FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

ACCOUNTING
 “the Language of Business”
 “Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of
an organization to interested users.” (Weygandt, J. et. al)
 “Accounting is the process of recording financial transactions pertaining to a business. The
accounting process includes summarizing, analyzing and reporting these transactions to oversight
agencies, regulators and tax collection entities.” -Investopedia

ACCORDING TO BALLADA:
 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.
 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 results thereof.
 Business transactions are economic activities of a business.
 Money serves as a medium of exchange and a measure of value. It is the common financial
denominator.

PROCESS OF ACCOUNTING
 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.

According to Accounting Theory:

 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 objectives 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.

Why accounting is considered as the language of business?

 Accounting is the means by which business information is communicated to business owners and
stakeholders.
 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.
 FABM #2

DEFINE ACCOUNTING
 Accounting is a service activity, its purpose is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making economic decisions.
(AICPA-American Institute of Certified Public Accountant).

1. A service activity. (Business offering service)

Service Activities means direct, meaningful actions through organized community service efforts
that counts toward fulfilment of service hours in a term of service.

TYPES OF BUSINESS:
THE THREE MAJOR TYPES OF BUSINESS ARE:
1.Service Business (offer intangible products to customers using their skills and expertise.)
2.Merchandising Business (Buy goods and sell the same at a higher prices.)
3.Manufacturing Business (Purchase goods/raw materials and use them to make new products to
be sold.)

2. Its purpose is to provide quantitative information. (ACCOUNTING provides quantitative information)

Quantitative Information the data is based on quantities obtained using a quantifiable
measurement process. Numerical data, also known as quantitative data.

3. Financial in nature (Records financial transaction of a business.)

4. Economic Entities (ACCOUNTING is about economic entities.)

The basic forms of organization or business ownership include:
Sole proprietorship
Partnership
Corporations
Cooperatives

5. Intended to be useful in making economic decisions. (Accounting provides vital information

regarding cost and earnings, profit and loss, liabilities and assets for decision making, planning
and controlling processes within a business.)

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.”

1) 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.

2) Management Accounting
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.

3) Government Accounting
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.

Government accounting deals with these transactions, the recording of inflow and
outflow of funds of the government.

4) Auditing
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.

5) 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.
6) 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.

7) 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.

8) 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, financial, 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.

PRACTICE TEST

1) Evaluation of the performance of a sales department

2) Review tax compliance of the business
3) Evaluate whether a branch of the business complies with the collection and deposit policy of the
company
4) Develop standards to address a new business set up
5) Report on the spending of government
6) Report on the total cost of materials and labor used in the production
7) Review whether the financial statements are presented fairly and in compliance
8) Conducting lectures on accounting topics
9) Preparation of general-purpose financial statements

1. Answer : Managerial
2. Answer: Tax Accounting
3. Answer: Auditing (Internal)
4. Answer: Accounting Research
5. Answer: Government Accounting
6. Answer: Cost Accounting
7. Answer: Auditing (External)
8. Answer: Accounting Education
9. Answer: Financial
 CHAPTER 2

“Who uses accounting data or information?”

There are two broad categories of users of financial information: internal and external users.

INTERNAL USERS - Those individuals inside a company who plan, organize, and run the business. These
users are directly involved in managing and operating the business. These include marketing
managers, production supervisors, finance directors, company officers and owners.

Accounting information is presented to internal users usually in the form of management

accounts, budgets, forecasts and financial statements. This information will support whatever
decision of the internal users.

EXTERNAL USERS - Individuals and organizations outside a company who want financial information
about the company. These users are not directly involved in managing and operating the
business.

The two most common types of external users are potential investors and creditors.

 Potential Investors use accounting information to make decisions to buy shares of a

company.
 Creditors (such as suppliers and bankers) use accounting information to evaluate the risks
of granting credit or lending money.

Also included as external users are government regulatory agencies such as Securities and
Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Department of Labor and
Employment (DOLE), Social Security System (SSS), and Local Government Units (LGUs).

SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS

Internal users of accounting information are those who are involved in planning, organizing and running
the business. They need more detailed information on a timely basis in order to support their decisions.
Examples of these internal users are managers, employees and owners.
The external users of accounting information are those individuals or organizations outside a company
who are interested in its financial information.
Examples of these external users are potential investors, suppliers and government agencies.

ACCOUNTING ORIGIN
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.

ACCOUNTING CONCEPTS AND PRINCIPLES

GAAP - Generally Accepted Accounting Principles

 Set of accounting principles, standards, and procedures that must be followed when
preparing financial statements.

• Business entity principle – a business enterprise is separate and distinct from its owner or investor.
Examples :
o If the owner has a barber shop, the cash of the barber shop should be reported separately from
personal cash.

o The owner had a business meeting with a prospective client. The expenses that come with that meeting
should be part of the company’s expenses. If the owner paid for gas for his personal use, it should not be
included as part of the company’s expenses.

• Going concern principle – business is expected to continue indefinitely.

Example: When preparing financial statements, you should assume that the entity will continue
indefinitely.

• Time period principle – financial statements are to be divided into specific time intervals.
Example :
o Philippine companies are required to report financial statements annually.
o The salary expenses from January to December 2015 should only be reported in 2015.

• Monetary unit principle – amounts are stated into a single monetary unit
Example :
Jollibee should report financial statements in pesos even if they have a store in the Uniated States.
IHOP should report financial statements in dollars even if they have a branch here in the Philippines
• Objectivity principle – financial statements must be presented with supporting evidence.
Example :
When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to represent as
evidence.
When a company incurred a transportation expense, a voucher should be prepared as evidence.

• Cost principle – accounts should be recorded initially at cost.

Example :
When Jollibee buys a cash register, it should record the cash register at its price when they bought it.
When a company purchases a laptop, it should be recorded at the price it was purchased.
• Accrual Accounting Principle – revenue should be recognized when earned regardless of collection and
expenses should be recognized when incurred regardless of payment. On the other hand, the cash basis
principle in which revenue is recorded when collected and expenses should be recorded when paid. Cash
basis is not the generally accepted principle today.
Example:
When a barber finishes performing his services he should record it as revenue. When the barber shop
receives an electricity bill, it should record it as an expense even if it is unpaid.

• Matching principle – cost should be matched with the revenue generated.

Example:
When you provide tutorial services to a customer and there is a transportation cost incurred related to
the tutorial services, it should be recorded as an expense for that period.
• Disclosure principle – all relevant and material information should be reported.
Example:
The company should report all relevant information.
• Conservatism principle – also known as prudence. In case of doubt, assets and income should not be
overstated while liabilities and expenses
should not be understated.
Example:
In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a
lower amount.
• Materiality principle – in case of assets that are immaterial to make a difference in the financial
statements, the company should instead record
it as an expense.
Example:
A school purchased an eraser with an estimated useful life of three years. Since an eraser is immaterial
relative to assets, it should be recorded as an expense.
Accounting principles. Indicate which principles are violated
1. The owner-manager bought a computer for personal use. The invoice was given to the
accountant who recorded it as an asset of the business.
Ans. (1) Business entity
2. The statement of financial position of a company included an equipment purchased from Japan
for 350,000 yen. It was reported at that amount in the statement of financial position while all the other
assets were reported in Philippine pesos.
Ans. (2) Monetary unit
3. No financial statements were prepared by Michael Go for his business. He explained that he will
prepare the statements when he closes the business, which he predicts to take place after 20 years.
Ans. (3) Time period
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the canteen are
reported in the statement of financial position of the shoe store.
Ans. (4) Business entity
5. Purchased a hammer at a cost of PHP500. This was recorded as an asset and expense to decrease
its value by PHP50 per year for 10 years.
Ans. (5) Materiality

6. A food company ordered a machine needed in the assembly line of its production department.
Upon order, the machine was immediately listed as one of its assets.
Ans. (6) Objectivity