Introduction to Accounting Part 1

Introduction

Accounting is the system of recording financial transactions with both numbers and text in the form of
financial statements. It provides an essential tool for billing customers, keeping track of assets and
liabilities (debts), determining profitability, and tracking the flow of cash. The system is largely self-
regulated and designed for the users of financial information, who are referred to as stakeholders:
business owners, lenders, employees, managers, customers, and others. Stakeholders utilize
financial statements to help make business, lending, and investment decisions.

Objectives
At the end of the module, the learners will be able to:
 define accounting
 describe the nature of accounting
 explain the function of accounting
 narrate the history/ origin of accounting
 differentiate the branches of accounting
 explain the kind/type of services rendered in each of these branches
 define external users and gives examples
 define internal users and give examples
 identify the type of decisions made by each group of users
 describe the type of information needed by each group of users
 explain the varied accounting concepts and principles
 solve exercises on accounting principles as applied in various cases

Pre-task:

The following are terms that are related to finance, please unscramble to discover them

1. gtbedu _____________________
2. tciasniuoqi _____________________
3. rseecrous _____________________
4. nosbgtiilao _____________________
5. arezdeli _____________________

While Task:

Lesson 1: Introduction to Accounting

DEFINITION OF ACCOUNTING
The first thing one should do, no matter what subject one is studying, is to define the subject itself. In
other words...What is this thing all about?
Let us now define accounting.

Accounting is the systematic process of measuring and reporting and reporting relevant financial
information about activities of an economic organization or unit.

The Committee on terminology of the American Institute of Certified Public Accountant in 1953
defined accounting as 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".
The Philippine Institute 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.

NATURE OF ACCOUNTING

1. Accounting is a systematic process

Process is a series of actions that produce something or that lead to a particular result.

2. Accounting is an art.
Art is a skill acquired by experience, study or observation. It is also defined as an occupation
requiring knowledge or skill.

3. Accounting is a service activity.

Service is the occupation or function of serving. Activity is something that is done as work or
for a particular purpose.

FOUR ASPECTS OF ACCOUNTING

1. Recording- writing down business transactions in chronologically order in the books of account as
they transpire.

2. Classifying- sorting similar and related business transactions into the three categories of assets,
liabilities, and owner’s equity.

3. Summarizing- preparing the financial statements form the transactions recorded in the books of
account that are designed to meet the information needs of its users.

4. Interpreting- representing the qualitative and quantitative financial information about the business
transactions in a language comprehensible to the users of financial statements.

THE BASIC FUNCTIONS OF ACCOUNTING IN BUSINESS

The aspects of accounting can be summed up to one basic function which is the generation of
relevant and timely financial information for interested parties. The data provided by accountants can
assist investors, government agencies, creditors, and management in making sound decisions.

HISTORY OF ACCOUNTING

Knowledge knows no bounds. This is equally true in accounting. There are many stories of
how accounting began, but most writers agree that it has a long history, going back 5,000 years or so.
Legend has it that wealthy individuals, wanting to keep track of their possessions (cattle, stores of
grain, gold ornaments and so forth), hired scribes to keep records of additions and deletions to their
lists of possessions as they bought, sold, or traded them. One supposes that that they wanted to be
sure that any changes were legitimate; that losses were not due to theft, and that if 100 cattle were
purchased that the herd increased by 100. From time to time, a count of possessions would be made
and compared to the records maintained by the scribe. Any unexplained losses would be a signal that
something was amiss and worthy of investigation.
A Franciscan monk, Luca Di Borgo Pacioli is the name that looms largest in the history of early
accounting. He is credited with the ownership of the first written work about algebra, geometry and
bookkeeping entitled “Summa de Arithmetica Geometria Proportionnioni and Proportionalita,”
(“Everything about Arithmetic, Geometry nd Proportions”), written in 1494. The following year, Pacioli
wrote “De Computis et Scripturis” which clearly defined double entry bookkeeping principles, thus
recognizing Luca Pacioli as the “Father of Modern Accounting.”
Recent years archeological expeditions have uncovered many splendid examples of craftsmanship in
the culture of ancient China, Egypt, India, Mesopotamia, and Astec and Mayan Indian civilization with
very sound historical contributions to the science of accounting.
The art of writing and the use of arithmetic. If writing and arithmetic were absent, the concept of
business bookkeeping would not exist.
The use of money. Money is the medium of exchange. With man’s ability to express values in terms
of pesos or dollars, arithmetic could be used to compute values, prices, costs, profits and give
genuine significance and understanding to financial records.
The recognition of ownership of private property and the use of capital. Here man established the
rights of ownership to private property –to own it, to buy it, to sell it or exchange it, and to put it to
work as wealth productively employed. If these were not present, there would nothing to record or no
records to keep for business.
The growth of commerce and trade. This is the foundation of the business transaction through the
interchange of commodities and services rendered. Without commerce and trade, the need for
financial records would not necessarily extend beyond government taxation.
The use of credit. This powerful force of business offered man the opportunity to utilize existing
commodities, goods, and services in the present with payment in full deferred to a future date.
Without money and credit, each business transaction would be closed at the time of transaction.
Man brought each of these ingredients into existence as the need arose. Each added important
progressive step to the development of the science of accounting.