FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS

Lecture 1: Accounting and Accountancy define

 Accounting or accountancy is the art of collecting, analyzing,

recording, posting, summarizing, and reporting financial transactions
in a significant and orderly manner to provide useful information that
is essential to decision-making.
 Accounting also includes the function of interpreting
the significance of the relationships of information in
financial statements.
 Accounting is oftentimes referred to as the language of
business.
 Financial statements are the financial reports produced in the
accounting process and consist of the income statement, balance
sheet, equity statement, and the statement of cash flows
 The financial statements are used to communicate the
profitability and financial stability of a business.
 The financial statements are used to indicate whether
the business made profits or suffered losses, or if the
business will be able to pay its debts on time.

Origin of Accounting

1. The earliest accounting practice originated in Mesopotamia in

the Middle East.
2. The Egyptians and Babylonians developed a system of counting,
recording, and controlling money with documents listing
expenditures, goods received and traded. These transactions were
traceable to the funding activities of the temples.
3. The Romans
4.  also established some form of financial information system of
recording transactions involving cash, commodities, and other
financial activities by military personnel of the Roman Empire.
5. During the Mauryan Empire in India, Chanakya, an Indian
philosopher and economist and chief adviser to the emperor,
wrote a political treatise called Arthashastra that described
procedures for maintaining books of accounts for some government
states.
6. Italian Luca Pacioli, the Father of Accounting and Bookkeeping, was
the first person to publish a book on double-entry bookkeeping,
Summa de Arithmetica, Geometrica, Proportioni et
Proportionalita or the Review of Arithmetic, Geometry, Ratio
and Proportion.
7. The modern profession of chartered accountants began in Scotland.
Accounting became an organized profession in the nineteenth
century.
Lecture 2: The Accounting Profession in the Philippines
 Accounting is an important profession that provides services to
businesses, government, and the investing public. Accountants
have an enormous responsibility since financial information from
accounting reports is used by the various stakeholders in making
decisions. Therefore, the government enforces strict laws and
regulations in both the academic requirements for obtaining an
accountancy degree and in the practice of the accounting
profession.

1
FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
 Republic Act 9298 (RA 9298), known as the Philippine
Accountancy Act of 2004 signed into law on July 28, 2003, is
the law that regulates the practice of accountancy in the
Philippines. RA 9298 provides for the
(1) standardization and regulation of accounting education;
(2) examination for registration of certified public accountants;
and
(3) supervision, control, and regulation of the practice of
accountancy in the Philippines.
 By RA 9298, the Commission on Higher Education (CHED)
issued the Memorandum Order 27 Series of 2017 (CMO
27.S2017) which provides for the revised policies, standards, and
guidelines for universities and colleges for the degree Bachelor of
Science in Accountancy. CMO 27.S2017 prescribes the minimum
courses that students should complete to earn the Accountancy
degree, which will qualify them to meet the academic requirements
for the licensure examination to become a Certified Public
Accountant (CPA).
The Board of Accountancy (BOA) of the Professional Regulation Commission
(PRC) is mandated to administer the licensure examination for CPAs. The
examination is given twice a year, in May and October. The licensure
examination covers topics in:
 Financial Accounting and Reporting
 Advanced Financial Accounting and Reporting.
 Management Advisory Services.
 Auditing.
 Taxation.
 Regulatory Framework for Business Transactions.
Successful board passers take their professional oath before the Board
after the release of the results of the examination.
The Philippine Institute of Certified Public Accountants (PICPA) is the
national organization of CPAs that catalyzes the accounting profession.
There are several local geographic chapters of PICPA, whereby all cities and
provinces are represented to coordinate with the national PICPA. Also, there
are four sectoral bodies, namely commerce and industry, education and
academe, government, and public practice. The government through its
various agencies, such as the Bureau of Internal Revenue, the Bureau of
Customs, and other agencies, coordinates with PICPA in the conduct of
studies to evaluate the impact of the changes that the government is
considering to implement.
LECTURE 3: Areas or Branches of Accounting
Areas or Branches of Accounting
An accountant can engage in different areas of expertise in the
practice of his profession. The opportunities requiring the services of an
accountant are expansive. The accountant can work in various departments
in business organizations, government agencies, academic, and research
institutions, as well as provide consultancy services. The following are the
different areas or branches of accounting:
1. Financial accounting. This branch of accounting involves the
analysis and recording of financial transactions and the production
of financial reports, particularly the financial statements that
adhere to prescribed accounting principles. These financial reports
provide information that is useful for decision-making.
2. Management accounting. This involves the preparation of timely,
reliable, and useful management reports to assist the various users
2
FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
of financial information to render a reasonable decision based on
relevant information.
3. Government accounting. This branch of accounting produces
accounting information and financial reports that are useful to the
national government and the local government units.
4. External auditing. Also known as public accounting, this involves
an examination of financial records and financial statements of the
company by an independent Certified Public Accountant (CPA),
who issues an auditor’s report on the financial statements after
conducting an audit in accordance with applicable auditing
standards.
5. Internal auditing. This is an audit function that is done by the
employees of the company to strengthen internal control, promote
adherence to company policies, and minimize the risks to company
resources.
6. Tax accounting. This involves accounting methods, procedures,
and policies about taxation with the objective of tax compliance at
the least cost to the company. It is governed by the Internal
Revenue Code and other implementing rules and regulations
promulgated nationally by the Bureau of Internal Revenue and
locally by the local government units.
7. Cost accounting. This emphasizes cost analysis to minimize or
reduce costs in order to improve the profitability of the company. It
also involves setting up budgeted as well as standard costs and
analyzing the causes for variances of actual costs with established
budgeted costs or standard costs.
8. Accounting education. This concerns the teaching of accounting
and the design and improvement of the accounting curriculum and
the syllabus of each accounting subject that requires the
coordination of the schools offering accounting courses, the Board
of Accountancy (BOA), the Commission on Higher Education
(CHED), and the Philippine Institute of Certified Public
Accountants (PICPA).
9. Accounting research. This involves research on such topics as the
impact of economic and financial events on the accounting
process, reporting, systems, methods and procedures, and the
relevance of these events to the practice of accounting and the
impact to the clientele
10. Forensic accounting. This branch is becoming popular as
business crimes are being committed that are harmful to the
investing public. Forensic accounting makes use of accounting and
auditing procedures to extract financial information in investigative
functions to be used in litigation in a court of law.
LECTURE 4: Career Opportunities for Accountants
The CPA or external auditor is a person who examines the financial
records of the business and issues an auditor's report where he expresses an
opinion on the financial statements of the business.
Aside from public accounting, the accountancy profession offers other areas
of career opportunities where the accountant can choose to hone his skills.
The management accountant is a person who is employed in a business
organization to provide his services to help management in decision-making.
The tax accountant provides his expertise to individuals and businesses to
enable his clients to comply with the various taxation rules and regulations.
The budget accountant analyzes the budget and evaluates the causes of
discrepancies between the budget and the actual amounts earned or spent
by the business. The cost accountant studies the cost and expenses and
makes recommendations on how to minimize costs to improve the profits of
the business. The cost accountant also sets the standard costs for
3
FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
manufacturing companies. The internal auditor is an employee of the
business who makes sure that internal control procedures are followed to
protect the interests of the business. Financial planning and forecasting are
functions that include predicting future financial results and financial
condition based on assumptions from the different variables such as interest
rates, inflation rate, sales growth, sales volume, pricing considerations, and
other prevailing factors existing in the environment where the business
operates.
Bookkeeping, Accounting, and Auditing
Many people are confused about bookkeeping, accounting, and
auditing. Bookkeeping is the recording phase of the accounting process. It
involves recording accounting journal entries in the general journal and
posting these general journal entries in the general ledger. The general
journal and the general ledger are the two books of accounts; hence, the
person who keeps and maintains these books is called the bookkeeper.
Bookkeeping is only one of the steps involved in the accounting process. As
you will see later, there are other activities involved in accounting, in
addition to bookkeeping. The accountant performs all the steps in the
accounting cycle. Therefore, accounting covers a wider scope of activities
compared with bookkeeping. Auditing (sometimes referred to as public
accounting) involves the application of generally-accepted auditing
standards, methods, testing. and procedures in order to determine if
business entities adhere to generally-accepted accounting principles in the
preparation of their financial statements.
LECTURE 5: Users of Financial Information
Users of financial information can be classified into:
1. external users and
2. internal users.
External users of financial information are those who are not part of the
operation of the business such as the creditors, investors, government, labor
unions, and the general public.
1. Creditors - outside parties who provide loans to the business
 examples: banks, financial institutions, and trade suppliers
 use the financial statements to evaluate if the borrower can
pay its loans on time.
2. Investors - outside parties who invest money into the business with
the hope that they will earn money from their investments.
3. Government - user of the financial information because taxes
collected are based on the financial statements that the business
entity files with government agencies, such as the Bureau of Internal
Revenue (BIR)
4. Labor unions - interested in the financial condition of a business in
order to assess if the business can afford improvements in wages and
fringe benefits that it will propose during labor-management
bargaining negotiations. It is impractical for labor unions to ask for
wage and benefit improvements that the business entity cannot
afford.
5. General public - also a user of the financial information. Sometimes,
lawsuits are filed against business entities and the financial
statements can show the financial capability of the business to pay
the amount of damages and legal claims filed against it.
Internal users of financial information are those who are part of the
operation of the business.
1. Management - order to evaluate its performance and to address
concerns that require management action.
4
FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
 if it has money to support its business plans
 also makes decisions with respect to salary and improvement
of benefits, and negotiations with labor unions, therefore it
must be knowledgeable about its financial ability and
capability to satisfy many of its commitments.
2. Employees want to work for business entities that are profitable.
LECTURE 6:Generally-Accepted Accounting Principles (GAAPs)
For purposes of this book, accounting principles, concepts,
procedures, and assumptions are used synonymously. These are accounting
practices that are used as the framework that guides the recording of
financial transactions and the preparation of financial statements to
preserve their reliability, integrity, and comparability. These are adopted in
order to protect all users of financial information and provide them with
reliable information that is useful in decision-making.
1. The principle of going concern stipulates that the business entity will
continue its normal operations and will not terminate its business
operations. Can you imagine if this principle is not applied in the
recording of business transactions and in the preparation of financial
statements? The user of the financial statements will always doubt
the continuous existence of the business and perhaps will not be
interested in investing into the business.
2. The principle of conservatism provides that if there is a choice
between two equally acceptable accounting methods or procedures,
the alternative that will result in lower net income or less favorable
effect on balance sheet items must be used. The principle of
conservatism prevents companies from manipulating financial
transactions to reflect more favorable outcome.
3. The principle of separate business entity states that the business
entity has a personality separate and distinct from its owners. All
business transactions are analyzed and recorded from the point of
view of the business, not from the point of view of the owner. The
assets of the business are not the assets of the owner. The owner
cannot use the asset of the business to pay for his personal expenses
and treat his personal expenses as expenses of the business.
4. The principle of consistency states that accounting principles, rules,
methods, and procedures must be applied in the same manner from
year to year in order to ensure the comparability and maintain the
integrity of financial statements. Do you think that financial
statements would be reliable if businesses could simply use
accounting principles, methods, rules, and procedures as they please,
changing from one method to another, thus, producing better results
in their favor? If this were allowed, naturally, businesses would
switch to accounting practices that would be favorable to them from
year to year. It would be very difficult to make evaluations of financial
statements from year to year if they were prepared in an inconsistent
manner. However, changes in accounting principles, methods, rules,
and procedures are allowed if the change will produce a fairer
presentation of the financial statements. If an accounting change was
made, proper disclosure must be made in the financial statements
and of the effect in prior period financial statements.
5. The principle of full disclosure provides that accounting information
and other relevant information must be identified and explained in
the financial statements so that the financial statements will provide
better information and they will not be misleading to users.
Disclosures are shown in the financial statements either as footnotes
accompanying the financial statements or shown in the body of the
financial statements as a parenthetical note after the affected

5
FA MODULE 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
accounts. Disclosures are made in order to provide information to
users of financial statements so that they are guided properly when
they make decisions.
6. The principle of materiality is closely related to the full disclosure
principle. According to the principle of materiality, businesses are
obligated to disclose in their financial statements significant or
material information that may affect the judgment of a reasonably
informed person in making a decision, which may be influenced by
knowing or not knowing the material information. in actual practice,
some companies establish specific cutoff amounts for specific
accounts to define material amounts.
7. The principle of matching of costs and revenues provides that
revenues must be recorded in the same accounting period or over the
same periods, as expenses, costs, or expenditures are spent or will
provide the benefits, to earn the revenues.
8. The principle of monetary measurement means that money is the
most appropriate unit of measure used in recording financial
transactions and reporting financial statements.
9. Related to the monetary measurement principle is the principle of
stable currency, which states that the purchasing power of the
currency used in the recording of transactions and in the preparation
of the financial statements is not subject to major fluctuations in
value. Therefore, users of the financial statements are confident that
the monetary values expressed in the financial statements will
maintain its integrity since the currency is stable and not subject to
major devaluation.
10. The principle of objectivity provides that financial information that is
reflected in the accounting records and in the financial statements is
unbiased and verifiable by objective and fair validation of
documentary evidence. Before transactions are recorded, source
documents (invoices, official receipts, checks, etc.), which are always
verifiable, are used as the basis for recording the entries in the books
of accounts. Businesses cannot invent or manufacture journal entries
in their books of accounts simply because they want to.
11. The principle of realization identifies that changes in assets,
liabilities, revenues, costs, capital, and expenses should not be
recognized until the change is definitely certain and that the change
is measurable in monetary terms to justify the recognition in the
books of accounts. Businesses do not record the sale until it is
definitely certain that it has occurred; inquiries from prospective
customers are not recognized as sales. The principles of conservatism
and objectivity support income realization.