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Lesson 1: Introduction To Accounting

This document provides an overview of financial accounting and reporting. It defines accounting as identifying, recording, and communicating economic information to aid in decision making. Accounting information has both internal and external users. Internally, owners and management use it to evaluate business performance and make decisions. Externally, investors, creditors, employees, and the government use it to assess the business's ability to meet obligations and remain operational. The document also outlines the history of accounting and describes various fields, forms of business organizations, and accounting specializations.

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0% found this document useful (0 votes)
44 views

Lesson 1: Introduction To Accounting

This document provides an overview of financial accounting and reporting. It defines accounting as identifying, recording, and communicating economic information to aid in decision making. Accounting information has both internal and external users. Internally, owners and management use it to evaluate business performance and make decisions. Externally, investors, creditors, employees, and the government use it to assess the business's ability to meet obligations and remain operational. The document also outlines the history of accounting and describes various fields, forms of business organizations, and accounting specializations.

Uploaded by

Dante Sausa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FINANCIAL ACCOUNTING AND REPORTING

LEARNING MODULES

Lesson 1 INTRODUCTION TO ACCOUNTING

Did you know that?


LEARNING OBJECTIVES Vicente F. Fabella became the first Filipino certified
public accountant in 1915 at the state of Wisconsin,
1. Explain the definition, nature, fields, USA.
and history of accounting; Source: www.manilatimes.net

2. Describe the users of accounting


information; and
Accounting is a process of identifying, recording,
3. Classify business organizations as to
and communicating economic information that is
their form and activities.
useful in making economic decisions.

The accountant identifies whether the


transaction is an accountable or non-accountable event because only accountable events are
recorded in the books of accounts which this process is known as journalizing. The
accountant classifies the effects of the event on the accounts and this process is called
posting. At the end of the accounting period, the accountant summarizes the information
processed in the accounting system to produce meaningful reports. Accounting information
is communicated to interested users through accounting reports, the most common form of
which is the financial statements.

The nature of accounting is to provide information about economic activities intended to be


useful in making economic decisions. The types of information provided by accounting can be
quantitative, qualitative, and financial information. The functions of accounting in business
are to provide external users with information that is useful in making investment and credit
decisions and to provide internal users with information that is useful in managing the
business. Internal users are those who are directly involved in managing the business. External
users are those who are not directly involved in managing the business.

Internal Users
 Owner  They are interested to know whether the business should be maintained, increased,
decreased, or disposed of completely. They also want to know whether they are getting
a fair return for his/her investment.
 Management  Financial information serves a measure for making future financial decisions and a
measure of its effectiveness.

External Users
 Investors (Potential Investors)  They are interested in the financial statement to determine whether
to acquire ownership in the firm.
 Creditors (Potential Creditors)  They are interested to investigate whether the firm can meet its
obligations before granting loans or credits.
 Employees  They are interested in accounting information to enable them to
assess the ability of the firm to provide remuneration and other
benefits.
 Government  The government needs accounting information to regulate the firm’s
activities and determine the basis for taxation policies.

1
FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES

Accounting can be traced as far back as prehistoric times, perhaps more than 10,000 years
ago. Archeologists found writings in cones, disks, spheres, and pellets which serve as
records.

“In 1494, the first book on double-entry accounting was


published by a Franciscan monk, Luca Pacioli. While Friar
Luca is regarded as the “Father of Accounting”, he did not
invent the system. Instead, he simply described a method
used by merchants in Venice during the Italian
Renaissance period. His system included most of the
accounting cycle as we know it today. The first accounting
book was one of five sections in Pacioli's mathematics
book, titled “Summa de Arithmetica, Geometria,
Proportioni et Proportionalita”. This section on accounting
served as the world’s only accounting textbook until into
the 16th century.” (Smith, 2018).
Exhibit 1. Fr. Luca Pacioli is the author of the
book on double-entry bookkeeping.
Fields of Accounting Source: Smith (2018)

Public accounting is a professional service rendered by a CPA to the public for a fee.
1. Auditing  It primarily centers on the critical examination of financial statements by an
independent CPA to express an opinion regarding the fairness of the
contents of the financial statements.
2. Management Advisory  It assists the management through industrial advice regarding accounting,
Services finance, budgeting, business policies, and organization procedures.
3. Tax Services  It deals with the preparation of income tax returns, business, and transfer
taxes. The accountant represents the client in tax assessment and
investigations conducted by the BIR.

Private accounting is an accounting job done by accountants in private business enterprises.


1. General Accounting  It includes the recording of transactions and preparing financial reports for
the use of management, owners, creditors, governmental units, and other
interested parties.
2. Cost Accounting  It has to do with the determining and controlling costs especially in
producing products or services.
3. Budgeting  It provides management a plan for future operations that will be compared
eventually to actual results.
4. Internal Auditing  It 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 prescribed managerial policies.
5. International  It encompasses specialized accounting for international transactions,
Accounting comparisons of accounting principles in different countries, and
harmonization of diverse accounting standards worldwide and tax
requirements of each country in which the company does business.
6. Social Accounting  It concerns the measurement of the impact of business or government
agency’s decision on the public sector.
7. Not-for-Profit  It deals with specialized accounting for charitable organizations,
Accounting philanthropic foundations, religious groups, governmental agencies,
schools, and cooperatives.

2
FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES

Government accounting mainly focuses on the custody of government funds and their purposes and is
generally used in accounting for the national government and its political instrumentalities.

Accounting education refers to CPAs teaching accounting in various colleges and universities.

Forms of Business Organizations

A sole proprietorship is a business entity owned by one person and registered with DTI.
Advantages Disadvantages
 Easy to start; only a few legal requirements.  The owner bears all the losses.
 Only the owner decides for the business.  The owner bears all responsibility and decision-
making.
 All profits are for the owner.  Limited resources, e.g. capital and managerial
skills.
 Lower extent of government regulation and  Unlimited liability. The owner is legally liable for
relatively lower taxes. all business debts.

A partnership is a business entity owned by two or more persons called partners and registered with the SEC.
Advantages Disadvantages
 Partners are sharing ideas towards a better  Joint decision making may give rise to conflict
business decision. among partners.
 Partners share the business risk and the  Profits are divided among partners.
responsibility of running the business.
 Easy to form – Mere agreement organizes a  Limited life, since a partnership can be easily
partnership. dissolved by the withdrawal, retirement, death, or
insanity of one of the partners.
 Joint resources, e.g. capital and skills.  Lesser capital compared to a corporation.
 Relatively lower extent of government regulation  A partnership other than a general professional
compared to corporations. partnership is taxed like a corporation.
 Unlimited liability - The partners can be held liable
for partnership debts up to their personal assets.

A corporation is an artificial person under the operation of the law and its existence as evidenced by its
registered Articles of Incorporation and Corporation By-Laws with the SEC.
Advantages Disadvantages
 Limited liability because shareholders are liable for  Shareholders have limited access and control over
corporate debts only up to they have invested. management and operations.
 Greater source of resources, e.g. capital and skills.  Costly and difficult to organize.
 Unrestricted transfer of ownership.  Greater government regulation and higher taxes.
 Renewable and perpetual life.  Profits are only shared through dividends when
declared by the board of directors.

Types of Business According to Activities

Service business deals with the rendering of services to customers such as tailoring shops, beauty shops, and
professional firms.
Advantages Disadvantages
 No or minimal inventory costs.  Demand more personal time from the owner.
 Minimal capital is needed.  A service business is usually affected the most
during economic recession especially when it does
not cater to the basic needs.
 Promote expertise.  Largely depends on the owner’s credibility and
more costly to commit an error.

3
FINANCIAL ACCOUNTING AND REPORTING
LEARNING MODULES

Merchandising business deals with the buying and selling of goods for profit.
Advantages Disadvantages
 Lower start-up capital than a manufacturing  Requires retail stores in a strategic location.
business.
 More opportunities for lesser purchase prices  Lesser control on the purchase price of goods.
during sale offering more discounts.
 Easy to start since it is only buying and selling.  Higher inventory costs.

Manufacturing business involves the purchase of raw materials and converting these raw materials into
finished products.
Advantages Disadvantages
 Potential for high growth.  High start-up capital.
 Opportunity to establish a brand that could last  Conceptualizing a viable manufacturing business is
longer than your lifetime. difficult.
 Do not need a retail store.  Need to be always updated and innovative.
 Better pricing policies due to economies of scale.  Warehousing and logistics costs can be high.
 Greater flexibility in controlling costs.  Too much reliance on raw materials.
 Manufacturing processes are too complicated and
difficult to manage.

Suggested Readings

1. Basic Financial Accounting and Reporting (2019) by Ballada & Ballada, pp. 1-1 to 1-48.
2. Financial Accounting & Reporting (Fundamentals) 2nd Edition (2019) by Millan, pp. 1-25.
3. Accounting Principles 13th Edition (2018) by Weygandt, Kimmel, & Kieso, pp. 1-1 to 1-25.

References

1. Ballada, W. & Ballada, S. (2019). Basic Financial Accounting and Reporting 22nd Edition.
Manila, Philippines: DomDane Publishers.
2. Millan, Z. V. (2019). Financial Accounting & Reporting (Fundamentals) 2nd Edition. Baguio
City, Philippines: Bandolin Enterprise.
3. Smith, M. (2018). Luca Pacioli: The father of accounting (2018). Available at SSRN:
https://ssrn.com/abstract=2320658 or http://dx.doi.org/10.2139/ssrn.2320658
4. Philippine Institute of Certified Public Accountants - Northern Metro Manila Chapter.
(2018). PFRS.
5. Torres, J. (2018). 95 years of invaluable service. https://www.manilatimes.net/2018/03/08/
opinion/analysis/95-years-of-invaluable-service/384747/
6. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting Principles 13th Edition.
Asia: John Wiley & Sons (Asia) Pte Ltd.

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