CHAPTER 1- INTRODUCTION TO ACCOUNTING

LEARNING OBJECTIVES:

At the end of this chapter, the student should be able to:

1. Define and understand the nature of Accounting

2. Trace the history of Accounting

3. Determine the Functions of Accounting

4. Identify the users of Accounting Information

5. Enumerate and explain the branches and areas of Accounting

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- DEFINITION OF ACCOUNTING

The Accounting Standards Council defined “Accounting” as 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.

The Committee on Accounting Terminology of the American Institute of Certified Public

Accountants defined “Accounting” as the art of recording, classifying, and summarizing in a
significant manner in terms of money, transactions and events which are in part at least of a
financial character and interpreting the results thereof.

The American Accounting Association in its Statement of Basic Accounting Theory defined
“Accounting” as the process of identifying, measuring, and communicating economic information to
permit informed judgment and decision by users of the information.

ACCOUNTING AS SCIENCE AND ART

1. As a social science, accounting is a body of knowledge which has been systematically

gathered, classified and organized

2. As a Practical Art, accounting requires the use of creative skills and judgment (Millan, 2019)

WHAT IS A BUSINESS TRANSACTION?

- It is an event that has a direct effect on the operation of the economic unit and can be expressed in
terms of money.

Ex. Buying and Selling of goods, renting a building, paying employees, buying new office equipment,
buying new office equipment and any other activity of a business that involves exchanges of values
in monetary items
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Accounting has a number of components:

1. Identifying as the analytical component

2. Measuring as the technical component

3. Communicating as the formal component

1. IDENTIFYING- This accounting process is the recognition or non recognition of business activities
as “Accountable events.

Not all business activities are accountable. For example, the hiring of employees, The death of the
entity president and the entering into a contract are all business activities but such events are not
accountable, because they cannot be quantified or expressed in terms of a unit of measure.

Economic activities may be classified as external and internal.

External Transactions or exchange transactions are those economic events involving one entity and
another entity

Examples: Purchase of merchandise from a supplier, borrowing money from a bank, sale of
merchandise to customer and payment of salaries to employees.

Internal Transactions are economic events involving the entity only.

Examples: Production and Casualty Loss

Production is the process by which resources are transferred into products. Casualty is any sudden
and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as an act of
God.

2. MEASURING- is the assigning of peso amounts to the accountable economic transactions

and events. Financial statements without monetary amounts would be largely unintelligible or
incomprehensible. The Philippines peso is the unit of measuring accountable economic
transactions.

Four Measurement bases or financial attributes

Historical Cost- this is identified as the original acquisition cost.

Current Cost- this is identified as replacement cost or the current purchase price

Realizable Value—this is identified as current selling price or the amount that could currently be
obtained by selling the asset in an orderly disposal.

Present Value- This is the discounted value of the future net cash inflows that the asset is expected
to generate in the normal course of business.
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3. COMMUNICATING- is the process of preparing and distributing accounting reports to potential
users of accounting information. Implicit in the communication process are the recording,
classifying and summarizing aspects of accounting.

Recording or Journalizing is the process of systematically maintaining a record of all economic

business transactions after they have been identified and measured.

Classifying- is the sorting or grouping of similar and interrelated economic transactions into their
respective classes.

Summarizing- is the preparation of financial statements which include the statement of financial
position, income statement, statement of comprehensive income, statement of changes in equity
and statement of cash flows.

Interpreting- The accountant’s interpretation on the financial statement is needed. Analysis reports
are submitted together with the financial statements.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative Information – Information expressed in numbers,, quantities, or units

2. Qualitative Information- Information expressed in words or descriptive form. Qualitative

information is found on the notes to financial statements as well on the face of the other
components of the financial statements.

3. Financial Information- Information expressed in money, financial information is also

quantitative information because monetary amounts are normally expressed in numbers
(Millan, 2019)

BRIEF HISTORY OF ACCOUNTING

Accounting can be traced as far back as the prehistoric times. Since the dawn of civilization when
mankind began to engage in trade, perhaps more than 10,000 years ago, methods of record keeping
and accounting have been invented.

As early as 8500B.C, accounting has already existed. Archaeologists have found clay tokens as old as
8500 B.C. In Mesopotamia which were usually cones, disks spheres, and pellets. These tokens
correspond to commodities like sheep, clothing ot bread. They were used in the Middle West in
keeping records. After some time, the tokens were replaced by wet clay tablets. During such time,
experts concluded this to be the start of the art of writing (Source:
http://EzineArticles.com/456988)

Other ancient civilizations keeping account records are Babylonia (4,500 BC), Egypt (2,250BC),
China and Greece.
In the Middle ages (13th and 15th centuries), trades flourished in places such as Florence, Venice and
Genoa) this has brought advancement in account keeping methods. In 1211 A.D, one of the systems

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in accounting was kept by a Florentine Banker. However the system was primitive as the concept of
equality for entries was absent. Double Entry records first came out during 1340 AD in Genoa.

In 1494, the first systematic record keeping dealing with the “double entry recording system” was
formulated by Fr. Luca Pacioli, a Franciscan monk and mathematician. The double entry recording
system was included in Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni et
Proportionalita published on November 10, 1494 in Venice.

In this book, Pacioli introduced three important books of records, namely:

a. Memorandum Entry- For all information on a transaction

b. Journal Book- For the original entry

c. Ledger Book- For the final entry

The concept of Double Entry Recording is being used up to this day. Thus, Fr. Luca Pacioli is
considered as the Father of Modern Accounting. (Millan, 2019 and Roxas, Valencia, 2018)

FUNCTION OF ACCOUNTING IN BUSINESS

Accounting is often referred to as the “Language of Business” because it is fundamental to the

communication of financial information.

Accounting has the following two broad functions in a business:

1. To provide external users with information that is useful in making among others, investment
and credit decisions

2. To provide internal users with information that is useful in managing the business (Millan,
2019).

USERS OF ACCOUNTING INFORMATION

1. Internal Users- Those who are directly involved in managing the business.

Examples: Business Owners who are directly involved in managing the business, Board of
Directors, Managerial Personnel

2. External Users- Those who are not directly involved in managing the business.

Examples: Existing and Potential Investors, Lenders, Government Agencies, Non Managerial
E Employees, Customers, Public. (Millan, 2019)
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO USER’S NEEDS

1. General Purpose Accounting Information- It is an information designed to meet the common

needs of most statement users, it is provided by financial accounting and is prepared
primarily for external users

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2. Special Purpose Accounting Information- Is information designed to meet the specific needs of
particular statement users. It is provided by management accounting or other branches and
is prepared primarily for internal users. (Millan, 2019)

EXAMPLES OF DECISIONS AND TYPES OF INFORMATION NEEDED TO MAKE THOSE DECISIONS

(Millan, 2019)
Users Example of Decision/s to make Example of Information needed

1. External User - Existing Investor: - Audited Financial

Statements of the
(Investor) Whether to hold or sell business to aid in
investment in stocks analysing the value of
the company (General
Potential Investor
Purpose Information)
Whether or not to buy
shares of stocks

2. External User - Lender: - Audited Financial

Statements of the
(Lender or Supplier) Whether or not to business to aid in
extend loan to a analysing the
business company’s ability to
pay its debts (General
- Supplier:
Purpose Information)
Whether or not to
extend credit to a
business
 3. Internal User Whether or not to increase - Analysis of the effects of
the sale price of a product sales volume and
(Manager) sales prices to earnings
(Special Purpose
Information)

How much capital is needed

to manufacture a new
Budget Report ( Special
product?
Purpose Information)

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Accounting rules, procedures, and practices came to be known as Generally Accepted Accounting
Principles (GAAP).

Simply stated, Generally Accepted Accounting Principles represent the rules, procedures, practice
and standards followed in the preparation and presentation of financial statements.”

Generally Accepted Accounting Principles are like Laws that must be followed in financial

reporting. FINANCIAL REPORTING STANDARDS COUNCIL (Replaces the ASC)

On November 18, 1981, The Philippine Institute of Certified Public Accountants, the national
professional body of CPA’s in the Philippines, created the Accounting Standards Council as the
accounting standard body in the Philippines, to establish and improve accounting standards that
will be generally accepted in the Philippines.

In 2004, The Philippine Regulations Commission (PRC) created the Financial Reporting Standard
Council (FRSC) replacing the ASC. The FRSC was created to assist the Board of Accountancy (BOA)
to carry out its powers and functions provided under Republic Act No. 9298, The Philippine
Accountancy Act of 2004

The approved accounting standards of the FRSC are known as the Philippine Financial Reporting
Standards (PFRS) and Philippine Accounting Standards (PAS) which fully took effect on January 1,
2005, statements of the FRSC are known as “Philippine Accounting Standards or PAS and Philippine
Financial Reporting Standards or PFRS.”

CAREER FIELDS IN ACCOUNTING

1) Public Accounting- composed of individual practitioners, accounting firms and large
multinational organizations that render independent expert financial services to the public
in a professional fee basis. (Dean Ester F Ledesma)

Professional Accountants who work in public accounting firms are usually Certified Public
Accountants (CPA’s). A Public Accountant may perform one or more of the following
services: (Arenas T, Chua, M. & Villarina F. (2018)

a.) Auditing- In performing an Audit, the accountant makes an independent examination of

the financial statements of a business enterprise. The auditor evaluates the accounting
system of business enterprise and carefully examines the records to see to it that
transactions have been properly recorded. After conducting his examination, the auditor
issues a report expressing an opinion as to the fairness of the financial statements.

b.) Management Advisory Services- includes the design, installation and improvement of
firm’s general accounting system and other system deemed necessary for controlling
and distributing manufacturing costs. Individuals who provide management advisory
services need not be CPA’s. in fact they need not be Accountants at all. The area of
Management Advisory Services includes financial planning and control, the

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development or improvement of an accounting or computer system, financial
forecasting, and advice on mergers and consolidations.

c.) Tax Services- It includes giving advice in the possible tax consequences of a certain
financial decisions, preparing income tax returns and representing clients before
government agencies such as BIR during a tax audit.

2) Private Accounting- An accounting job done in private business enterprises. The accountant
works as an employee of a business enterprise. They may be employed in various capacities.
(Arenas T, Chua, M. & Villarina F. (2018)

The Chief Accounting Officer of a business enterprise is called Controller.

The Chief Financial Officer is called Finance Manager.

Tasks in Private Accounting

a.) General Accounting- performing the entire accounting process, from identifying to
recording transactions and the preparation of financial statements for the use of
management.

b.) Cost Accounting- it has something to do with controlling, determining and controlling
costs particularly those costs in producing a product or service.

c.) Budgeting- Provides management a plan for future operations after this plan has been
applied, summaries and reports comparing the actual accomplishments with the plan
are provided.
 d.) Internal Auditing- Establishes accounting procedures are being followed throughout the
year. The task of conducting a review of the company’s operations to determine
adherence to management policies and measuring efficiency of operations.

e.) Accounting/ Management Information System- task of designing and setting up a manual
or computerized accounting system.

3.) Government Accounting- Accounting for the national government and its instrumentalities such
as provinces, towns and cities. They are of concerned with public funds. (Arenas T, Chua, M. &
Villarina F. (2018)

Example of government agencies requiring the services of professional accountants are the
commission on Audit (COA), Bureau of Internal Revenue ( BIR), Bangko Sentral ng Pilipinas,
GSIS, and Bureau of Custom.

4. Accounting Education- is another Professional field where the accountant assumes the role of
researcher, teacher and reviewer. (Vera Cruz- Manuel, Z. (2018)

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Researcher- investigates and makes a study creating, applying, relating or improving accounting
theories and business concepts that suit the changes taking place in a particular business or
industry.

Accounting Professor- is responsible for the formation of competitive accountants and

consultants and teaching subjects such as accounting, auditing, management advisory services
and other subjects.

Accounting Reviewer- helps prepare the candidates for the CPA Licensure Examination.

AREAS OF SPECIALIZATION: (Vera Cruz- Manuel, Z. (2018), (Dean Ester F. Ledesma)

Basic Accounting or Bookkeeping- is the routine activity of recording, classifying and

summarizing business transactions in a systematic manner. It is the procedural aspect of
accounting.

Financial Accounting- involves the preparation and interpretation of Financial Statements

primarily for external users.

Cost Accounting- deals with the recording, classifying and summarizing the details of material,
labor and overhead necessary to produce and sell a product or service.

Managerial Accounting- is the presentation of accounting data primarily for management who
are considered the internal users. The special reports will assist managers in planning, directing
 and controlling the operation of the business as well as in managing enterprise resources.

Auditing- deals with independent verification and examination of the accounting records for the
purpose of giving an opinion on the fairness of its presentation.

Government Accounting- deals with the administration or uses of public funds, to bring about
service to the community.

Fiduciary Accounting (Trust Accounting, Estate Accounting, Receivership Accounting)- Handling

of accounts managed by a person entrusted with the custody and management of property for
the benefit of another. (Examples: Banks, Insurance Companies, Mutual Trust, Pension Plans)

Environment Accounting- The area of accounting that focuses on programs, activities and
projects that are focused on care for Mother Earth.

Social Responsibility Accounting- Reporting of programs and projects that have to do with the
upliftment of the welfare of the people of a community or nation.

PHILIPPINE REGULATORY AGENCIES

The practice of the accounting profession, among others, is governed by regulatory bodies
such as the Professional Regulation Commission, Board of Accountancy and the Philippine Institute
of Certified Public Accountants. The financial reports prepared are also affected by the rulings and

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promulgations issued out by the Securities and Exchange Commission, Bangko Sentral ng Pilipinas,
and the Bureau of Internal Revenue.

Professional Regulation Commission

This is a government body in charge of regulating and licensing the practice of a profession like
accounting, medicine, engineering, nursing and others. Among its primary functions are the
following:

a.) Maintaining and enforcing professional examinations

b.) Promulgating and implementing standards and ethics in the practice of profession c.)
Providing legal and other regulatory services such as hearing formal complaints d.) Acting
on valid complaints by suspending and revoking license of an erring professional.

Board of Accountancy

Republic Act 3105 regulated on March 17, 1978, the practice of accounting by creating the Board of
Accountancy. It is under the jurisdiction of the PRC and is tasked in setting up and promulgating a
set of professional standards and ethics in the practice of the accounting profession. It is composed
of a chairman and six members appointed by the President of the Philippines upon the
recommendation of the PRC. It constantly monitors the practice of accountancy in the Philippines
by conducting exams to CPA candidates, granting certificates to board passers, registering and
suspending members, conducting dialogues with accountancy students, examinees, and
accountants.

Securities and Exchange Commission (SEC)

SEC was established on October 26, 1936 under C.A 83. Its task is to safeguard public interest. It
regulates business operations specifically of partnerships and corporations, entities granted
license/ franchise to operate, and foreign companies doing business in the country.

Bangko Sentral ng Pilipinas (BSP)

BSP Regulates the operations of all banks, as well as all importations (goods coming into the
country) and exportations (goods going out to other countries) of goods. It also closely monitors
foreign currency transactions and the Philippine Peso exchange rate ensuring its stability through a
series of measures it undertakes.

Bureau of Internal Revenue (BIR)

BIR ensures compliance of tax and license requirements by all businesses. People and business
entities earning income are required to fill up and submit periodic tax returns and pay for licenses,
fees and taxes.

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PROFESSIONAL EXAMINATIONS, TITLES AND ORGANIZATIONS RELATED TO ACCOUNTING IN THE
PHILIPPINES AND INTERNATIONAL
NAME OF EXAMINATIONS NAME OF PROFESSIONAL TITLES
ORGANIZATIONS

CERTIFIED PUBLIC ACCOUNTANT PHILIPPINE INSTITUTE OF

LICENSURE EXAMINATION CERTIFIED PUBLIC ACCOUNTANTS
(PICPA) CPA

CERTIFIED ACCOUNTING ASSOCIATION OF ACCOUNTING

TECHNICIAN ( CAT LEVEL 3) TECHNICIANS- CANADA
CAT
INSTITUTE OF CERTIFIED
MANAGEMENT ACCOUNTANTS
AUSTRALIA
MAAT
NATIONAL INSTITUTE OF
ACCOUNTING TECHNICIANS
 CERTIFIED ACCOUNTING INSTITUTE OF CERTIFIED
TECHNICIAN ( CAT LEVEL 2)- MANAGEMENT ACCOUNTANTS
REGISTERED COST ACCOUNTANT AUSTRALIA ( ICMA-AUSTRALIA) RCA
(RCA)
NATIONAL INSTITUTE OF
ACCOUNTING TECHNICIANS (NIAT)

CERTIFIED ACCOUNTING INSTITUTE OF CERTIFIED

TECHNICIAN (CAT LEVEL 1)- BOOKKEEPERS- LONDON, UNITED
CERTIFIED BOOKKEEPER KINGDOM MICB

NATIONAL INSTITUTE OF
ACCOUNTING TECHNICIANS( NIAT)

CERTIFIED TAX TECHNICIAN ( PHILIPPINE ASSOCIATION OF

CTT) CERTIFIED TAX TECHNICIANS INC.
(PACTT, INC.) CTT

CERTIFIED PAYROLL CHARTERED INSTITUTE OF

PROFESSIONAL ( CPP) PAYROLL PROFESSIONALS ( CIPP
UK) CPP

NATIONAL INSTITUTE OF
ACCOUNTING TECHNICIANS( NIAT)

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CERTIFIED INTERNAL AUDITOR INSTITUTE OF INTERNAL AUDITORS

CIA

CERTIFIED MANAGEMENT INSTITUTE OF

ACCOUNTANT MANAGEMENT
ACCOUNTANTS CMA

Note: There are also other Local and International Certifications available for Business
and Accounting Professionals.

REFERENCES:
 Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon

City: National Book Store

Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
Enterprise

Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply

Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.

Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition. Quezon City:
Raintree Trading & Publishing Inc.

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EXERCISE 1

(TRUE or FALSE)
Name: Year and Section:

Date: Score:

Write TRUE if the statement is correct or FALSE if it is incorrect.

_________________1. Accounting is an art and a perfect science

_________________2. Internal accounting reports are more strictly governed by the required accounting
standards than the general accounting for external users

_________________3. Employees and investors are external users of financial reports

_________________4. The success or failure of business is due to accounting records are kept

_________________5. Bookkeeping is synonymous to accounting

_________________6. Auditing is performed before financial accounting starts

_________________7. The American Institute of Certified Public Accountants describes Accounting as an

Art.

_________________8. Management accounting provides reports for internal users. These financial
reports observe generally accepted accounting principles

_________________9. Bookkeeping is the procedural portion of the Accounting Process

_________________10. Accounting identifies, measures and communicates information about economic

entities for use in making economic decisions.

_________________11. Auditing is recording, classifying and summarizing of business transactions

_________________12. In classifying phase of accounting, items are sorted and grouped.

_________________13. The Accounting Standards Council sees accounting as a service activity

_________________14. Accounting is broader in scope than Bookkeeping

_________________15. Accounting serves as a means of communication in the business only

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EXERCISE 2

(MULTIPLE CHOICE)
Name: Year and Section:

Date: Score:

Encircle the letter that corresponds to the best answer

1. The function of Accounting is to provide

a. Quantitative Information
b. Qualitative Information

c. Quantitative and Qualitative Information

d. Mission and Vision

2. Which of the following is not an appropriate description of Accounting?

a. Accounting is an information system

b. Accounting is an exact science and art

c. Accounting is the language of Business

d. Accounting is a process that leads to understandable information

3. The following are the external users of general purpose financial statements, except:

a. Creditors

b. Managers

c. Government

d. Employees

4. Statement 1: Accounting is useful in making economic decisions

Statement 2: Accounting demands critical thinking and creative skills

a. Only Statement 1 is correct

b. Only Statement 2 is correct

c. Both Statements are correct

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d. Both statements are incorrect

5. This work in accounting is performed after the work of accountant is completed

a. Bookkeeping

b. Recording

c. Auditing

d. Reporting
6. Accountants employed by a business firm or a non- government organization are said to be
engaged in

a. General Accounting

b. Public Accounting

c. Private Accounting

d. Independent Accounting

7. These external users of financial reports primarily use accounting information to assess their
return on investment im the business

a. Government and its agencies

b. Investors

c. Management

d. Creditors

8. The field of accounting which is directly involved in the preparation of financial statements is:

a. Cost Accounting

b. Managerial Accounting

c. General Accounting

d. Internal Auditing

9. The field of accounting which deals on ensuring adherence to prescribed management

policies is:

a. General Accounting

b. Cost Accounting

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c. Managerial Accounting

d. Internal Auditing

10. This accounting organization aims to promulgate and improve the accounting standards
that will constitute GAAP in the Philippines.

a. Philippine Institute of Certified Public Accountants

 b. The Professional Regulatory Board of Accountancy

c. Professional Regulation Commission

d. Financial Reporting Standards Council

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EXERCISE 3

(MATCHING TYPE)
Name: Year and Section:
 Date: Score:

Identify what is being referred in each statement given. Refer your answer to the list provided for
and write your answer before each number.
a. Financial Accounting g. Auditing

b. Accounting h. Classifying

c. Budget Accounting i. Basic Accounting

d. Management Accounting j. Recording

e. Financial Accounting k. Management Advisory Services

f. Controller l. Reporting

___________________________1. Sorting and grouping similar items together

___________________________2.It covers the efficient management of cash and other resources by

anticipating or predicting monetary objectives in the future

__________________________3. It includes the design, installation and improvement of the firm’s general
accounting system necessary for controlling

__________________________4. Examination of the accuracy of the accounting records

__________________________5. Provides management of plan for future operations

__________________________6. Focuses on records, business transactions, developed into sets of financial

reports

__________________________7. The highest accounting officer in a company

__________________________8. Branch of accounting that is concerned primarily with the preparation of

general purpose financial statements

__________________________9. What function do accounting journals serve in the accounting process?

__________________________10. The procedural element of accounting

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