Lesson 1.

1 Introduction to Accounting

The Accounting Process

Accounting is the process of identifying and analyzing,

recording or journalizing and communicating economic
information to permit informed judgment and decisions by
users of information. Therefore, an accountant should
identify which business activities and transactions are
relevant to these concerns and which are not.

Next, the accountant should record or journalize the A bookkeeper is responsible for developing and

identified financial information in the accounting books. maintaining accounting records. On the other hand, an

This process is also known as bookkeeping, where accountant supplies financial information to make

financial information is recorded in journals (books of informed judgments and better decisions. Therefore, the

original entry) and ledgers (books of final entry). essence of accounting is “decision-usefulness.”

Finally, the accountant communicates the results of the The Nature of Accounting

first two phases through financial statements. Identifying Accounting encompasses a wide array of tasks, sub-
and recording financial transactions are pointless if the tasks, and responsibilities related to business operations.
information is not communicated to internal and external The following points summarize the nature of accounting:
users. This crucial function in communicating financial
1. Accounting is a service activity. All the processes that
information is why accounting is also considered the
an accountant undergoes and accomplishes are used by
universal language of business.
the business organization and its units in day-to-day data is vital for this information system. These reports tell
operations. users how well an entity is performing financially.

2. Accounting is a process. It is a step-by-step and Functions of Accounting in Business

systematic procedure to produce results relevant to the
Accounting is a multifaceted field. Although it centers
management and other potential users.
primarily on recording and interpreting financial data, the
3. Accounting is an art and a discipline. Although end goal of accounting is to provide relevant information
accounting involves well-defined activities and necessary to make decisions for the organization's
procedures, businesses and their accountants could still success.
devise their own tactics on how to go through the
1. Keeping systematic records of business
rigorous process, which, on the other hand, will require
transactions.
much discipline to finish.
Accounting ensures that the correct and relevant data is
4. Accounting deals with financial information. The
organized, detailed, and understandable to reflect the
data that accountants work with is financial in nature. If
business's economic standing. It provides users, such as
accounting information is useful, it must be expressed as
the management and investors, with relevant information
a common financial denominator. Therefore, accountable
needed to make informed decisions.
economic transactions and events have a monetary
value. 2. Protecting properties of the business.

5. Accounting is an information system. It measures An accountant's responsibility is to ensure that the

business activities, processes information into reports, business's assets are monitored and performing well.

and communicates these to decision-makers. Creating Accounting allows the management to examine whether

financial statements and documents based on relevant the assets on hand coincides with the recorded data.
Keeping track of assets, most especially cash, must be History of Accounting
thorough to avoid fraud, corruption, and theft. With proper
Historical records show that earlier forms of accounting
stewardship of resources, businesses produce profit and
had been practiced since ancient civilizations.
overall economic wealth.
Mesopotamian Era (3500 B.C.)
3. Communicating results to various parties.
The informal recording of money and trade-related
Accounting aims to communicate the financial health and
information started as early as the Mesopotamian Era:
performance of a company effectively. The accuracy of
5,000 years before the popularization of the bookkeeping
the information it produces is essential for internal and
system. Mesopotamians pioneered the use of stone
external users to make sound decisions. Accounting is
tablets to record commercial transactions such as sales
also essential in auditing. Auditing is an independent
and loans. These tablets also provided evidence that the
undertaking where the information presented from a
Hammurabi Code enforced the rules and regulations for
completed accounting process is evaluated to determine
commercial transactions. It is believed that the ancient
whether it abides with established accounting standards
accounting system contributed to the economic and
and does not favor specific groups or individuals.
political success of Nineveh and Babylon, being the
4. Meeting legal requirements. centers of trade and commerce in their respective eras.

It is the accountant's responsibility and duty to ensure Luca Pacioli (14th Century)
that the company meets all the legal requirements and
Considered the father of modern accounting. His work,
regulations set forth by the government, including
the Summa de Arithmetica, Geometrica, Proportioni et
compliance with trade and business standards, fair
Proportionalita (Everything About Arithmetic, Geometry,
employment agreements, and, most importantly, proper
and Proportion), published in Venice, Italy in 1494 A.D.,
payment of taxes.
was recognized as the precursor for the double-entry
system. The double-entry system is what we know today processes. Accounting systems continually adapt to the
as the rules of debits and credits. It is the process that needs of the global market and the business
paved the way for modern accounting to arise. Across environment. The existence of multinational and
time, the double-entry system had been one of the most transnational corporations required uniform accounting
used bases for various accounting principles and standards across different countries and industries. The
concepts. Generally Accepted Accounting Principles (GAAP)
and the International Financial Accounting Standards
Industrial Revolution (17th and 18th Century)
(IFRS) are considered the most credible accounting
In this period, accounting was emphasized with utmost standards used today by different countries, corporations,
importance and relevance. The industrial revolution was and governments. The Philippines adheres to the
characterized by the development of machines for the Philippine Financial Accounting Standards (PFRS), which
mass production of goods. Thus, a system of checks and are patterned after the IFRS.
balances to monitor the process and expenses in
Lesson 1.2: Branches of Accounting
production became necessary.
Accounting is a process employed by individuals,
Queen Victoria (19th Century)
organizations, institutions, and businesses. It provides
The first recorded accounting standards were attributed the necessary financial information so that users can
to the British Empire’s Queen Victoria reign. She was make informed judgments and decisions.
known to establish a commission that monitored the
8 Branches of Accounting
reported transactions of companies, which eventually
evolved into the modern process of auditing. Different Financial Accounting
countries and international organizations benchmarked
This branch of accounting is concerned with preparing
this practice and developed their standards and
financial reports at least once a year to be presented to
external users of accounting information. These financial Management Accounting
reports, also called financial statements, follow the
This branch of accounting is related to preparing,
generally accepted principles or standards set by
analyzing, and communicating accounting information to
accounting regulatory bodies. The Philippine Financial
the internal users or people working within an
Reporting Standards (PFRS), the financial accounting
organization, i.e., the owners, management, and
standard followed in the Philippines, adhere to the
employees. Management accounting aims to help
International Financial Reporting Standards (IFRSs).
business stakeholders make informed decisions
These accounting standards are set to ensure concerning their day-to-day operations vis-a-vis the
consistency and comparability of financial statements, general direction of the company. It is important to note
regardless of the locality or the type of industry. For that since management accounting aims to meet the
instance, a creditor who is not familiar with a specific needs of internal users, it does not need to follow the
industry (e.g., mobile gaming) could still assess the risks PFRS.
associated with providing debt to a company in that
How is the business or organization performing
sector (e.g. mobile game development company)
financially? What expenses can be cut? What is the
because its financial statements follow the generally
projection of sales for a product or service? Did a
accepted accounting standards. Through the information
particular business decision have a positive or negative
provided by financial accounting, investors, creditors,
impact on a company’s financial performance? These are
stock brokers, and other concerned parties can also
some of the questions that can be answered through the
compare the performance of businesses (e,g, small and
practice of management accounting.
big companies, start-up, and established firms, etc.) and
decide where to invest, buy stocks, or lend money to. Cost Accounting
This branch of accounting records and analyzes the branch of management accounting since it contributes
information related to the costs in producing goods or more to the said branch than financial accounting.
services, such as the object and driver of costs, direct
and indirect costs, and fixed and variable costs. One
example of cost accounting in a business is reviewing the Government Accounting

cost of manufacturing goods or providing services to set This branch of accounting deals with how the government
a fair selling price. Also, this branch of accounting can apportions and spends the financial resources allocated
inform the management of the difference in total to them. Government accounting also involves preparing
production cost if new machines are purchased, if and analyzing financial reports that show where the
different materials are used, or if the company would government funds come from and how it is spent. This
employ less labor. branch of accounting provides information on the

Cost accounting provides information for both financial position and the operations of government

management and financial accounting that is useful in agencies. The information in government accounting is

making decisions concerning the operations of a useful both for internal users (i.e., government officials,

business or an organization. It may be considered a oversight committees, employees) and external users

crossroads of financial and management accounting. For (i.e., citizens).

instance, cost accounting determines the production cost. In the Philippines, government accounting could provide
It is used in management accounting to determine price information on whether or not the disbursement of funds
decisions. On the other hand, it is used in financial is aligned with the approved budget by Congress and
accounting to determine the cost of goods sold and the whether or not it is utilized according to state priority,
ending inventory presented in the financial statements. standards, and laws. Since government accounting is
However, cost accounting is more known to be a sub- related to public governance, the information provided in
this branch is useful in the checks and balances financial reports reflect fairness and compliance with the
mechanism in the government. accounting standards. On the other hand, internal
auditing is performed by someone who works for the
There are three main agencies involved in government
reporting entity. It checks the validity of accounting
accounting. These are the Department of Budget
records, discovers operational inefficiencies, and
Management (prepares the budget), the Bureau of
identifies weaknesses in the internal control measures.
Treasury (Disburses cash to the different government
agencies), and the Commission on Audit (Monitors the Tax Accounting
use and allocations of public funds).
This branch of accounting covers everything related to
Auditing the payment of taxes: computation of income tax and tax
returns, assessment of repercussions of tax decisions,
This branch of accounting deals with verifying the
coming up with ways to minimize tax legally, and other
correctness of financial reports prepared by an
tax-related matters. Tax accounting in the
organization. It is a process that determines whether or
not the information stated in the financial report is truthful Philippines adheres to the National Internal Revenue
and without errors. Therefore, auditing includes an Code (NIRC). In 2017, the Tax Reform for Acceleration
unbiased and Inclusion (TRAIN) Act was signed into law, which
amended the NIRC. Other reforms followed under the
evaluation and opinion by the auditor based on
Comprehensive Tax Reform Program.
established criteria. Auditing helps businesses and
organizations develop their credibility in their fields. Tax accounting may involve tax avoidance. Tax
avoidance, or the process of reducing tax in compliance
Professionals may perform auditing from the inside or
with tax laws, is a legitimate practice that organizations
outside an organization. External auditing is performed by
and businesses can perform. However, tax evasion, or
someone outside the reporting entity. It ensures that
the act of omitting sources of income on taxable
transactions and the intentional non-payment of tax, is
illegal and is an offense that may be subject to
imprisonment.

Accounting Education

This branch of accounting involves the education sector

in coming up with an appropriate curriculum to help
aspiring accountants be equipped with relevant
accounting knowledge and skills. Accounting practitioners
can work as teachers or professors who can share their
expertise in the accounting industry, encouraging
students to seek a career in accounting.

Accounting Research

Accounting research centers on the pursuit of current and

relevant information in the field of accounting. It can help
a particular clientele solve problems concerning its
business. It can benefit regulatory bodies by amending
existing accounting principles or developing new
accounting standards to address issues and trends in
accounting in business.
The American Institute of Certified Public
Accountants (AICPA) defines accounting as “the art of
recording, classifying, and summarizing in a significant
manner and terms of money, transactions and events,
which are in part at least of a financial character, and
interpreting the results thereof.”

Internal Users

Internal users are considered as the primary users of

Lesson 2.1: Identifying the Users of Accounting
financial information.
Information
Owners and Stockholders

Owners and stockholders are the parties who provide

financial assets and resources to keep the company
afloat. Owners of sole proprietorship businesses,
partners in a partnership businesses, and shareholders in
a corporation belong to this group of users. By examining
financial information, this group of users decides whether decisions. Financial information helps them evaluate the
they would continue investing in a company or not. They business’s progress and the areas of concern. It is also a
are interested in keeping track of the economic position, basis for measuring future management decisions and
financial performance, and changes in the organization’s actions.
financial position. Their goal is to determine whether the
Employees
company is maximizing its profit and wealth and
increasing the value of their investment. Those who Employees are people who work for an organization

belong to this group also need accounting information to under a contract of employment. In exchange for

assess if the operations of the company are effective and payment and benefits, they perform specific tasks and

efficient. roles to help the organization achieve its goals. Both

management and rank-and-file employees belong to this
Management
group. Employees are interested in knowing the
The management is composed of people who administer company's financial performance. They want to know if
the tasks within an organization. Their role is to efficiently the company they are employed in can provide them with
manage the resources towards achieving the business’s long-term job security and income. In collective
goals and objectives. Depending on the form and size of bargaining, employees also examine the financial
a company, the management may be composed of senior statement of the company to determine the amount of
managers (president and board of directors), mid-level increase in salary, wage, and benefits that they could
managers (heads of departments, sections, regional negotiate.
operations, etc.), and low-level managers (supervisors
External Users
and frontline managers). Whichever level they work in,
the management needs financial information to set goals, External users are the secondary users of financial

plan, monitor, and make organizational and operational information.

Creditors legislative, and judiciary—use accounting information to
perform their respective functions.
Creditors provide funds to enterprises in exchange for
interest earnings. They provide the company additional For instance, government agencies such as the Bureau
capital for business expansion and operations like of Internal Revenue and the Securities and Exchange
investors. However, unlike investors, they do not gain Commission examine the financial information of a
ownership of the enterprise; thus, they remain outside the company for compliance and tax purposes. They are
business organization. Some examples of creditors interested if the organization declared and filed the
include banks and other financial institutions. correct amount of taxes, and they cross-reference the
financial information of suppliers and consumers to
Creditors use financial information to assess a company’s
identify potential tax evaders.
capacity to pay its obligations. By examining a company’s
assets, liabilities, and obligations, creditors can determine During legislative oversight hearings, financial information
how much money they are willing to lend the debtor. If may also be examined by the Congress to determine if
creditors think that the enterprise is financially stable and there are irregularities in government dealings with
healthy, there is a chance that they would approve the private entities. Judicial courts may also look into the
entity’s request for a loan. financial statements if there are legally enforceable
claims that need their decision.
Government
Potential Investors
The government is the entity that legislates and enforces
tax policies and other laws concerning the operations of Potential investors are individuals or organizations who
business organizations in a given territory. Agencies in are interested in buying stocks and other securities. This
different branches of the government—the executive, group of users includes individuals, institutions, and
investment banks who have not yet invested their assets
and therefore remain outside of the business
organization.
Lesson 2.2: Decisions of External and Internal Users
Potential investors examine the company’s performance
Decisions of Internal Users
through their financial information. This information helps
them determine if their investment would yield a Internal users are part of the reporting entity. They are

reasonable rate of return. They also use the information the owners, investors, stockholders, management, and

to assess if their investment would be secured. employees. These users utilize the accounting
information to come up with useful decisions for the
company. They are deemed primary users because they
have direct access to the information within the
organization. The following are the common types of
decisions that secondary users make.

Decisions by Management

Management refers to the group of people responsible for

day-to-day business operations. They get first-hand
access to accounting information. The decisions made by
management are related to budgeting, forecasting,
analysis of management accounting reports, and other
management accounting decisions. They can also use
accounting information to decide on a wide range of
investment ventures available. Since management is
concerned with day-to-day operations, they also use
financial information to ensure compliance with regulatory remunerations. Moreover, with the use of accounting
authorities. information, employees could check if all statutory
contributions of the business are reported and paid by the
Decisions by Owners
employers. Employees engaged in collective bargaining
Owners or shareholders are the legal stakeholders of also examine the financial statements of their company.
business interest. This group is

concerned with monitoring their investment in the

Decisions of External Users
company and evaluating its returns. Depending on the
type of business organization, some owners are External users are users outside of the organization who
personally responsible for signing contracts and indirectly access accounting information from the
partnerships with other companies. They need organizations of their interest, hence the term, secondary
accounting information to determine if their business can users. The following are the common types of decisions
meet the requirements and obligations stated in the that secondary users make.
contract, or not. Moreover, they also use accounting
Decisions by Potential Investors
information to assess the performance of the business
and its financial position. Potential investors are parties interested in putting capital
into a company with the objective of earning a profit.
Decisions by Employees
Potential investors use accounting information to decide
Employees refer to people hired by businesses, bound by whether prospective investments should be pursued or
an employment contract, to render services in exchange not. With accounting information, potential investors
for compensation. Employees evaluate the financial decide by checking if the management is using the equity
performance of a company that they are working for to invested in the business appropriately. They can also
ensure its sustainability and the security of their evaluate whether their potential investment will carry a
return. For potential investors, the analysis of risk is also Decisions by Regulatory and Tax Authorities
important in making investment decisions.
Government agencies regulating the operations of
businesses and organizations in terms of compliance with
the latter’s statutory obligations belong to this type of
decision-makers. They check accounting information to
evaluate whether the business is following all the

Decisions by Lenders necessary principles, standards, and regulations.

Moreover, accounting information also helps them check
Lenders are financial institutions that extend credit to
whether the taxes of the company are properly computed
individuals or businesses who need additional capital.
and reported. Government agencies also decide if
This group is interested in the creditworthiness of an
applicable penalties and/or surcharges need to be
individual or business and in the capacity of an individual
or a business to pay its obligation. Hence, accounting imposed.

information plays a vital role in the lender’s decision to Decisions by Customers

loan their money or not. Accounting information will help
Customers are interested in buying goods or services
them to evaluate the financial ratios of the business such
from a business entity. Accounting information is useful
as liquidity or ability of the business to pay its current
for them to check if the inflow of stock would be
obligations, solvency or ability of the business to pay its
continuous. They can also examine if the pace of
long-term maturing obligations, and profitability or the
production would meet their needs. With this, customers
ability of the business to generate profit. Analysis of the
can decide objectively if they would continue their
financial ratios will help lenders decide whether to accept
transaction with the firm or not.
and grant credit applications of their clients.
Decisions by Suppliers
Suppliers are interested in assessing the accounting
information to check whether their

clients are liquid enough to pay their current obligations.

It also helps them to agree on an applicable credit limit
and payment terms with their customers.

Decisions by the Public

The public uses accounting information in diverse ways

and in accordance with their varied interests. In general,
they are interested in knowing the budgetary health of
businesses to ascertain reasonable information about the
market, trade environment, and financial status of the
nation. These pieces of information help them in their
day-to-day decisions especially as consumers.
Lesson 2.3: Types of Accounting Information

Net Profit or Net Loss

A business's financial performance is presented through

the Statement of Profit or Loss. This financial
statement reports the revenues earned and the
expenditures incurred by the company. If revenues are
greater than the expenses, the company gains a net
profit. However, if revenues are less than the
expenditures, the company suffers a net loss.

The information on profit or loss can be useful in different

ways. For instance, when there is net profit, and
assuming that the profit translates into cash, employees
of the company, like the rank and file and managers, can
Financial Position
request or collectively bargain for a salary increase and
additional compensatory benefits. The company's A business’s financial condition is presented through the

stockholders or shareholders can also demand dividends Statement of Financial Position. Financial position

at the end of the year. In case of net loss, a business refers to the current balances of the assets, liabilities, and

might not grant the request and demands of the internal equity of the business. Hence, this financial statement

users. reports the assets, or the resources owned by the

company and used in the business operations; the
liabilities or the obligations needed to be settled to the
creditors; and equity, or the financial claims owners have
in the business. If the company gains net income, the owners decreases. If the company has a high net
equity of the business owners increases, while if the income, assuming that the said income produces cash,
business suffers a net loss, the equity of the business the company

will have enough cash to sustain the company's Planning and Control of Business
expenses, including the salaries of employees,
Internal users need information for the planning and
consumption of electricity, payables to creditors, and
control of business. Hence, they need information that
others. This business scenario affects the financial
shows the financial plan and activities of the business.
condition of the company.
The financial data needed for this type of information are
presented in the Statement of Profit and Loss, Statement
of Financial Position, and Statement of Cash Flows.
The Statement of Cash Flows shows the cash receipts Total Cost and Per Unit Cost
and disbursements from the operating, investing, and
This type of accounting information focuses on the cost of
financing activities of the business. The cash flow from
producing a product. It includes the cost of raw
operating activities refers to any source or use of cash
materials, or the basic material from which a product is
from business activities. The cash flow from
made; the cost of labor, or the payment for the salaries
investing activities includes the sources and uses of
and wages of the employees; and overhead costs, or
cash from various investments. The cash flow from
the other costs related to the development and
financing activities are sources from investors or banks,
production of the product. Costs can be either fixed or
including the uses of cash paid to shareholders. The said
variable. Fixed costs are expenses that remain constant
financial activities benefit the business's financial
no
planning, and this information is available from the
management. matter the quantity of products or output that the
company decides to produce, while variable costs are
costs that change or vary based on the level of output
and efficiency of production. Examples of fixed costs
include rent, insurance premiums, taxes, and
depreciation. On the other hand, raw materials, labor,
and overhead are examples of variable costs. When all
the information about the cost is available, it will be easy
for the manufacturers to set a price with a mark-up.
higher the operating income, the higher the taxes and
vice versa.

Tax Management

Accounting information is important for tax management.

Taxes are computed based on the operating income of
the business. Operating income is the result of deducting
the expenses from the revenue. If revenue is greater than
the expenses, the result is the operating income. The