INTEGRATED ACCOUNTING LEARNING MODULE ATTACHMENT (DO NOT COPY)

INTRODUCTION TO ACCOUNTING

LEARNING OBJECTIVES:

DEFINITION OF ACCOUNTING

• Accounting is a process of identifying, recording and communicating economic information that is

useful in making economic decisions.
• Accounting is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities that will be useful in making decisions. (Accounting Standards
Council)
• 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 or at least of a financial character and
interpreting the results thereof. (American Institute of CPAs)

ESSENTIAL ELEMENTS OF DEFINITION

1. Identifying - This refers to the analysis and identification whether the transaction is an “accountable
event” or “non-accountable event”.
• Only “accountable events” are recorded in the books of accounts.
• “Non- accountable events” are not recorded in the books.
• Not all activities of the business entity are an accountable or economic event. An event is
identified as accountable when it affects the assets, liabilities, equity, revenues and expenses of
the business
• Sociological and psychological matters are outside the scope of accounting.
2. Recording
• Journalizing - Recognizes the identified accountable events.
• Posting – Classifies the effects of the events on the “accounts”
3. Communicating - This refers to the summary of the information processed in the accounting system in
order to produce and communicate relevant information to intended users. Accounting information is
communicated to users through accounting reports, the most common form of which is the financial
statements.

NATURE OF ACCOUNTING

Accounting is a process with the basic purpose of providing information about economic activities that is
intended to be useful in making economic decisions.

Types of information provided by accounting

1. Quantitative Information – expressed in numbers, quantities or units
2. Quanlitative Information – expressed in words or descriptive forms. Found in the notes of financial
statements
3. Financial Information - expressed in money. Financial information is also quantitative because
monetary are normally expressed in numbers.

Accounting as Science and Art

• As social science, accounting is a body of knowledge which has been systematically gathered,
classified and organized
• As practical art, accounting requires the use of creative skills and judgement

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Accounting as an Information system
• A system is consists of input, process and output.

INPUT PROCESS
Recording, OUTPUT
(Accountable
Classifying and Accounting Report
Events) Summarizing

Bookkeeping and Accounting

• Bookkeeping - process of recording the accounts or transactions of entity. Normally ends with the
preparation of trial balance
• Accounting - covers the process of identifying, recording and communicating of information to
intended users.

FUNCTION OF ACCOUNTING IN BUSINESS

• Accounting often referred as “language of business”. It has the following broad functions:
1. To provide external users with information that is useful in making, among others, investment
and credit decisions.
2. To provide internal users with information that is useful in managing business

Users of Accounting Information

1. EXTERNAL USERS – not directly involved in managing the business. Examples are:
a. Existing and potential investors
b. Lenders
c. Government Agencies
d. Non-managerial employees
e. Customers
f. Public
2. INTERNAL USERS - directly involved in managing the business. Examples of internal users includes:
a. Business owners
b. Board of directors
c. Managerial personnel

Types of Accounting information classified as to users’ needs

1. General purpose accounting information – designed to meet the common needs of most statement
users. It is provided by financial accounting and prepared primarily for external users.
2. Special purpose accounting information – designed to meet specific needs of particular statement of
users. It is provided by managing accounting or other branches of accounting and is prepared primarily
for internal users.

Examples of decisions and types of information needed to make those decisions.

USER EXAMPLES OF DECISION TO MAKE EXAMPLES OF INFORMATION
NEEDED
EXTERNAL USER • Existing Investor Audited financial statement of the
(INVESTOR) Whether to hold or sell investment in business to aid in analyzing the
stocks value of the company.
• Potential investor (General purpose)
Whether or not to buy shares of stocks

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 EXTERNAL USER • Lender Audited financial statement of the
(LENDER) Whether to or not to extend loan business to aid in analyzing the
• Potential investor ability to pay in debts
Whether or not to extend credit (General purpose)

INTERNAL USER Whether or not to increase the sales price of the Analysis of the effects of sales
(MANAGER) product volume and sales process to
earnings (Special purpose)
INTERNAL USER How much capital is needed to manufacture a Budget Report
(MANAGER) new product (Special purpose)

Examples in which accounting is used in investment and credit decisions

EXTERNAL USERS OF DECISION ACCOUTING INFORMATION
INFORMATION
INVESTOR Shall I invest in this business? Is this Financial performance of the
a profitable undertaking? business
CREDITOR Shall I lend money to this business? Ability of the business to generate
Does this business have the ability revenue and cash flows from its
to pay back my loan? operations.

BRIEF HISTORY OF ACCOUNTING

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BRANCHES OF ACCOUNTING AND THEIR USES

BRANCH OF ACCOUNTING TYPES OF ACCOUNTING USERS OF SERVICE

SERVICE PROVIDED
Financial Accounting ➢ General Record-keeping, ➢ All business use financial
i.e, maintenance of accounting in their record-
journals and ledger keeping. These records
provide information that is
also used in the other
branches of accounting

➢ Preparation of general ➢ Business prepare general

purpose financial purpose FS at least
statements annually for the use of
lenders, investors or
government regulatory
bodies

Management Accounting ➢ Preparation of specific ➢ Required by management

tailored management to aid them in performing
reports management functions

Government Accounting ➢ General Record-keeping ➢ Required by the

and preparation of FS for government and its
government and its agencies
agencies. Also includes
preparation of budgets and
accountability reports
Auditing ➢ Expression of an opinion ➢ Business with gross
on the correspondence annual receipts exceeding
between management P3,000,000 are required to
assertions and established have FS Audited by
criteria. independent Certified
Public Accountant
** most common form of audit
opinion is the Independent
auditors’ Report which is
attached to audited FS
Tax Accounting ➢ Preparation of tax returns ➢ All business are required
to file tax returns
**Failure to file tax returns result to
penalty and imprisonment of not
less than 6 months but not more
than 10 years

➢ Providing tax advice ➢ Some taxpayers may

require the professional
advice of a tax practitioner
regarding management of
taxes

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Cost Accounting ➢ Analyses of cost of ➢ Business use cost
products or services accounting to analyze the
cost of their products or
services and the effects of
those costs in, among
others, earnings and price
policies

Accounting Education ➢ Teaching of Accounting ➢ Required by business

and related subjects students, business owners,
accounting professional in
their Continuing
Professional Development
(CPD) and other interest
parties

Accounting Research ➢ Accounting Research ➢ Required by business

papers , articles and owners, professional
similar publications organizations and other
related parties.

FORMS OF BUSINESS ORGANIZATION

Forms of Business FORMATION/

Ownership
Organization REGISTRATION
Sole Proprietorship ➢ One individual ➢ Registered with DTI

Partnership ➢ More than one (partners) ➢ Formed by contractual

agreement
➢ Registered with the SEC

Corporation ➢ More than one ➢ Formed by operation of

(stockholders) law
➢ Registered with the SEC

Cooperative ➢ More than one (member) ➢ Formed in accordance

with the Cooperative
Code
➢ Registered with the CDA

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

• Service Business
• Merchandising (Trading)
• Manufacturing

Service Business – offers service as it main products rather than physical goods. It may offer
professional skills, expertise, advice, lending service and similar services. It includes:
a. Schools
b. Professional (accounting firm, law firm, construction firm, etc)

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 c. Hospitals and clinics
d. Banks and other financial institutions
e. Hotels and Restaurants
f. Transportation and travel
g. Entertainment and event planner

Merchandising (Trading ) - one that buy and sells goods without changing their physical form.
Examples are:
a. General Merchandise resellers (groceries, department stores, hardware,
pharmacies, etc.)
b. Distributors and dealers ( rice wholesalers, vegetable and fish dealers etc)

Manufacturing – one that buy raw materials and process them into final products. Unlike merchandising,
this business changes physical form of the goods it has purchased into a production process. Examples
are:
a. Car Manufacturer (Toyotam Isuzu. etc.)
b. Technology companies (Apple, Samsung, Sony, etc)
c. Food processing companies (San Miguel Pure Foods, Silver Swan, etc)
d. Factories (Clothing, Animal Feeds, Plastic Ware

***Some business are called “ hybrid business”, they are engage in more than one type of activity.
For example, a restaurant used ingredients to cook meal (manufacturing) , sells coca-cola drinks
(merchandising) and serve food to customers (service). Nevertheless, a hybrid business is classified into
one major types based on the activity that is most inline with the business purpose. Restaurants are
expected to fill-in customer orders and provide dining services, thus they are more of service-type
business.

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