Fundamentals of

Accountancy,
Business and
Management 1&2
• meet the ever-increasing
needs for financial
information
• used in decision-making
purposes ACCOUNTING
• language of business
Introduction to accounting
Accounting has evolved, as in the case of medicine and law, in
response to the social and economic needs of the society. (for decision
making)
Accounting is relevant in all walks of life, and it is absolutely essential
in the world of business. Accounting is the system that measures
business activities, processes that information into reports and
communicates the results to decision-makers. (language of business)
No business could operate very long without knowing how much it was
earning and how much it was spending.
A sound understanding of this language will bring about a better
management of the financial aspects of living. (e.g. personal financial
planning, education expenses, car amortization, business loans,
income taxes, investments)
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ people have counted and kept records
throughout the history;
⋄ traced far back as 8500 B.C. (clay
tokens – cones, disks, spheres and
pellets – found in Mesopotamia
(modern Iraq);
⋄ represents sheep, jugs of oil, bread or
clothing;
⋄ often sealed in clay balls, called bullae,
which were broken on delivery so the
shipment could be checked against the
invoice (first bill of lading)
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ symbols impressed on wet clay tablets
replaced the tokens (experts consider this
stage of record keeping the beginning of
the art of writing)
⋄ During the 1st dynasty of Babylonia (2286-
2242 B.C.) its law which was based on
the Code of Hammurabi, requires
merchants trading goods to give buyers a
sealed memorandum containing the
agreed price before it can be considered
enforceable (recorded by the Scribe on a
small mound of clay with the parties
affixing their signatures on it
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ around 3600 B.C. in Babylonia, clay tablets also
recorded payments of wages (keep track of cost
of labor and materials used in building structures
as in the case of pharaohs of Egypt)
⋄ Factors attributed by the presence of
bookkeeping in the ancient world:
⋄ The invention of writing
⋄ Introduction of Arabic Numerals
⋄ The decimal system
⋄ The diffusion of knowledge in Algebra
⋄ The presence of inexpensive writing
materials
⋄ The rise of literacy
⋄ The existence of a standard medium of
exchange
 Primitive Middle Ages

EVOLUTION OF ACCOUNTING
» Middle Ages
⋄ As a result of Crusades (a medieval
military expedition, one of a series
made by Europeans to recover the
Holy Land from the Muslims in the
11th, 12th, and 13th centuries), literacy
has become widespread
⋄ Arabic numerals were also being
used as a result of trade (columns
added or subtracted)
⋄ Use of credit was prevalent and a
semblance of an international banking
system was also functioning
 Primitive Middle Ages

EVOLUTION OF ACCOUNTING
» Middle Ages
⋄ The Inca Empire, used knotted cords of
different lengths and colors called quipu
to keep accounting records
⋄ Development of more formal accounting-
keeping records is attributed to the
merchants and bankers of Florence,
Venice and Genoa during the 13th to 15th
centuries
⋄ Double-entry bookkeeping is not a
discovery of science; it is the outcome of
continued efforts to meet the changing
necessities of trade. (a decisive event in
European economic history)
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» The Florentine Approach
⋄ Renaissance Florentine markets were a fascinating
combination of formalization, in the form of account
books and double-entry bookkeeping, and of informal
social networks, constructed out of the surrounding
rules of Florentine sociality. To them, doing business
and living life were extensions of each other.
⋄ The earliest evidence of business bookkeeping in
Florence, France was evidenced by the bank ledger
fragments of 1211 (transcribed in 1887 by Pietro
Santini) and with the development of accounting in
Tuscany, Italy during the 13th century, as evidenced
in the account-books or extracts.
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» The Florentine Approach
⋄ The emergence of double entry itself, was
first witnessed in the "ledgers“ of Renieri
(or Rinieri) Fini & Brothers (1296-1305)
and Giovanni Farolfi & Company (1299-
1300).
» Giovanno Farolfi & Company
⋄ was a firm of Florentine merchants whose
head office was at Nimes in Languedoc,
in the kingdom of France
⋄ Financial records that he kept for the
firm's branch in Salon, Provence, survive
from 1299-1300.
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» Amatino Manucci
⋄ Inventor of double-entry bookkeeping;
⋄ managed to construct a comprehensive
and fully-articulated set of double entry
records, with a regular balancing
procedure on closure of the general
ledger;
⋄ gave importance to the aspect of financial
control
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» The Method of Venice
⋄ Luca Pacioli, a Franciscan friar and a
celebrated mathematician, is generally
associated with the introduction of
double-entry bookkeeping;
⋄ In 1494 he published his book, Summa
de Arithmetico, Geometria, Proportioni et
Proportionolito or "Everything about
Arithmetic, Geometry, Proportions and
Proportionality, " which includes,
Particularis de Computis et Scripturis or
"Details of Calculation and Recording, "
describing double-entry bookkeeping.
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» The Method of Venice
⋄ Although Pacioli made no claim to
developing the art of bookkeeping, he has
been regarded as the father of double-
entry accounting. He stated that the
purpose of bookkeeping was "to give the
trader without delay information as to his
assets and liabilities.”
⋄ Pacioli also advised the computation of a
periodic profit and the closing of the
books. He said, "It is always good to close
the books each year, especially if you are
in a partnership with others. Frequent
accounting makes for long friendship. "
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» Savary and Napoleonic Commercial Code
⋄ The earliest systematized form of accounting regulation
developed in continental Europe, starting in France in
1673. The government introduced the submission of an
annual fair value statement of financial position to protect
the economy from bankruptcies.
⋄ The Napoleonic code or code Napoleon is the French civil
code, established under Napoleon Bonaparte on March
21, 1804. The commercial Code was adopted in 1807.
⋄ The concept of lower of cost or net realizable value by
Jacques Savary (If this merchandise is starting to
deteriorate, or go out of style, or is that which one judges
he could find at the factory or wholesalers at 5% less, it
must be reduced to this price)
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» Savary and Napoleonic Commercial Code
⋄ In the 17th century, Nicolas Petri was the
first person to group similar transactions
in a separate record and enter the
monthly totals in the journal, rather than
recording all transactions seriatim, that is,
in a series.
⋄ In 1769, Benjamin Workman published
The American Accountant, the earliest-
known American accounting textbook.
 Primitive Middle Ages Florentine Venice Industrial

EVOLUTION OF ACCOUNTING
» Industrial Revolution, Corporate Organization,
Railroads, United States Steel
⋄ This revolution, which occurred in England from the
mid-18th to the mid-19th century, changed the
method of producing commercial goods from the
handicraft method to the factory system. With this
change came the problem of costing for a large
volume of products.
⋄ The expanded business operations initiated by the
Industrial Revolution required increasingly large
amount of funds to build factories and purchase
machinery. This need resulted to the development
of the corporate form of organization. (managers
report to corporate owners)
 Primitive Middle Ages Florentine Venice Industrial

EVOLUTION OF ACCOUNTING
» Industrial Revolution, Corporate Organization, Railroads,
United States Steel
⋄ Railroads, heavy users of debt financing in the late
1800s, were the first American firms to issue balance
sheets to absentee creditors. By 1880, the US railroad
system had accumulated $4. 6 billion of investments
which was roughly equivalent to 40% of the American
economy’s annual output. (depreciation)
⋄ A 1912 Journal of Accountancy editorial complained
that that depreciation had become a tool used by
management to counter fluctuations in profits. In good
years, heavy depreciation charges were made. Bad
years saw no provision or an inadequate charge.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Schmalenbach and The Model Chart of
Accounts
⋄ Eugen Schmalenbach, German academic
and economist, contributor to German
language journals on the subjects of
economics, business management and
financial accounting;
⋄ publisher of The Model Chart of Accounts;
⋄ Important information could be gained
from a firm’s accounts
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with Financial
Accounting
⋄ In the year 10 CE, Xin Dynasty's Emperor Wang
Mang instituted an unprecedented tax – the
income tax – at the “rate of 10% of profits, for
professionals and skilled labor.”
⋄ To pay for weapons and equipment in
preparation for the Napoleonic wars) William Pitt
the Younger of Britain levied an income tax in his
budget of December 1798.
⋄ The 1862 Union Government established the
Bureau of Internal Revenue to assess personal
and corporate income taxes to help finance the
Civil War.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with
Financial Accounting
⋄ In 1943, the US Congress passed income tax
withholding as the only way to collect on high
tax rates to fund World War ll.
⋄ The Philippines‘ Bureau of Internal Revenue
(BIR) was created through the passage of
Reorganization Act No. 1189 dated July 2,
1904.
⋄ 0n August 1, 1904, the BIR was formally
organized and made operational under the
Secretary of Finance.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with
Financial Accounting
⋄ Financial accounting is conservative and it's
about matching efforts and results. Tax
accounting, in turn, is about improving the
amount and timing of collections.
⋄ Note that "taxes are the lifeblood of the
government and their prompt and certain
availability are an imperious need
(Commissioner vs. Pineda, 21 SCRA 105).“
This difference in perspective produces
conflicts.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Information Age
⋄ Dan Brinklin and Bob Frankston wrote
VisiCalc for the Apple II, the first electronic
spreadsheet, the most important business
application for the personal computer.
⋄ Tremendous advances in information
technology have further revolutionized
accounting in recent years. Tasks those are
time-consuming when done manually can
now be done with speed, consistency,
precision and reliability by computers.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Information Age
⋄ There is an abundance of accounting
applications, and modules to suite the
businesses‘ various needs. With the
proliferation of netbooks and smartphones
along with its mind-boggling array of
applications, surely, doing business will
change. This will necessarily bring
changes to the field of accounting. As
they say information technology is it, you
either breathe it or perish.
 ROLE OF ETHICS IN BUSINESS

Ethics – concerned with right or wrong and

how conduct should be judged to be good or
bad

Ethical dilemma – situation in which there is

no obvious right or wrong decision but rather a
right or a right answer
EXAMPLES: :EXAMPLES
White collar crime Fiduciary responsibilities
Whistle-blowing Sexual harassment
Conflicts of interest Discrimination
child labor
Professional vs personal ethics
To remain competitive, a company decided to use cheaper lumber in the
ladders it sells; although this may, in some instances, cause injury
A staff is asked to take part in a clandestine investigation of the personal life of
an employee
A superior directs a subordinate not to hire a qualified individual because he is
“not his type”
A human resource manager must lay off a staff who desperately needs the
income and the staff is without any good alternative job option
Having privilege or insider information which can surely help the trusted staff
earn a significant amount of money from the stock market
Ethical reasoning
Sleep-test ethics
 TYPES OF BUSINESS

Raw
Services Trader Manufacture
designing materials
buying and growing or
selling products,
selling extracting
people’s time aggregating
products raw materials
components

Infrastructure Financial Insurance

receiving pooling
selling the
deposits, premiums of
utilization of
lending and many to meet
infrastructure
investing money claims of a few
 FORMS OF BUSINESS ORGANIZATION

• has a single • owned and • owned by

Partnership

Corporation
Sole Proprietorship
owner called the operated by two stockholders
proprietor or more persons • an artificial
• small service- who bind being created
type businesses themselves to by operation of
and retail contribute law, having the
establishment money, rights of
property, or succession and
industry to a the powers,
common fund, attributes and
with the properties
intention of expressly
diving profits authorized by
among law or incident
themselves to its existence
 ACTIVITIES IN BUSINESS
ORGANIZATION

Financing
Operating • used to obtain
• use of resources and manage
to design, financial
produce, resources
distribute and
market goods
and services

Investing
• acquire other
resources used in the
transform-ation
process
 DEFINITIONS OF ACCOUNTING

Accounting is a service activity. Its function is

to provide quantitative information, primarily
financial in nature, about economic entities
that is intended to be useful in making
economic decisions. (Statement of Financial
Accounting Standards No. 1, “Basic Concepts
and Accounting Principles Underlying
Financial Statements of Business Enterprises”
(Manila: Accounting Standards Council, 1983)
par. 1)
 DEFINITIONS OF ACCOUNTING

Accounting is an information system

that measures, processes and
communicates financial information
about economic entity. (Statement of
Financial Accounting Concepts No. 1
“Objectives of Financial Reporting by
Business Enterprises” (Norwalk,
Conn.: Financial Accounting Standards
Board, 1978), par. 9)
 DEFINITIONS OF ACCOUNTING

Accounting is the process of identifying,

measuring and communicating
economic information to permit
informed judgements and decision
users of the information (American
Accounting Association, “A Statement of
Basic Accounting Theory” (Evanson, III.:
American Accounting Association, 1966)
par. 1)
 DEFINITIONS OF ACCOUNTING
Accounting is an 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
(American Institute of Certified Public
Accountants, “Review and Resume”,
Accounting Terminology Bulletin No.
1 (New York: AICPA 1953), par 9)
 FUNDAMENTAL CONCEPTS
OF ACCOUNTING PROCESS
Periodicity Stable Monetary
Entity Concept
Concept Unit Concept
• accounting • entity’s life is • the Philippine
entity is subdivided into peso is a
separate from equal periods reasonable unit
other for reporting of measure
organizations purposes and that its
and individuals purchasing
power is
relatively
stable.

GAAP (generally accepted accounting principles) – encompasses the conventions,

rules and procedures necessary to define accepted accounting practice at a particular
time.
 BASIC PRINCIPLES
• records and statements are based on the most reliable data
Objectivity Principle available

Historical Cost • acquired assets should be recorded at their actual cost

Revenue Recognition • recognized when goods are delivered or services are

Principle rendered or performed

Expense Recognition • recognized when expenses are incurred in producing goods

Principle and services

• all relevant information that would affect the user’s

Adequate Disclosure understanding and assessment be disclosed in FS

• concerned with information that is significant enough to

Materiality affect evaluations and decisions

• use of accounting method from period to period to achieve

Consistency Principle comparability over time within a single enterprise
 ACCOUNTANCY ACT OF 2004

Republic Act No. 9298, signed into

law by President Gloria Macapagal-
Arroyo
on May 13, 2004
 ACCOUNTANCY ACT OF 2004
Practice of
Public
Accountanc
y

Scope Practice in
Practice in
Government of Commerce
and Industry
Practice

Practice in
Education/
Academe
 ACCOUNTANCY ACT OF 2004
The Professional Regulatory Board of
Accountancy is the body regulating the
practice of Accountancy in the
Philippines.

BOA CHAIRMAN: Hon. Noe G. Quiñanola

BOA VICE CHAIRMAN:Hon. Marko Romeo L. Fuentes
BOA MEMBERS: Hon. Gloria T. Baysa
Hon. Samuel B. Padilla
Hon. Thelma S. Ciudadano
Hon. Arlyn S. Villanueva
Hon. Gervacio I. Piator
 ACCOUNTANCY ACT OF 2004
Financial
Accounting
and
Reporting
Advanced
Financial
Auditing Accounting
and
Reporting

Scope of
Examination

Management
Advisory Taxation
Services

Regulatory
Framework
for Business
Transactions
 CODE OF ETHICS FOR PROFESSIONAL
ACCOUNTANTS
complying with
not allowing relevant laws
maintaining
bias, conflict of respecting the and
should be professional
interest or confidentiality regulations;
straightforward knowledge and
undue of information avoiding any
and honest skill at the level
influence of acquired action that
required
others discredits the
profession

Professional
Professional
Integrity Objectivity Competence Confidentiality
Behavior
and Due Care

Code of Ethics
 PROFESSIONAL ORGANIZATION

The Philippine Institute of Certified Public

Accountants (PICPA) is the integrated national
professional organization of CPAs in the
Philippines accredited by the BOA and the PRC.
Objectives:
To protect and enhance the credibility of the CPA
certificate in the service of the public
To maintain high standards in accounting education
To instill ideals of professionalism, ethics and
competence among accountants
To foster unity and harmony among members
 BRANCHES OF ACCOUNTING
Cost
Bookkeeping,
Auditing Bookkeeping
Costing, and
Cost Accounting

Financial Financial Management

Accounting Management Accounting

Government
Taxation
Accounting
1.Auditing – service to public; An external audit is the independent
examination that ensures the fairness and reliability of the reports that
management submits to users outside the business entity; independent
auditor’s report; conflict of interest; diff of external and internal auditors
(accuracy of business records, uncover internal control problems and
identify operational difficulties); internal auditors perform routine tasks
and undertake detailed checking; external auditors are likely to go in for
much more selective testing (they work closely)
2.Bookkeeping – mechanical task involving the collection of basic financial
data (first entered in the accounting records or the books of accounts,
and then extracted, classified and summarized in the form of financial
statements; functions of fin statements); procedures end when the basic
data have been entered in the books of accounts and the accuracy if
each entry has been tested (difference bet accounting and bookkeeping)
1.Cost Bookkeeping, Costing, and Cost Accounting – involves
the recording of cost data in books of accounts (similar to
bookkeeping but records are in very much greater detail); deals
with the collection, allocation, and control of the cost of
producing specific goods and services; main subbranches of
management accounting
2.Financial Accounting – focused on the recording of business
transactions and the periodic preparation of reports on financial
position and results of operations; GAAP; preparation and
subsequent publication of highly summarized financial
information; mainly for owners of an entity., also for
managements (planning and control), interest of other parties
(employees, creditors)
1.Financial Management – setting financial objectives, making
plans based on those objectives, obtaining the finance needed
to achieve the plans, and generally safeguarding all the
financial resources of the entity; wider range of disciplines (e.g.
economics and mathematics) and relies more extensively on
non-financial data than does the more traditional accountant.
2.Management Accounting – incorporates cost accounting data
and adapts them for specific decisions which management may
be called upon to make; incorporates all types of financial and
non-financial information from a wide range of sources.
1.Taxation – preparation of tax returns and the consideration of
the tax consequences of proposed business transactions or
alternative courses of action; aim to comply with existing tax
statutes but are also in constant legal search for ways to
minimize tax payments (tax avoidance, tax evasion, tax shifting)
2.Government Accounting – identification of the sources and
uses of resources consistent with the provisions of city,
municipal or national laws (government collects and spends
huge amount of public funds annually so it is necessary that
there is proper custody and disposition of these funds)
 CLASSICAL NOTION OF STEWARDSHIP

Stewardship means custodianship or being

a keeper.
In accounting, classical notion of
stewardship applies to
the valuation and
the stewardship role.
 CLASSICAL NOTION OF STEWARDSHIP
Valuation Stewardship

• how • accounting
accounting is an
measures information-
the value of provider or
the firm data
provider
1.Valuation
This gives emphasis on how accounting measures the value of
the firm. This would mean that whatever is the condition of the
economy, the firm's value can still be accounted and
known. When the markets are perfect and complete, the
assets and the changes in the book value of owner's equity can
be measured at their market value. While, when the markets
are not perfect and complete, accounting can still be used to
approximate the change in the value of the entity.
Stewardship
Essentially, accounting is an information-provider or data-provider.
Accounting is an steward of economic and financial information about the
entity.
Basically, the economic information obtained from accounting and financial
databases are used for monitoring businesses and provides information on
how the management performs and where the business is going.
Useful information are presented thru financial statements and internal
financial reports. From these statements and reports, business owners and
managers can gauge and measures the operational performance of the
business as a whole. The information provided by accounting are
indicators of performances of the people inside the organization.
In short, Stewardship of the firm affects the value of the firm. Accounting
information is used to assess, monitor and control the activities of the entity.
 USERS OF ACCOUNTING INFORMATION

Internal External
Users users
 QUALITATIVE CHARACTERISTICS
OF USEFUL FINANCIAL INFORMATION
• Predictive
Relevance
value
• Confirmatory
value
Fundamental
Qualitative
Characteristics
• Completeness
Faithful • Neutrality
Representation
• Free from
error
 QUALITATIVE CHARACTERISTICS
OF USEFUL FINANCIAL INFORMATION
• information • comparable with
represents other entities
faithfully the with similar
economic information
phenomena it about the same
purports to entity
represents
Verifiability Comparability

Fundamental Qualitative CharacteristicsEnhancing

Qualitative
Characteristics
Understand-
Timeliness
ability

• information is • should contain

available to information that
decision-makers is complete and
in time not potentially
misleading
 UNDERLYING ASSUMPTION

GOING CONCERN
an entity will continue in operation
indefinitely
 ELEMENTS OF FINANCIAL
STATEMENTS

• Assets
Financial
• Liabilities
Position
• Equity

Financial • Revenue
Performance • Expenses

MEASUREMENT:
Historical Cost Realizable Value

Current Cost Present Value

 ACCOUNTS

account - basic summary device of

accounting
Account title

Left side Right side

or Debit side or Credit side

ACCOUNTING EQUATION:
Assets = Liabilities + Owner’s Equity
 DOUBLE-ENTRY SYSTEM

accounting is based on a double-entry

system which means that the dual effects of
a business transaction is recorded

» a debit side entry must have a corresponding credit side

entry
» there must be one or more accounts debited and one or
more accounts credited
» each transaction affects at least two accounts
» the total of debits for a transaction must always equal the
total credits
 NORMAL BALANCE OF AN ACCOUNT

INCREASE SIDE OF AN ACCOUNT

Assets Liabilities
Drawings Owner’s equity
Expenses Income