CHAPTER 1-INTRODUCTION TO ACCOUNTING
LEARNING COMPETENCIES
The learners shall be able to:
● define accounting (ABM_FABM11-IIIa-1)
● describe the nature of accounting (ABM_FABM11-IIIa-2)
● explain the functions of accounting in business (ABM_FABM11-IIIa-3)
● narrate the history/origin of accounting (ABM_FABM11-IIIa-4)
WHAT IS ACCOUNTING?
“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 financial character,
and interpreting the results thereof”-American Institute of Certified Public Acco untants
(AICPA)-
“ACCOUNTING is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.”
- American Accounting Association
“ACCOUNTING is a service activity whose function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful in making
economic decisions.” – Accounting Standards Council
Three Major Steps in the Accounting Process
Identification of economics events
Recording of economic events
Summarize the recorded economic events
OTHER PROCESSES:
1. Identifying – this is the process of recognition or non-recognition of business activities as
accountable events.
2. Measuring – this is the process of assigning amounts or value to the accountable economic
transactions and events.
3. Communicating – this is the process of preparing and distributing accounting reports to
potential users of accounting information.
OTHER PROCESSES:
a. Recording – also called journalizing, involves the routine and mechanical process of
committing to writing business transactions and events on the books of accounts in a
chronological sequence in accordance with established accounting rules and procedures.
b. Classifying – this involves sorting or grouping of similar and interrelated transactions
and events into their respective classes. This is performed by posting accounts to ledger.
c. Summarizing – this involves the preparation of financial statements, which includes the
Balance Sheet (Statement Of Financial Position), Income Statement, Statement Of
Equity, Statement Of Cash Flows and accompanying Notes To The Financial Statements
d. Interpretation – this involves analyzing the liquidity, solvency, stability and profitability
of an entity.
BASIC FEATURES OF ACCOUNTING
● Accounting is a process.
● Accounting is an art.
● Accounting deals with financial information and transactions.
● Accounting is a means not an end.
● Accounting is an information system.
FUNCTIONS OF ACCOUNTING:
● Keeping systematic record of business transactions;
● Protecting properties of the business;
● Communicating results to various parties in or connected with the business; and
● Meeting legal requirements
EVOLUTION OF ACCOUNTING
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.
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.
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.
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.
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.
