Fundamentals of Accountancy,

Business and Management 1

Quarter 1

Module 1 & 2
The Definition, Nature and History of
Accounting
and
Branches of Accounting

SPECIALIZED SUBJECT
ABM 12

This Module Belongs to:

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Learning Outcomes
At the end of this lesson, the learners will be able to :
 Define accounting
 Describe the nature of accounting
 Explain the functions of accounting in business
 Narrate the history/origin of accounting

This is an introductory course in accounting, business and management data analysis that
will develop your appreciation of accounting as language of business and an understanding of
basic accounting concepts and principles that will help you analyze business transactions. “Is
accounting important to you?” Accounting delivers financial information to different users
through financial statements. It gives business owners the chance to analyze the overall
efficiency and effectiveness of their business operations. In this module, you will know the
definition, nature and history or origin of accounting.

IDENTIFYING this involves selecting economic events that are relevant to a particular
business transaction.

COMMUNICATING – occurs through the preparation and distribution of financial and other
accounting reports.
Phases - a distinct period or stage in a series of events or a process of change or development.

Preliminary Test
Direction: Answer the following questions briefly

a. Do your parents ask how you spend your allowance every day?
b. When deciding between buying a bottle of soft drinks or fruit juice, what is the
basis of your decision? Do you compare the prices of both and then decide?
c. When going home, do you sometimes choose to walk from school rather than
riding a jeepney because you want to save?

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Read the Information Sheet very well then find out how much you can remember and how much
you learned by doing Self-check 1.1.

Information Sheet

Module 1 :The Definition, Nature and History of Accounting

There are lots of successful businesses today and each of them has a story to tell. Among
them are owned by the top three business tycoon in the Philippines. SM is owned by Henry Sy,
Cebu Pacific the leading airline is owned by John Gokongwei and Asia Brewery has Lucio Tan.
There are a variety of factors that contribute to the success of any business but they share one
thing in common. They make use of accounting. How does accounting help the business grow?
As an example, lets check the popular Filipino family business, the sari-sari store. How come
most ft it, if not all, closed before it expands? Mismanagement? It could be. Whoever stays at
home manages the store. Daily household expenses- a kilo of rice, a can of sardines, pouch of
vinegar and soy sauce, a bar of laundry detergent, shampoo, name it; its all taken out from the
sari-sari store’s supplies. Is there any inventory? Is it properly accounted? No. this poor
recording and recognition of little expense sums up as a material loss at end. Before we knew it,
the sari- sari store will not open again.
In simple terms, accounting involves collecting and processing of financial information
that is useful to various user in making economic decisions. These decision are anchored on the
main objective of business which is to make profit. In the real scenario business owners are
faced with many challenges on what economics must be chosen to optimize profits. These
include: “how much is the price that I would set for my product?, “ how much did I earn for the
past few months? “Do I have to borrow additional money to finance the business? “How much is
the cost of the products which I sold?”. “How much tax will I pay the government?” and many
more.
Heintz and parry(2016:4) explain that these are the reasons why accounting is often referred to as
the “language of the business” accounting serve as the common language that can be understood
in the field of business. It means to know what is happening in the business. It has noticeably
become a part of our daily activities. Whenever we decide, accounting is present. Deciding
whether to save an allowance or spend it all at once is already an application. In all activities,
which require money and other economic resources, accounting is there to help us make
economic decisions.
What is the first thing that comes to your mind when you hear the word “accounting?”
Business? Numbers? Mathematical computation? Or a difficult subject? Well. Accounting is
used almost by everyone in their daily activities. In simple terms, accounting is recording and
reporting of financial date Lopez (2015) opines that the widely-used definition of accounting is
provided by American Institute of Certified Public Accountants (AICPA) which stated as
follows:

Accounting is an art or recording, classifying, summarizing in a significant manner

and the terms of money, transactions and events which are in part at least, of a financial
character, and interpreting the results thereof. (Lopez, 2015:12)

This definition mentions the 4 phases of accounting which are recording, classifying,
summarizing and interpreting.

1. Recording is the first phase of accounting that is also known as bookkeeping. In this
phase, all business transactions are recorded in chronological manner called journalizing.

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 2. Classifying phase involves sorting and grouping of similar items. After analyzing, the
transactions are group under designated accounts. The process of transferring the entries
from the journal to the ledger is called posting. All recorded transactions will be
summarized for the preparation of the financial statements.
3. Summarizing phase makes the interpretations of data easier. The data is presented in a
manner which is easy to understand for the users of accounting information all
transactions will be summarized for the preparation of financial statements.
4. Interpreting is the phase for analyzing financial data needed in decision making. The
accountant will assist the users in understanding the health of the business.

Through communication is not an official phase of accounting, it is still considered as an

important part of the phase. After analyzing, the reports must be communicated properly to the
various users.

The four phases of accounting can also be applied in allocating your daily school allowance.
Writing your school allowance and expenses in a day basis is the process of recording while
breaking down your expenses is the classifying phase. Computing the totals for each day is
summarizing. Finally, analyzing the saving (deficit) is called interpreting. This simple
accounting procedure gives information on how you spent your daily allowance for the week.
Such information may help your parents or guardians decide whether there is a need to raise or
reduce your daily allowance.

The Nature of Accounting

According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-
scope-of-accounting.html): “Accounting is a systematic recording of financial transactions and
the presentation of the related information to appropriate persons.” Based on this definition we
can derive the following basic features 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.

Why accounting is considered as the language of 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

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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.

The Function of Accounting in Business.

Mr. Juan is a retired government employee who is good at baking. One day he decides to put up
a bakery shop in your barangay. He renovates a portion of his house to serve as the area for the
production of bread. He purchases baking equipment and raw materials to produce five different
types of bread. Mr. Juan also hires Jose to help him with the baking and, at the same time, to be
in-charge of sales. Mr. Juan pays Jose on a weekly basis. Every day, Mr. Juan’s wife deposits
the daily cash sales in their bank account at XY Savings Bank. With the help of accounting, what
possible decisions or questions of Mr. Juan can accounting provide an answer to?

Possible Answers:
• 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 the funds?
• Can I afford to pay a bank loan

Accounting is as old as civilization itself. It has evolved in response to various social and
economic needs of men. Accounting started as a simple recording of repetitive exchanges. The
history of accounting is often seen as indistinguishable from the history of finance and business.

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)

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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.

Instructions: Answer the questions according to your own understanding. Write your answer on
the lines provided below.

1. Define accounting
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

2. Is accounting important to you? Does it affect your daily activities? How?

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______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

Instructions:
1. You will create an infomercial on the nature and evolution/history of accounting.
2. Be Creative.
3. Submit your video presentation only in one file through cellphone, usb or any of your
convenience.

Guidelines:
Use any media platform at your convenience
Maximum of 2 minutes
You can use Mother Tongue, Tagalog or English as language
Wear casual attire

Rubric Scoring
Categories Advance Proficient Emerging
(5) (3) (1)

Content Idea stands out and Idea is somewhat clear Idea is not clear and no
clearly supported by but there is a need for supporting information.
detailed information. more supporting
information.

Sentence Structure Sentences are all Sentences somewhat Sentences are not
grammatically structured. grammatically structured. grammatically structured.

Organization Ideas are well-organized Ideas are somehow Ideas are not organized
and easy to follow. organized and easy to and difficult to follow.
follow.

Total

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Resources
Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill Publishing
Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach
2nd Ed., New York: McGraw-Hill/Irwin
Fundamentals of Accountancy, Business and Management 1 : Julie Ann E. Lubon-Madelo, CPA,
MBA, Rommel E. Lubon, CPA, MBA.

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