LEARNING TO SUCCEED IN BUSINESS

WITH ACCOUNTING
Content Standards:

 The learners demonstrate an understanding of:

1. the definition, nature, function, history of accounting, function, and role of

financial statements as a means of communicating financial operation and
performance of a sole proprietorship form of business; and
the internal and external users of financial information.

Performance Standards:

 The learners shall be able to:

1. cite specific examples in which accounting is used in making business

decisions;
2. solve exercises and problems on the identification of users of information,
type of decisions to be made, and type of information needed by the users;
and
3. cite users of financial information and identify whether they are internal or
external users.

Transfer Goals:

 The learners, on their own and in the long run, will be able to communicate
different types of financial reports prepared by a sole proprietorship form of
business.

Nature and Scope of Accounting

BOOKEEPING

- Deals primarily with the systematic method of recording and classifying financial transactions of
business.
- Considered to be the procedural element of accounting as arithmetic is a procedural element of
mathematics
 - Due to rapid economic growth and technological changes, the demand for bookkeepers has
been reduced for it is now done through the use of computers and soft wares designed for such
a purpose

ACCOUNTING

- Defined by AICPA as the art of recording, classifying, and summarizing in a significant manner
and in terms of money, transactions, and events that are in part at least of a financial character,
and interpreting the results thereof
- Also defined by PICPA as a system that measures business activities, processed given
information into reports, and communicates those findings to decision-makers

The “art” in AICPA’s definition connotes that accounting is an arts of communication. Although the
primary function of accounting is to supply financial information, it also provides nonfinancial
information.

Moreover, accounting is referred to as a science in the sense that it is a piece of systematized

knowledge. A growing body of accounting theories seekd to plae accounting in the context of human
knowledge and activity in general.

Hence, an accountant is a bookkeeper and more, for he must not only be well-versed with the recording
process but must also be concerned with the functions of interpretation and analysis of financial
statements which requires the exercise of reason, judgment, and intelligence of a higher order. It is
function that best distinguishes accounting from bookkeeping.

History of Accounting thought

Accounting has a long history. Some scholars claim that writing arose to record accounting information
Account records date back to the ancient civilizations (Circa 4000 BC) of China. Babylonia, Greece, Egypt,
and Mesopotamia. The rulers of these civilizations used accounting to keep track of the cost of labor and
materials used in building structures like the great pyramids (Horngren, Harrison, and Robinson, 1995).

Accounting developed as a result of the information needs of merchants in the city-states of Italy during
the 1400s. In that commercial climate a monk. Luca Paciol, a mathematician, and friend of Leonardo da
Vinci published the first known description of double-entry bookkeeping entitied Summa de
Arithmetica, Geometria, Proportioni et Proportionalite (Everything about Arithmetic Geometry, and
Proportion), published in Verice in November 1494 This book contained prmanly pinnciples of
mathematics and an incidentally set of accounting procedures (Homgren, Harrison and Robinson, 1995).
The pace of accounting development increased during the industrial Revolution (1760-1840) as the
economics of developed countries began to munt-produce goods. Until that time, the merchandise was
priced based on managers’ hunches about cost but increased competition required merchants to adopt
a more sophisticated accounting system

During the early 20th century, the growth of corporations, especially those in the railroad and steel
industries spurred the development of accounting Corporate owners were no longer necessarily the
managers of their business Managers had so create accounting systems to report to the owners how
well their businesses were doing.

The government played a role in leading more development in the field of accounting when it started
using income tax. Accounting supplied the concept of "income". Also, the government at all levels has
assumed expanded roles in health, education, labor, and economic planning. To ensure that the
information that it uses to make decisions is reliable, the government has required strict accountability
in the business community.

At the beginning of the third millennium, there would still be a lot of developments in the field of
accounting. The great challenge of globalization and the effects of new technologies (e.g.
supercomputers, robotics, inter and intranet, etc.) pose a shift in the structure and pattern in this field.
More and better information is now being required and therefore, accounting, being the means used in
communicating business and financial information must also evolve into a more efficient level

A. Language of Business

Accounting is often described as the "language of business" because it is the medium of communication
between a business firm and its stakeholders. It is the tool, which enables the companies to
communicate to various interested third parties certain quantitative information about the financial
activities of a business.

Accounting is often utilized whenever there are business transactions, which normally involve people.
One cannot engage in business without involving and affecting other persons. The activities of a
business enterprise involve and affect many stakeholders management, owners, short-term and long-
term creditors, employees, existing and potential investors, the government, and even the public. All
these users of information need to be informed about the financial affairs of a business entity.
Therefore, accounting serves this need of providing quantitative information, primarily financial in
nature, about economic entities that are useful in making sound business decisions.

The following are the principal accounting reports referred to as financial statements:

Statement of Cash Flows - reports the firm's receipts and disbursements of cash which are classified
according to the company's major activities, namely (1) operating (2) investing, and (3) financing

Income Statement-shows the results of business operations whether net income or net loss for a given
period of time
Statement of Changes in Equity-presents a summary of the changes that occurred in the owner's equity
of the entity during a specific period of time, eg month or year

Statement of Financial Position - informs the users of the financial condition of the business at a given
date, usually at the end of an accounting period

As the major end products of accounting, these statements convey to management and/or interested
outside parties the messages about the financial activities of the business. Information needed by
different parties is of three kinds

- The financial condition or position of the business, Le, the amounts and kinds of its assets and
liabilities, and the status of the owners' interest at a given point in time.

- The financial performance or results of operation, ie, whether the business operating activities
during a given period of time resulted in net income or a loss.

- The financing and investing activities which are responsible for the changes in the financial
resources of the business, Le, the sources and applications of fund during a given period of time.

These pieces of information, furnished through accounting, are utilized by end-users as the basis for
reaching important decisions affecting themselves, the business enterprise, and other stakeholders.

B. Users of Accounting Information

 INTERNAL USERS. They are those who are directly involved in the business enterprise.
1. Owners. The owner provides the money/capital the business needs to begin operations.
Through the financial reports, the owner can property manage and monitor the
business, analyzing whether or not he/she can expect a reasonable return from his/her
business.
2. Management. Managers of businesses use accounting information to set goals for the
organization, to evaluate the progress made toward those goals, and to take corrective
action, if necessary
3. Employees. The employees that made up the workforce of the company will be
interested in information about the stability and profitability of the company. Through
financial statements, employees will be able to assess the ability of the enterprise to
provide remuneration, retirement benefits, and other employee opportunities and
benefits.

 EXTERNAL USERS. They are those who are not directly involved in the operation of the business.
1. Investors. Investors use financial reports in evaluating what income they can reasonably
expect from their investment.
2. Creditors. This group includes money lenders, suppliers, and other trade creditors.
Potential lenders or current creditors determine the borrower's ability to meet
scheduled payments.
3. Customers. This group is interested in information about the continuance of an
enterprise, especially when they have a long-term involvement with, or are dependent
on the company's offerings either in form of goods or services.
 4. Taxing authorities. Local and national governments levy taxes on individuals and
businesses. The amount of the tax is determined using accounting information.
5. Government regulatory agencies. Most organizations face government regulation. For
example, the Securities and Exchange Commission (SEC) requires businesses to disclose
certain financial information to the public. The SEC, like many government agencies,
bases its regulatory activity in part on the accounting information it receives from firms.
6. Nonprofit organizations. Nonprofit organizations (e.g. churches, most hospitals,
government agencies, and colleges), which operate for purposes other than to earn a
profit, use accounting information in much the same way that profit-oriented
businesses do.
7. Other users. Consumer groups and the general public may also be interested in the
amount of income that the businesses earned and also to know how it affects the
economy, possible prospects for employment, and/or for educational and research
purposes.

CONTENT STANDARD:

o The learners demonstrate an understanding of the basic accounting

concepts and principles.

PERFORMANCE STANDARD:

o The learners shall be able to understand the important role of different

basic accounting concepts in the preparation of financial statements.

TRANSFER GOAL:

o The learners, on their own and in the long run, will be able to know the
importance of the basic accounting concepts in the sense that these
basic rules and guidelines ensure that financial reports are prepared
following the generally accepted practices in accounting.

BASIC ACCOUNTING CONCEPTS

The basic concepts of accounting are commonly known as rules. The term "rules" is used in the sense
that it is to be used as a guide to action in the day-to-day dealings of business entities and how these
items can be accounted for. This connotes that accounting concepts do not prescribe exactly how each
event happening in an entity should be recorded. As a result, there are many cases in accounting
practice that differ from one company to another. According to Anthony, Hawkins, and Merchant
(2011), the differences reflect that, within "generally accepted accounting principles," management has
some latitude in which to express its ideas about the best way of recording and reporting a specific
event
Three Basic Purposes of Basic Accounting Concepts:
1. They help increase the confidence of stakeholders that the financial statements
faithfully represent the financial performance and position of an entity.
2. They provide the company's management who prepare financial statements
with guidance on how to account for and report economic activities.
3. They provide independent auditors of financial statements with a basis for
evaluating the fairness and completeness of those statements

The basic accounting concepts include, but not limited to, the following:

- Economic Entity Cost

- Verifiability
- Materiality
- Going Concern
- Accrual
- Time Period
- Revenue Recognition
- Disclosure
- Monetary
- Matching
- Consistency

A. Economic Entity Assumption

- All of the business transactions are separated from the business owner's personal transactions

- A business transaction is a business event that can be measured in terms of money that affects
the enterprise. This would give rise to an exchange between the business and its stakeholders

B. Going Concern Assumptions

In the absence of any contrary information, the business entity is assumed to remain in existence for an
indeterminate period of time. Assumes that the company will continue to exist long enough to carry out
its objectives and commitments and will not liquidate in the foreseeable future.

C. Time Period or Periodicity Assumption

⚫ Economic entity life can be divided into artificial time periods, it means that financial statements are
prepared at equal time intervals.

Calendar Year - a twelve-month period that ends on December 31.

Fiscal Year- a twelve-month period that may or may not end on December 31.

Natural Business Year- a twelve-month period that ends on the month when the company is at its
lowest (may follow a fiscal or a calendar year) Interim Period- an accounting period shorter than one
year.
D. Monetary Concept

. A peso is assumed to remain relatively stable over the years in terms of purchasing power regardless of
any inflation in the economy in which the entity operates. It requires that the different obligations,
resources, and properties of the business be reported in the financial statements at their values in
monetary units.

E. Cost Principle

Acquired assets should be recorded at their actual cost and not at what management thinks they are
worth as at reporting date

a "cost" - amount spent when an item was originally obtained regardless of the time it was purchased
Amounts shown in financial statements are referred to as "historical cost". "acquisition cost" most
objective and verifiable basis, more definite and determinable than other valuation methods.

ETO KULANG
Entity concept – financial position