyzing the financial statements of the companies, the public can properly respond
to the various economic cycles.
 INTERNAL USERS – Refers to the members of a company’s management and other individuals
who use financial information in running and managing the business. They work within the
company and make decisions for the business.
 MANAGEMENT – the management makes decisions for the company and is considered
as the brain of the company. Management needs the accounting information to
evaluate the performance of the organization and position, so that the necessary
measures may be taken to bring improvements in terms of business results. Besides,
accounting information is useful to help managers do their jobs better.
 EMPLOYEES – they are persons in the company aside from managers and owners who
do not have authority to implement decisions. Employees use the accounting
information to find out the financial health, amount of sales and profitability of business
to determine their job security, the possibility of future remuneration, retirement
benefits, and employment opportunities.
 OWNER (OR STOCKHOLDERS) – they are the existing investors of the company and the
ones concerned mostly with the profits of the company. Owners use the accounting
information for analyzing the viability and profitability of their investments. Accounting
information enables the owners to assess the ability of the business organization to pay
dividends. It also leads them to determine any future course of action.
How these users make use of the accounting information will depend on the decisions they have to
make. Below is a summary of all the users of accounting information, their examples, and decisions that
they make based on the accounting information.

TYPES OF USERS EXAMPLES OF USERS DECISION MADE USING THE

ACCOUNTING INFORMATION/ BENEFITS
FROM ACCOUNTING INFORMATION
CUSTOMERS Clients, people acquiring goods or Whether or not to build relationship with
services of a business for a fee. the business
CREDITORS Banks, lending institutions, wealthy Whether or not to lend resources to the
individuals and sometimes the business; try to see the risks before
government lending funds
POTENTIAL INVESTORS Wealthy individuals, other businesses Whether or not to invest in the business,
planning to invest primary concern is the ability of the
business to provide acceptable returns.
GOVERNMENT Different government agencies and Overseas business operation with the end
taxing authorities goal of improving the economy, check the
accuracy of financial statement to ensure
Correct amount of taxes payable
ACADEME Professors, lecturers, students and Uses accounting information in teaching
researchers accountancy, researches loopholes, and
possible improvements in the field
GENERAL PUBLIC Common people not connected with Concerned with the overall performance
the company of the economy, use financial information
to estimate economic performance
MANAGEMENT Board of Directors, Top Management, Uses financial information in making
middle-level managers, supervisors business decision
EMPLOYEES Laborers, Field workers, non- Check if the business is profitable enough
managerial employees to provide compensation and other
benefits
OWNERS OR STOCKHOLDERS Founders of the company, owners, Concerned with the returns earned from
stockholders, partners, proprietors their investments, owners taking active
roles in the operations of the business