DEFINITIONS OF ACCOUNTING Industrial Revolution

Accounting is called the “Language of business”, Mid-18th to the mid-19th centuries

-a service activity. Artisan/Craftsman – Manpower

-provide quantitative information, primarily financial
in nature, about economic entities, that is intended
to be useful in making economic decisions, in making
reasoned choices among alternative courses of
action.
-defined as the art of recording, classifying and
summarizing, in a significant manner and in terms of
money, transactions and events
Recording or Bookkeeping – the process of
systematically maintaining a record of all business
transactions.
Classifying – the sorting or grouping of similar and
interrelated transactions in their respective class.
Summarizing – is the preparation of financial
statements which include the Statement of Financial
Position (Balance Sheet), Statement of Profit or Loss
(Income Statement), Statement of Cash Flows, and
Statement of Changes in Owner’s Equity.
THE DEVELOPMENT OF ACCOUNTING
Dates back in 8500 BC in the Middle East Region and
used even during Biblical times.
Corporate form of business organization was created
to accommodate the need for the increasing large
amounts of funds which was required to finance the
expansion of business.
THE ROLE OF ACCOUNTING FOR BUSINESS
Business is an organization in which basic resources
are assembled and processed to provide goods or
services to customers or clients.
 Provides the necessary information
 essential tool of management.
FORMS OF BUSINESS ORGANIZATIONS
Single or Sole Proprietorship - a business owned by
only an individual called proprietor.
Partnership - an association of two or more persons
who bind themselves to contribute money, property,
or industry to a common fund.
Corporation - is an artificial being created by
operation of law having the rights of succession and
the powers and attributes expressly authorized by
law or incident to its existence.

Ancient Civilization – Babylon, Greece Egypt

Tradesmen use clay objects to represent

commodities such as flocks of sheep, jars of spices
and oil, bolts of clothing and other goods.

THE DEVELOPMENT OF ACCOUNTING

FRIAR LUCA PACIOLI (1494)

Father of Double-entry Bookkeeping

Wrote a book called “ Summa De Arithmetica,

Geometria, Proportioni et Proportionalita”
(Everything about Arithmetic, Geometry, Proportions
and Proportionality)
TYPES OF BUSINESS THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE

Service Business – renders services to customers or GAAP - defines what is accepted accounting practice.
clients for a fee
Financial Reporting Standards (FRSC) - standard
 public transport companies setting body
 beauty parlors
Professional Regulation Commission (PRC) – Creates
 security agencies
the standard setting body
 repair shops
 laundry shops Business Entity Concept - separate and distinct from
 schools its owner/s and from other business units.
 medical or health clinics
Going Concern or continuity assumption – will
 event coordinators
continue to operate for an indefinite period.
 law offices
 accounting firms Time Period Assumption - indefinite life of the
 advertising firms business be divided into time periods
Merchandising Business or Trading – buys goods or Unit of measurement assumption - monetary unit
commodities and sells them at a profit. such as the Philippine Peso.

 grocery stores Matching Principle - costs and expenses incurred in

 supermarkets generating the revenue should be properly matched
 car dealers against the related revenue in determining the net
 hardware stores income
 drugstores
Accrual Basis - requires that revenue or income
 appliance stores
should be recognized when earned regardless of
Manufacturing Business - makes finished goods when collection is received.
from raw materials or unassembled parts.
THE BASIC FINANCIAL STATEMENTS
 shoe factories
Financial Statements are the end product of the
 food processing plants
accounting process.
 car assembler
FIVE BASIC FINANCIAL STATEMENTS
SPECIALIZED ACCOUNTING FIELDS
1. Statement of Profit and Loss - summary of
 Certified Public Accountants (CPA)
the company’s revenue and expenses
 Public Accounting 2. Statement of Financial Position - shows the
 Auditing list of a company’s asset, liabilities and
 Tax Services owner’s equity as of a specific date,
 Management Advisory Services 3. Statement of Changes in Owner’s Equity –
About cash receipt and cash Payments
4. Statement of Cash Flows – cash receipts
and cash payments of an entity for a given
period of time.
5. Notes to the Financial Statements - to
make the financial statements more useful
and meaningful to those who might have an
interest in the business.
QUALITATIVE OF CHARACTERISTICS OF FINANCIAL
STATEMENTS
Fundamental qualitative characteristics of
financial statements
Relevance - influence a decision by helping users
form predictions about the outcome of past, present
and future events,
Faithful Representation - it must also represent
faithfully the phenomena it purports to represent.
 Completeness
 Neutrality
 Freedom from error
Enhancing qualitative characteristics of financial
statements
 Comparability
 Verifiability
 Timeliness
 Understandability
THE USERS OF FINANCIAL INFORMATION
Management – planning and controlling
Creditors and suppliers - to evaluate a borrower’s
ability to pay
Owner/s of the firm – need to know if the business
is operating at a profit or loss.
Investors – they should buy, hold or sell their shares
of stocks.
Government and their agencies - determine taxation
policies and as basis for national income statistics.
Customers - evaluating the possibility of price
changes and identifying other sources of cheaper
services and commodities.
Employees - interested in information about the
stability and profitability of their employers.
Public - financial statements may assist the public by
providing information about the trends
THE ELEMENTS OF FINANCIAL STATEMENTS
ASSETS - Resources controlled by the enterprise
Liabilities - Present obligations from past
transactions or events
Capital or Owner’s Equity - Claim of the owner
on the assets of the business
Revenue or income - Gross inflow of economic
benefits
-Decrease in liabilities & increase in equity
Expenses - Gross outflow of economic benefits
-Decrease in equity
ASSETS
 Cash - exchange that a bank will accept at
face value.
 Accounts Receivable - Claims against
debtors
 Notes receivable - Promissory note
 Merchandise Inventory - Goods on
hand available for sale
 Office/Store Supplies - Supplies being
used by the business
 Furniture and fixtures - Includes office
table, chairs
 Intangible Asset - Non-monetary asset
w/o physical substance
 Franchise - Right granted by one party
to another party for a specific period
 Copyright - Exclusive right to an author
for literary
 Patent - Exclusive legal right invention
to enable its holder to manufacturer
 Trademarks - Words, names symbols
 Computer software - Just software
LIABILITIES

 Accounts Payable - amounts due to EXPENSES

creditors for assets acquired on
 Salaries or Wages Expenses - includes
accounts
all payments ▪ salaries, 13th month pay,
 Notes Payable - amounts due to
cost-of living allowances and etc.
creditors evidenced by written promise
 Utilities Expense - use of
to pay
telecommunications facilities,
 Mortgage Payable - long term debts
consumption of electricity, fuel and
secured by a collateral.
water
 Salaries Payable - unpaid salaries of
 Supplies Expense - supplies in the
employees at the end of an accounting
conduct of daily business
period.
 Insurance Expense - portion of
 Interest payable - nterest due on
premiums paid on insurance coverage
borrowed funds.
which has expired.
 Utilities Payable - unpaid electric and
water bills  Depreciation Expense - portion of the
 Unearned Revenue - is revenue cost of a tangible asset allocated or
collected by the business in advance charged as expense during an
accounting period.
CAPITAL/ OWNER’S EQUITY  Interest Expense - to use of borrowed
funds.
 Owner’s Capital - used to record the
original and additional investments of
the owner in the business entity.
 Owner’s Drawing/ Withdrawal - cash
or other asset withdrawn or taken by
the owner from the business for
personal use.
 Income Summary - temporary account
used at the end of the accounting
period to close income and expenses.

REVENUE OR INCOME

 Service Income - revenues earned by

performing services

Used revenue accounts are:

 Sales Interest Income Service Revenue

 Fees Earned Professional Fee
Subscription Revenue
 Rent Income Commissions Earned