LESSON 1.

1: INTRODUCTION TO ACCOUNTING

Do your parents ask how you spend your allowance every day? 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? When going home, do you sometimes choose to walk from school
rather than riding a jeepney because you want to save? These questions are connected to accounting.
GATEWAY INTEGRATED SCHOOL Accounting is involved in all of our daily activities.
OF SCIENCE AND TECHNOLOGY GEN. TRIAS CAMPUS
Sitio Tinungan Brgy. Manggahan Gen. Trias City Cavite ACCOUNTING
Accounting is, broadly speaking, a system that helps businesses track events that affect them. This
process involves identifying the events that affect a business, recording these events, and

Senior High School Department communicating the summarized results of all events within a particular period to interested parties.

ACCOUNTING PROCESS

Module 1  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.

FUNDAMENTALS OF ACCOUNTANCY, 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; and purchases of trucks needed to
BUSINESS, AND MANAGEMENT 1 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 which will be discussed in
future chapters.
 COMMUNICATING – occurs through the preparation and distribution of financial and other
accounting reports.

NATURE OF ACCOUNTING
The basic features of accounting are as follows:
1. Accounting is a process. It refers to the method of performing any specific job step-by-step
according to the objectives. It performs the specific task of collecting, processing, and
communicating financial information.
2. Accounting is both an art. It is considered an art because one records, classifies, summarizes, and
finalizes financial data. The way something is done is referred to as “art”. It is a behavioral
Prepared by: knowledge involving an established creativity and skill to help one achieve distinct objectives.
MS. SHIRLY S. CAÑETE 3. Accounting deals with financial information and transactions. It records financial transactions and
Subject Teacher data, categorizes these, and finalizes the results given for a specified period. Accounting only deals
with financial and not with non-monetary or non-financial aspects of an information.
__________________________________________________________
Name of Student 4. Accounting is a service activity. It helps decision makers by giving them financial reports that will
guide them in making sound decisions.
__________________________________________________________
Grade Level and Section 5. Accounting is an information system. As a service function, it collects processes and
communicates financial information of any entity.
Date: ________________________

1|Fundamentals of Accountancy, Business, and Management 1

FUNCTIONS OF ACCOUNTING  The Cradle of Civilization (3600 B.C.) – In Mesopotamia, record-
keeping was done through “Clay Tablet” as evidence of recording
The American Accounting Association (AAA) defines accounting as "the process of identifying,
transactions. From India and China to Central and South America, the
measuring, and communicating economic information to permit informed judgments and decisions by
clay tablet records the business transactions like accounts receivable
the users of information."
and accounts payable.
Meanwhile, the American Institute of Certified Public Accountants (AICPA) defines accounting as "the
 Development in Roman Empire – The reign of Emperor Augustus
art of recording, classifying, and summarizing in a significant manner and in terms of money,
(63BC – 14 AD). Roman government kept detailed financial
transactions and events which are in part at least of a financial character and interpreting the results
information of the deeds of Emperor Augustus regarding the
thereof."
stewardship of Roman resources. This is evidenced by the Res Gestae
From the foregoing definitions, the main functions of accounting can be summarized as follows: Divi Augusti (The Deeds of the Divine Augustus). Roman historians
1. Keeping systematic record of business transactions Suetonius and Cassius Dio recorded that in 23BC, Augustus prepared
2. Protecting properties of the business a rationarium (account) which listed public revenues, the amounts of cash in the aerarium
3. Communicating results to various parties in or connected with the business (treasury), in the provincial fisci (tax officials), and in the hands of publicani (public contractors);
4. Meeting legal requirements and that it included the names of the freedmen and slaves from whom a detailed account could
Keeping Systematic Record of Business Transactions be obtained.
Recording transactions does not only involve entering the transactions in the accounting books. The  14th Century - Double-Entry Bookkeeping – The most relevant
records, should be systematic enough to enable easy understanding of readers. No matter how event in accounting history is generally considered to be the
comprehensive the records are, if they are not produced systematically, then they provide little to no dissemination of doubleentry bookkeeping-by Luca Pacioli (Father
value. of Accounting, in 14th century Italy). Pacioli was much revered in his
Protecting Properties of the Business day, and was a friend and fellow of Leonardo da Vinci. The Italians
The accounting records serve as the evidence that properties of a business do exist or how much of a of the 14th to 16th centuries are recognized as the fathers of
particular resource does a company have. If the accounting records show that the amount of cash modern accounting and were the first to use Arabic numerals than
should be P1 000 000, any excess and deficiency will be noticed immediately. Moreover, the accounting Roman, and for following business accounts. Summa de Arithmetica was written by Luca Pacioli,
system helps in preventing employee fraud and misappropriation of company resources. the first book issued that contained a detailed chapter on double-entry bookkeeping.
Communicating Results to Various Parties in or Connected with the Business  French Revolution (1700s) – In this period, the development of accounting theory has begun and
The accounting reports produced at the end of each period are not only used by external parties (e.g., was influenced by social upheavals.
potential investors, government agencies), but also by the management in their decision-making  The Industrial Revolution (1760-1830) – The focus on this era are fixed assets and mass
function. Communication of the results of operations of a company is essential for all concerned parties production.
to enable them to take well-informed decisions.  19th Century – The Beginnings of Modern Accounting in Europe
Meeting Legal Requirements and America – The modern and formal accounting profession
In the Philippines, the government requires some companies (particularly those with public emerged in Scotland in 1854. Most accountants stayed in the U.S.,
accountability) to provide financial reports quarterly, semi-annually, or annually. This procedure aims establishing accounting practices and becoming the origins of
to protect the public by providing them the necessary information to make sound decisions. The several U.S. accounting firms. The first national U.S. accounting
government also requires reports from heavily regulated industries such as the energy and oil society was established in 1887.
industries. The American Association of Public Accountants was the initiator of
the current American Institute of Certified Public Accountants (AICPA).
HISTORY OF ACCOUNTING  The Present - The Development of Modern Accounting standards and
Accounting is as old as civilization itself. It has evolved in response to various social and economic needs Commerce – In the present time, accounting standards were
of men. Accounting started as a simple recording of repetitive exchanges. The history of accounting is established and practitioners follow the rules of international
often seen as indistinguishable from the history of finance and business. Following is the evolution of organizations or groups like AICPA. Modern accounting standards were
accounting: given more attention and time. Some of these standards include the
PFRS (Philippine Financial Reporting Standard) and the PAS (Philippine
Accounting Standards).

2|Fundamentals of Accountancy, Business, and Management 1

LESSON 1.2: USERS OF ACCOUNTING INFORMATION correct amount of taxes
payable
Accounting information helps users to make better economic decisions. Financial reports Uses accounting information in
Uses accounting information Professors, lectures,
supply the information these groups demand in order for them to make decisions connected to the the teaching of accountancy;
Academe primarily for academic students, and
business. possible improvements in the
purposes researchers
field of accountancy
Companies typically produce two types of financial statements:
Citizens and residents of the
 General purpose financial statements – intended to provide information to those who do not have Concerned with the overall
country even though they do
the capability to request directly from the company. Some examples of such groups are the Common people not performance of the economy;
General not plan to transact with the
customers, creditors, potential investors, and government agencies. connected with the use financial information to
Public business; use financial
 Special purpose financial statements – usually produced based on the requests of parties that have company estimate economic
statements to gauge the
capability to ask for accounting information directly from the company. Some examples of such performance
condition of the economy
groups are the board of directors, managers, employees, and the stockholders or owners (existing
investors).  INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan,
USERS OF INFORMATION
organize, and run the business. These users are directly involved in managing and operating the
 External Users business. They need more detailed information on a timely basis in order to support their decisions.
External users are individuals and organizations outside a company who want financial These include marketing managers, production supervisors, finance directors, company officers and
information about the company. These users are not directly involved in managing and operating owners.
the business. Internal users (Primary Users) of accounting information include the following:
Decisions made using Decisions made using
accounting information/ accounting information/
Type of User Definition Example of Users Type of User Definitions Example of Users
Benefits from accounting Benefits from accounting
information information
Patrons, clients, Whether or not to build Uses financial information in
Main source of income of
people acquiring relationship with the business, Employees that can make Board of directors, top making business decisions;
Customers businesses; acquire goods
goods or services of a to have any dealings with the decisions for the company; management, middle- allows management to
and services for a fee Management
company for a fee business. considered the brain of the level managers, identify problems
Banks, lending company supervisors immediately and to respond
Providers of additional funds
institutions, wealthy accordingly
when the initial investments Whether or not to lend
individuals; sometimes Persons in the company
Creditors of owners is exhausted; lend resources to the business is not Check if the business is
the government can aside from managers and Laborers, field
resources to businesses very risky before lending funds profitable enough to provide
also lend resources to Employees owners or stockholders; do workers, non-
usually in the form of money compensation and other
a company not have authority to managerial employees
Providers of additional funds benefits
Whether or not to invest in the implement decisions
when the initial investment of Wealthy individuals Mainly concerned with the
Potential business, primary concern is
owners is exhausted; invest other businesses Existing investors of the Founders of the returns earned from their
Investors the ability of the business to
resources in the business planning to invest Owners or company; concerned company, owners, investment; owners taking
provide acceptable returns
hoping to earn decent returns stockholders mostly with the profits of stockholders, active roles in the operations
An external user whose Oversees business operations the company partners, proprietors of the business; also make
Different government
primary role is to regulate with the end goal of improving decisions
agencies, taxing
Government businesses; studies financial the economy; checks the
authorities,
statements to determine accuracy of the financial
government officials
amount of taxes payable statements to compute for the

3|Fundamentals of Accountancy, Business, and Management 1

ACTIVITY 1 ASSESSMENT 1

A. Directions: Identify whether the given is a process or nature of accounting. Write your answers on Directions: Read each statement below and choose your answers from the box. Write your answers on
a separate sheet of paper. a separate sheet of paper.
1. Accounting is a storehouse of information.
Customers French Revolution Communicating
2. Accounting deals with financial information.
The Present Identifying Creditors
3. Recording events in a chronological order.
4. Communicating the financial reports to the users.
Accounting is an information system Owners
5. Accounting is a process. Accounting is a process Management
6. Accounting is a service activity.
7. Identifying the economic events. ___________ 1. This involves selecting economic events that are relevant to a particular business
8. Accounting is both an art and a discipline. transaction.
9. Recording the sale of merchandise. ___________ 2. This occurs through the preparation and communicating of financial and other
10. Recording the purchase of merchandise accounting reports.
___________ 3. This nature of accounting refers to the method of performing any specific job step-by-
B. Write TRUE if the statement is correct and FALSE if it is not. Write your answers on a separate step according to objectives.
sheet of paper. ___________ 4. This nature of accounting tells accounting is known and characterized as a storehouse
____________ 1. The external users inside the company are those who plan, organize and operate the of information.
business. ___________ 5. During this period, thorough study and development of theory of accounting began.
___________ 2. The external users are those individuals and organizations outside a company who Social upheavals affect the government, finances, laws, customs, and business which greatly influenced
want financial information outside the company. the development of accounting.
____________ 3. There are four primary internal users of accounts. ___________ 6. During this period, the Modern Accounting Standards and Commerce were developed.
____________ 4. Management is a primary internal user of accounting information. The accounting profession developed the requirements for financial statement audits around the
____________ 5. Owners are internal users of financial information. states.
____________ 6. Customers are not external users of accounts. ___________ 7. This user analyze the organization’s performance and position and take appropriate
measures to improve the company’s results.
____________ 7. In Mesopotamia, record-keeping was done through “Clay Triangle Drawing” as
evidence of recording transactions. ___________8. These users need accounting information to know the profit or income for the period
as well as the assets and liabilities of the company.
____________ 8. Luca Pacioli is the Father of Accounting.
___________9. These users need accounting information to determine the credit integrity, worthiness
____________ 9. The British Association of Public Accountants was the initiator to the current
of the organization, and credit terms.
American Institute of Certified Public Accountants (AICPA).
___________10. These are the users of accounting information that need to assess the financial
____________ 10. Accounting is a process.
position of its suppliers which is necessary for them to maintain a stable source of supply in the long
____________ 11. Accounting is both an art and discipline. term.
____________ 12. Accounting is NOT an information system.
____________ 13. Accounting is NOT the language of business.
____________ 14. Accounting is the process of informing, repeating, and destructing economic events.
____________ 15. Recording is a part of accounting process.

4|Fundamentals of Accountancy, Business, and Management 1