FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND

MANAGEMENT 1

Introduction to Accounting

“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING

economic events of an organization to interested users.” (Weygandt, J. et. al)
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. Examples of
economic events or transactions - In a bakery business:
• sales of 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.

The nature of accounting

According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html): “Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.” Based on this definition we
can derive the following 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 bjectives or targets. Accounting is identified as a process, as it performs the
specific task of collecting, processing and communicating financial information. In
doing so, it follows some definite steps like the collection, recording, classification,
summarization, finalization, and reporting of financial data.
• Accounting is both an art and a discipline.
Accounting is the art of recording, classifying, summarizing and finalizing financial
data. 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.
• 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 and financial
information only. It does not deal with non-monetary or non-financial aspects of such
information.
• 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. This discipline of knowledge has evolved to meet the need for financial
information as required by various interested groups.
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?

The history of accounting

Accounting is as old as civilization itself. It has evolved in response to various social and
economic needs of men. Accounting started as a simple recording of repetitive exchanges.
The history of accounting is often seen as indistinguishable from the history of finance and
business. Following is the 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.

Branches of Accounting
“Accounting is divided into several branches to better serve the needs of different users with
varying information needs. These branches sometimes overlap and they are often closely
intertwined.”
Financial Accounting
Financial accounting is the broadest branch and is focused on the needs of external
users. Financial accounting is primarily concerned with the recognition, measurement
and communication of economic activities. This information is communicated in a
complete set of financial statements. It is assumed under this branch that the users
have one common information need. Financial accounting conforms with accounting
standards developed by standard-setting bodies. In the Philippines, there is a Council
created to set these standards.
Examples of these financial reports include:
• the balance sheet (statement of financial condition)
• income statement (the profit and loss statement, or P&L)
• statement of cash flows
Financial accounting is primarily concerned with processing historical data. Although
financial accounting generally meets the needs of external users, internal users of
accounting information also use these information for their decision-making needs.
Management (or Managerial) Accounting
Management accounting emphasizes the preparation and analysis of accounting
information within the organization. The objective of managerial accounting is to
provide timely and relevant information for those internal users of accounting
information, such as the managers and employees in their decision-making needs.
Oftentimes, these are sensitive information and is not distributed to those outside the
business - for example, prices, plans to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost
analysis, evaluation of business decisions, and similar areas.
Government Accounting
Government accounting is the process of recording, analyzing, classifying,
summarizing, communicating and interpreting financial information about the
government in aggregate and in detail reflecting transactions and other economic
events involving the receipt, spending, transfer, usability and disposition of assets and
liabilities. This branch of accounting deals with how the funds of the government are
recorded and reported.
Auditing
There are two types of auditing: external and internal auditing. External auditing
refers to the examination of financial statements by an independent CPA (Certified
Public Accountant) with the purpose of expressing an opinion as to fairness of
presentation and compliance with the generally accepted accounting principles
(GAAP). The audit does not cover 100% of the accounting records but the CPA
reviews a selected sample of these records and issues an audit report. Internal auditing
deals with determining the operational efficiency of the company regarding the
protection of the company’s assets, accuracy and reliability of the accounting data,
and adherence to certain management policies. It focuses on evaluating the adequacy
of a company's internal control structure by testing segregation of duties, policies and
procedures, degrees of authorization, and other controls implemented by management.
Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax
planning and preparation of tax returns. It also involves determination of income tax
and other taxes, tax advisory services such as ways to minimize taxes legally,
evaluation of the consequences of tax decisions, and other tax-related matters.
Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers
to the recording, presentation, and analysis of manufacturing costs. Cost accounting is
very useful in manufacturing businesses since they have the most complicated costing
process. Cost accountants also analyze actual and standard costs to help managers
determine future courses of action regarding the company's operations. Cost
accounting will also help the owner set the selling price of his products. For example,
if the cost accounting records shows that the total cost to produce one can of sardines
is PHP50, then the owner can set the selling price at PHP60.
Accounting Education
This branch of accounting deals with developing future accountants by creating
relevant accounting curriculum. Accounting professionals can become faculty
members of educational institutions. Accounting educators contribute to the
development of the profession through their effective teaching, publications of their
research and influencing students to pursue careers in accounting. Accounting
teachers share their knowledge on accounting so that students are informed of the
importance of accounting and its use in our daily lives.
Accounting Research
Accounting research focuses on the search for new knowledge on the effects of
economic events on the process of summarizing, analyzing, verifying, and reporting
standardized financial information, and on the effects of reported information on
economic events. Researchers typically choose a subject area and a methodology on
which to focus their efforts. The subject matter of accounting research may include
information systems, auditing and assurance, corporate governance, financials,
managerial, and tax. Accounting research plays an essential part in creating new
knowledge. Academic accounting research "addresses all aspects of the accounting
profession" using a scientific method. Practicing accountants also conduct accounting
research that focuses on solving problems for a client or group of clients. The
Accounting research helps standard-setting bodies around the world to develop new
standards that will address recent issues or trend in global business.