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Lesson 1: Introduction To Accounting

Accounting involves identifying, recording, and communicating economic events of an organization. It is the process of collecting, processing, and communicating financial information to interested parties. Accounting has evolved over thousands of years in response to the needs of civilizations and businesses, from early clay tablet record keeping to today's global standards. It allows businesses to assess performance and make informed decisions.

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Mica Bengson Tolentino
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50 views

Lesson 1: Introduction To Accounting

Accounting involves identifying, recording, and communicating economic events of an organization. It is the process of collecting, processing, and communicating financial information to interested parties. Accounting has evolved over thousands of years in response to the needs of civilizations and businesses, from early clay tablet record keeping to today's global standards. It allows businesses to assess performance and make informed decisions.

Uploaded by

Mica Bengson Tolentino
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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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)
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.
COMMUNICATING – occurs through the preparation and distribution of financial and other accounting
reports.

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:
1. 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.
2. 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.
3. 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 behavioural
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.
4. 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.
5. 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 analysing and forecasting future sales.
History of accounting
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)
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.

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