FABM 1

Week 1: Introduction to Accounting

A Numbers Game

There are numerous successful businesses both locally and internationally. Some top-of-mind companies
include Microsoft, Apple, Coca-Cola, and Procter & Gamble. Here in the Philippines, surging businesses include
Puregold, Petron, Globe, and many others.

Obviously, these businesses offer products which are distinct from one another. Have you ever wondered
about the secret formula for a company’s success? This discussion can go on and on for days without yielding a
definite answer. Nonetheless, there is a common factor among these businesses that contribute to their success
– accounting.

Accounting involves the processes of identifying, recording, and communicating financial information to
internal and external users alike. It helps quantify data for easier interpretation. Numbers is the language of
business. In order to efficiently manage your business, you need to know numbers. After gathering the data on
the performance of the company, these are summarized and used as a guide for future decision-making.
Accounting is a too used in achieving all these goals.

How will the manager know if the company is doing well? How can he/she know if additional investment is
needed in a particular segment of the company? If not for accounting, managers will still be making decisions not
based on solid foundation.

➤To have a better understanding of accounting, let us first talk about business.

NATURE OF BUSINESS
Business refers to the regular conduct of legal activities primarily intended to accumulate profit. The generation of
profit is considered as the primary motive of a business entity.
Most, if not all, of business activities undertaken by the management are directed towards accumulation of profit.
The different functions and actions of the management, like the setting of goals and objectives, the identification of
different schemes, the adoption of strategic approaches, and the evaluation of past performance are all directed towards
the common end, that is, the improvement of business profitability.
A business is also formed to promote the welfare of its members. The different individuals comprising the business
have common objectives, aspirations, accountabilities, and responsibilities. They usually consider the business to be of
assistance to all them of them. In most instances, business transactions are conducted among the members.
Aside from profit motives, businesses also have a responsibility towards the environment where they operate.
Businesses have the responsibility of promoting the welfare of their employees; providing clean and safe working place;
sustaining a healthy environment; respecting the rights, values, customs and traditions of every employee; and
contributing taxes to local and national governments. The secondary obligation of a business towards society is called
social responsibility.

CLASSIFICATION OF BUSINESS ACTIVITIES

☞EXTERNAL BUSINESS ACTIVITIES are transactions undertaken by the business with outside parties or with
parties that are not connected with the business. Examples of these activities may include, among others,

a. selling of goods or products;

b. purchasing raw materials;
c. rendering services to customers; or
d. paying the creditors.

☞INTERNAL BUSINESS ACTIVITIES, on the other hand, are activities that happen within the business only. Entities
outside the business are not involved. Examples of internal business activities may include, among others,
a. Conversion of raw materials to finished products;
b. Payment of salaries;
c. Processing of voluminous supporting documents;
d. Preparation of budgetary requirements; or
e. Checking the authenticity of transactions.
 CHARACTERISTICS OF BUSINESS
1. ECONOMIC ACTIVITY

 Business results into generation of employment opportunities thereby leading to growth of economy.
 The production and distribution of goods.

2. BUYING AND SELLING

 The basic activity of business is trading.

 It involves buying and processing raw materials into finished products for selling.

3. CONTINUOUS PROCESS

 Business is not a single time activity.

 It should be conducted regularly in order to grow and gain regular returns.

4. PROFIT MOTIVE

 The primary goal of a business is usually to obtain the highest possible level of profit through the production and
sale of goods and services.
 Profit serves as the driving force, it is needed for survival, growth and expansion of business.

5. RISK AND UNCERTAINTIES

 Risk is the effect of uncertainty arising on the objectives of the business.

a. Insurable Risk/Predictable:

o Taxes
o Change in the volume of expected sales
o Cost of supplies and equipment
o Overhead
cost
Salaries
b. Non-insurable:

o Changes in trends and taste of customers .

o Impact of the local economy on customer base.
o Any unexpected action taken by your competitors.

6. CREATIVE AND DYNAMIC

 Has to come out with creative ideas, approaches and concepts for production and distribution of goods and
services.
 To bring things in fresh, new and inventive way.
 Innovation is a key factor for businesses to operate under constantly changing economic, social and technological
environment.
7. CUSTOMER SATISFACTION

 It is the ultimate aim of all economic activities.

 Providing quality product at a reasonable price.
 The purpose of business is to create and retain the customers.
 8. SOCIAL ACTIVITY

 Business is a socio-economic activity.

 Business entity must have their Corporate Social Responsibility (CSR)
 Business has some responsibility towards the society and in turn it needs to support various social groups.

9. GOVERNMENT CONTROL

 To follow certain rules and regulations enacted by the government.

10. OPTIMUM UTILIZATION OF RESOURCES

 The scarce resources are brought to its fullest use for concentrating economic wealth and satisfying the needs
and wants of the consumers.

➤I believed that you already gained more understanding about business, with that note, let us now go deeper
and discuss accounting.

INTRODUCTION TO ACCOUNTING

THE ACCOUNTING
Accounting has evolved, as in the case of medicine and law, in response to the social and economic needs of
society. As business and society become more complex, accounting develops new concepts and techniques to meet the
ever-increasing needs for financial information. Without such information, many complex economic developments and
social programs may never have been undertaken.
In a market economy, information helps decision-makers make informed choices regarding the allocation of scarce
resources under their control. When decision-makers can make well-informed decisions, resources are allocated in a
way that better meets the needs and goals of those within the market.
Accounting is relevant in all walks of life, and it is 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.
Accounting quantifies business communication. For this reason, accounting is called the language of business. The task
of learning accounting is very similar to the task of learning a new language.
No business could operate very long without knowing much it was earning and how much it was spending.
Accounting provides the business with this information and more. So, accountants can be called the scorekeepers of
business. Without accounting, a business couldn’t function optimally; it wouldn’t know where it stands financially,
whether it’s making a profit or not, and it wouldn’t know its financial situation. Also, a sound understanding of this
language will bring about a better management of the financial aspects of living. Personal financial planning, education
expenses, car amortization, business loans, income taxes and investments are based on the information system that we
call accounting.

DEFINITION AND NATURE OF ACCOUNTING

☞What is Accounting?
 Accounting is, broadly speaking, a system that helps businesses track events that affect them. This process
involves identifying the events that affect a business, recording these events, and communicating the summarized
results of all events within a particular period to interested parties.

 Accounting is a systematic recording of financial transactions and the presentation of the related information to
appropriate persons (Accounting Theory, http://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html).

➤We can also define accounting as:

 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).
 Accounting is an information system that measures, processes and communicates financial information about
an 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).

 Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information (American Accounting Association, "A Statement of
Basic Accounting Theory" (Evanston, III.: American Accounting Association, 1966), par. 1; Accounting Principles
Board, Statement No. 4, "Basic Concepts and Accounting Principles Underlying Financial Statements of Business
Enterprises" (New York: AICPA, 1970), par. 40).

a. Identifying – This accounting process is the recognition or non-recognition of business activities as

“accountable events”.
b. Measuring – This accounting process is the assigning of Peso amounts to the accountable economic
transactions and events.
c. Communicating – This is the process of preparing financial statements and interpreting the results thereof.

 Accounting is the 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).

 Accounting deals with financial information and transactions. Accounting records financial transactions and
data, classifies these and finalizes their results given for a specified period of time, as needed by their users. At
every stage, from start to finish, accounting deals with financial information and financial information only. It does
not deal with non-monetary or nonfinancial aspects of such information.

THE NEED TO LEARN ACCOUNTING

Business transactions are accumulated, processed, and communicated to interested users through accounting. The
various accounting information are finally used by different interested users in making economic decisions.

Figure 1.2 – Flow of Accounting Information

The diagram presents the flow of accounting information. The different business transactions and events are measured,
recorded, and processed and finally communicated to interested users of financial statements. It is through accounting
that one understands how to measure the operating performance of a business entity.

The following information about the business is usually communicated:

1. The result of its financial operation, that is, whether the business is profitable or not.
2. The status of its financial condition, that is, whether the business is stable and has the capacity to settle financial
obligations.
3. The cash inflows and outflows during the period, that is where the business obtains its cash and where it spends
the said cash.
4. Other information that are probable to happen in the future.

FUNCTIONS OF ACCOUNTING

Figure 1.3 – Procedural Steps in Accounting

»RECORDING
 The routine and mechanical process of writing down business transactions. Only business transactions and
events that are quantifiable or measurable are recorded in the books of accounts in chronological manner.
 It is otherwise known as journalizing or bookkeeping.
 Business transactions are recorded daily and chronologically.

»CLASSIFYING
 The process of sorting or grouping similar business transactions and events into their respective kinds or classes.
In other words, similar transactions and events should be grouped together.
 In accounting, this is technically known as posting.

»SUMMARIZING
 It involves preparation of the financial statements.
 Ordinarily, the summarizing process starts from the preparation of the trial balance, determination of adjusting
entries, and the preparation of the worksheet.

»INTERPRETING
 The process of analyzing and evaluating the information presented in the face of the financial statements and the
accompanying notes.
 The data found on the face of the financial statements and other related accounting information are analyzed to
determine the following:

a. Profitability of the business – the ability of the business to realize more revenues than expenses.
b. Liquidity of the business – the ability of the business to pay its current maturing obligations or those
obligations that are payable within one year.
c. Stability of the business – the ability of the business to pay its long-term financial obligations and remain
stable.
d. Management efficiency – reflects how effective and efficient the management is in utilizing is resources.

Financial statements are formal structured statements serving as the final product of the accounting process vis-à-vis
statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash
flows, and notes to the financial statements.

➤Other functions of accounting include the following:

»PROTECTING PROPERTIES OF THE BUSINESS

 The accounting records serve as the evidence that properties of a business do exist or how much of a particular
resource does a company have.

»MEETING LEGAL REQUIREMNETS

 In the Philippines, the government requires some companies to provide financial reports quarterly, semi-annually,
or annually.
 This procedure aims to protect the public by providing them the necessary information to make sound decisions.

☞Let’s take a look in the past. – HISTORY OF ACCOUNTING

It is believed that the history of accounting is thousands of years old and can even be traced to ancient civilizations.
A number of history books suggest that the early development of accounting can be dated back to ancient Mesopotamia.
During those times, people followed a system of writing and counting money. The development of accounting may be
related to the taxation and trading activities of temples.
The reign of Emperor Augustus (63BC—14AD) provided more evidence about the development of accounting. The
Roman government kept detailed financial information of the deeds of Emperor Augustus regarding the stewardship of
Roman resources. This is evidenced by the Res Gestae Divi Augusti (The Deeds of the Divine Augustus). The Roman
historians Suetonius and Cassius Dio recorded that in 23BC, Augustus prepared a rationarium (account) which listed
public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of
the publicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed
account could be obtained. The closeness of this information to the executive authority of the emperor is attested by
Tacitus' statement that it was written out by Augustus himself. (Oldroyd 1995)
Many consider the dissemination of the double-entry bookkeeping of Luca Pacioli in the fourteenth century Italy is
the most important event in accounting history. In fact, Luca Pacioli is acknowledged as the father of modern accounting
because of this. The double entry bookkeeping system is defined as any bookkeeping system that has a debit and a
credit for each transaction. Luca Pacioli's Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Review of
Arithmetic, Geometry, Ratio, and Proportion) is the first book printed with a treatise on bookkeeping. The double-entry
bookkeeping system is the system being used to this very day. (Sangster et al. 2007)
 The modern profession of the chartered accountant originated in Scotland in the nineteenth century when Queen
Victoria granted a royal charter to the Institute of Accountants in Glasgow. At present times, accounting standards are
already available to guide accountants in their practice of the profession. Some of these standards include the PFRS
(Philippine Financial Reporting Standard) and the PAS (Philippine Accounting Standards).

ACCOUNTING IN THE PHILIPPINES

From the work of Pacioli, accounting underwent different stages of change. The different accounting principles,
procedures, and practices have been improved, amended, and modified for several decades. The accounting process is
continuously evolving up to the present, and developments and changes in the field of accounting will continue in the
future. Change has become an ordinary phenomenon in accounting.
In the Philippines, the field of accounting has undergone similar changes and development, as well. In November 1981,
the
Philippine Institute of Certified Public Accountants (PICPA) formed the Accounting Standard Council (ASC). The main
function of the ASC was to establish the generally accepted accounting principles in the Philippines. Prior to the
formation of the Accounting Standard Council in 1981, accounting concepts and principles in the Philippines were
principally based on what were used and applied in the United States. There was no formal body then to establish
generally accepted accounting principles. The different accounting books outlined accounting principles that were
accepted and practiced in the United States. The financial statements prepared by businesses were based on American
standards.
The Accounting Standard Council issued several numbered statements that outlined generally accepted accounting
principles to be observed by businesses in the Philippines. The approved statements of the ASC were known as
Statement of Financial Accounting Standards or SFASs. The statements issued by ASC, however, were also
predominantly based on American standards and principles.
In 1996, a major change happened in the Philippine accounting system. Philippine accounting standards began to
be based on the approved statements of the International Accounting Standard Committee (IASC) known as the
International Accounting Standards (IAS). In other words, accounting standards changed from American standards to
international accounting standards.
The IASC was formed in 1973 through the agreement made by professional accounting bodies from Australia,
Canada, France, Japan. Mexico, Germany, the United Kingdom and Ireland, the United States of America, and the
Netherlands. The agreement aimed to achieve a uniform accounting principles around the world. However, it was only in
1996 that the Philippines adopted the international standards of the IASC.
In 1997, the ASC decided to totally adopt the statements issued by the IASC. However, it was only in 2000 that
major revisions were made in the Philippine accounting standards in order to conform with the international standards.
On May 13, 2004, the President of the Philippines approved Republic Act No. 9298, otherwise known as the Philippine
Accountancy Act of 2004. This law repealed Presidential Decree No. 692, which used to regulate the practice of
accountancy in the Philippines.

The changes in accounting principles and procedures answered the call for change because new types of business
practices were emerging and happening in the business community. These changes indicated that developments and
growth are happening in the field of accounting. This is a clear manifestation that accounting is not a dormant field.
Changes in accounting will continue in the future.
Under the implementing rules and regulations of the Accountancy Act specifically Resolution No. 71, series of
2004, the Board of Accountancy established the Financial Reporting Standards Council (FRSC) in 2006 to replace the
ASC. The FRSC has full discretion in developing and pursuing the technical agenda for setting accounting standards in
the Philippines.
The FRSC monitors the technical activities of the International Accounting Standards Board (IASB) and issues
Invitation to Comment on exposure drafts of proposed International Financial Reporting Standards (IFRS) as these are
issued by the IASB. When finalized, these are issued as Philippine Financial Reporting Standards (PFRSs).
The change in the accounting setting body in the Philippines is parallel to the change happening at the international
level. Internationally, the International Accounting Standard Board (IASB) replaced the International Accounting
Standard Committee (IASC). In the Philippines, the Accounting Standard Council (ASC) was replaced by the Financial
Reporting Standard Council (FRSC).
In August 2006, the FRSC formed the Philippine Interpretations Committee (PIC) to assist the FRSC in establishing
and improving financial reporting standards in the Philippines. The principal role of the PIC is to issue implementation
guidelines on PFRS. The PIC members were appointed by the FRSC and include accountants in public practice, the
academe, and regulatory bodies and users of financial statements. The PIC replaced the Interpretations Committee
created by the ASC in year 2000.
Presently, the FRSC issues its Standards in a series of pronouncements called Philippine Financial Reporting
Standards (PFRSs). These consist of:

1. Philippine Financial Reporting Standards (PFRSs) which correspond to the International Financial Reporting
Standards (IFRSs);
2. Philippine Accounting Standards (PASs) which correspond to the International Accounting Standards (IASs); and
3. Philippine Interpretations (PIs) which correspond to interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) of the IASB.
📌GENERALIZATION:
The primary objectives of the business are to generate profits and to properly manage its limited and scarce resources.
With these objectives, a business must prepare financial reports and interpret these reports as an aid in decision-
making. In making decisions, accounting is used as a tool for communication. Accounting, being the “language of
business,” is used as a tool in reporting financial information to business stakeholders. Its main functions are to record,
classify, summarize, and interpret business data, transactions, and events. Accounting is believed to be started way
back the ancient Mesopotamia and Luca Pacioli was knows as the father of accounting.

“There are no secrets to success. It is the result of preparation, hard work,

and learning from failure.”
--Colin Powell

“Managers and investors alike must understand that accounting numbers are the
beginning, not the end, of business valuation.”
--Warren Buffett