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Fundamentals of Accountancy

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Fundamentals of Accountancy

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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT

ORIGIN AND NATURE OF ACCOUNTING


Even before 2000 BC, cities in Babylonia, Greece, and Egypt and much later in 3500 BC, also in
Assyria, had already introduced accounting as shown by the records of taxes collected from the
people as mandated by their king.

From simple recording of reports of taxes collected from the people, accounting had evolved
into a more complicated field in the 15th century when the double-entry system was introduced
by Fr. Luca Pacioli, Father of Accounting, in his book, to help Italian merchants in their trade
practice.

Notice that the invention of the double-entry system was intended to address the needs of
merchants engaged in trade business.

BRANCHES OF ACCOUNTING AND USERS OF ACCOUNTING INFORMATION


This chapter discusses the origins of accounting, branches of accounting, and users of
accounting information. Knowledge of these basic concepts serves as the foundation towards
understanding the more complicated concepts of bookkeeping essential in learning how to
prepare financial reports of a company.

INTRODUCTION TO ACCOUNTING
Objectives:

- Define accounting
- Determine the functions of accounting in business
- Trace the origin of accounting

Petroff (1991) states that the basic accounting purpose is “to provide a means of recording,
reporting, summarizing, and interpreting economic data”. To realize this, it is imperative to
design an accounting system to be able to address the needs of users of accounting
information. With the accounting system in place, financial statements can be prepared and
analyzed. From these reports, decisions can be made.

DEFINITION OF ACCOUNTING

“Accounting is an art of recording, classifying, summarizing in significant manner and in terms


of money transactions and events, which are in part at least of a financial character and
interpreting the results thereof” (American Institue of Certified Public Accountants (AICPA),
cited in Abrugar,, para.3)

Recording is writing in the books of accounts in terms of value of the items purchased or
bought.

Classifying means identifying what type of account to record the items bought, whether it is an
asset, liability, capital, income or an expense account. In recording purchases on account, it is
considered a liability. Owner’s investment, on the other hand, is classified as capital account.

Summarizing means tallying all transactions incurred for a particular period for each type of
account such as assets, liabilities, capital accounts, etc.

Interpretation refers to analyzing of results based on the summary made. Results of operation
can either be net surplus or net loss.

FUNCTIONS OF ACCOUNTING IN BUSINESS


Any business without accounting is bound to fail. Accounting reports will give the business
owners the true picture of his business whether he is earning or not. Business decisions are
usually anchored in the accounting reports. A prospective investor makes his decision whether
to invest or not based on the company’s financial reports. From the supplier’s point of view,
financial reports can be his/her basis whether to grant credit line or not to his/her customers.

ORIGINS OF ACCOUNTING

Accounting was found as early as 2000 BC in the cities of Babylonia, Greece, and Egypt and in
3500 BC, in Assyria. When pyramid was also being constructed in Egypt, the pharaoh required a
record of materials, labor and other overhead costs incurred in the construction.

Cotrugli in Naples wrote the first accounting book. Subsequently, in 1494, Fr. Luca Pacioli, an
Italian mathematician, wrote the book, Summa de Aritmetica, Geometria, Proportioni et
Proportionalita, which contained the modern-day double-entry system. Modern bookkeeping
system evolved from Pacioli’s “Model of Venice” which he developed to help Italian merchants
in their trade practice. This work had eraned him the title, “Father of Accounting”

In the 15th century, the corporate form of organization was conceived. During that time, in their
absence, Italian merchants entrusted their properties to their servants or employees, who in
turn, kept track of daily transactions by listing down what properties their masters owned and
what debts were owed to others. From their records came the debtor and creditor terms.

- Debtor borrows money or buys goods and services on credit


- Creditor lends money or sells goods and services.

After the 16th century, with trading done in foreign ports, there emerged a profit and loss
system prepared after completing a particular voyage or trip.

The 19th century saw massive development of trade and industry. The simple business structure
evolved into a more complex one with business combinations, mergers and consolidations.
Simple bookkeeping thus turned into accounting. Manual accounting became automated using
devices such as computers.

In the Philippines, it was the Spaniards who introduced accounting. The bookkeeper then was
called tenedor de libro. Trade between Spain and the Philippines were active then and also
between China and the Philippines and other Asian countries.

It was during the American colonization that the first licensure examination for Certified Public
Accountants was given specifically in 1923, and in 1929, the professional association of
accountants was established (Manuel, 2014)

FOOD FOR THOUGHT

Accounting is highly important in business operations because it is a process of recording


money transactions and events which is a vital tool for business owners to make sound
decisions for the company and for their employees.
AUDIT

A. Identification. Write your answers on the space provided.

______________1. It is an art of recording, classifying, and summarizing money transactions


and events essential in making sound economic decisions.

______________2. It refers to writing the value of the items purchased in the books of
accounts.

______________3. He is the Father of Accounting.

______________4. The country that is NOT included among the countries where accounting
originated as early as 2000 BC

______________5. The year when the first licensure examination for Certified Public
Accountants given in the Philippines.

______________6. The year when the association of Certified Public Accountant established in
the Philippines.

______________7. It refers to analyzing of results based on the summary made.

______________8. The one who wrote the first accounting book.

______________9. The one who lends money or sells goods or services.

______________10. The one who borrows money or buys goods or services.

B. Answer the following questions briefly.

1. Define accounting in your own words.

2. How does accounting help in business?

3. Define debtor. Define creditor.

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