Start of Module 5Start of Module 5

• Fundamentals of Accounting

• INTRODUCTION OF ACCOUNTING

Accounting is an art of recording, classifying, summarizing and interpreting business transaction in terms
of money and events. It is the recording of all business transactions that take place in an enterprise. It is
the “language of business.” Business transactions are expressed in accounting terms.

• For example, an individual who purchase lot and house for P 150 000.00, paying P 50, 000. 00 as
down payment and signing a balance for P 100,000. 00 does the following

• He purchase lot and house for P 150,000. 00 on installment basis.

• He decreases his accounts payable (a/p) by P 50, 000. 00

• He incurs a long- term liability of P 100, 000. 00

• To the manager’s point of view, accounting is an information system by which financial data are
recorded, accumulated and communicated for decision- making purposes.

• It provides information concerning profitability a vital element in business. It also provides data
for the guidance and control or certain business operations.

Many people confuse accounting with bookkeeping, but there are important differences between the
two.

• Accounting deals with the entire system for providing accurate and up- to- date financial
information- from the design of the system through its operation to interpretation of the
information that is obtained to become an accountant, an individual must undergo years of
training and chalk up a great deal of practical experiences.

•  Accounting involves taking financial statements and analyzing and interpreting the information
they contain in order to effectively plan and control a business’s affairs, identify and overcome
its problems.

BOOKKEEPING

• Bookkeeping on the other hand, is the routine, day- to- day record keeping that is necessary
part of accounting. Bookkeepers are responsible for obtaining the financial data that the
accounting system processes.

•  An accounting system cannot operate without good, accurate bookkeeping, but a bookkeeper
can generally trained within a year or so.

•  Bookkeeping involves systematically recording information about a business’s transactions in

WHY BOTHER TO KEEP RECORDS

• Every person carrying on a business shall keep sufficient records, in the English language, of his
income and expenditure to enable his assessable income and allowable deductions to be rapidly
ascertained, and shall retain such records for a period of at least five years after the completion
of the transactions, acts or operations to which they relate.

•  The above regulation applies to all businesses. In addition, the corporation Act has this to say
about the records to be kept by a limited liability company:

• A company shall

• Keep such accounting records as correctly record and explain the transactions of the company
(including any transactions as trustee) and the financial position of the company; and

• Keep its accounting records in such a manner as will enable (1) the preparation from time to
time of true and fair accounts of the company; and (2) the accounts of the company to be
conveniently and properly audited in accordance with this act.

• The accounting records of the company shall be kept in writing in the English language or so as
to enable the accounting records to be readily accessible and readily convertible into writing
into English language.

•  There are, however, positive reasons for keeping records, whether they are financial or
statistical. Effective control of a business is impossible without an efficient information system,
and an information system is based on records of one kind or another.

• The accounting records of the company shall be kept in writing in the English language or so as
to enable the accounting records to be readily accessible and readily convertible into writing
into English language.

• Thus, whether a business operates as a sole trader, partnership or limited liability company, it is
required by law to keep proper records.

• The legal obligations outlined are really negative reasons for keeping accounting records. Under
these conditions most businesses would maintain only the minimum records consistent with
meeting legal responsibilities.

• A good record- keeping system

• will allow you to:

• Identify and avoid problems such as:

• Overspending

• Overstocking

• Slow collection of accounts

• Cash shortages
 • Failing profits

• Fraud

• Identify and seize opportunities to:

• Invest surplus cash

• Win creditor confidence

• Take advantage of purchase discounts

• Maximize profits

• Minimize tax

FIELDS OF ACCOUNTING

•  Private business accounting

• Government accounting

• Public accounting

PRIVATE BUSINESS ACCOUNTING

• Enterprise of private ownership employ as many accountants as they find necessary. In large
organizations, an accounting department may be composed of many employees with accounting
knowledge under the chief accountant.

• Where the accounting department is quite large. Work may be divided into the following fields
of specialization:

• General or financial accounting- deals with the over- all problems of operations and financial
position.

• Cost accounting- deals specifically with the manufacturing phase of the business.

• Internal auditing- deals with the verification of accounts as well as the maintenance of adequate
internal control or check in the office systems.

GOVERNMENT ACCOUNTING

• All divisions of the government employs accountants. The work of the private business
accountant is almost similar to the work of the government accountant.

• Of the governmental institutions, the Bureau of Internal Revenue, Budget Commission, and the
general auditing office employ the greatest number of accountants.

PUBLIC ACCOUNTING

• In public accounting, the accountant offers his varies services to the public like other
professionals. In the Philippines, only licensed Certified Public Accountants can legally practice
public accounting.
 • At present, the title C. P. A. can be obtained only by passing a very difficult civil service
examination for the purpose.

ELEMENTS OF ACCOUNTING

• In accounting, all items resulting from business transactions are classified into accounting value
or elements namely:

• Assets- these are the property rights of the business. Example cash, account receivable, land,
building, equipment, furniture and others.

• Liabilities- these are financial obligations or depts. Of the business to other persons or firms.
Example – amounts payable to sellers from whom the business might have bought merchandise
on credit. Loans from other parties, taxes due but not paid to the government. Promissory
notes, etc.

• Capital- when the proprietor goes into business, he makes an investment of various assets. The
investment may consists of cash, and other assets.

• The total of the assets invested is called the proprietor’s capital. Capital may be defined as the
amount invested in a business. A point to be stressed is that capital does not mean cash. Capital
is a total of the assets invested.

DEBIT AND CREDIT

•  The accounting Equation. As previously stated, the business entity is distinct and separate from
the person or the owner. This concept is expressed in the equation.

•  ASSETS= EQUITIEES

•  ASSETS according to Pasion, include anything owned or possesses by the business which is
capable of being expressed in terms of money or possessing monetary values, and which,
consequently, is available for the payment of the debts for the business.

•  EQUITIES- include all the vested rights of persons in the assets of the business. Stated
differently, equities include all the amounts owned by the business to all persons which may be
classified into:

• Equities of outsiders or amounts owning to persons other than the owners of the business,
technically known as liabilities and

• Equities of owners, known in the accountant’s language as “capital” “proprietorship”, “net