Introduction to Accounting

Accounting Defined

● 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.
● Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transaction and events which are in part, at least of financial character and interpreting the
results thereof.
● The process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information.

Phases of Accounting

● Recording
❖ Also called journalizing.
❖ Recording of all transactions that occurred in a given time in a systematic and chronological
manner in the journal book. (general journal, sales journal, purchases journal, cash receipts
journal and cash disbursement journal)
❖ Transactions to be recorded are based on source documents such as receipts and cash
vouchers.
● Classifying
❖ Also known as posting.
❖ All about sorting and grouping of all individual accounts.
❖ Transactions from the journals are transferred or posted to the ledgers.
● Summarizing
❖ Summarizing data through the preparation of financial statements, charts or graphs to interpret
data easily and effectively.
❖ Done after an accounting period. (monthly, quarterly, yearly, etc.)
● Interpreting
❖ The final stage where users of financial information interpret data for decision making,
interpreting the financial position of a company and the results of its operations.
Objectives of Accounting

1. To provide general financial statements about a reporting entity that is useful to the financial users
involved to assist them in making sound economic decisions.
2. To determine the results of the business operation in a given period.
3. To determine the financial position of an entity. (asset, liability, equity)
4. To implement and maintain internal controls over assets.
5. To help management in planning, decision making and performance evaluation.
6. To provide financial and/or legal information to government agencies.

Users of Accounting Information

1. Internal Users
● Owners (proprietor, partners, BOD/BOT)
● Management
2. External Users
● Investors and Potential Investors
● Lenders and Financing Institutions
● Suppliers and Trade Creditors
● Employees and Labor Unions
● Customers
● Government Agencies, Regulatory Agencies and Taxing Authorities
● General Public
History

● 8500 BC - Use of “bulla” or “bullae” for commercial and legal documentation. These hollow ball-like
clay envelopes were also used to identify the quantity and types of goods being recorded.
● 3600 BC - “The clay of Mesopotamia” containing commercial transactions including accounts
receivables and payables.
● 2286 BC - “Code of Hammurabi” required merchants to give buyers a sealed memorandum containing
the agreed price of goods.
● 1000 BC - Phoenicians created an alphabet with accounting trade with ancient Egyptians.
● 500 BC - Egyptian Accounting records and the invention of Bead and Wire Abacus.
● 63 BC - “Res Gestae Divi Augusti” or The Deeds of the Divine Augustus containing the expenditures of
the emperor, including distributions to people.
● 10 AD - Emperor Wang Mang of Xin Dynasty implemented the first income tax of 10% of profits.
● 1299 - Giovanni Farolfi & Company, a firm of Florentine Merchants that used the earliest evidence of
full double entry bookkeeping that appeared in the “Farolfi Ledger”.
● 1299 to 1300 - Amatino Manucci kept the ledger accounts of Giovanni Farolfi & Company.
● 1300 - “Statute of Westminster” showed historical records of accountants.
● 1340 - “Massari Ledgers of Commune of Genoa” displayed the perfect double-entry form of double
entry bookkeeping that shows different pages for debit and credit.
● 1458 - Benedetto Cotrugli an economist who wrote the bookkeeping manuscript called “Della
mercatura e del mercante perfetto” but his work was only published in 1573. Pacioli credited Cotrugli
for the origination of the double entry bookkeeping systems.
● 1494 - Luca Pacioli the father of modern accounting who published the first ever book with a detailed
chapter of double entry bookkeeping known as the “Summa de Arithmetica, Geometria, Proportioni et
Proportionalita”.
● 1675 - Jacques Savary published his book “The Perfect Merchant” with chapters describing
accounting.
● 1798 - Income tax was implemented in Britain.
● 1804 - “Code of Napoleon” a civil law that was enforced containing regulations on commercial
transactions.
● 1861 - Income tax was implemented in America.
● 1896 - First CPA examination in the State of New York.
● 1898 - Eugen Schmalenbach quoted price level accounting.
● 1913 - Income tax was implemented in the Philippines.
● 1915 - Vicente F. Fabella became the first Filipino CPA. He took the exam in Wisconsin, USA.
● 1932 - First CPA Exam in the Philippines.

Accounting as a Profession

1. Practice in Public Accountancy

● Accountants who offer their professional services to clients for a fee including partners and staff
members of an accounting or auditing firm.
2. Practice in Commerce and Industry
● Accountants employed in a private company or a nonprofit organization.
3. Practice in Academe
● Accountants teaching accounting subjects. (schools, review centers)
4. Practice in the Government
● Accountants working in a government body. (BIR, COA, DBM, etc.)

Standard-Setting Bodies

1. International
a. IFRS Foundation
➢ Formerly known as the Internal Accounting Standards Foundation is a nonprofit
corporation developing IFRS.
b. International Accounting Standards Board
➢ Formerly known as the IASC is the independent, accounting standard-setting body of the
IFRS Foundation that develops and approves IFRSs.
➢ With 14 board members.
c. International Auditing and Assurance Standards Board
 ➢ Issues International Standards on Auditing.
2. National
a. Philippine Institute of Public Accountants
➢ The national professional Accountancy body in the country.
b. Financing Reporting Standard Council
➢ Successor of Accounting Standards Council, created to assist the BOA to carry out its
power and functions under RA 9298.
➢ Philippine Counterpart of IASB
➢ With 1 chairman and 14 members.
c. Auditing and Assurance Standards Council
➢ The body authorized to establish and promulgate generally accepted auditing standards
in the country.
➢ With 1 chairman and 14 members.

Accounting Standards

1. International
a. International Financial Reporting Standards
b. International Accounting Standards
c. Interpretations of IFRS and IAS.
2. National
a. Philippine Financial Reporting Standards
b. Philippine Accounting Standards
c. Interpretations of PFRS and PAS
d. Philippine Standards on Auditing
e. Philippine Standards on Quality Control

Regulatory Government Agencies

1. Professional Regulation Commission

➢ The agency is mandated to implement the regulatory laws and policies for various regulated
professions including CPAs.
2. Board of Accountancy
➢ Has the legal power to administer the Accountancy Law.
➢ Has the only power to issue and revoke CPA licenses.
➢ With 1 chairman and 6 member
3. Securities and Exchange Commission
➢ For registration and monitoring of partnership and corporations.
4. Department of Trade and Industry
➢ For registering sole proprietorship business.
5. Cooperative Development Authority
➢ Regulates cooperatives in the country.
6. Commission on Audit
➢ Supreme audit institution in the country that audits government units.
7. Bangko Sentral ng Pilipinas
➢ Agency that maintains price stability.
8. Bureau of Internal Revenue
➢ Raises revenue for the government by the collection of national taxes and enforcement of tax
laws.
9. Local Government Units
➢ Ensures payment of local taxes.
10. Insurance Commission
➢ Regulates and supervises the insurance industry in the country.

Professional Organizations of CPAs

1. International
a. Association of International Certified Professional Accountants
b. Institute of Management Accountants
c. Association of Accounting Technicians
 d. Institute of Certified Forensic Accountants
e. Institute of Internal Auditors
2. National
a. Association of CPAs in Public Practice
b. Association of CPAs in Commerce and Industry
c. Association of CPAs in Education
d. Government Association of CPAs
e. Philippine Association of Management Accounting
f. Philippine Institute of Management Accounting
g. National Institute of Accounting Technicians

Forms of Business Organization

1. Sole Proprietorship
➢ Owned by a single person or a married couple.
2. Partnership
➢ 2 or more owners contributing money, property or industry to a common fund to earn profit.
3. Corporation
➢ A juridical entity created by the operation of law, separate and distinct from its owners and has
rights, duties, and privileges of an
4. Cooperatives
➢ An autonomous and duly registered association of persons, with a common bond of interest,
who have voluntarily joined together to achieve their social, economic and cultural needs and
aspirations by making equitable contributions to the capital required, patronizing their products
and services and accepted cooperative principles.

Complete Set of Financial Statements

1. Statement of Financial Performance

➢ Shows the entity’s results of operations over a period, presenting its revenues and expenses and
the resulting income or loss.
2. Statement of Changes in Owner’s Equity
➢ Shows the balance of the capital accounts at the beginning of the period, the changes that may
increase or decrease these accounts such as income, loss, additional contribution and
withdrawal and the resulting ending balance during the period.
3. Statement of Financial Position
➢ Shows the assets, liabilities and capital of an entity as of a given date.
4. Statement of Cash Flows
➢ Shows the cash inflows and outflows during a period from three activities: operating, investing,
and financing
5. Notes to the Financial Statement
➢ Provides supplementary information, required disclosures by standards, supporting
computations, breakdown of line on the FS and other useful information for the user.

5 Elements of Financial Statements

1. Assets - resources owned and controlled by the entity.

a. Current Assets - assets that can be sold, consumed or exhausted through the normal operating
cycle of a business usually yearly.
b. Non Current Assets - long term assets that are not expected to be sold, consumed or exhausted
through the normal operating cycle of the business.
2. Liability - present obligation of the entity.
a. Current Liability - short term obligations that are due within a year or within the normal
operating cycle of the business.
b. Noncurrent Liability - long term assets that are not due for settlement within a year or within the
normal operating cycle of the business.
3. Capital/Equity - remaining interest after the liabilities was deducted from the assets.
4. Revenue - increase in economic benefits during a period.
 a. Sales Revenue or Service Revenue - income earned from the ordinary course of business
activities.
b. Gains - income that does not arise from the core operations of the business.
5. Expenses - decrease in economic benefits during a period.