Module 1: The Basics of

Accounting

LEARNING OUTCOMES

At the end of this module, the student is expected to:

define accounting and determine the nature and functions of

accounting in the business world.

This accounting course will help you understand the financial insides of a business.
Whether you are looking at a large multinational company like Apple or Starbucks or
a single-owner software consulting business or coffee shop, knowing the
fundamentals of accounting will help you understand what is happening. Module 1
introduces you to the fundamentals of accounting. This module is divided into three
lessons:

Lesson 1: The Meaning of Accounting

Lesson 2: The Nature and Scope of Accounting
Lesson 3: The Functions of Accounting

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 Lesson 1: The Meaning of Accounting

Activate

Directions: There are 15 accounting-related words in the grid below. Locate the given words in
the grid, running in one of eight possible directions horizontally, vertically, or diagonally.

Acquire

What is accounting?

In order to effectively communicate and understand each other, people must use the same
language. In business, accounting is known as its language. Accounting is where it all comes
together. The accountant is the one telling the story of the business.

Accounting is the language of business because it's both useful and universal. If, say, a company
has ₱1 million in sales revenue, and the cost of goods sold is ₱300,000, the gross profit on
the income statement is ₱700,000. The numbers add up the same no matter which nation you
work in or whether you speak English, Portuguese or Korean. That allows investors and
executives around the world to understand income, expenses and company value the same
way. Accounting is the financial information system that provides these insights. In short, to
understand your organization, you have to know the numbers.

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But what is accounting, really? Three of the most acknowledged accounting bodies defined
accounting as the following:

“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 financial character, and
interpreting the results thereof.”
-American Institute of Certified Public Accountants (AICPA)

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

permit informed judgment and decision by users of the information.”
-American Accounting Association (AAA)

“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
decision.”
-Financial Reporting Standards Council (FRSC)

To summarize the given definitions, accounting is a system that helps businesses track events
that affect them. This process involves identifying the events that affect a business, recording
these events, and communicating the summarized results of all events within a particular
period to interested parties.

There are three (3) important activities implied by the given definitions – identifying, recording
and communicating economic events of the organization to intended users. These activities
make up the accounting process. Take a look at the illustration on the next page.

The Accounting Process

Identifying involves selecting the relevant economic events of the business. Examples of economic
events are the sale of snack chips by PepsiCo, the provision of cell phone services by AT&T, and
the payment of wages by Facebook. Recording consists of keeping a systematic, chronological
diary of events, measured in peso or dollar and cents. Communicating involves reporting the
collected information to interested parties. It also involves analyzing and interpreting the reports
for users.

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You should understand that the accounting process includes the bookkeeping function.
Bookkeeping usually involves only the recording of economic events. It is therefore just one part
of the accounting process.

References:
Fundamentals of Accountancy, Business, and Mangement 1 by Joselito Florendo
Accounting Principles, 12th Edition by Jerry Weygandt, et al.

Apply

Answer the following questions in not less than 5 sentences.

1. Why do you think accounting is considered as the language of business?

2. Is accounting important to you? Why or why not?
3. After the lesson, how do you perceive accounting now?

Lesson 2: The Nature and Scope of

Accounting

Activate

Complete the statement using the pictures below.

Accounting is a/an _____________________________.

1. 4.

2. 5.

3. 6.

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 Acquire

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 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.
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 a means and not an end. Accounting is a tool to achieve specific objectives.
It is not the objective itself. Imagine that you dream to go to Paris someday. Accounting
can be thought of the plane that will bring you to your destination.
6. 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.

References:
Fundamentals of Accountancy, Business, and Mangement 1 by Joselito Florendo
Accounting Principles, 12th Edition by Jerry Weygandt, et al.

Apply

Choose one nature of accounting and create a poster (by hand or digital) depicting how you
understood the nature of accounting that you have chosen. Provide a short description if
necessary. Draw/create your poster on a 1 whole short-sized bond paper.

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 Lesson 3: The Functions of Accounting

Activate

Read the following story below and answer the questions that follow.

Juanita just graduated from college. Her parents gave her Php100, 000 as a graduation
gift. With the help of her friend, Maria, she put up a clothing store. They looked for a good location
to set up their store. They also searched for suppliers of the ready-to-wear clothes that they are
going to sell. After placing their first order and securing the place to put up their store, they
recorded all the transactions and expenses they have incurred in their record book. They have also
purchased some assets for their business such as computer set and delivery vehicle. They have
also secured their licenses and permits from the respective government agencies.

All their sales and expenses are being recorded chronologically and systematically in their
record book. The also keep their records up to date.

Fast forward, they have been able to run their business for a year now. Maria prepares
their annual financial statements to be submitted to the BIR for taxation purposes and renewal of
licenses with DTI. They are also planning to admit additional investors into their business. Juanita,
on the other hand was tasked to do the year-end audit. While doing their end of the year audit,
Juanita found out that the receipts doesn’t match up their inventory on hand and in the record
book. Upon checking with their suppliers, it was found out that one supplier failed to send the
receipt of their purchase.

Questions:
1. Was accounting involved in the business transactions of Maria and Juanita? Why do
you say so?
2. If accounting was involved, how did it help Maria and Juanita manage their
business?
3. Can a business survive without accounting? Why do you think so?

Acquire

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 3 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.

Let us now discuss the functions of accounting. Accounting has four (4) main functions. These are:

1. Keeping systematic records of business transactions. Recording transactions does not

only involve entering the transactions in the accounting books. The records should be

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 systematic enough to enable easy understanding of readers. No matter how
comprehensive the records are, if they are not produced systematically, then they provide
little to no value.

In the business of Maria and Juanita, having a record book shows how accounting helped
them keep systematic records of their business transactions.

2. Protecting properties of the business. The accounting records serve as the evidence that
properties of the business do exist and how much of a particular resource does
accompany have. If the accounting records amount of cash should be Php1, 000, 000,
any excess or deficiency will be noticed immediately. Moreover, the accounting system
helps in preventing employee fraud and misappropriation of company resources.

In our example, because of accounting, Juanita was able to find out the reason for the
difference of their inventory (on hand and in their record) as against the receipts provided
by the suppliers. Thus, they were able to establish the validity and ownership of their
stocks/inventory.

3. Communicating results to various parties in or connected with the business. The

accounting reports produced at the end of each period are not only used by external
parties (e.g., potential investors, government agencies) but also by the management in
their decision making function. Communication of the results of operations of a company
is essential for all concerned parties to enable them to make well-informed decisions.

The financial reports prepared by Maria at year-end will help them secure additional
investors because everything is detailed in the report. Since accounting is known as the
language of business, they will be able to communicate through the financial reports they
have prepared. Also, they were able to decide soundly regarding the progress of their
business if they have enough information about it.

4. Meeting legal requirements. In the Philippines, the government requires some companies
(particularly those with public accountability) to provide financial reports quarterly, semi-
annually or annually. This procedure aims to protect the public by providing them the
necessary information to make sound decisions.

Submitting copies of the financial reports to the BIR for taxation purposes and to DTI for
registration purposes are some examples of how accounting meet the legal requirements
set by the government and regulatory bodies.

References:
Fundamentals of Accountancy, Business, and Mangement 1 by Joselito Florendo
Accounting Principles, 12th Edition by Jerry Weygandt, et al.

Apply

Research and read on the WorldCom, an American telecommunications company, accounting

scandal that happened in 2002. Write a reflection on the role and functions of accounting on the
said business case.

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