Introduction to Accounting

I. THE NATURE OF ACCOUNTING

1. Accounting, defined
a. Accounting is the systematic process of measuring and reporting relevant
financial information about the activities of an economic organization or unit. Its
underlying purpose is to provide financial information. It is capable of being
expressed in monetary terms.
b. 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. (American Institute of
Certified Public Accountants (AICPA))
c. 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.
d. Accounting is the language of business.
2. Aspects of Accounting
a. Recording writing down business transaction chronologically in the book of
accounts as they transpire
b. Classifying sorting similar and related business transactions into the three
categories of assets, liabilities and owners equity.
c. Summarizing preparing the financial statements from the transactions recorded
in the books of accounts that are designated to meet the information needs of its
users.
d. Interpreting representing the qualitative and quantitative financial information
about the business transaction in a language comprehensive to the users of
financial statements.
3. Users of Information
a. Internal Users primary users of information who are inside the reporting entity
and are directly involved in managing the companys daily operation.
Investors/ Owners/ Stockholders
Management
Employees
b. External Users secondary users of information who are parties outside the
company. They may not be directly involved in the companys operation but their
decisions may significantly affect the business entity.
Financial Institutions / Creditors
Government
Potential Investors / Creditors
4. Basic Function of Accounting in Business
Generate relevant and timely financial information to the users of information
which they can use in making sound economic decisions.

II. HISTORY OF ACCOUNTING

1. Ancient Accounting in Egypt, Mesopotamia, Greece, and Rome
a. Abacus functioned as a calculator in the ancient times; was developed by
Sumerians in 5,000 BCE
b. Papyrus developed by ancient Egyptians in 4,000 BCE. The papyrus was not only
allowed for recording of commercial transactions but also for but also for the
transcription of religious text, music, literature, and more.
c. Dr. Gunter Dreyer of the German Institute of Archeology discovered old
stone labels believed to date back to 3,000 BCE in the tomb of King Scorpion I of

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Introduction to Accounting
Egypt. These old stone labels are complete with marks representing accounts of oil
and linen which were believed to be paid to the king as taxes.
d. Clay tokens and clay tablets used by Mesopotamia to record their loans, herds,
crops, and system of trade. The scribes who performed extensive duties in writing
and recording the Mesopotamian civilization are the equivalent of present-day
accountants.
e. Greeks - introduced money in the form of coins, in 600 BCE. They adopted the
Phoenician writing system and invented Greek alphabet which they used to
facilitate record-keeping. Bankers in Greece offered credit and helped people
transfer funds to banks in other cities as evidenced by the bankers book of
accounts.
f. Romans introduced the use of annual budget which coordinated estimated
revenues and taxes paid by the citizen in relation to the nations expenditures. A
cash book was maintained by household for their expenses.
g. England In 1086, the Doomsday Book contained all the real estate surveyed by
William the Conqueror and the taxes due to them. To date, the Pipe Roll or the
Great Roll of the Exchequer is the most ancient surviving accounting record in
the English language. This contains the yearly accounting of rents, fines, and taxes
due to the King of England from 1130 to 1830.
2. 14th Century The Birth of Double-Entry Bookkeeping
a. Luca Pacioli of Italy (known as Friar Luca dal Borgo) considered as the
Father of Accounting. He wrote Summa de Arithmetica, Geometrica,
Proportioni et Proportionalita (Everything About Arithmitic, Geometry and
Proportion). One section of this book, De Computis et Scriptus (Of Reckonings
and Writings), is composed of 36 short chapters that describe bookkeeping. The
accounting cycle, similar to the modern-day accounting cycle is also included in this
book. The book also explains the extensively used balance sheet of today, the
method of using memorandums, journals and ledgers, the use of accounts such as
assets, liabilities, owners equity, revenues and expenses, year-endclosing entry,
and the use of trial balance to prove a balanced ledger.
b. Benedetto Cotrugli credited for the original idea of the double-entry
bookkeeping. Cotruglis manuscript of Della Mercatura et del Mercante
Perfetto (Of Trading and The Perfect Trader), which contains a brief description of
the double-entry bookkeeping, was never printed.
3. 19th Century The Dawn of Modern Accounting in Europe and America
a. Industrial Revolution era which replaced hand tools with machine or power
tools, otherwise known as the factory system, transformed accounting into an actual
profession. Business continued to expand requiring the expertise of accountants to
gain corporate control of their flourishing business.
b. Queen Victoria of Scotland granted a royal charter to the Institute of
Accountants in Glasgow on July 6, 1854, thereby creating the profession of
chartered accountants (CA)
c. American Association of Public Accountants the first national US accounting
society established in the year 1887. They provided a formal certification process
for accountants and was the predecessor of the present American Institute of
Certified Public Accountants (AICPA)
4. 20th Century The Evolution of Modern Accounting Standards
a. American Institute of Certified Public Accountants (AICPA) first national
professional association for Certified Public Accountant (CPA), was formed in the
young but prosperous nation of the United States. Tasked to set the accounting and
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Introduction to Accounting
auditing standards fort these reports until the establishment of the Financial
Accounting Standard Board (FASB).
b. Security and Exchange Commission (SEC) was formed due to the economic
depression. Periodic reports vouched by certified public accountants were filed by all
publicly-traded companies who had to register with SEC before selling their
securities to the public.
c. Financial Accounting Standard Board (FASB) was established in 1973. This is
the result of the demand for more reliable and comparable financial reporting by the
Congress and SEC.

5. The Information Age

Known as the Computer Age, Digital Age, or New Media Age, has brought about a
significant change in the work load of accountants.
Manual, tedious and time-consuming tasks were replaced by faster and more
accurate computer methods. Transactions can be consummated online with
the help of the internet.
Various software applications in accounting have been developed to expedite
procedures and accommodate the numerous needs and demands of the
different businesses.
st
6. 21 Century Accounting in the Modern Times
a. International Accounting Standard Committee (IASC) replaced the
International Accounting Standard Board (IASB) which was established in January
2001.
b. Sarbanes Oxley Act was passed by the US Congress in 2002 to protect
investors from corporate misinformation. This imposed tougher restrictions on
accountants conducting consultancy services.
c. Dodd-Frank Act was signed into federal on July 21, 2010 in response to the Great
Recession in the United States. This contains sixteen major areas to reform.

III. THE BUSINESS ENVIRONMENT

1. The Different Branches of Accounting
a. Financial Accounting deals with theoretical framework covering accounting
principles and concepts relative to measurement and valuation as applied to assets,
liabilities, stockholders equity, retained earnings, revenue and expense accounts in
relation to the preparation and presentation of financial statements.
b. Management Accounting involves partnering in management decision making,
devising planning and performance management systems, and providing expertise
in financial reporting and control to assist management in the formulation and
implementation of an organizations strategy.
c. Government Accounting encompasses the process of analyzing, classifying,
summarizing, and communicating all transactions involving the receipt and
disposition of government funds and property, and interpreting the result thereof
(Sec. 109of Presidential Decree (PD) No. 1445).
d. Auditing examination and review of accounting reports in order to ascertain their
fairness, propriety, and reliability. The independent auditors opinion provides
reasonable assurance that the financial statements under examination are fairly
present the companys financial position and result of operation in accordance with
the generally accepted accounting principles (GAAP).

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Introduction to Accounting
e. Tax Accounting include the preparation of monthly value added tax, percentage
tax, expanded withholding tax returns, quarterly and annual tax returns, and any
other taxes applicable to business.
f. Cost Accounting includes the collection, determination, allocation, assessment,
interpretation, and control of cost data, particularly the cost of production in a
manufacturing concern.
g. Accounting Education involves planned grading and formal teaching in an
educational institution. The professional accountant imparts knowledge to students
enrolled in an accounting subject wither in basic accounting or in higher accounting
subjects.
h. Accounting Research involves conducting a careful and diligent study aimed at
discovering and interpreting facts, revising accepted theories in the light of new
facts, or the practical application of such new or revised theories for the generation
of a new knowledge.

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Introduction to Accounting
2. Types of Business Organization:
3. Typ 4. Definitio 5. Legal Requirements 6. Advantages 7. Disadvantag
es n es
of
Busi
nes
s
Org
aniz
atio
n
1. Sole / 8. Business 9. It is registered with a. Minimal cost and a. Resources are limited
Single owned Department of Trade and requirement in the as the capital is
Proprietors and Industry (DTI) under its formation provided only by the
hip managed Bureau of Trade Regulation b. Owner can withdraw owner
by only and Consumer Protection the assets and profits b. Liability of the owner
one of the business any is unlimited as he or
person time at his/her she is accountable to
discretion all creditors of the
c. Decision making is business
solely in the hands of c. Infusion of knowledge
the owner in the management of
d. Duration of the life of the business is limited
the business solely to one person only,
depends on its owner which is the owner
2. Partnership 10. 12. Is a. Minimal cost and a. Partners are liable for
Business registered with the Securities requirement in the the action of each
organizati and Exchange Commission formation partner because of
on owned (SEC) upon submission of the b. More funds mutual agency
and following documents: contributed from the b. General partner has
managed Proposed Articles of Partnership; investments of the unlimited liability
by two or Name Verification Slip; partners c. Easily dissolved
more Bank Certificate Deposit; c. Infusion of d. Admission of a new
people Alien Certificate of Registration, knowledge, partner depends upon
who Special Investors Resident Visa, or experience, and skills the approval of all
agreed to proof of other types of visa (in case from two or more partners

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Introduction to Accounting
contribut of foreigners); partners
e money, Proof of Inward Remittance (in case d. Division of labors
property, of non-resident alien) among partners
or 13.
industry
to a
common
fund with
the
purpose
of earning
a profit
11.
3. Corporation 14. 16. Re a. Stockholders have a. Entails many
Business quired to file to the limited liability, as requirements and is
organizati Securities and Exchange their liability extends more costly than a
on Commission (SEC) the only up to the amount partnership
managed following incorporation of their capital b. Government exercised
by an documents: investment strict control over
elected Articles of incorporation, which shall b. Indefinite life corporation and
board of include: c. More infusion of funds imposes high taxes
directors. The name of the corporation (must from stockholders or c. Shareholders have
The not be identical, or deceptively or investors little or no
investors confusingly similar to any existing participation in the
are called corporation) management of the
stockhold The purpose of the corporation corp
ers and Principal office of the corporation
the unit 17.
of
investme
nt is
called
share of
stock.
15.
18. T 19. 20. Le 21. 22.
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Introduction to Accounting
ype Definition gal Requirements Advantages Disadvantages
s of
Busi
nes
s
Org
aniz
atio
n
23. C 24. The term or life of the corporation d. Shares can be d. Distribution of net
orpo which should not exceed fifty (50) transferred without income depends
ratio years. This corporate life may, the consent of other upon declaration of
n, however, be extended for another shareholders dividends by the
cont fifty (50) years but the extension e. Management is board of directors
.. must not be effected earlier than vested upon its board e. In large corporation,
five (5) years before the expiration of directors there is formal or
of its term. impersonal
By-Laws relationship between
Treasurers Affidavit which should employees and
state compliance with the management due to
authorized subscribed and paid-up the big number of
capital stock requirements employees.
25. Ba
nk Certificate which should
state that the paid-up capital
portion of the authorized
capital stock has been
deposited to the issuing
bank
4. Cooperativ 26. 28. Is a. Prices of products a. Limited capital due to
e An registered with the offered are lower due underprivileged
associatio Cooperative Development to direct purchases members
n of small Authority (CDA) upon the from producers and b. Strictly for members
producers submission of the following manufacturers only and shares
and documents b. Managed by members cannot be transferred
consumer Economic Survey themselves; thus, to non-members
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Introduction to Accounting
s who Notarized Articles of Cooperation saving on c. Lack of efficient
come and By-Laws management costs. management as it is
together Bond of accountable officer or managed only by its
voluntaril officers members
y to form Notarized sworn statement of the
a treasurer certifying that the
business required subscription and payment
which of the authorized share capital and
they own, paid-up capital have been fulfilled.
manage, 29.
and
patronize.
27.
30.
31. Types of Business Activities / Operations
32. 33. Feature
Business Activities /
Operations
1. Service 34. Business operation is engaged in rendering service
2. Trading / Merchandising 35. Business operation is engaged in buying and
selling of goods
3. Manufacturing (1) Business operation is engaged in the production of items to be sold
(2) It involves the purchasing and converting of raw materials into finished goods
36.
37.

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Introduction to Accounting
IV. ACCOUNTING CONCEPTS AND PRINCIPLES
1. Fundamental Concepts
a. Entity Concept regards the business enterprise as a separate and distinct from
its owners and from other business enterprise
b. Periodicity the behind providing financial accounting information about the
economic activities of an enterprise for specified time periods. For accounting
purposes, one year is usually considered as one accounting period. Accounting
period may be classified as either of the following:
Calendar Year a twelve-month period that starts on January 1 and ends on
December 31
Fiscal Year a twelve-month period that starts on any month of the year
other than January and ends twelve months after the start period.
c. Going Concern a concept which assumes that a business enterprise will continue
to operate indefinitely
2. Basic Accounting Principles
a. Objectivity Principles states that all business transactions that will be entered in
the accounting records must be duly supported by verifiable evidence.
b. Historical Cost all properties and services acquired by the business must be
recorded at their original acquisition cost
c. Accrual Principle income should be recognized at the time it is earned such as
when goods are delivered or when services have been rendered. Likewise, expenses
should be recognized at the time they are incurred such as when goods and services
are actually used and not at the time when the entity pays for those goods and
services.
d. Adequate disclosures states that all material facts that will significantly affect
the financial statements must be indicated
e. Materiality financial reporting is only concerned with information significant
enough to affect decisions. This refers to the relative importance of item or event.
An item is significant if knowledge of it would prudently influence users of the
financial statements.
f. Consistency approaches used in reporting must be uniformly employed from
period to period to allow comparison of results between time periods. Any change
must be clearly explained.
38.
V. Reference:
Fundamentals of Accountancy, Business and Management 1 by Flocer Lao Ong

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