CHAPTER 1

Introduction to Accounting

DEFINITION OF ACCOUNTING
● Process of identifying, recording, and communicating economic
information useful for economic decisions.

ESSENTIAL ELEMENTS OF ACCOUNTING

1. Identifying
● Analyzes each business transaction to identify "accountable
events" (those affecting assets, liabilities, equity, income, or
expenses) and "non-accountable events."
2. Recording
● Recognizes "accountable events" through "journalizing" and
classifies them into accounts by "posting."
● Account - Basic storage of information (e.g., cash, land, sales).
3. Communicating
● Summarizes information at the end of each accounting period to
produce meaningful reports, like financial statements.

NATURE OF ACCOUNTING
● Provides information about economic activities intended to be useful
in making economic decisions.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative Information- Expressed in numbers, quantities, or units.
2. Qualitative Information- Expressed in words or descriptive form,
found in notes to financial statements.
3. Financial Information- Expressed in money (also quantitative).

ACCOUNTING AS SCIENCE AND ART

● Social Science - Systematic body of knowledge.
● Practical Art - Requires creative skills and judgment.

ACCOUNTING AS AN INFORMATION SYSTEM

● Input - Identified accountable events.
● Process - Recording, classifying, summarizing.
 ● Output - Accounting reports communicated to users.

BOOKKEEPING AND ACCOUNTING

● Bookkeeping - Recording accounts or transactions, preparation of the
trial balance, does not require interpretation.
● Accounting - Covers identifying, recording, and communicating
information to users.

FUNCTIONS OF ACCOUNTING IN BUSINESS

● Accounting - “ language of business”
1. Provides information for external users (investment and credit
decisions).
2. Provides information for internal users (managing the business).

USERS OF ACCOUNTING INFORMATION

1. Internal users - Directly involved in managing the business (owners,
board of directors, managerial personnel).
2. External users - Not directly involved in managing the business
(investors, lenders, government agencies, non-managerial employees,
customers, public).

TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO USERS’

NEEDS
1. General purpose accounting information - Designed for most
statement users, provided by financial accounting, prepared primarily
for external users.
2. Special purpose accounting information - Designed for specific needs,
provided by management accounting, prepared primarily for internal
users.

BRIEF HISTORY OF ACCOUNTING

● Prehistoric Times - 8500 B.C., Mesopotamia - clay tokens used for
record-keeping.
● Middle Ages - Trade flourished, advancements in account-keeping
methods. 1340 A.D., Genoa - Double-entry records emerged.
● 1494 - Fra Luca Pacioli published "Summa di Arithmetica,"
introducing the "double entry recording system," which is still used
today.

COMMON BRANCHES OF ACCOUNTING

 1. Financial accounting - Focuses on general purpose financial
statements, governed by the PFRS.
● Financial reporting - Often used interchangeably with financial
accounting, it also includes "other financial reporting," which
provides information outside the financial statements to aid in
decision-making.
● Financial statements - Structured representation of an entity's
financial position and results, including:
1. Statement of Financial Position
2. Statement of Profit or Loss and Other Comprehensive
Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes
6. Additional Statement of Financial Position
● Financial report - Includes the financial statements and
additional information to improve decision-making.
● Primary objective of financial reporting - To provide information
about an entity's economic resources, claims, and changes in
those resources.
● Secondary objective of financial reports - To assess
management's stewardship of the entity's resources.
● Entity - Refers to the 'reporting entity,' which can be a business,
non-profit organization, government, or individual preparing
financial statements. Government employees prepare 'SALN'
(Statement of Assets, Liabilities, and Net Worth).
2. Management accounting - Communication of information for internal
users, includes management advisory services.
3. Government accounting - Accounting for government, focusing on
public funds and accountability.
4. Auditing - Inspection of financial statements or business processes.
5. Tax accounting - Preparation of tax returns, tax advice.
6. Cost accounting - Systematic recording and analysis of costs.
7. Accounting education - Teaching accounting subjects.
8. Accounting research - Analysis of economic events and variables,
related to various branches of accounting.

FORMS OF BUSINESS ORGANIZATIONS

1. Sole or single proprietorship - Owned by one individual, registered
with DTI.
2. Partnership - Owned by two or more individuals, registered with SEC.
 3. Corporation - Owned by stockholders, created by law, registered with
SEC.
4. Cooperative - Owned by members, formed under The Philippine
Cooperative Code, registered with CDA.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

1. Service business - Offers services as its main product.
2. Merchandising business - Buys and sells goods without changing their
form.
3. Manufacturing business - Buys raw materials and processes them into
final products.
● Hybrid Businesses - Engage in more than one type of activity, e.g.,
restaurants