UNIT 1: INTRODUCTION TO ACCOUNTING

1.1 Definition, Purpose and Nature of Accounting

1.1.1 The Definition and Nature
Many people may not have the idea of what accounting is and some may have very
limited understanding about this matter. Despite all these, it has to be noted that you
actually experience accounting in your daily lives without you knowing it.

When you ride a taxi or a cab, you give out money and that is your expense. The driver,
on the other hand, earns an income.

At home, your family’s income is being handled by either of your parents. That income is
being allocated or distributed for various purposes like food, clothing, transportation,
health and education.

In all those situations, there is ACCOUNTING.

But what really is Accounting?

The definition of ACCOUNTING given by the Accounting Standards Council (ASC) can be
broken down as follows:

- Service activity
Accounting services are rendered not by any random people but by
professional accountants. Meaning, Accounting is a profession.

- About quantitative information & Financial in nature

The kinds of information that can be gathered through accounting do not
involve those that are qualitative but only quantitative and financial in
character. Anything that goes beyond financial character is no longer covered
by accounting.

In other words, we are talking about monetary values.

- Useful in making economic decisions

This means that the information available through accounting is being
channelled and used in arriving at certain decisions.

For example, if you want to expand your business and open a new outlet in
your locality, you would have to consider the amount of your resources and
existing liabilities. You are most likely to ask these questions to yourself:

“Do I have enough money for this?” or “Will I be able to borrow money from the
bank so that I can open a new outlet?”
 These questions can be answered by looking into the financial information of
your business. The level or amount of your resources/properties, the amount
of your obligations, your income and expenses are recorded by your
accountant and you can access these information. Upon knowing the answers
to the questions, you as the business owner can make an economic decision.

Meanwhile, the definition from the American Institute of Certified Public Accountants
(AICPA) mentions the four functions of ACCOUNTING such as:
- recording
- classifying
- summarizing
- interpreting the results

*you will get to know more of these four functions as we go deeper.

1.1.2 The Purpose

Remember the four functions of Accounting as part of its definition?

In a business perspective, a business owner would have to keep track of the transactions
his business has entered into. He also needs to keep track of his level of income, expenses,
debts and resources.

The owner won’t be able to do all those tasks especially if he has no background in
accounting. This is where recording comes in with the help of a bookkeeper or an
accountant. The job of an accountant doesn’t just stop at recording but he also has to help
the business with the other three (3) functions.

Eventually, when the process is over, the accountant will prepare reports known as
Financial Statements. These are reports that summarize the resources (assets),
obligations (liabilities), capital, income and expenses of the business. By using the
financial statements, it will be easier for the business owner to have an understanding of
how the business is doing—
whether the business is
profiting or losing and
whether it is in good financial
status or not.