THE BASIC ACCOUNTING

ENVIRONMENT
LEARNING OBJECTIVES:
After studying this chapter, you
should be able to:
1. Explain the importance of
accounting in your life.
2. Explain the importance of
accounting in business.
 OBJECTIVES (cont'd)
3. Trace the origin of
accounting.
4. Define business and
explain its various
motives and roles.
5. Identify the sources of
capital.
 OBJECTIVES
(cont'd)
6. Describe the forms of business
organizations and types of
operations.
7. Define management and
explain its functions and roles
in business.
8. Define accounting and explain
why it is called the language
of business.
 OBJECTIVES (cont'd)
9. Identify the users and
explain why they depend
on accounting
information.
10. Explain management
and the role it plays in
business.
 Objectives
(cont'd)
11. Describe what an
accounting information
system is.
12. Identify the financial
reports and the financial
information contained
herein.
 INTRODUCTION
Accounting is part of any
organization, be it profit or non-
profit. It also touches your life.
An understanding of a business,
its form of organization and type
of operation may minimize the
risk involved in managing it
especially since you will become
part of it in the future.
 Introduction
(cont'd)
-It is important for you to possess
the skills and knowledge needed to
address the challenges brought
about by the environment
prevailing in the 21th century –
global market, high information
technology, trade liberalization.
Note: Realize that you will
become either the preparer or the
user of the of financial
information.
Accounting and you as a
Decision Maker
Example of possible decisions to be made
by any professional/entrepreneur:
should I set up an Internet Shop or A
Water Refilling Station? (entrepreneur)
Should I buy stocks of Jollibee or buy
bonds of San Miguel Corporation?
(investor)
Should I approve the cash loan of Mr.
Ben Chan for P 1,000,000? (bank
manager)
 YOU AS A DECISION
MAKER ( CONT’D)
How many units of Product A should our
firm sell to breakeven? ( financial
manager)
Should our firm spend P 5,000,000 to
promote new product? (marketing
manager)
Should I grant Mr. King a credit line of P
200,000? (supplier of beverages)
Note: Before you can make sound economic
decisions, you need information and must
know how to use information properly to
enable you to make a sound decision.
 Accounting and
Business
 All businesses, from the simple to the
most complicated, have one thing in
common: they need financial
information before making
decisions. Accounting plays a vital
role in business since it keeps
track of the business activities and
resources and reports back its
financial position and result of
operation.
 ORIGIN OF
ACCOUNTING
The infancy of accountancy can be traced
from the early civilizations of the Sumerians in
Mesopotamia. Simple accounting was used and
was mostly applied in agriculture.
Accounting is one of the oldest professions.
The history of accounting dates back to the
earliest days of civilization driven by the trade
system of crops and products necessary for
survival. As the barter system expanded to
include monetary exchange, methods were
formalized by 2000 BC. To include the creation
of accurate records of the quantities and
relative values.
 ORIGIN OF
ACCOUNTING
Primitive Accounting
Origin of keeping accounts – 8500 B.C.
Archaeologists established for certain clay
tokens – cones, disks, spheres and pellets – found
in Mesopotomia (modern Iraq). These tokens
represented such commodities as sheep, jugs of
oil, bread or clothing and were used in the Middle
East to keep records. The tokens were often
sealed in clay balls, called bullae, which were
broken on delivery so the shipment could be
checked against the invoice; bullae, in effect,
were the first bill of lading.
 ORIGIN OF
ACCOUNTING
Later, symbols impressed on
wet clay tablets replaced the
tokens. Some experts consider
this stage of record keeping the
beginning of the art of writing,
which spread rapidly along the
trade routes and took hold
throughout the known civilized
world.
 ORIGIN OF ACCOUNTING
Account records date back to the ancient
civilizations of China, Babylonia, Greece and Egypt.
People in these civilizations maintained various types
of records of business activities. During the 1st
Dynasty of Babylonia (2286-2242 B.C.), its law was
based on the Code of Hammurabi, requires merchants
trading goods to give buyers a sealed memorandum
containing the agreed price before it can considered
enforceable. The agreed upon transaction was
recorded by the Scribe (the predecessor of the
modern accountant) on a small mound of clay with
the parties affixing their “signatures” on it. This clay
was allowed to dry and served as the record of the
transaction. For the more important ones, the record
can be kiln-dried.
 ORIGIN OF
ACCOUNTING
Ancient Bookkeeping

WHEA
T

GOATS

Tokens representing ownership

4000 B.C. (Tokens and
Envelopes in Sumeria)
 ORIGIN OF
ACCOUNTING
1330 northern Italian
trading cities employ
Visitatore to review the
books of merchants.
1494 Prof. Pacioli
establishes the classic
double accounting system.
 Influence of Earliest
Accountants

Through archaeological discoveries of

artifacts, researchers are learning more about
the true influence the earliest accountants
had on civilization. Through their discoveries,
archeologists have discovered accountants
participated in the development of:
· trade – expand market for and access to
goods and services
· cities – as trade grew, so did the
marketplace
Influence of Earliest
Accountants
· concepts of wealth and numbers – personal
and governmental planning
· writing – understandable system of
accurate recordkeeping
· double entry bookkeeping – associated with
birth of Italian Renaissance
· money and banking – helped businesses
avoid bankruptcy in Industrial Revolution
 FATHER OF ACCOUNTING
The history of accounting is not complete
without Luca Pacioli (1445 - 1517), also known
as Friar Luca dal Borgo and the “Father of
Accounting”. Pacioli is credited for the "birth"
of accounting. In 1494, he wrote a textbook
that was a compilation of the mathematical and
accounting knowledge of his time. His textbook
provided the first printed description of the
double-entry accounting system used by
Venetian merchants in the late 15th century
including a similar accounting cycle as we
know it today. The system described journals
and ledgers with sections for assets, liabilities,
capital, income, and expenses found on the
modern accounting balance sheet.
Luca Pacioli - “The Father of Accounting”
c. 1495, Attrib to Jacopo de’ Barbari
 MODERN ACCOUNTING
As civilization evolved, businesses grew and so
did capital markets and with that…
accountability. Successes depended more and
more on accurate and dependable financial
documents. Through time, the role of the
accountant has become an integral part of
almost every aspect of day-to-day business and
governmental regulation. The history of
accounting has led modern accounting to
become a global, real-time integrated
information system driving the direction of
accounting expertise and emphasis on the
importance of the accounting profession.
 ACCOUNTANCY IN THE
PHILIPPINES
Accounting has been in practiced in the
Phils. since the Spanish period.
The seeds of accountancy as a recognized
profession were planted on March 17, 1923
(when Act No. 3105) was approved by the
Sixth Legislature. “An Act Regulating
Practice of Public Accounting; Creating the
Board of Accountancy (BOA); Providing for
Examination, for the Granting of Certificates,
and the Registration of Certified Public
Accountants.
 Origin of Accounting
(cont'd)
In the Phils., bookkeeping was introduced
by the Spaniards and the bookkeeper was
called Tenedor de Libro. Trade was
flourishing then not only between Spain and
the Phils. but long before that between the
Phils. and other Asian countries, as well,
China in particular. The first licensure
examination was given for Certified Public
Accountants in 1923 and the professional
association of accountants was established in
1929. Don Vicente Fabella, founder of the
Jose Rizal University in 1919, holds the
distinction of being the first Filipino CPA.
 BUSINESS, ITS MOTIVES AND
ROLE IN SOCIETY
Business affects almost all aspects of our
lives. We interact with several businesses
everyday because of the products and services
we need.
 A business is an economic unit that
controls resources and engages in buying and
selling of goods and services. A major
concern of a business is how best to use the
resources – what machines are needed, what
labor skills are required, how many men to
employ, how much fixed capital and working
capital are needed, what raw materials to use
– all with the end view of earning profit.
 BUSINESS ….. (CONT’D)
In business endeavor, success is possible when
money, machines, men and materials are used
efficiently a the least possible cost.
Most often success in business is measured in
terms of profit and increase in funds. Profits is
obtained when the amount you receive is more
than the amount you paid for the goods or
services you sold.
Profit generate more resources or funds for
the business. With more funds, there is a need
for business to expand.
* Both gov’t. and businesses benefit from one
another.
 Sources of Capital
The main source of capital is the owner or
investor.
If the business owner/entrepreneur does not
have enough funds, one may borrow from
relatives, friends or financing institutions such
as banks and cooperatives.
 Institutions helping Filipino entrepreneurs
fund their projects:
Tulay sa Pagunlad Inc., Bangko Kalayaan,
the new BPI micro finance program called BPI
Globe Banko, and the Rural Bankers Association
of the Phils.
 The successful entrepreneur is one who
creates new ideas or differentiate a product that
would entice customers to buy.
 BUSINESS RISK
Risk is the element of uncertainty in an
outcome. An endeavor like a business has
always an element of uncertainty – it is not
certain that the operation of the business will
turn out well, nor is it certain that owner will
recover what was invested nor is it certain that
the owner will recover what was invested nor is
it certain that the creditors will be paid. But
there are ways of reducing risks. Careful
planning and control by the manager reduce
risk. Another way is to make a careful
assessment of the form of business and the
type of operation one wants to put up.
 MANAGEMENT OF THE
BUSINESS
 The success of any business endeavor
will depend on many factors one of which
is good management.
 Management may be defined
simply as the art of directing people
and resources as efficiently as
possible with a view of accomplishing
the goal of the organization.
 The director or manager of the
organization is accountable for
generating adequate profit which is
usually is the mark of success of any
business endeavor.
 Management of the Business
(cont'd)
 It is important that authority and
responsibility for performance be
delegated to some people called
managers who are qualified to run the
business. A sole proprietorship being
simple in structure and operation may
not need the expertise of a manager. But
once the business grows and branches
out or once the business sells a great
number of products or services needing
the creation of departments or divisions,
then the organization becomes complex
and people with the right expertise have
to be hired.
 Management of the Business
(cont'd)
 For a business to be successful,
management must be efficient and
effective.
 Efficiency requires that the company’s
resource inputs (materials, labor hours) be
used at the least time, effort and cost to
produce the required output (products or
services).
 Effectiveness refers to the company’s
attainment of its goals in terms of being able
to produce and sell the number of products
or services as stated in the plan.
 Management of the Business
(cont'd)
•Management’s efficiency and effectiveness depends on
how the management functions are carried out.
• The management functions are:
- Planning, organizing, directing and controlling
decision making.
Planning – lining up of activities to be undertaken to
accomplish the goals set up.
Organizing – positions will be created, people will be
hired. Defining of role ( authority and responsibility.
Directing and controlling – overseeing the day to day
operation of carrying out the planned activities – act,
decide, agree, argue, question, approve, solve, and
ensure that daily activities conform with the planned
activities.
 Management of the Business
(cont'd)
Managers are hired to head diff.
departments of an organization: production,
finance, marketing, sales and human
resource.
Much of the work of these managers are
driven by an accounting information. The
accountant strives to assist management
accomplish its four areas of responsibility by
providing them with managerial reports in an
accounting information system called
managerial accounting.
 Business Entity
Forms
Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Characteristics of Business
Forms
Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
Businessentity
entity yes
yes yes
yes yes
yes
Legal
Legalentity
entity nono * nono * yes
yes
Limited
Limitedliability
liability nono nono yes
yes
Unlimited
Unlimitedlife
life nono nono yes
yes
Business
Businesstaxed
taxed nono nono yes
yes
One
Oneowner
ownerallowed
allowed yes
yes nono yes
yes
* Proprietorships and partnerships that are set up as
LLC’s provide limited liability.
 Corporation

owners of a corporation are called shareholders (or

stockholders).

When a corporation issues only one class of shares,

we call it ordinary shares (or share capital).
TYPES OF BUSINESS
ACTIVITIES
TYPES OF BUSINESSES
 AICPA Classic Definition of
Accounting (1941, restated 1953)

“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 a financial
character, and interpreting the results
thereof.
 AICPA Definition of
Accounting, 1970

“..to provide quantitative

information, primarily financial in
nature, about economic entities that
is intended to be useful in making
economic decisions.”
 Class definition of
Accounting
Accounting is the process of:

Economic For making

Identifying,
information Decisions &
Measuring, &
about an Informed
Communicating
entity judgments
 Users of Accounting
Information
Management
Investors
Creditors
Employees / Unions
Government Agencies / Regulatory bodies