CHAPTER 1: Introduction to  Why study Accounting?

Accounting - One should have an understanding of

HOW data are gathered and recorded in
Chapter Outline order to appreciate and understand the
I. Introduction to Accounting financial reports of the business.

1. Need for Accounting

2. Why study Accounting  Definition of Accounting

o According to Accounting Standards
3. Definition of Accounting
Council:
4. Four Phases of Accounting
 Accounting is a service activity. The
5. Fields of Accounting accounting function is to provide
quantitative information, primarily
6. Business Organizations
financial in nature, about economic
7. Business as an Accounting Entity entities, that is intended to be useful
8. Transaction in making economic decision.

9. Accounting Elements or Values o According to the Committee on

Accounting Technology of the American
Institute of Certified Public
 Need for Accounting
Accountants:
- Everyday transactions cannot be retained
in the human brain for a quiet period  Accounting is the art of recording,
without confusions and complications. To classifying and summarizing in a
avoid these, transactions and other significant manner and in terms of
important events should be recorded. money, transactions and events which
 Owner. “Has the business improved?” are in part at least of a financial
character and interpreting the results
 Management. “What are the
thereof.
resources of the business?”
 According to the American Accounting
 Prospect Investors. “Will my money
Association:
grow in this business?”
 Accounting is the process of
 Creditors. “Can the business meet its
identifying, measuring and
obligation?”
communicating economic information
 Employees. “Can we ask for more to permit informed judgment and
financial assistance?” decision by users of the information.

 Government. “Is this firm reporting

the correct amount of income?”
 Four Phases of Accounting  Tax Services. This includes
preparation and filing of income tax
 Recording. This is technically called
returns.
the bookkeeping. In this phase,
business transactions are recorded
systematically and chronologically in
 Private Accounting
the proper accounting books.
 General Accounting. This includes the
 Classifying. In this phase, items are
recording transactions and preparing
sorted and grouped. They may be
financial reports for the use of the
classified as asset accounts, liability
management, owners, creditors,
accounts, capital accounts, revenue
governmental units, and other
accounts and expense accounts.
interested parties.
 Summarizing. After each accounting
 Cost Accounting. This has to do with
period, data recorded are summarized
the controlling, determining, and
through financial statements.
controlling costs particularly those
 Interpreting. Due to the technicality costs in producing a product or
of accounting reports, the service.
accountant’s interpretation is needed.
 Budgeting. This provides management
In this case, analysis reports are
a plan for future operations and after
submitted together with the financial
this plan has been applied, summaries
statements.
and reports comparing the actual
accomplishments with the plan are
provided.
 Fields of Accounting
o Public Accounting  Internal Auditing. Internal auditors
see to it that the established
 Auditing. This is the principal service
accounting procedures are being
that a public accountant offers. In
followed throughout the year.
making an audit, he carefully
examines, tests, and checks the  Government Accounting. Accountants
accuracy of the reports and the in private business firms also check
financial data from which these and audit the income, payroll, and tax
reports were taken. returns submitted to the government.

 Management Advisory Services. This  Accounting Education. Faculty

includes the design, installation, and members in Accounting in various
improvement of the firm’s general colleges and universities are Certified
accounting system and other system Public Accountants.
deemed necessary for controlling and
distributing manufacturing costs.
  Internal Accounting. This is  Nature of Business
concerned with the transactions and
 Service Concern. Deals with the
special problems of multinational
rendering of services to the
business organizations in their
customers such as tailoring shops,
dealings in the international trade.
beauty shops, firms of CPAs, lawyers,
 Internal Auditing. Internal auditors doctors, and others.
see to it that the established
 Trading or Merchandising. Deals with
accounting procedures are being
the buying of goods and selling the
followed throughout the year.
same goods in the same form for
 Social Accounting. This involves the profit such as sari-sari stores,
measurement of social costs and department stores, grocery stores,
benefits such as the measurement of etc.
traffic patterns for the most
 Manufacturing Concern. Involves
efficient use of traffic funds.
purchase of raw materials and
converting these raw materials into
finished products such as textile
 Business Organizations
manufacturing firms, candy
o Ownership
manufacturing firms, etc.
 Single or Sole Proprietorship. Owned
only by one person. Usually the owner
is also the manager of the business. Business as an Accounting Entity
He usually supplies the capital or
- Under this assumption, the entity is
borrow funds from the banks or other
separate from the owners, managers and
lending institutions.
employees who constitute the entity.
 Partnership. Owned by two or more - The personal transactions of the owners
owners. The owners, called partners, shall not be allowed to distort the
agree on the capital contributions, financial statements of the entity.
management or the firm, distribution - The shareholder is not the corporation
or profits and losses, and other and the corporation are not the
matters pertaining to the operation of shareholder.
the firm.

 Corporation. This is a business

organization of not less than five
persons. It is organized by operation
of law.
Transactions  Noncurrent Asset. (PAS 1; Par. 66)
Simply states that “an entity shall
- Are the data that we record in the
classify all other assets not classified
accounting books.
as current as noncurrent”.
- These are economic activities of the
firm.
- External transactions (activities that
o Liability. A present obligation arising
involve one enterprise and another
from past events the settlement of
enterprise); internal transactions
which is expected to result in an outflow
(activities within the enterprise)
from the entity of resources embodying
- In every transaction, there is always a
economic benefits.
value received and a value parted with
(like money, property, or services).  Current Liability. (PAS 1; Par. 69) The
entity expects to settle the liability
within the entity’s normal operating
cycle. The entity holds the liability
primarily for the purpose of trading.
The liability is due to be settled
 Accounting Elements or Values within twelve months after the
reporting period. The entity does not
 Elements directly related to the
have an unconditional right to defer
measurement of financial position
settlement of the liability for at least
o Asset. A resource controlled by the twelve months after the reporting
entity as a result of past events and from period.
which future economic benefits are
 Noncurrent Liability. (PAS 1; Par. 69)
expected to flow to the entity.
provides that all liabilities not
 Current Asset. (PAS 1; Par. 66) The classified as current are classified as
asset is cash or cash equivalent noncurrent.
unless the asset is restricted to
settle a liability for more than twelve
months after the reporting period.
The entity holds the asset primarily
for the purpose of trading. The
entity expects to realize the asset
within twelve months after the
reporting period. The entity expects
to realize the asset or intends to sell
or consume it within the entity’s
normal operating cycle.
o Equity. It is the residual interest in the
assets of the entity after deducting all
of the liabilities.

- Under PAS 1, paragraph 7, the holders of

instruments classified as equity are
simply known as owners.

 Owner’s Equity in a proprietorship

 Partner’s Equity in a partnership

 Stockholders’ Equity or
Shareholders’ Equity in a corporation

o Income. Increase in economic benefit

during the accounting period in the form
of inflow or increase in asset or decrease
in liability that results in increase in
equity, other than contribution from
equity participants.

o Expense. Decrease in economic benefit

during the accounting period in the form
of an outflow or decrease in asset or
increase in liability that results in
decrease in equity, other than
distribution to equity participants.