Subject: ABM1

Lesson 1: Introduction to Accounting

“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an
organization to interested users.” (Weygandt, J. et. al)

Explain the three highlighted words in the graphic:

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.

 Nature of accounting
• 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.

 Function of accounting in business

Accounting is the means by which business information is communicated to business owners and
stakeholders. The role of accounting in business is to provide information for managers and owners to
use in operating the business. 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.

Accounting helps the users of these financial reports to see the true picture of the business in financial
terms. In order for a business to survive, it is important that a business owner or manager be well-
informed.

With the help of accounting, the following questions can be answered;

 Is my business earning? (profitability)
 How much daily or monthly sales do I need in order to recover my fixed-cost? (break-even)
  Do I need to hire additional workers to help me with my production?
 Can I afford to set up a new store in another place? Where do I get funds?
 Can I afford to pay back the loans?
 Is accounting important to you?
 Does it affect your daily activities? How?”

 History of accounting
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.