Introduction

Accounting plays an important role in keeping businesses running. Often referred to as the
language of business, accounting is fundamental to the communication of financial
information. Using accounting information, business owners and managers can determine
which of their products are profitable, how much to pay in taxes, how much capital is
required for further projects, whether to lease or buy an asset, and so on. Potential
investors, creditors and regulatory agencies can evaluate the financial performance and
position of the business and make informed decisions with the help of accounting.

Definition of Accounting

Accounting is a process of identifying, recording and communicating economic information

that is useful in making economic decisions.

Essential elements of the definition of accounting

1. Identifying – The accountant analyzes each business transaction and identifies

whether the transaction is an “accountable event” or “non-accountable event.” This is
because only “accountable events” are recorded in the books of accounts. “Non-
accountable events” are not recorded in the books of accounts.
2. Recording – The accountant recognizes (i.e., records) the “accountable events” he
has identified. This process is called “journalizing.” After journalizing, the accountant
then classifies the effects of the event on the “accounts.” This process is called
“posting.”
3. Communicating – At the end of each accounting period, the
accountant summarizes the information processed in the accounting system in order
to produce meaningful reports. Accounting information is communicated to interested
users through accounting reports, the most common form of which is the financial
statements.

Nature of accounting

Accounting is a process with the basic purpose of providing information  about economic
activities intended to be useful in making economic decisions.

Users of Accounting Information

1. Internal users – those who are directly involved in managing the business.

Examples:

 Business owners who are directly involved in managing the business

 Board of directors
 Managerial personnel

2. External users – those who are not directly involved in managing the

business. Examples:
  Existing and potential investors (e.g., stockholders who are not directly involved in
managing the business)
 Lenders (e.g., banks) and Creditors (e.g., suppliers)
 Non-managerial employees
 Public

Basic accounting concepts

Below is a list of the basic accounting concepts lifted from Conceptual Framework and
Accounting Standards by Zeus Vernon B. Millan, some of which will be discussed in greater
detail during the second quarter of the semester.

1. Double-entry system – each accountable event is recorded in two parts – debit and
credit.
2. Going concern - the entity is assumed to carry on its operations for an indefinite
period of time.
3. Separate entity – the entity is treated separately from its owners.
4. Stable monetary unit - amounts in the financial statements are stated in terms of a
common unit of measure; changes in purchasing power are ignored.
5. Time Period – the life of the business is divided into series of reporting periods.
6. Materiality concept – information is material if its omission or misstatement could
influence economic decisions.
7. Cost-benefit – the cost of processing and communicating information should not
exceed the benefits to be derived from it. 
8. Accrual Basis of accounting – effects of transactions are recognized when they occur
(and not as cash is received or paid) and they are recognized in the accounting
periods to which they relate.
9.  Historical cost concept – the value of an asset is determined on the basis of
acquisition cost.
10. Concept of Articulation – all of the components of a complete set of financial
statements are interrelated.
11. Full disclosure principle – financial statements provide sufficient detail to disclose
matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.
12. Consistency concept – financial statements are prepared on the basis of accounting
policies which are applied consistently from one period to the next.
13. Matching – costs are recognized as expenses when the related revenue is
recognized.
14. Residual equity theory – this theory is applicable where there are two classes of
shares issued, ordinary and preferred. The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity = Ordinary Shareholders’ Equity.”
15. Fund theory – the accounting objective is the custody and administration of funds.
16. Realization – the process of converting non-cash assets into cash or claims for cash.
17. Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty,
such that assets or income are not overstated and liabilities or expenses are not
understated.
Brief history of accounting
https://www.youtube.com/watch?v=qGEOHCXLJrI

•       Accounting can be traced as far back as the prehistoric times, perhaps more than
10,000 years ago.

•       Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which
were usually cones, disks, spheres and pellets. These tokens correspond to commodities
like sheep, clothing or bread. They were used in the Middle West in keeping records. After
some time, the tokens were replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing. (Source: http://EzineArticles.com/456988)

•       Double entry records first came out during 1340 A.D. in Genoa.

•       In 1494, the first systematic record keeping dealing with the “double entry recording
system” was formulated by Fra Luca Pacioli, a Franciscan monk and mathematician.
The “double entry recording system” was included in Pacioli’s book titled “Summa di
Arithmetica Geometria Proportioni and Proportionista,” published on November 10, 1494 in
Venice. 

•       The concept of “double entry recording” is being used to this day. Thus, Fra Luca
Pacioli is considered as the father of modern accounting.

Forms of business organizations

https://www.youtube.com/watch?v=mPRCxIphQzM

Sole Proprietorship – consists of one individual doing business called the proprietor. The
manager is usually the owner also. All profits belong to the proprietor. 

Partnership – consists of two or more persons who bind themselves to contribute money,

property, or industry to a common fund, with the intention of dividing the profits among
themselves. The co-owners are called partners. 

Corporation – is an artificial being created by operation of law, having the rights of

succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. The owners in a corporation are called stockholders, evidenced by
their holdings of shares of stocks.

Types of business operations

https://www.youtube.com/watch?v=BmjSFxn4lE4
Business entities are usually engaged in business operations that increase the value of
the enterprise and earn a profit. These activities are performed daily to generate sufficient
revenues.

Types of Business According to Activities

1. Service business
2. Merchandising (Trading)
3. Manufacturing

Overview of the accounting cycle

https://www.youtube.com/watch?v=eUQTeo7bfeI (start at 2:06)