Fundamentals of Accounting, Business

and Management (FABM) 1:

An Introduction
What is Accounting?

The American Institute of Certified Public Accountants

(AICPA) defined accounting as: "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 financial character, and INTERPRETING the
results thereof."
FINANCIAL ACCOUNTING
Financial Accounting deals with the theoretical The Institute of Management Accountants
framework covering accounting principles and (IMA) defines management accounting as a
concepts relative to measurement and profession that involves
valuation as partnering in management decision making,
applied to assets, liabilities, stockholders’ devising planning and performance
equity, retained earnings, revenue and management systems, and providing
expenses accounts in relation to the expertise in financial reporting and control
preparation and presentation of financial to assist management in the formulation
statements. These financial statements and implementation of organization’s
include disclosure requirements as governed strategy.
by the generally accepted accounting
principles (GAAP).
Government Accounting Auditing is the examination and review of
accounting reports in order to ascertain
Section 109 Decree (PD) No. 1445 states that their fairness, propriety and reliability
government accounting encompasses the
process of analyzing, classifying, summarizing
and communicating all transactions involving
the receipt and disposition of government
funds and property, and interpreting the
results thereof.
Tax services provided by accountants Cost Accounting includes the
include the preparation of monthly collection, determination, allocation,
value assed tax, percentage tax, assessment, interpretation, and
expanded withholding tax returns, control of cost data
quarterly and annual tax returns, and
any other taxes applicable to
business.
Accounting education involves Accounting research involves
planned grading and formal teaching conducting a careful and diligent
in a educational institution study aimed at discovering and
interpreting facts, revising accepted
theories on the lights of new facts, or
the practical application of such new
or revised theories for the generation
of a new knowledge.
 “Summa de Arithmetica, Geometria,
Proportioni et Proportionalita”.
Don Vicente Fabella
Accrual principle
Conservatism principle
Consistency principle
Cost principle
Economic entity principle
Full disclosure principle
Going concern principle
Matching principle
Materiality principle
Monetary unit principle
Reliability principle
Revenue recognition principle
Time period principle
Assets are normally
shown at cost price in the
balance sheet, and this
cost is the basis for all
subsequent accounting
for the asset. The balance
sheet does not show the
current value of an asset.
Financial statements
should disclose fully
and completely all
significant
information.
Expenses are matched to
revenues within an
accounting period. Profit is
therefore the difference
between revenue and
expenses not cash received
and paid. This accounting
concept is sometimes
referred to as the accruals
accounting concept.
The main task of accounting is to
calculate the capital, liabilities, assets,
and profit or loss of a business and to
serve the people interested in the
consequences. The main objective of
accounting is to publish important
information in this regard.

According to this principle, it is

necessary to judge the relevance of all
such information when recording all
information.

The materiality principle states that

the economic impact of all issues or
events is of little or no consideration to
the needs of users, these issues are of
no importance at all and they cannot
be published.
Revenue is considered
as earned income
when it is realized, this
is at the time the
goods or services are
passed to the customer
and the customer
incurs liability for
them.
Accounting is a means by which necessary financial information about business enterprise is
communicated. There are many users of accounting information who need financial
information of enterprise in order to make important decisions.
 Internal Users
Owners:
Owners contribute capital in the business and thus are exposed to
maximum risk. Naturally, they are interested in knowing the profit earned
or loss incurred by the business besides the safety of their capital. The
financial statements give the information about profit or loss and financial
position of the business.

Management:
The management makes extensive use of accounting information to arrive
at informed decisions such as determination of selling price, cost controls
and reduction, investment into new projects, etc.

Employees and Workers:

Employees and workers are entitled to bonus at the year-end, which is
linked to the profit earned by an enterprise. Therefore, the employees and
workers are interested in financial statements. Besides, the financial
statements also reflect whether the enterprise has deposited its dues
towards Employees’ Provident Fund and Employees’ State Insurance, etc.,
or not with the appropriate authorities.
 External Users
Banks and Financial Institutions:
Banks and financial institutions are an essential part of any business as
they provide loans to businesses. Naturally, they watch the performance of
the business to know whether it is making progress as projected to ensure
the safety and recovery of the loan advanced. They assess it by analysing
the accounting information.

Investors and Potential Investors:

Investment involves risk and also the investors do not have direct control
over the business affairs. Therefore, they rely on the accounting
information available to them and seek answers to questions such as—
what is the earning capacity of the enterprise and how safe is their
investment?

Creditors:
Creditors are those parties who supply goods and/or services on credit. It is
a common business practice that a large number of suppliers remain
invested in credit sales. Before granting credit, creditors satisfy themselves
about the credit-worthiness of the business. The financial statements help
them immensely in making such an assessment.
 External Users
Government and its Authorities:
The government makes use of financial statements to compile national
income accounts and other information. The information available to it
enables it to take policy decisions. Government levies varied taxes such as
excise duty, GST and income tax. These government authorities assess
correct tax dues after an analysis of the financial statements.

Consumers:
Consumers require accounting information for establishing good
accounting control so that cost of production may be reduced with the
resultant reduction in the prices of products they buy. Sometimes, prices of
some products are fixed by the government, so it needs accounting
information to fix fair prices so that consumers and producers are not
exploited.
 BUSINESS ENTITY
An organization
Uses economic resources
Provides goods or service to
customers
Exchange for money or goods and
services

Comes in different types and

form of ownership
Service Business

A service type of business which provides

customers with intangible products
(products that are not seen, felt or
touched).

Service based firms offer professional

skills, ability, advice, and other similar
products. Examples of businesses offering
services are: salons, repair shops, schools,
banks, accounting firms, law firms etc.
Merchandising Business

A merchandise buys products at wholesale price

from the wholesale and sells the product at retail
price to the consumer.

Merchandising businesses are "buy and sell"

businesses. They make profit when they sell the
products at prices higher than their cost price.

A merchandising business sells a product without

changing its original form. Examples of
merchandising businesses are: grocery stores,
convenience stores, distributors, and other
resellers.
Manufacturing Business

A manufacturing business purchases products

with the aim of using them as materials to make a
new product. They usually buy capital good.

Thus, the manufacturer transform the products

after purchase. A manufacturing business puts
together raw materials, labor, and overhead costs
in its production process. The manufactured
goods (end products) will then be sold to the
wholesalers, retailers or consumers depending on
the channel of distribution used.
Hybrid Business

Hybrid businesses undertake in more than

one type of business. They involve in
manufacturing, merchandising and
services.

A restaurant, for instance, puts together

ingredients in preparing a meal
(manufacturing), sells chilled wine
(merchandising), and fills customer orders
(service).