Aracellie Joy S.

Galura
ACCOUNTING
— The word accounting
originates from the Old
French word ‘ACONT’,
which itself comes from
the Latin ’COMPUTES’,
meaning ‘CALCULATIONS’
 Objectives

At the end of the lesson, 90% of the

learners should be able to:
• Define accounting. (ABM_FABM11-
IIIa-1)
• Describe the nature of accounting.
(ABM_FABM11-IIIa-2
• Cite the importance of Accounting in
a business.
Introduction
to
Accounting
Lesson 1
Cite your opinion about the
picture. What do you
observe?
Accounting
“Accounting is the process of
IDENTIFYING, RECORDING, and
COMMUNICATING economic
events of an organization to
interested users.”
(Weygandt, J. et. al)
Accounting
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.
 Identifying
Examples of economic events
or transactions -
In a bakery business:
• salesof 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.
Accounting
 Seatwork

Directions: Choose your answer from the given choices. Use separate paper.

1. What is the process of IDENTIFYING, RECORDING AND COMMUNICATING

economic events of an organization to interested users?
A. Accounting B. Management C. Organization D. Planning

2. Which of the following is/are an objective/s of accounting?

A. To ascertain the results of operations during the period.
B. To ascertain the financial position.
C. To maintain control over assets.
D. All of the above.

3. Which of the following is the purpose of accounting?

A. To aid management in planning and performance evaluation.
B. To provide information to government agencies and other legal
purposes.
C. To help end-users see the true picture of the business in financial
terms.
D. all of the above
 Seatwork

4. What accounting function that is employed to ensure all

the business transactions are recorded in a systematic
manner in property books of accounts?
A. Communicating B. Identifying
C. Recording D. Summarizing

5. occurs through the preparation and distribution of

financial and other accounting reports
A. Communicating B. Identifying
C. Recording D. Summarizing
 Nature of Accounting

According to Accounting Theory

“Accounting is a systematic recording of
financial transactions and the
presentation of the related information to
appropriate persons.”
 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. In doing so, it
follows some definite steps like the collection,
recording, classification, summarization, finalization,
and reporting of financial data.
 Basic features of Accounting

• Accounting is both an art and a discipline. 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.
 Basic features of Accounting

• 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 only. It does not deal with
non-monetary or non-financial aspects of such
information.
 Basic features of Accounting

•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.
 Why accounting is the language of
the business?
• Accounting is the means by which business information is
communicated to business owners and stakeholders.
• The role of accounting in business is to provide information
for managers and owners to use in operating the business.
• In addition, accounting information allows business owners to
assess the efficiency and effectiveness of their business
operations.
• Prepared accounting reports can be compared with industry
standards or to a leading competitor to determine how the
business is doing.
• Business owners may also use historical financial accounting
statements to create trends for analyzing and forecasting
future sales.
 Accounting helps the users of these financial reports to see the true picture
of the business in financial terms. In order for a business to survive, it is
important that a business owner or manager be well-informed.

Mr. Juan is a retired government employee who is good at baking.

One day he decides to put up a bakery shop in your barangay. He
renovates a portion of his house to serve as the area for the
production of bread. He purchases baking equipment and raw
materials to produce five different types of bread. Mr. Juan also
hires Jose to help him with the baking and, at the same time, to be
in-charge of sales. Mr. Juan pays Jose on a weekly basis. Every day,
Mr. Juan’s wife deposits the daily cash sales in their bank account at
XY Savings Bank. With the help of accounting, what possible
decisions or questions of Mr. Juan can accounting provide an
answer to?
Possible Answers:
• Is my business earning? (profitability)
• How much daily or monthly sales do I
need in order to recover my fixed cost?
(break-even)
• Do I need to hire additional workers to
help me with my production?
• Can I afford to set up a new store in
another place? Where do I get the funds?
• Can I afford to pay a bank loan?
 Seatwork # 2: True or False.

1) Accounting is both an art and a

discipline.
2) Accounting information allows business
owners to assess the efficiency and
effectiveness of their business
operations.
3) Accounting is a formation system.
4) Accounting is a discipline because it
follows certain standards and
professional ethics.
5) Accounting is a non-systematic
recording of financial transactions
History of Accounting
It has evolved in response to various social and economic needs of men. Accounting started as a simple
recording of repetitive exchanges.

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

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

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.
• The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were

given attention during this period.
 History of Accounting
It has evolved in response to various social and economic needs of men. Accounting started as a simple recording of repetitive
exchanges.

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

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.
American Institute of Certified Public Accountants 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 a financial character, and interpreting the results
thereof.
Financial Reporting Standards Council states that
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 (Manalaysay, B., 2017)
Bookkeeping is part of the recording process of
accounting wherein all the financial transactions of the
business are recorded in the book of accounts or in a
database.
 Functions of Accounting

Keeping Systematic Record of

Business Transactions
recording transactions does not only
involve entering the transactions in the
accounting books. the records should be
systematic enough to enable easy
understanding of readers
 Functions of Accounting

Protecting Properties of the Business

the accounting records serve as the evidence

that properties of a business do exist or how
much of a particular resource does a company
have.

if the accounting records show that the

amount of cash should be P1,000,000, any
excess and deficiency will be noticed
immediately.
 Functions of Accounting

Communicating Results to Various

Parties in or Connected with the
Business
the accounting reports produced at the end
of each period are not only used by external
parties, but also by the management in their
decision-making function.
 Functions of Accounting

Meeting Legal Requirements

In the Philippines, the government requires some

companies (particularly this with public accountability) to
provide financial reports quarterly, semi-annually, or
annually.

this procedure aims to protect the public by providing

them the necessary information to make decisions.

the government also requires reports from heavily

regulated industries such as the energy and oil
industries.
 The Language of Business: Accounting and the decision
makers

Accounting serves as a language that

communicates financial information to decision
makers. They are what we called users of
accounting information which is also known as the
stakeholders.
 Users of Financial
Information
Objectives:
-identify the internal and external users of
financial information,
- Classify the users of financial
information
- Know the importance of financial
information in making business
decision.
 Internal Users

- those who make decisions on behalf

of the organization.
Internal Users- those who make
decisions on behalf of the organization.

1. The managers or management.

they classified as the top-level management
(CEO, CFO, COO, etc.).
 Internal Users- those who make
decisions on behalf of the organization.

Ø The managers or management.

- They plan, organize, and run a business.
- They use the information to oversee the
performance of the whole organization and
set its strategic direction.
 Internal Users- those who make
decisions on behalf of the organization.

ØThe middle-level management

Ø(department heads, branch
managers, and junior
executives) ensures that their
unit’s performances are
aligned with the organization’s
objectives.
 Internal Users- those who make
decisions on behalf of the organization.

ØLower-level management
Ø(supervisors, team leaders)
oversees the day-to-day
operations and direct
employees in the
performance of tasks.
 Internal Users- those who make
decisions on behalf of the organization.

2. Employees/labor unions
ØThey assess the company’s
profitability and stability, and their
consequence on future salary and job
security.
 Internal Users- those who make
decisions on behalf of the organization.

3. Owners.
ØThey provide the capital to the business.
ØOwners need accounting information to help
them decide whether they should withdraw or
increase their investments.
ØMore importantly, they are interested to know
the returns on their investment.
 External Users of financial reports

are those who make their

decisions on the company’s
financial information.
 External Users of financial reports

1. The potential and existing

investors need information to
help them decide whether they
should invest or not in the
business.
 External Users of financial reports

2. Creditors and potential

creditors assess the credit
worthiness and the capability of
the business to pay its obligation
including the related interests on
maturity date.
 External Users of financial reports

3. Customers assess the financial position

of their suppliers which is necessary for
them to maintain a stable source of supply
in the long term. They are interested to
know whether the business will continue to
honor its product warranties.
 External Users of financial reports

4. Suppliers use the financial statement of

their customers to determine whether the
debts owed to them will be paid when due or
whether the customer has enough funds or
resources to pay the goods to be delivered or
the services to be rendered.
 External Users of financial reports

5. Tax authorities use financial

reports to determine the credibility of
the tax returns filed on behalf of the
company.
 External Users of financial reports

6. Regulatory bodies want to ensure that the

company’s disclosure of accounting
information is in accordance with the rules
and regulations set in order to protect the
interest of the stakeholders who rely on such
information.
 External Users of financial reports

7. The public use the financial information

to know how the business affects the
economy possible prospects for
employment and/or for educational and
research purposes.
In your own words, what is the
importance of Accounting
Information to each users?
Seatwork: Classify the following
users of financial information if it is
INTERNAL or EXTERNAL users

1.Customer 6. Suppliers
2.Regulatory bodies 7. Manager
3.Employee 8. creditors
4.Investors 9. CEO
5.Tax authorities 10. Owner
 What I have learned?

Based on the concepts that you have

learned in this lesson, write at least three
scenarios or events where accounting is
used in making business decisions.