MODULE 1

Title: Introduction to Accounting

Time Frame: 6 hours

Introduction/ Rationale:

The study of accounting is crucial for business people because accounting is the language of
business. Most of the information that is used in the business world consists of accounting information.
This information is necessary for informed decision making. Accounting information directs the attention
of decision makers to problems and opportunities, provides the input necessary to make business
decisions concerning those problems and opportunities, and then provides feedback on the success or
failure.

Of all the business knowledge you have learned or will learn, the study of accounting will
probably be the most useful. Your financial and economic decision as a student and consumer involves
accounting information. Understanding the discipline of accounting will also influence many of your
future professional decisions.

Accounting provides information that is intended to be useful- information that people can use in
making decisions. When we understand how accounting information is used, we will be able to
understand why accounting procedures are performed in the ways that they are.

In order to appreciate and understand the financial reports of the business, one should have an
understanding of how data are gathered and recorded. All these understanding are gained in the study of
accounting. The study of accounting should not be limited to students majoring in accounting or to
business students. Everyone who engages in economic activity- which means everyone- will benefit from
understanding the nature, significance, and limitations of accounting information.

Specific Objectives:

At the end of the topic, the students should be able to:

• Define accounting and explain its role in business
• Explain the nature, purpose, and uses of accounting
• Enumerate and describe the specialized fields of accounting
• Trace the history of accounting
• Identify the role of the accountants in providing useful information to different users.
• Identify and distinguish the different forms of business organization and their activities.
• Enumerate and describe the basic accounting concepts and principles.
• Define and classify the elements of the financial statements and give examples of each.
Definitions of Accounting

• 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.[ Accounting Terminology Bulletin No. 1, “Review and
Resume,”1953. (New York: American Institute of Certified Public Accountants), p. 9.]

• 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. [Statement of Financial Accounting Standards No. 1, “Basic Concepts and Accounting
Principles Underlying Financial Statements of Business Enterprises,” 1983 (Accounting
Standards Council), par. 1]

• Accounting is the process of identifying, measuring and communicating economic information to

permit informed judgment and decision by users of the information. (Statement of Basic
Accounting Theory. American Accounting Association.)

The important points made in these definitions are:

1. Accounting is about quantitative information;
2. The information is likely to be financial and
3. The information should be useful in decision making.

The definition that has stood the test of time is the definition given by the American Accounting
Association. This definition states the very purpose of accounting, that is, to provide quantitative
information for the making of economic decision. The definition also states that accounting has a number
of components, namely:

1. Identifying. This is the analytical component. This accounting process is the recognition or
nonrecognition of business activities as “accountable events.” An event is accountable or
quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject
matter of accounting is economic activity or the measurement of economic resources and
economic obligations. Only economic activities are emphasized and recognized in financial
accounting.

Economic activities of an enterprise are referred to as transactions which maybe classified as

external or internal.

External transactions or exchange transactions are those economic events involving one
enterprise and another enterprise.

Internal transactions are economic events involving the enterprise only. These are the economic
activities that take place entirely within the enterprise. Production and casualty loss are examples
of internal transactions.

Production is the process by which resources are transformed into products. Casualty is any
sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as
act of God.
 2. Measuring. This is the technical component. This accounting process is the assigning of peso
amounts to the accountable economic transactions and events. The amounts used in measuring
financial transactions are historical cost, current replacement cost, current selling price and
present or discounted value.

3. Communicating. This is the formal component. This is the process of preparing and distributing
accounting reports to potential users of accounting information. It is for this reason that
accounting has been called the “language of business.”

Aspects of accounting implicit in the communication process:

a. Recording or journalizing- the process of systematically committing to writing business

transactions and events after they have been identified and measured , in books of
account in a systematic and chronological manner according to accounting rules and
regulation.

b. Classifying- is the sorting or grouping of similar and interrelated economic

transactions after they have been identified and measured. It is accomplished by

posting to the ledger. The ledger is a group of “accounts” which are

systematically categorized into asset accounts, liability accounts, equity accounts,
revenue accounts and expense accounts.

c. Summarizing- is the preparation of financial statements which include the

Statement of financial position, the statement of comprehensive income, the statement of
cash flows, the statement of changes in equity and the notes to financial statement.

Accounting as a science and art

• Accounting is a social science with a body of knowledge which has been systematically
gathered, classified, and organized. It is influenced by, and interacts with, economic,
social and political environments.
• Accounting is a practical art which requires the use of creative skill and judgment.

Accounting as an information system

• Accounting identifies and measures economic activities , processes information into
financial reports and communicates these reports to decision makers.

History and Evolution of Accounting

Why study about the history of accounting?

• A glimpse back into this period helps illuminate our past generally, which led to where the
accountancy profession is, at the current time.
• To help explain the phenomenal growth that the profession of accountancy has enjoyed
worldwide.

Accounting has been around since the beginning of history.

• Ancient South Africa

Blombos Cave in South Africa, were found markings that may have been used to count or
store information that are almost 76,000 years old. A close-up look shows that the markings
are clearly organized.

• Ancient Iran- (between 4th millennium BC and 3rd millennium)- Cylindrical tokens were
found which were used for bookkeeping on clay scripts.
• Accounting in Mesopotamia, circa 3500 B.C.

Produced some of the oldest known records of commerce, 5,000 years before the appearance
of double entry.

• Accounting in Ancient Egypt, China, Greece and Rome

Eqypt: Extensive records were kept for government accounting (for ‘in kind” tax payments).
In its thousand of years of existence these records showed simple list-making only.

China: used accounting as a means of evaluating the efficiency of governmental programs.

Greece: 5th century B.C., legislation on financial matters included control of receipts and
expenditures of public monies through the oversight of 10 state or “public accountants”
chosen by lot.

The Roman Empire (25 BC- 20 BC)

• Historians say that early Romans had the following records:

▪ A rationarium (account) which listed public revenues,
▪ An aerarium (treasury) which listed amounts of cash in the provincial fisci
(tax officials and in the hands of the publican (public contractors which
included the names of freed men and slaves
▪ Records of cash, commodities, and transactions were kept scrupulously by
military personnel of the Roman army.

• Christian Bible- (Book of Mathew (New Testament- Simple accounting is mentioned in the
Parable of Talents.
• Medieval Europe (13th century)
 The introduction of double-entry bookkeeping: Historical origin of the use of the words
‘debit’ and ‘credit’ dates back to the days of single-entry bookkeeping. The chief objective
was to keep tract of amounts owed by customers (debtors) and amounts owed to creditors.
‘Debit’ is Latin for ‘he owes’ and ‘credit’ is Latin for ‘he trusts’.

• Luca Pacioli and Double-entry bookkeeping system

Evolvement of Double-Entry Bookkeeping

• The early history of the double entry booking cannot be traced with much accuracy. The
earliest known examples of this technique was the mercantile of Feris Bonis of Montauban,
dated 1339 .However, the evolution of the double entry bookkeeping has an Italian influence
in the 13th to 15th century.

• The book of Massari (Treasury Officials), ledgers of Commune of Genoa written or if

expanded is called Ledger in 1340. These books were known as a perfect double entry form
because separate pages were used for debit and credit. Presently known as simplified T
account

• In Florence, there were double entry records wherein debits were written over credits. It
is also in Florence that manuscripts of Partnership and Association Contracts reflecting how
partners’ capital, division of profit and losses, and dissolution of partnership were computed.

• In the present system, the Florentine method is observed in Journal entries.

• Venice of Northern Italy had key influence in the use of the double entry system in1400s.

• Luca Pacioli’s "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (English:

"Review of Arithmetic,Geometry, Ratio and Proportion") was first printed and published in
Venice in 1494. It included a 27-page treaties on bookkeeping, "Particularis de Computis et
Scripturis" (Italian) : "Details of Calculation and Recording"). It was written primarily for,
and sold mainly to, merchants who used the book as a reference text, as a source of pleasure
from the mathematical puzzles it contained, and to aid the education of their sons. It
represents the first known printed treaties on bookkeeping; and it is widely believed to be the
forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced
symbols for plus and minus for the first time in a printed book, symbols that became standard
notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known
book printed in Italy to contain algebra .In this book, Pacioli introduced three important
books of records:
a. Memorandum Books - for the recording , in chronological order, for all information on a
transaction;
b. Journal Book – the book of original entry;
c. Ledger Book - the book for final entry

• For this reason Pacioli is known as the Father of Accounting, though he was neither an
accountant nor a merchant
SAVARY COMMERCIAL CODE (Historical Cost Method of Accounting )

• Jacques Savary, (1622-1690) belong to a noble French Family devoted to trade and to
publication of works on commercial matters. He was known as the chief architect of the
Commercial Code of France in 1673 (called Code of Savary) which generally uses historical cost
as the basis of valuation

NAPOLEON COMMERCIAL CODE (Fair Value Method in accounting )

• Napoleon Bonaparte· introduced the codification of the Frances Civil Law named Code of
Napoleon which was enforced on March 21,1804. Three years later (1807), the Code of
Commerce was enacted as supplement to Code of Napoleon. It regulated commercial
transactions, laws of business, bankruptcies and the courts jurisdiction and procedures dealing
with this subjects.

• The Code of Commerce does not provide for any rule of valuation but gives in notes and
examples of inventory in which it is said that assets must be carried at their market value on the
day of inventory and not on the basis of historical cost

BOOKKEEPING IS THE RECORDING OF FINANCIAL TRANSACTIONS. TRANSACTIONS

INCLUDE SALES, PURCHASES, INCOME, AND PAYMENTS B Y AN INDIVIDUAL OR
ORGANIZATION.

• The common bookkeeping systems used by businesses and other organizations are the single-
entry bookkeeping system and the double- entry bookkeeping system. SINGLE-ENTRY
BOOKKEEPING uses only income and expense accounts, recorded primarily in a revenue and
expense journal. Single-entry bookkeeping is adequate for many small businesses.

• DOUBL ENTRY BOOKKEEPING requires posting (recording) each transaction twice, using
debits and credits

• The primary bookkeeping record in single-entry bookkeeping is THE CASHBOOK, which is

similar to a checking account register but allocates the income and expenses to various income
and expense accounts. Separate account records are maintained for petty cash, accounts payable
and receivable, and other relevant transactions such as inventory and travel expenses.

• The double -entry bookkeeping system was codified in the15th century and refers to a set of
rules for recording financial information in a financial accounting system in which every
transaction or event changes at least two different accounts. In modern accounting this is done
using debits and credits within the accounting equation: Equity = Assets - Liabilities. The
accounting equation serves as a kind of error-detection system: if at any point the sum of debits
does not equal the corresponding sum of credits, an error has occurred
Florentine vs Venetian Approach

• In the14th Century, Amatino Manucci, the inventor of double entry bookkeeping and partner
of a merchant partnership called Giovanni Farolfe & Company in Florence, introduced the
Florentine Approach (known as Journal entries). This method records each transaction twice in
 at least one account being debited and at least one account credited, with the total debits of the
transaction equal to total credits

• The Venetian approach ( known as the ledger posting ), where accounts are recorded in
bilateral forms, with debits recorded on the left side of the page across form credits. It points to
highly evolved system using several books carefully cross indexed and coordinated to form a
coherent whole. This was introduced by merchant Andrea Bargarigo (1418-1449).

Although the basic principles have not changed substantially since Pacioli’s time, the scope and
methodology of accounting are in a constant state of evolution.

Schmalenbach and the chart of accounts

The idea of a uniform system of accounts was first developed in the 1920s. One of its first advocates
was the German economist and accounting theorist Eugen Schmalenbach. The idea was further developed
and applied in various other countries, including France, Sweden and the United States, along two rather
different lines. Uniform systems of accounts may by either macro-or micro-orientated: that is, they may
be designed with a view to national income accounting, economic planning, taxation and other
governmental concerns; or they may seek to serve the accounting needs of individual business firms.
They may also include a bookkeeping structure for recording accounting data (input) as well as a uniform
set of financial statements (output), or may be confined to the latter. They may be tailored to the needs of
individual industries, or be more general. While in principle uniform systems of accounts (especially
those with an industry orientation) might be international in scope, in practice this is unusual.

Accounting Variations among Countries

Although accounting standards and practices are the same across the board in their origin, the
accounting and taxation structures of different countries around the world makes them vary between
countries. Different countries apply different accounting practices. This accounting diversity is the reason
that one company may seem profitable while another seems to be operating at a loss, in extreme cases.
The disparity between global accounting practices can lead to poor business decision-making, difficulties
in raising capital in different or foreign markets, and difficulty in monitoring competitive factors across
firms, industries, and nations. Their accounting practices are linked to the objectives of the parties who
will use the financial information, including people like investors, lenders, and governments.

The differences in accounting principles between countries could really cause inconsistencies
between international operations. Maybe if an international standard were set for all countries, there
would be less quarreling and more agreement in accounting between countries. That way there would be
less discrepancy in the accounting principles and the balance sheets for each country.

Types of Business Organizations

A business maybe classified based on its primary activities. The most common types of business
as to its nature or main activities are;

1. Service Concern- renders service to a customer or client on a fee basis.

 2. Merchandising / Trading Concern- buys goods and sells the same (without further processing) at
a price higher than its acquisition cost.

3. Manufacturing Concern- deals with the acquisition of raw materials and the conversion of these
raw materials into finished products through the application of necessary labor.

4. Hybrid companies- are those involved in more than one type of activity ( manufacturing,
merchandising, service)

Forms of Business Organizations

Business is any economic activity conducted primarily for profit. To engage in business is to
supply goods and services to earn profit or income. Business could be organized in several forms. The
most common forms of business are:

1. Sole Proprietorship. This is the simplest and the most common form of ownership and is found
mostly in such businesses as small retail stores, service stations, repair shops and doctors’
practices. The owner, or proprietor is the only person in control and makes the management
decisions. If the business is successful, the owner enjoys the profits; if the business fails, he
suffers the loss. Thus the owner has a strong incentive to the best he can.

2. Partnership. The ownership is divided between two or more person who agree to pool their
resources and skills in order to establish and operate a business. Like the single proprietorship,
the partnership is simple to organize and well suited to small businesses. A partnership
agreement, either oral or written is made to indicate what each partner will contribute in terms of
money and skills, what responsibilities each will have, and how profits and losses will be divided.

3. Corporation. It is an artificial being created by operations of law. It has its own name, in which it
can buy, own and sell property; make contracts, borrow money; and take court action. Ownership
is divided into shares of stock as evidenced by stock certificates.

Basic Purpose of Accounting: To provide quantitative information about economic entities intended to
be useful in making economic decisions.
• Financial accounting communicates information about the economic effects of accounting
transactions and events of an economic entity to different groups of external users.
• Types of information provided by accounting
1. Quantitative information- expressed in numbers, quantities or units
2. Qualitative information- expressed in words or descriptive form
3. Financial information- expressed in terms of money
• Financial reporting is the process of communicating financial accounting information about a
company tom external users. The primary medium of communication is the general-purpose
financial statements.

“Accounting identifies, measures and communicates information about entities for use in making
informed judgment and decision.”
An accountant’s primary task therefore is to supply financial information to statement users so that they
could make informed judgment and better decision.

Advantages of Accounting in Business

1. Aid to management. It provides financial information to the management to do its daily work
properly and efficiently. The financial information helps the management in planning, organizing,
evaluating, controlling or correcting various business activities.

2. Reference. It removes the limitation of memory by recording business transactions

chronologically. It serves as future reference and facilitates comparative study of business
financial status. It helps in assessing the value of the business at the time of sale.

3. Basis for tax assessment. It helps in assessing the tax liability of the organization regarding
income taxes, sales taxes and other business taxes.

4. Evidential matter. It serves as good evidence in the court of law or legal investigation.

5. Tool to evaluate management performance. It helps businessmen know the true status of the
business in terms of the results obtained and the financial condition of the business.

Basic Accounting Concepts

Nature of Accounting Concepts

The accounting reports prepared by accountants assist economic decision makers by providing
useful information about the economic status and performance of the business enterprise. Accordingly,
the users of financial reports should be able to understand the information in order to draw sound,
consistent and profitable economic decisions

Proper understanding of financial statements is possible only when a user has a basic knowledge
of (a) concepts, (b) conventions and (c) principles which serve as guidelines in the practice of
accountancy.

Accounting concepts are important assumptions or ideas which accountants observe on how to
record business transactions in the books of accounts. It may refer to an assumption, or an abstract idea
that governs accounting practice.

Accounting conventions are accounting practices that practitioners accept because of their long
use and existence. A good example of accounting convention is the use of “debit and credit” or the “dual
aspect concept”. Accountants observe such practice long time ago based on the idea that in every business
transaction, a value received has a corresponding value given.

Accounting principles are those that have first importance, which define broadly the actions that
will best accomplish the objectives of accounting. It refers to a doctrine, which is the basis of all other
rules, procedures and methods used in accounting practice.
 Accordingly, accounting principles are distinguished from accounting procedures, rules and
methods because the latter comprise the large body of practices that prescribe definitely how transactions
and other events should be recorded, classified, summarized and presented. They are the means of
implementing accounting principles.

Accounting principles are developed to meet organized needs for financial and other information
about business enterprises in a more useful manner. They are continually evolving and developing to meet
changing needs and conditions. They are influenced by changes in economic conditions and business
practices, by the needs of users of financial statements, by practical necessity and by the reasoning and
experience of accountants.

Accounting concepts, conventions, principles, rules, assumptions, doctrines and postulates- these
terms are not exactly the same in meaning, but over several years, accountants have used them
interchangeably.

The Basic Accounting Assumptions

Accounting assumptions are the basic notions or fundamental premises on which the accounting process
is based. They serve as the foundation or bedrock of accounting in order to avoid misunderstanding but
rather enhance the understanding and usefulness of the financial statements. Accounting assumptions are
also known as postulates.

Underlying assumptions:

1. Going Concern Assumption- this assumes that the business has a continuous life of existence
unless there is a specific evidence to the contrary. Since the business is presumed to continue
indefinitely, it values its assets at cost ( or as a going concern), with provisions for depreciation.
The main implications of this concept are the following;
a) The assets of the business is recorded at historical cost and not at their liquidating or
disposable value.
b) Fluctuations in market rates can be ignored.
c) Owners of the business are not interested in stopping and selling the business.

To illustrate, assume the following data: Yssa Laundry Shop acquired a washing machine at a
cost of P30,000 two years ago. The related accumulated depreciation is P6,000. If the washing
machine is disposed, second hand buyers are willing to pay P10,000. The current replacement
cost of a brand new washing machine with the same capacity is P50,000.

As a going concern business, Yssa shall continue to reflect in its books of accounts the
acquisition cost of P30,000 ignoring the disposable value and the current market value.

The valuation adapted in the going concern assumption is based on the accounting conventions of
“objectivity” and “historical cost”.

Objectivity Principle states that accounting records and statements should be based on reliable
data. Reliable data can be confirmed by any independent observer and are therefore reliable. The
 objectivity principle also known as reliability principle, also states that accounting records should
not be based on whims and opinions that can be subjected to dispute.

Cost Principle means that assets and services should be recorded based on the actual price paid.

Implicit assumptions:

2. Accrual Basis- this assumes that the recording of income and expense follow the accrual basis of
accounting. Under the accrual basis, income is recognized when earned regardless of when
received and expense is recognized when incurred regardless of when paid.

In contrast, cash basis of accounting recognizes income only when actual cash is received and
recognizes expenses only when actual cash is paid.

For example, if Dada Welding Shop received an end-of-month telephone bill of P2,000 from
GLOBE, such bill, even if not yet paid, shall be included as part of Dada’s operating expenses
during the period because it has been incurred. Accordingly, the appropriate liability must also be
recorded. On the part of GLOBE, a revenue of P2,000 shall be recognized and the related
receivable must be recorded during the period even if not yet received because of the fact that the
related service has been rendered.

The concept of accrual accounting is established in the revenue and expense recognition
principle.

3. Accounting Entity Assumption- this assumes that the business has a personality that is separate
and distinct from the owner. In practice, therefore, a business must keep its own record from the
point of view of a business and not to be merged with the personal transactions of the owners.

For instance, Mr. Villanueva owns a trading business. It will be very confusing if all the
information about his personal expenses on food, clothing and holidays are mixed up with the
expenses of running the business. In this case, the accountant will certainly sort out all of his
affairs and show the assets, liabilities and profits of the trading business.

The main purpose of observing the separate entity concept is to properly account the real
transactions of the business in order to report the true and fair picture of the business financial
affairs. The personal transaction of the owner(s) should not be allowed to distort the financial
reports of the business. Hence, it should be observed that economic transactions engaged into by
different entities should be separately accounted for.
Other terms to describe this concept are separate entity concept, entity concept and business
entity concept.

The accounting entity assumption adheres not only to the objectivity convention, but also to the
long accounting convention called “dual aspect” concept, which separates the entity’s resources
from the contribution of creditors and business owners. The dual aspect is also known as the
“debit-credit aspect”. The accounting equation that is emerged by the dual=concept is;

Debit Credit
 Assets = Liabilities + Capital

A = L + C

The dual-aspect concept is the basic foundation of accounting double entry system, which is
generally used by accountants in recording business transactions and events. Every change in
economic transaction maybe viewed as having two-sided effect to the extent of the same amount
as recorded in accounting books.

4. Monetary Unit Assumption- this includes the assumptions on quantifiability and peso stability.

Under quantifiability assumption, accountants use a common unit of measurement, i.e., money.
They use the currency unit of the country they are working in.

If the company has foreign currencies on hand at the time when financial statement is prepared,
the foreign currency should be converted into Philippine peso based on the prevailing exchange
rate at the date of the balance sheet.

Under the peso stability assumption, accountants assume that the monetary unit retains its
purchasing power regardless of fluctuation in money value. In other words, the money used is
stable or constant in value regardless of inflation. Hence, changes in money purchasing power are
generally not accounted for.

This assumption is supported by the application of the principles of historical cost and going
concern concept of accounting.

In line with the International Accounting Standards, however, an exception to the peso stability
assumption is stated in the appraisal accounting for plant assets subject to certain accounting
criteria. The objective of appraisal accounting is to effect relevance.

5. Time –Period Assumption- this states that accountants divide the economic life of the business
into relatively short periods of time normally of equal lengths such as quarterly, semi-annually or
annually to facilitate comparisons of the business’ economic standing and performance.

It is important to divide the entire economic life of the business into several time periods because
users of financial information need to make decisions at many points in the life of the business.
Thus, when financial report is prepared, it is important to indicate the date when it was prepared
and the time period it covers.

A time period is usually called an “accounting period” which is classified as either (a) calendar
year, (b) fiscal year and (c) interim period.
A calendar year is a twelve-month period which starts on January 1 and ends on December 31.

A fiscal year is also composed of twelve months but starts from any month other than January.
Consequently, fiscal year does not end in December of the accounting period.
 An interim period is a business period within an accounting period. When financial statements
are prepared even if the twelve-month period is not yet due, the reports are called interim reports
because they are prepared within an interim period. Examples of interim period are weekly,
monthly, quarterly or semi-annual.

Basic Financial Statements

Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users. In other words, the financial statements
are the end product or main output of the financial accounting process

The basic financial statements are:

1. Statement of Financial Position- a formal statement showing the financial position of an entity as
of a particular date. The balance sheet presents the three elements of financial position, namely
assets, liabilities and equity.

2. Income Statement/ Statement of Recognized and Expenses- a formal statement showing the
performance of the entity for a given period of time. The performance of the entity is primarily
measured in terms of the level of income earned by the entity through the effective and efficient
utilization of its resources. This income performance used to be known as the results of
operations of the entity.

3. Statement of Changes in Equity- a required basic statement that shows the movements in the
elements or components of the shareholders’ equity

4. Cash Flow Statement -this statement explains the changes of cash and cash equivalents during an
accounting period.

5. Notes to Financial Statements- are used to report information that does not fit into the body of
the statements in order to enhance the understandability of the statements. They provide
additional information and help clarify the items presented in the financial statements.

Elements of Financial Statements

The elements of financial statements refer to the quantitative information shown in the balance
sheet and income statement. They are the means of identifying or classifying the items affected by
transactions and events. The elements directly related to the measurement of financial position are assets,
liabilities and equity. The elements directly related to the measurement of performance are revenue and
expenses.
 1. Assets. Assets are economic resources owned by the business. They include properties and other
things of value the ownership title of which is in the name of the business. Assets can be grouped
into current assets and noncurrent assets.

a. Current assets are those assets which can be reasonably converted into cash within a
short period of time, usually within one accounting period or within the regular operation
of the business or normal operating cycle of business. Regular operation of the business
or normal operating cycle of the business is the period between the render of service,
incase of service concern, to the receipt of cash, and the period between the acquisition of
materials to their conversion into cash, in case of merchandising and manufacturing
concern. The following illustrations show this process;

Service Concern

Cash

Service rendered Accounts Receivable Cash

Notes Receivable Cash (upon maturity)

Merchandising Concern

Purchase or Selling of goods Cash

Acquisition of Selling of goods AR Cash

Goods or Merchandise Selling of goods NR Cash

Manufacturing Concern

Purchase or Acquisition Manufacturing

of Raw Materials Finished Goods

Selling of FG Cash

Finished Goods Selling of FG AR Cash

Selling of FG NR Cash
 The above illustration shows that assets such as Accounts Receivable, Notes Receivable and
Merchandise are considered current assets because they are eventually converted into cash within the
normal operating cycle of the business. Current assets are also used to liquidate current liabilities.
Included here are cash, accounts receivable and notes receivable which are expected to be realized into
cash, merchandise inventory which are expected to be sold, and prepaid expenses which are expected to
be used or consumed.

b. Noncurrent assets are those assets which are permanent in nature. Permanent in such a
way that their useful life to the business exceeds beyond one year. These are used in the
operation of the business and not intended for sale. Examples are building, equipment,
furniture and fixtures.

2. Liabilities are debts or obligations of the business to a party other than its owner. There are two
classifications of liabilities: current and noncurrent liabilities.

a. Current liabilities are those which are due for payment within a short period of time or
within one year from the balance sheet date. These obligations require a current asset for
payment. Included here are accounts payable, notes payable, accrued expenses and
unearned income.

b. Noncurrent liabilities are those which mature beyond one year from the balance sheet
date. Examples are mortgage payable, bonds payable and notes payable due beyond one
year.

3. Equity is the “residual interest in the assets of the enterprise after deducting all its liabilities.”
Other terms which can be used synonymously are Capital and Proprietorship.

4. Revenue is the “gross inflow of economic benefit during the period arising in the course of
ordinary activities of an enterprise when those inflows result in increase in equity other than those
relating to contributions from owners.” Simply stated, revenues are inflows of future economic
benefits that increase equity, other than contributions or investments by owners.

5. Expenses are the “gross outflow of economic benefits during the period in the course of ordinary
activities when those outflows result in decreases in equity, other than those relating to
distribution to owners.” Simply stated, expenses are consumption or outflows of future economic
benefits that decrease equity, other than distributions or dividends paid to owners.

ASEAN

The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic,
political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

The ASEAN Declaration states that the aims and purposes of the Association are: (1) to accelerate the
economic growth, social progress and cultural development in the region through joint endeavors in the
spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful
community
Ethical Considerations in Accounting and Business

Accounting ethics in the field of accounting refers to the guidelines (consisting of judgments and moral
values) that a professional needs to follow while practicing accounting. Just like the professionals in the
field of medicine or law, an accounting professional also needs to strictly adhere to the ethics that have
become a norm in accounting. The people who receive the services of an accounting professional not only
rely on his skill and ability, but also on his professional integrity. People using the service of accounting
professionals rely on their professional competency to take decisions and in the process also relies on the
ethics followed by them.

The practice of a profession is guided by a set of ethical standards.

Ethics is a term that refers to a code or moral system that provides criteria for evaluating right or wrong.
The Philippine Institute of Accountants has maintained a position encouraging practitioners to perform
with professional competence and in conformance with ethical standards. The reliability of the financial
statements rests on the credibility of the one preparing it. His credibility depends on his personal
characteristics such as competency, integrity, objectivity and independence.

Competency requires one to have adequate knowledge, skills and experience in the practice of his
profession. Integrity is a highly professional characteristic which requires one to be honest and
trustworthy. Objectivity requires one to be fair, to avoid bias and always maintain an impartial attitude in
all matters. Independence in mental attitude requires a practitioner to avoid compromising relationships
that may impair his objectivity. Confidentiality of records is another ethical consideration which a
practitioner should adopt. Social responsibility requires a practitioner not to engage in activities that will
be hazardous to the environment and to the welfare of the citizens as well.

Specialized Accounting Fields

1. Public Accounting- is composed of individual practitioners, accounting firms and large

multinational organizations that render independent and expert financial services to the public on
a professional fee basis.

a. Auditing- has traditionally been the primary service offered by most public accounting
practitioners. It is an independent verification and examination that assures fairness of
presentation of accounting reports released or submitted to interested users.

b. Taxation Services- includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors.

c. Management Accounting (or MAS)g- the accumulation and communication of

information for use by internal parties or management . This includes services to clients
on matters of accounting, finance, business policies, organization procedures, product
costs, distribution and many other phases of business conduct and operations.

2. Private Accounting- composed of individuals employed in business enterprises on salary basis to

assist management in planning and controlling the enterprise’s operations. This will include
 maintaining the records, producing the financial reports, preparing the budgets and controlling
and allocating the costs of the business.

a. Cost Accounting- this helps the management control the expenses and guides the business
in setting up correct prices for the products.

b. Financial Accounting/General Accounting- this deals with the preparation and

interpretation of financial information as reflected in the financial statements.

c. Budgeting- planning business activities in financial terms before they occur.

d. Accounting Systems- this deals with the installation of accounting procedures for the
accumulation of financial data: includes designing of accounting forms to be used in
data-gathering.

e. Accounting Education- composed of CPAs who are professors of accounting in various

colleges and universities. Their task is to prepare entrants into the Accountancy
Profession.

3. Government Accounting- composed of accountants employed in the different branches of

government, particularly, the Bureau of Internal Revenue, Commission on Audit, Securities and
Exchange Commission, etc. The focus of government accounting is the custody and
administration of public funds.

Accounting Related to Other Fields

Accounting vs. Auditing

In a broad sense, accounting embraces auditing. Auditing is one of the areas of accounting
specialization. In a limited sense, accounting is essentially constructive in nature. Accounting ceases
when financial statements are already prepared.

On the other hand, auditing is analytical. The work of an auditor begins when the work of an
accountant ends. After the financial statements are prepared, the auditor will begin to perform his task.

Accounting vs. Bookkeeping

Bookkeeping is the recording, posting, and proving of the financial data. Accounting is the
establishing and maintaining of the entire accounting system, the interpreting of the results of the
recorded data, and the assisting in the management or decision- making aspects of the organization. Thus,
bookkeeping must be completed before accounting can take place

Accounting vs. Accountancy

Broadly speaking, the two terms are synonymous because they both refer to the entire field of
accounting theory and practice.
 Technically speaking, however, accountancy refers to the profession of accounting practice while
accounting is used in reference only to a particular field of accountancy such as public accounting, private
accounting and government accounting.

Financial Accounting vs. Managerial Accounting

Financial accounting is primarily concerned with the recording of business transactions and the
eventual preparation of financial statements. Financial accounting focuses on general purpose reports
known as financial statements. These financial statements are intended for internal and external users.
Managerial accounting is the accumulation and preparation of financial reports for internal use
only.

Accounting Information Users and Their Needs

The basic role of accountants is to provide useful economic information to external and internal decision
makers (users ) as explained below:

a. Primary users. These are the parties to whom general purpose financial reports are primarily
directed which include the following:
1) Existing and potential investors. These are concerned with the risk inherent in and return
provided by their investments. They need information to help them determine whether
they should buy, hold or sell, Stockholders are also interested in information which
enables them to assess the ability of the enterprise to pay dividends.
2) Lenders and other creditors. They are interested in information which enables them to
determine whether their loans and the interest attaching to them will be paid when due.

b. Other users. These are the parties that may find the general purpose financial reports useful but
the reports are not directed to them primarily which include the following:
1) Employees. Employees and their representatives are interested in information about the
stability and profitability of their employers. . They are also interested in information
which enables them to assess the ability of the enterprise to provide remuneration,
retirement benefits and employment opportunities.

2) Customers. Customers have interest in information about the continuance of an

enterprise especially when they have a long-term involvement with, or are dependent on,
the enterprise.

3) Government and their agencies. Government and their agencies are interested in the
allocation of resources and, therefore, the activities of enterprises. They also require
information in order to regulate the activities of the enterprise, determine taxation
policies and as a basis for national income and similar statistics.

4) Public- Entities affect members of the public in many ways For example, enterprises
make substantial contributions to the local economy in many ways including the number
of people they employ and their patronage of local suppliers. Financial statements may
assist the public by providing information about the trends . and recent developments in
the prosperity of the enterprise and the range of its activities.
Exercises:

1. Forms of Business Organizations

Direction: Check the appropriate box that would identify whether the statement/business
refers to single proprietorship, partnership or corporation.

Single
Proprietorship Partnership Corporation
1. Greater tax burden
2. Contribution to a common fund.
3. Owners are called stockholders.
4. Professional organizations.
5. Easy transferability of ownership.
6. Can easily be dissolved.
7. One owner but managed by one or
more persons.
8. Simplicity and ease of formation.
9. No sharing of profits
10. Profits are divided among partners.
11. Complex or more expensive to
organize.
12. Subject to strict government
monitoring.
13. Can be in oral or written agreement.
14. Stability of existence.
15. Shares of stock.
16. Proprietor/proprietress
17. Organization is on the basis of trust
18. Often difficult to dissolve
19. Articles of Incorporation and by-
laws
20. Limited liability.

2. Types of Business Organizations

Direction: Cross out the appropriate column that would identify whether the statement/
business refers to service, merchandising, or manufacturing.

Service Merchandising Manufacturing

1. Raw materials converted to finished
products.
2. Boutiques
3. Professional fees
 4. Production concern
5. Universities, schools and colleges
6. Shoe-making
7. Absence of merchandise inventory
8. Sports club
9. Trading concern
10. Buy and sell
11. Accounting firms
12. Dealers
13. Consultancy firms
14. Driving schools
15. Restaurants, hotels and movie
houses
16. Medical and dental clinics
17. Day care centers
18. Sari-sari stores
19. Printing press
20. Del Monte Philippines, Inc.
21. Shoemart
22. Pharmaceutical Laboratories
23. Service fare
24. Further process
25. Producers/manufacturers

3. Presented below is a list of items relating to the concepts discussed in this module, followed by
definitions and examples of those items in scrambled order. Identify the concept described below.

a. Assets d. Revenues
b. Liabilities e. Expenses
c. Equity

__ 1. Debits of the company.

__ 2. Sales
__ 3. Probable future economic benefits.
__ 4. Inflows of assets from delivering or producing goods, rendering services or other activities.
__ 5. “Things” of value a company has.
__ 6. The residual interest in the assets of an entity that remains after deducting its liabilities.
__ 7. Probable future sacrifices of economic benefits.
__ 8. Outflows or other using up of assets from delivering or producing goods, rendering
services, or carrying out other activities.
__ 9. Costs that have no future value.
__10. What the company owes.
__11. What the company has less what it owes.
__12. The owner’s interest in the company.