MODULE 1: INTRODUCTION OF ACCOUNTING

“Accounting is the Language of Business.”

Accounting
 “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 results thereof.” —American Institute of Certified Public Accountants
(AICPA)
 “Accounting is the process of identifying, recording, and communicating economic
events of an organization to interested users.” —(Weygandt, J. Et. Al)

Steps in Accounting Process

 Identification
 This involves selecting economic events that are relevant to a particular business
transaction.
 Recording
 This involves keeping a chronological diary of events that are measured in pesos.
 Communicating
 Occurs through the preparation and distribution of financial and other accounting
reports.

Nature of Accounting
 Accounting is a service activity.
 Accounting is a systematic process.
 Accounting is an art.
 Accounting deals with financial information and transactions.

Function of Accounting
1. Keeping systematic record of business transactions.
2. Protecting properties of the business.
3. Communicating results to various parties in or connected with the business.
4. Meeting legal requirements.

Questions:
Which of the following is NOT a step in the accounting process?
A. Identification
 B. Recording
C. Verification
D. Communication
Answer: c
Which of the following does not show one of the main functions of accounting?
A. Jason prepares financial reports monthly for the company’s stakeholders.
B. Allen canvassed the price of a sewing machine to be used in the company’s operation.
C. Fred prepared a report to be submitted to the taxing authorities.
Answer: b
What profession does not use accounting at all?
A. Entrepreneurs
B. Economists
C. Bank Managers
D. None of the above
Answer: d
Which of the following can be considered as a relevant economic event?
A. GMA network signed a contract with Kris Aquino.
B. A meeting of the top management was held in the discussion room last month.
C. The company received advance payments from its customers.
D. Meralco announced that it will increase energy prices by the end of the month.
Answer: d

History of Accounting
 Scholars believe that accounting originates from early civilizations.
 Scribes in ancient Egypt were known to keep thorough records of the inventory of goods
for the pharaoh.
 Scribes are the equivalents of present-day accountants.
 Papyrus was developed by ancient Egyptians in 4,000 BCE. Papyrus not only allowed
recording of commercial transactions but also the transcription of religious text, music,
literature, and more.
 Mesopotamia has clay tokens and clay tablets to record their loans, herd, crops, and
system of trade.
 In the 14th Century, Luca Pacioli, who is considered as the “Father of Accounting, wrote
Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about
Arithmetic, Geometry, and Proportion).
 Actually, not only Luca Pacioli, but the Italians are broadly recognized to be the father
of accounting for their marked contribution to the improvement of trade and commerce.
  Pacioli credited Benedetto Cotrugli, for the original idea of the double-entry
bookkeeping.
 19th Century, the dawn of Modern Accounting in Europe and America.
 20th Century, the American Institute of Certified Public Accountants (AICPA), the
first national professional association for CPA, was formed in the United States.
 The Information Age, otherwise known as the Computer Age, Digital Age, or New
Media Age, has brought about a significant change in the workload of a accountants.
 21st century, Enron scandal , the greatest corporate fraud case recorded in American
history, caused Arthur Andersen, one of the top audit firms in the US, to close
business.
 In order to protect investors from corporate misinformation, the Sarbanes-Oxley act was
passed by the US Congress in 2002.

 With constant developments in modern technology and the globalization of

businesses, accountants continue to cope up with the changing trends.
 Many countries including the Philippines have adopted the International
Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) in order to support comparability and understandability of
financial statements across the globe.

Branches of Accounting
 Financial Accounting
 The broadest branch and is focused on the needs of external users.
 Financial accounting conforms with accounting standards developed by standard-
setting bodies.
 Financial accounting is primarily concerned with processing historical data.

 Management Accounting
 Management accounting emphasizes the preparation and analysis of accounting
information within the organization.
 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.

 Cost Accounting
 Refers to the collection, determination, allocation and analysis of manufacturing
costs.
 Is very useful in manufacturing businesses since they have the most complicated
costing process.
 Helps 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.

 Government Accounting
 This branch of accounting deals with how the funds of the government are
recorded and reported.
 Government accounting deals with these transactions, the recording of inflow and
outflow of funds of the government.

 Auditing
 The examination and review accounting reports order to ascertain their fairness,
propriety, and reliability.

 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 legally, evaluation of
the consequence of tax decisions, and other tax-related matters.

 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 Research
 Accounting research plays an essential part in creating new knowledge.
 The Accounting research helps standard-setting bodies around the world to
develop new standards that will address recent issues or trend in global business.

Users of Accounting
EXTERNAL USERS
 people outside the company
 They do not work in the company.

INVESTORS
 They decide whether to invest or not depending on the estimated amount of income on
the investment.

CREDITORS/SUPPLIERS
  Before extending credit, they use financial information to determine the capacity of the
business organization to pay its obligations and their interests at the appropriate time.

GOVERNMENT AND TAX AUTHORITIES

 Financial information is important for tax purposes and in checking of compliance with
Securities and Exchange Commission (SEC) requirement.

CUSTOMERS and CONSUMERS

 They may obtain financial information to acquire a picture of the longevity or continuity
of a business, especially, when there is potential long-term interaction and engagement
between them and the business.

COMPETITORS
 They want to check the developments and changes in services and products that the
competition is providing so that they can also adjust the strategies in their operations.

INTERNAL USERS
 people within the company directly involved in the business operations.

OWNERS/STOCKHOLDERS
 They depend on financial information to determine the longevity and profitability of their
business.

MANAGEMENT
 They need financial information in carefully planning the improvement of the business.

EMPLOYEES AND TRADE UNIONS

 They need to know this information to assess whether the employment conditions of the
business are beneficial for them or not. They can also use this as a basis for negotiation.

Questions:
The following are different situations requiring access to financial statements prepared by
accountants. Go through each of them and identify the user that needs the report, the type of user,
and the purpose of the report.
1. Julia Anderson wants to invest part of her retirement pay in the Spotless Laundry Services
franchise.
Answer: Investors

2. Enrique Luis owns the Affordable Living Furniture Company. He plans to expand the business
to include a new line of patio or terrace furniture.
Answer: Owner

3. BIR conducts spot audits. The Magara Garments Factory readies its reports for the visit.
Answer: Government and Tax Authorities

4. Maria Anna Valdez wants to expand her food stall business and she plans to apply for a loan
for small business enterprises from the Mayaman Bank.
Answer: Creditors or Supplier

TYPES OF ACCOUNTS
REAL OR PERMANENT ACCOUNTS NOMINAL OR TEMPORARY ACCOUNTS
• Assets • Expenses
• Liabilities • Income/Revenue
• Owner’s Equity • Profit or Loss Accounts

TYPES OF MAJOR ACCOUNTS

 Assets
 The resources owned and controlled by the firm.
 Liabilities
 Obligations of the firm which are to be settled in the future.
 Owner’s Equity
 The residual interest in the assets of the entity after deducting all the liabilities.
Note: Increase in assets is effected by additional investments or loans.
 Revenue
 Fees earned from providing services and the amounts or merchandise sold.
 Other term for income
 Increases equity
 Expenses
 Is the reduction in value of an asset as it is used to generate revenue.
 Costs of doing business
 Decreases equity

CLASSIFICATION OF ASSETS
A. Current Assets
 Assets that are expected to be realized (sold, collected, used up) within the normal
operating cycle of the business or within one year.
EXAMPLES OF CURRENT ASSETS
• Cash
 Is money on hand, or in banks, and other items considered as medium of exchange in
business transactions.
 Petty cash, checking accounts, savings accounts, cash accounts, money market,
certificates of deposit, cash float
• Accounts Receivable
 Are amounts due from customers arising from credit sales or credit services.
• Notes Receivable
 Are amounts due from clients supported by promissory notes.
• Inventories
 Are assets held for resale; unsold goods of the business
 Raw materials, components, and finished products
• Supplies
 Are items purchased by an enterprise which are unused as of the reporting date.
• Prepaid Expenses
 Are expenses paid in advance. They are assets at the time of payment and become
expenses through the passage of time.
 Office supplies
• Accrued Income
 Is revenue earned but not yet collected.
• Short Term Investments
 Are the investments made by the company that are intended to be sold immediately.
• Illiquid investments
• Marketable securities (
• Short term deposits
• Bills receivable
• Debtors
• Lease equipment
B. Non-Current Assets
 Are assets whose value will not be realized within a period of one year since they are not
easily converted into cash.
EXAMPLES OF NON-CURRENT ASSETS
• Property, Plant and Equipment
 Are long-lived assets which have been acquired for use in operations.
Examples
o Land
o Building
o Furniture and fixtures
o Equipment, etc
o Facilities
• Long Term Investments
 Are the investments made by the company for long term purposes.
• Intangible Assets
 Are assets without a physical substance.
Examples
o Franchise
o Copyright
o Goodwill
o Branding
o Trademarks
o Trade secrets
o Licenses and permits
o Corporate intellectual property
o Royalties
Basta assets
• Interest Receivable
• Bank accounts
• Real estate
• Investment (mutual funds, retirement plans and stocks)
• Factories
• Product design
• Mineral rights
• Distribution right
• Software
• Computers (fixed asset)
• Fixtures
Fixed Asset
 Property with a useful life greater than one reporting period, and which exceeds an
entity's minimum capitalization limit
o Gold/Jewellery
o Computer
o Laptop

CLASSIFICATIONS OF LIABILITIES
A. Current Liabilities
 Obligations that fall due within one year.
Examples
o Accounts Payable
 Money owed to supplier
o Utilities Payable
o Accrued Expenses
o Unearned Income
o Bank accounts overdraft
o Interest payable
o Income taxes payable
o Bills payable

B. Non-Current Liabilities
 Are liabilities that do not fall due (paid, recognized as revenue) within one year after
year-end date.
Examples
o Notes Payable
o Loans Payable
o Mortgage Payable
o Bonds payable
o Long-term notes payable
o Deferred tax liabilities
o Capital leases
Example
 Bank debt
 Mortgage debt
 Wages owed
 Taxes owed
 Accrued wages
 Customer deposits
 Current portion of debt payable
 Deferred revenue
 Payroll taxes payable
 Sales taxes payable
 Salaries payable
 Warranty liability
 Pending Lawsuit (not successful)
 Product warranties
 Benefits payable
 Lease agreement
 Contracts liability
 Car payments
 Pension obligation
 Principal / interest on a bank loan
 Domain name
OWNER’S EQUITY
Examples:
Capital
 Is the value of cash and other assets invested in the business by the owner of the business.
Drawing
 Is an account debited for assets withdrawn by the owner for personal use from the
business.
• Common stock
• Preferred stock
• Retained earnings
• Contributed surplus
• Additional paid-in capital
• Treasury stock or contra-equity accounts
• Dividends
• Other comprehensive income
• Owner's distribution
• Owner or member capital

REVENUE
Examples:
 Service revenue for service entities
 Sales for merchandising and manufacturing companies
 Professional fees
 Sales
 Contra revenue
 Interest income
 Service revenue
 Fees earned
 Top line
 Consulting services fees
 Subscription fees

EXPENSES
Examples:
 Salaries Expense
 Interest Expense
 Utilities Expense
 Advertising Expense
 Doubtful Accounts Expense
 Operating lease
 Legal fees
 Cost of goods sold for ordinary business operations
 Equipment depreciation
 Wages, salaries, commission, other labor
 Repairs and maintenance
 Rent expense
 Utilities expense
 Insurance rates
 Bank charges
 Losses on sales of non-current assets
 Advertising
 Marketing
 Sales material cost
 Entertaining cost
 Direct mailing cost
 Travel cost
 Promotions
 Employees benefits
 Taxes, Interest, impairment charges
 Depreciation and amortization
 Commission
 Transaction fees
 Factory lease

“EVERY DAY MAY NOT BE GOOD, BUT THERE’S SOMETHING GOOD IN EVERY
DAY.”
—Alice Morse Earle
ACCOUNTING EQUATIONS
Assets= Liabilities + Owner’s Equity
 In accounting, it is understood that every business activity always has a two-sided effect
on the business. This two-sided effect is the best illustrated in the accounting equation.
 This reflects the double-entry bookkeeping which tells us that if we add something from
one side, we must add the same amount to the other side to keep them in balance.