Fundamentals of Accountancy, Business, and Management 1

ACCOUNTING DEFINED economic events of the organization to

"Accounting is the art of recording, classifying, intended users. These activities make up

and summarizing in a significant manner and in the accounting process.

terms of money, transactions and events which  IDENTIFYING - This involves selecting

are, in part at least, of financial character, and economic events that are relevant to a

interpreting the results thereof." particular business transaction. The

- American Institute of Certified Public economic events of an organization are

Accountants (AICPA) referred to as transactions.

"Accounting is the process of identifying,  RECORDING - This involves keeping a

measuring and communicating economic chronological diary of events that are

information to permit informed judgment and measured in pesos and cents. The diary

decision by users of the information." referred to in the definition are the journals

- American Accounting Association (AAA) and ledgers which will be discussed in

"Accounting is a service activity. Its function is future chapters.

to provide quantitative information, primarily  COMMUNICATING - This occurs through

financial in nature, about economic entities, the preparation and distribution of financial

that is intended to be useful in making and other accounting reports it also

economic decision." includes the analysis and interpretation of

- Financial Reporting Standards Council data for the users. You should also note

(FRSC) that the accounting process includes the

 To summarize the given definitions, bookkeeping function, but it only involves

accounting is a system that helps the recording of economic events. It is

businesses track events that affect them. therefore just one part of the accounting

This process involves identifying the events process.

that affect a business, recording these, and Based on the definition of accounting as

communicating the summarized results we have discussed earlier, we could derive the

within a particular period to interested following features or natures of accounting:

parties. 1. Accounting is a service activity.

 There are three (3) important activities Accounting aids decision makers by

implied by the given definitions - providing them financial reports that will

identifying, recording, and communicating

guide them in coming up with sound from start to finish, accounting deals with
decisions. financial information and financial
2. Accounting is a process. A process information only. It does not deal with
refers to the method of performing any non-monetary or non-financial aspects of
specific job step by step according to the such information.
objectives or targets. Accounting is 5. Accounting is a means and not an
identified as a process, as it performs the end. Accounting is a tool to achieve
specific task of collecting, processing, and specific objectives. It is not the objective
communicating financial information. In itself. Imagine that you dream to go to
doing so, it follows some definite steps like Paris someday. Accounting can be thought
the collection, recording, classification, of as the plane that will bring you to your
summarization, finalization, and reporting destination.
of financial data. 6. Accounting is an information system.
3. Accounting is both an art and a Accounting is recognized and characterized
discipline. Accounting is the art of as a storehouse of information. As a
recording classifying, summarizing, and service function, it collects processes and
finalizing financial data. The word 'art' communicates financial information of any
refers to the way something is performed. entity. This discipline of knowledge has
It is behavioral knowledge involving a evolved to meet the need for financial
certain creativity and skill to help us attain information as required by various
some specific objectives. Accounting is a interested groups.
systematic method consisting of definite HISTORY OF ACCOUNTING
techniques and its proper application
Evidences show that accounting dates
requires skill and expertise. So, by nature,
back to as early as the ancient civilizations.
accounting is an art. Because it follows
The following section narrates the evolution of
certain standards and professional ethics, it
accounting.
is also a discipline.
 Jericho
4. Accounting deals with financial
 The first accountant known was "Jerry
information and transactions.
of Jericho". He was someone who
Accounting records financial transactions
needed to keep track of what was stored
and data, classifies these and finalizes their
in the temple or king's granary.
results given for a specified period of time,
as needed by their users. At every stage,
 Egypt  Accountability was assured by public
 Dr. Gunter Dreyer of the German Institute exposure of accounts on stone.
of Archaeology recently discovered  Rome
numerous inscribed bone labels attached  Practices of private life led to public
to bags of oil and linen in the tomb of accounting process
King Scorpion I at Abydos, Egypt.  Transactions were first entered in a "day
 The labels dated back 5300 years are the book" (memorandum or "adversaria" in
world's earliest known writing. It Latin).
describes inventory owners, amounts,  Monthly, the entries were transferred to
and suppliers. the ledger ("codex tabulae"). The codex
 In ancient Egypt, the accountant was could be used in court to substantiate
called the "eyes and ears" of the king. contracts and claims.
 "Zero" was not yet invented.  In government, there was separation of
 Sumeria and Mesopotamia responsibilities.
 Token system expanded. This was used  Use of tally sticks started.
as evidence of transactions.  China, India, and Greece - Invention
 Clay "envelopes" or tablets dated from of Money
around 4000 BC in Sumeria  Coins appeared to be a simultaneous but
 Complex tokens evolved about 3700 BC independent development at about the
 Use of lines, notches, and other markings same time in China, India, and Greece.
used as abstract representations of  63BC-14AD
wealth and the development of numbers  The Roman government kept detailed
 These evolved into cuneiform. financial information of the deeds of
 Use of sealing tablets Emperor Augustus regarding the
 Babylonia stewardship of Roman resources.
 59 symbols were built from just two  This is evidenced by Res Gestae Divi
symbols. Augusti (The Deeds of the Divine
 Greece Augustus)
 The public economy of the Athenians had  In 23BC, Augustus prepared a
a highly developed system of accounting rationarium (account) which listed public
and auditing. revenues, the amounts of cash in the
 Accounts were kept by clerks and aerarium (treasury), in the provincial fisci
controlled by "checking clerks”. (tax officials), and in the hands of the
publicani (public contractors); and that it  19th Century
included the names of the freedmen and  The beginning of Modern Accounting in
slaves from whom a detailed account Europe and America
could be obtained.  The modern, formal accounting
 14th Century profession emerged in Scotland in 1854
 The year Luca Pacioli, the Father of when Queen Victoria granted a Royal
Accounting was born. He wrote the book Charter to the Institute of Accountants in
entitled "Summa de Arithmetica, Glasgow, creating the profession of the
Geometria: Proportioni et Chartered Accountant (CA).
Proportionalita".  Present
 One section of the book was devoted to  At present times, accounting standards
methods of recording merchant are already available to guide accountants
transactions, including ideas about in their practice of the profession. Some
double-entry bookkeeping. of these standards are the GAAP,
 17th Century (The French Revolution) IFRS/PFRS and the IAS/PAS. These
 The thorough study of accounting and standards are continually developed and
development of accounting theory began improved to suit and accommodate the
during this period. Social upheavals changing needs of businesses and various
affecting government, finances, laws, organizations.
customs, and business had greatly  The most notable development in the
influenced the development of present is the increased dependence on
accounting. digitalization and smart technologies,
 Rise of cost accounting continued globalization of the accounting
 Josiah Wedgwood - Entrepreneur & Cost profession, and the imposition of
Accountant increased regulations on the profession.
 18th Century GENERALLY ACCEPTED
 William Seward Burroughs invented and
ACCOUNTING PRINCIPLES (GAAP)
patented the first workable adding
Assumptions
machine in 1885 in St. Louis, Mo.
1. Monetary Unit. It states that only
 Production increased dramatically after
transaction data that can be expressed in
1900.
terms of money can be included in the
accounting records. It also assumes that a
specific currency (Philippine peso) must be b.) Fiscal year, which starts at any
consistently used by a business in month of the year other than January and
recording its transactions. It further ends twelve months after.
assumes that the peso is stable over time; The time period assumption states that the
no adjustments are made for inflation or economic life of a business can be divided into
deflation (stability of peso). artificial time periods.
Example: Employee satisfaction and Example: The economic life of a business may
percent of international employees are not be divided into months, quarters, and years.
transactions that should be included in the 4. Going Concern. This assumption dictates
financial records. that the business is treated as continuing
2. Economic Entity/Accounting Entity. in its operation indefinitely and will
The economic entity assumption states continue in operation to carry out its
that the activities of the entity must be existing objectives.
kept separate and distinct from the Implications: Depreciation and amortization
activities of the owner of all other are used. Plant assets are recorded at cost
economic entities. instead of liquidation value. Items are
Example: The owner has a business labeled as fixed or long-term.
meeting with a prospective client. The Principles
expenses that come with that meeting 1. Revenue Recognition Principle. The
should be part of the company's expenses. revenue recognition principle dictates that
If the owner pays for gas for his personal revenue should be recognized in the
use, it should not be included as part of accounting period in which it is earned.
the company's expenses. When a sale is involved, revenue is
3. Time Period/Periodicity. This recognized at the point of sale. The point
assumption describes the time intervals of sale is the time the goods are
with which financial statements are transferred or delivered to the customer
prepared. The indefinite life of a business even if payment was not yet received. It is
is divided into time periods for reporting also known as Accrual Accounting.
purposes which is ordinarily twelve 2. Matching Principle. It requires that
months. Further, the annual time period expenses be matched with revenues as
may either be: long as it is reasonable to do so. Expenses
a.) Calendar year, which starts on are recognized not when the work is
January 1 to December 31; and, performed, or when a product is produced,
but when the work or the product actually  Cost is reliable because it is
makes its contribution to revenue. Only if a) objectively measurable;
no connection with revenue can be b) factual; and
established, cost may be charged as c) verifiable.
expenses to the current period (e.g. Office Constraints
salaries and other administrative 1. Materiality relates to an item's impact on
expenses). This principle allows greater a firm's overall financial condition and
evaluation of actual profitability and operations. An item is material if it changes
performance (shows how much was spent the opinion/decision of a reasonable
to earn revenue). person upon considering the amount and
Examples: cost of goods sold, depreciation the nature of transaction.
3. Full Disclosure Principle. The full 2. Conservatism dictates that when in
disclosure principle requires that doubt, choose the method that will be the
circumstances and events that make a least likely to overstate assets and income.
difference to financial statement users be It is also known as prudence.
disclosed. Compliance with the full Additional Concepts
disclosure principle is accomplished 1. Use of Estimates and Judgements. It
through allows accountants and management to
 the data in the financial statements; and use approximations in the preparation of
 the notes that accompany the financial statements.
statements. 2. Objectivity. Financial statements and
A summary of significant records of a company should be unbiased
accounting policies is usually the first and based on solid evidence.
note to the financial statements. 3. Substance over Form. Economic
4. Historical Cost Principle. The historical substance of transactions and events must
cost principle dictates that assets be be recorded in the financial statements
recorded at their cost. Cost is used rather than just their legal form in order to
because it is both relevant and reliable. present a true and fair view of the affairs
 Cost is relevant because it represents of the entity.
a) the price paid;
b) the assets sacrificed; and
c) the commitment made at the date of
acquisition.