Introduction to Accounting

1. Definition of Accounting
 The action of process of keeping financial accounts. (Dictionary)
 The process of recording and processing information about economic entities. (Wikipedia)
 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 a financial character, and
interpreting the result thereof.
 Accounting is a process of recording, identifying, analyzing, summarizing and reporting of
financial information to the stakeholders of the business.

2. Nature of Accounting
 Accounting as a Service Activity – Accounting collects financial information for various users for
taking decisions and tackling business issues.
 Accounting as a Language of Business – Accounting is the language of business. A proper use of
accounting makes a proper business.
 Accounting as a Science and Art –
Accounting is a social science with a body of knowledge which has been systematically
gathered, classified, and organized. It is influenced by, and interacts with, economic, social
and political environments.
Accounting is a practical art which requires the use of creative skill and judgment.
 Accounting as a Profession – A profession is a career that involves the acquiring of a specialized
formal education before rendering any service. Accounting is a systematized body of knowledge
developed with the development of trade and business over the past century.
 Accounting as an Information System – Accounting identifies and measures economic activities,
processes information into financial reports and communicates these reports to decision makers.

What are these economic activities?

1. Production - the process of converting economic resources into outputs of goods and services
that are intended to have greater utility than the required inputs.
2. Exchange - the process of trading resources or obligations for other resources or obligation.
3. Income distribution - the process of allocating rights to the use of output among individuals
and groups in society.
4. Consumption - the process of using the final output of the production process.
5. Investment - the process of using current inputs to increase the stock of resources available for
output as opposed to immediately consumable output.
6. Savings - the process by which individuals and groups set aside rights to present consumption
in exchange for rights to future consumption.

3. Functions of Accounting in Business

By definition, Accounting is a process. It follows systematic methods. These methods can be enumerated
by their functions. And these functions are:

 Identification. (Analytical function) The accounting process of recognition or non-recognition of

business activities as accountable events or whether has accounting relevance.
 When is an event considered ACCOUNTABLE?

One event is considered accountable when it is quantifiable and has an effect on assets, liabilities
and equity. This is also known as economic activity, which is the subject matter of accounting.

Criteria for an Accountable event

1. It must affect a financial element of accounting (increasing or decreasing asset, liability or
equity)
2. It is a result of a past activity
3. Its cost can be measured reliably

 Measurement. (Technical Function) The accounting process of assigning of peso amounts or

numbers to the economic transactions and events. The unit of measure of accounting is money,
expressed in prices.
 Communication. (Formal Function) The accounting process of preparing and distributing
accounting reports to potential users of accounting information and interpreting the significance
of this processed information. Implicit in the communication process are recording, classifying
and summarizing aspects of accounting.
Recording. the process of systematically committing to writing business transactions and
events after they have been identified and measured, in books of account in a systematic
and chronological manner according to accounting rules.
Classifying. The grouping of similar and interrelated items into their respective classes.
Summarizing. Putting together or expressing in condensed or brief form the recorded and
classified statements in financial statements.
Interpreting. Converting financial information into an open book that can be explored in
depth, giving crucial insights to users.

4. Brief History of Accounting:

 Accounting is considered one of the oldest professions.
 Earliest Accounting was found as early as 2000 BC in the cities of Babylonia, Greece, Egypt and
3500 BC in Assyria. It consisted then of records of taxes imposed by the kings and collected from
the people by their tax collectors as well as records of materials, labor, and overhead which the
pharaoh required when the pyramids were being constructed in Egypt.
 Babylonia was known as the city of commerce. Accounts were used for business to uncover losses
due to fraud and to uncover losses due to inefficiency.
 In the ancient Egypt, the accountant was called as "eye and ear" of the king. Archeologist Dr.
Gunter Dreyer of the German Institute of Archeology discovered that the numerous inscribed bone
labels attached to bags of oil and linen in the tomb of king scorpion, Egypt-date back 5300 year.
 In ancient Mesopotamia, Accounting token made of clay, from Susa - this is represented a huge
cognitive leap of mankind.
 In ancient Rome, government and banking accounts grew out of records keep by the heads of the
families. They also used memorandum or day book (adversaria) to record receipts and payments
and posted to ledgers or cash books (codex acepti et expensi) on monthly basis (700BC-400BC).
By the time of the Emperor Augustus, the Roman government had access to detailed financial
information.
  • In India, Chanakya wrote a manuscript similar to a financial management book, during the time
of Mauryan Empire. His book "Arthashasthra" contains few detailed aspects of maintaining books
of accounts for a Sovereign State.
 The Italian Luca Pacioli, recognized as the father of accounting and bookkeeping was the first
person to publish a work on double-entry bookkeeping, and introduced the field in Venice, Italy
in 1494. He described double-entry bookkeeping, and other commerce-related concepts, in his
book Particularis De Computis et Scripturis (Details of Calculation and Recording).
 In Summa de Arithmetica, Pacioli introduced symbols of plus and minus, a symbols which became
standard notation in Italian Renaissance mathematics also known as Algebra.
 • In 15th century, the Italian mathematician usually entrusted their properties to their servants or
employees who were required to keep track of their daily activities by listing down what properties
(assets) are owned by the merchants and what debts (liabilities) are owed to others.
 From their records came the term debtor and creditor. Debtor is one who lends money or buy goods
or services with a promise to pay at a future date. Creditor is one who lends money or sells services
or goods to be collected in the future.
 In 19th century, the massive development of trade and industry and the simple structure of a
business changed to a more complex one with the formation of business combinations, mergers
and consolidations.
 It became necessary to improve the process of recording and reporting financial information. And
with the advent of the information age driven by electronic devices such as the computer, the
design for processing information turned manual to electronically assisted.

5. Common Branches of Accounting

 Financial Accounting – Financial Accounting is a branch of accounting focused on measuring
and reporting a business’s financial condition and performance. It follows Generally Accepted
Accounting Principles (GAAP). The process starts with bookkeeping, which involves
systematically recording financial transactions. The recorded data is then classified, analyzed, and
presented to show the business's financial results and position.
 Auditing – Auditing involves the independent review of accounting records to provide an opinion
on their fairness. External auditors must be licensed CPAs and independent from the company.
Internal auditors, who are employees of the business, focus on evaluating operational efficiency
and ensuring company policies are consistently followed.
 Cost Accounting – Cost accounting is a system for recording and reporting the costs of producing
goods or services, mainly for internal use by management. It helps in controlling operations and
planning through detailed cost analysis, budgeting, cost behavior, and performance evaluation.
While rooted in manufacturing, cost accounting is now also used in service industries, like banks,
to guide pricing and decision-making.
 Management Accounting – Management accounting uses cost and other financial/non-financial
data to support decision-making. Its goal is to provide timely, relevant information to help
management plan (short-term and long-term) and evaluate performance. It is a key tool for
achieving effective control and successful execution of business strategies.
 Financial Management – Financial management is a newer branch of accounting that has grown
significantly in the past 35 years. Financial managers are responsible for setting financial goals,
creating plans to meet those goals, securing necessary funding, and protecting the organization's
financial resources.
  Taxation or Tax Accounting – Tax accounting focuses on tax-related matters, such as preparing
tax returns and planning for future tax obligations, rather than creating financial statements. CPAs
often handle clients' tax filings with the BIR and must have deep knowledge of tax laws,
regulations, and court rulings, in addition to strong accounting expertise.
 Government Accounting – Government accounting uses Fund Accounting to manage and
monitor the use of public funds for community service rather than profit. Its main focus is on
ensuring that funds are properly used to benefit the public. This system is also used by non-profit
organizations like the Red Cross.

6. Users of Accounting Information

INTERNAL USERS
Internal Users are those who make decisions directly affecting the internal operations of the business.
 Managers are directly involved in operation of the business. They need accounting data to
Improve the efficiency and effective of the organization.
 Employees use financial data to assess whether they are receiving the right compensation and to
check if they bargain for higher remuneration, retirement benefits and employment opportunities.
 Officers, also called as the company executives who are interested to know if the company is
doing well in its operation so they can plan for possible expansion or branching out to widen its
geographical and demographic market.
 Internal Auditors, there role is to protect and safeguard the resources of the company against
fraud or irregularities. Fraud is the act of making money by making people believe something
which is not true.

EXTERNAL USERS
External users are individuals or enterprises that have financial interest in the business but they are not
involved in the day activities of the organization. These are:
 Investors (The providers of risk capital) are interested in information which enables them to assess
the ability of the enterprise to pay dividends. They need information on whether they should buy,
hold or sell their shares in.
 Lenders are interested in information that enables them to determine whether their loans, and their
interest attaching to hem will be paid when due.
 Suppliers and other trade creditors are interested in information that enables them to determine
whether amount owing to them will be paid when due.
 Stockholders are interested in the safety of, and return on their investments, in the efficiency of
management and in long-run earnings prospects of the enterprise.
 Customers are interested in the quality of goods and services that they are getting from the entity.
 Government and their agencies require information in order to regulate the activities of the
enterprise, determine taxation policies and as a basis for national income and similar activities.
 Public are assisted by information through Financial Statements about the trend and recent
developments in the prosperity of the enterprise and the range of its activities.
 Members of non-profit organizations such as schools, colleges, hospitals, clubs, charitable
institutions etc. need accounting information to know how their contributed funds are being
utilized and to ascertain if the organization deserves continued support or support should be
withdrawn keeping in view the bad performance depicted by the accounting information and
 diverted to another organization. In knowing the performance of such organizations, criterion will
not be the profit made but the main criterion will be the service provided to the society
 Research Scholars, accounting information, being a mirror of the financial performance of a
business organization, is of immense value to the research scholars who wants to make a study to
the financial operations of a particular firm. To make a study into the financial operations of a
particular firm, the research scholar needs detailed accounting information relating to purchases,
sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long term
liabilities and shareholders' funds which is available in the accounting records maintained by the
firm.

7. Forms of Business Organizations

8. Advantages and Disadvantages of the Different Forms of Business Organizations

Sole Proprietorship:
A business owned and controlled by one person. Easy to register through DTI. Owner gets all profits
and is personally responsible for all debts.

ADVANTAGES:

 Easy to start and close – Few legal requirements.

 Full control – Owner makes all decisions.
 All profits go to the owner – Strong motivation.
 Quick decisions – No need to consult others.
 No corporate tax – Only pays individual income tax.

DISADVANTAGES:

 Limited capital – Hard to raise large funds.

 Limited skills – One person may lack expertise in all areas.
 Unlimited liability – Owner is personally liable for debts.
 No continuity – Business may end if owner dies or becomes incapable.

Partnership:
A business owned by two or more persons who contribute money, property, or effort to a common fund
and agree to share profits. Defined in Articles 1767–1867 of the Civil Code of the Philippines.

ADVANTAGES:
 Easy to form – just needs a contract.
  Larger Capital – Combined resources of partners.
 Better Management – More people can supervise and contribute idea.
 Profit sharing – Based on agreement or shared equally.
 Creditor trust – Unlimited liability can make it easier to get loans.

DISADVANTAGES:
 Unlimited liability – personal assets at risk.
 Solidary liability – one partner may be liable for others’ actions.
 Instability – can dissolve if a partner dies or withdraws.
 Conflicts – equal authority can lead to disagreements.

Corporation:
A corporation is an artificial being created by law, with its own legal identity, rights, and powers. It has
right of succession, meaning it continues to exist even if ownership changes. (Defined under Section 2
of the Corporation Code of the Philippines)

ADVANTAGES:

 One Person Corporation (OPC):

A single person can now form a corporation, unlike before when 5 members were required.
 Limited Liability:
Stockholders are only liable up to their investment. Creditors cannot claim personal assets.
 Transferability of Shares:
Shares can be easily transferred, especially in publicly traded corporations.
 Continuity:
Corporations can now exist perpetually, unless stated otherwise in the Articles of Incorporation.
Death or withdrawal of members does not affect its existence.
 Attracts More Investors:
Corporations are attractive due to limited liability, perpetual existence, and easy share
transfers, helping raise more capital.
 Centralized Management:
The Board of Directors manages corporate affairs (Sec. 23, Corporation Code), allowing
consistent decision-making.

DISADVANTAGES:

 Costly to Form:
Requires SEC registration and various legal documents. May involve lawyers, stamp taxes, and
high capital.
 Highly Regulated:
Corporations must comply with many reportorial and regulatory requirements from agencies
like the SEC, BSP, CHED, or IC. Non-compliance leads to penalties.
 Discourages Creditors:
Limited liability may make lenders hesitant to offer credit, especially if the corporation has poor
financial health.
  Double Taxation:
The corporation pays tax on income, and dividends are taxed again when received by
shareholders (10% final tax + personal income tax).

9. Types of Businesses According to Activities

10. Advantages and Disadvantages of the Different Types of Business