Module 1 – Principles of Accounting

Name: __________________________________________________ Date Submitted: ___________

Subject Code : Actg 1 Descriptive Title : Principles of Accounting

Module Content: The Nature of Accounting and Its Business Environment

Learning Objectives:
1. Define accounting.
2. Distinguish accounting from bookkeeping
3. Describe the nature of accounting.
4. Explain the function of accounting in business.
5. Discuss briefly the history/origin of accounting.
6. Identify the different users of financial information and their primary concerns.
7. Compare the different type of business organizations
8. Know the legal requirement in the formation of a business
9. Classify the different types of business operations

Introduction

It is important for a business to keep its records for proper monitoring of transactions.
Because of the global need for records and financial information in making economic decisions,
accounting has become a basic need of every business.
---------------------------------------------------------------------------------------------------------------------
THE NATURE OF ACCOUNTING

What is Accounting?

Accounting is the systematic process of measuring and reporting relevant financial

information about the activities of an economic organization or unit. Its underlying purpose is to
provide financial information. It is capable of being expressed in monetary terms.

The American Institute of Certified Public Accountants (AICPA) defines accounting as 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 a financial character, and interpreting the result thereof.

The Philippine Institute of Certified Public Accountants (PICPA) defines accounting as 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 and Bookkeeping Distinguished

Bookkeeping is defined Accounting is

as an art and science of conceptual and
recording financial goes beyond
transactions of a business. bookkeeping. It
It is the procedural and includes the
mechanical aspect of interpretation of
information
accounting. It involves the
recorded under bookkeeping. The
setup, update, and maintenance of the practice of accountancy can only
accounting records. Bookkeeping may be be performed by a professional
done by a properly trained non- accountant.
accountant.

Natures of Accounting

Based on the definitions, various natures of accounting may be considered. These include the
 Accounting as the language of business
It is the language of business because it is used to communicate financial information to
interested parties, such as stakeholders, management, government, creditors, and employees.
Through accounting, the users of financial information understand what is happening in the
business.

Accounting is a systematic process.

Process is a series of actions that produce something or that lead to a particular result. As such,
the performance of the six aspects of accounting leads to communication to its users the relevant
financial information needed by the parties interested.

Accounting is an art.
Art is defined as an occupation requiring knowledge or skill. The six aspects of accounting require
both knowledge and skill through experience, study or observation as a means to produce the key
end product which are the financial reports.

Accounting is a service activity.

Service is the occupation or function of serving. Activity is something that is done as work or for
a particular purpose. Combining the meaning of the two words, accounting is a work or occupation
for serving a particular purpose.

The Functions of Accounting in Business

The diagram below shows the six (6) functions of accounting in business.

ANALYZING ACTIVITY 1. Identify which aspect of accounting is being defined below.

Please write your answer in the line after each statement.

1. The process of determining the effects on the different accounts of the

RECORDING documented transactions and economic events. ______________

2. The process of writing in the journal the effects, whether increase or decrease, of the
analyzed transactions and events. _____________
CLASSIFYING
3. The process of identifying the relationship of various items in the
financial statements and pointing out their effects and importance to decisions to be
made by their users. ______________________
SUMMARIZING
4. The process of grouping like transactions and events together.
_________________
REPORTING
5. The process of explaining the relationships of the different items in the
financial statements. ______________________

INTERPRETING 6. The process of preparing balance sheet, income statement and statement
of cash flows. ______________________

The aspects of accounting can be summed up to one basic function which is the generation of
relevant and timely financial information for interested parties . The data provided by
accountants can assist investors, government agencies, creditors, and management in making sound
economic decisions. The financial information provided about the activities of an economic
organization makes it easily comprehensible for users to assess its financial position as of a given
time and results of operations for a given period. This qualitative and quantitative financial data used
by users relating to specific business decisions makes accounting the language of business.
A BRIEF HISTORY OF ACCOUNTING

“It is believed that the very origins of writing itself may have developed out of early marks used to
keep account of goods at ancient warehouses more than 5300 years ago.”
Wiley Carol
 now have, dates back to 1400 in Italy. The Italian mathematician, scholar and philosopher Fra Luca
Pacioli published in 1494, Summa de Arithmetica, Geometrica Proportioni et Proporionalita. This
contained description of the practice of accounting at that time. Because of this work Pacioli has been
referred to as the Father of Accounting.

A BRIEF HISTORY OF ACCOUNTING

“ItUsers of Financial
is believed that the Information
very origins of writing itself may have developed out of early marks used to
keep account of goods at ancient warehouses more than 5300 years ago.”
Internal
Wiley Carol Users
Primary users of financial information who are inside the reporting entity and are directly involved in
managing isthe
Accounting an company’s daily
old discipline thatoperations.
dates backThey are the decision
to thousands makers
of years but whoclosest
the one make to
thewhat
strategic
we and
operational
now decisions
have, dates for1400
back to the company.
in Italy. The Italian mathematician, scholar and philosopher Fra Luca
Pacioli published in 1494, Summa de Arithmetica, Geometrica Proportioni et Proporionalita. This
Externaldescription
contained Users of the practice of accounting at that time. Because of his work, Pacioli has been
Secondary users
referred to as the Fatherof of
financial information who are parties outside the company. They may not be
Accounting.
directly involved in the company’s operations but their decisions may significantly affect the business
entity.

EXTERNAL USERS
INTERNAL USERS
Financial Institutions/Creditors
Investors
Potential investors/creditors
Owners
Government
Stockholders
Lenders
Management
Suppliers
Employees
Customers

ACTIVITY 2. The statements below are the reasons why there is a need for financial statements.
Please identify the user of financial information for each reason.

1. To determine the capacity of the enterprise to pay taxes and its tax compliance. ______________
2. To determine stability and profitability if employers. __________________
3. To determine the ability of the customer to pay debts as they fall due. __________________
4. To determine the activities of the enterprise for planning, organizing, leading and controlling.
__________________
5. To determine the ability of the borrowers to pay on time. __________________
6. To determine whether to buy, hold or sell their investments in equity ownership in the business to
and assess the ability of the investee to pay dividends or to pay return to investors. ___________
7. To determine the ability of the enterprise to be a continuing source of supply. ________________
8. To determine the activities of the enterprise and contribution to the economy in the form of
number of employees, ownership of assets, prices of their products, patronage of local supplies &
patronage by customers. __________________

THE BUSINESS ENVIRONMENT

Business

A business (also known as enterprise or firm) is an organization engaged in the trade of

goods, services, or both to consumers where the goods or services are exchanged for other goods,
services, or money.

Forms of Business Organizations

An organization is defined as having two or more individuals working together towards the
attainment of a goal or goals. A business is therefore an organization formed in any of the following:

1. Sole proprietorship. It is a business owned by

only one person. It is easy to set-up and is the
least costly among all forms of ownership.

Corporation
2. Partnership. A business owned by two or more persons who contribute resources into the entity.
The partners divide the profits of the business among themselves.
3. Corporation. A business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
4. Cooperative. A business organization owned by a group of individuals and is operated for their
mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated. Some examples of cooperatives are: water and electricity (utility)
cooperatives, cooperative banking, credit unions, and housing cooperatives.

Legal Requirements in the Formation of a Business

The sole proprietorship is the easiest business to register. It is registered with the Department
of Trade and Industry (DTI) under its Bureau of Trade Regulation and Consumer Protection.

For a partnership, the business is registered with the Securities and Exchange Commission (SEC)
upon submission of the following documents:
a. Proposed Articles of Partnership
b. Name Verification Slip
C. Bank Certificate Deposit
d. Alien Certificate of Registration, Special Investors Resident Visa, or proof of other types of visa
(in case of foreigners)
e. Proof of Inward Remittance (in case of non-resident aliens)

For a corporation, the following are the incorporation documents required to be filed with the
Securities and Exchange Commission (SEC):
a. Articles of Incorporation
b. By-laws
c. Treasurer's Affidavit which should state compliance with the authorized subscribed and paid-up
capital stock requirements.
d. Bank Certificate which should state that the paid-up capital portion of the authorized capital
stock has been deposited to the issuing bank

What should be stated upon registration of a corporation?

a. The name of the corporation which must not be identical, or deceptively or confusingly similar
to any existing corporation
b. The purpose of the corporation
c. Principal office of the corporation
d. The term or life of the corporation which should not exceed fifty [50] years. This corporate
lifetime may, however, be extended for another fifty [50] years but the extension must not be
effected earlier than five [5] years before the expiration of its term.

For a cooperative, the business is registered with the Cooperative Development Authority (CDA)
upon submission of the following documents:
a. Economic Survey
b. Notarized Articles of Cooperation and By-Laws
c. Bonds of accountable officer or officers
d. Notarized sworn statement of the treasurer certifying that the required subscription and
payment of the authorized share capital and paid-up capital have been fulfilled.

Three Types of Business Activities/ Operations

1. Service is a type of business operation engaged in the rendering of services. A service type of
business earns based on the skill or quality of service it offers. In order for the business to grow, its
people or employees have to be trained. For example, a well. known hair cutter cannot perform all
the hair and makeup services to his or her customers. He/She must train employees to replicate the
quality of the service he/she renders. Constant monitoring, evaluating, and updating of knowledge of
the staff are necessary. He/She has to continuously maintain, if not improve, the quality of service
offered to his/her customers.
Examples: dental clinic, barbershop, laundry service

2. Trading/ Merchandising is a type of business engaged in the buying and selling of goods.
Merchandising includes the process of managing and marketing the products sold to its customers.
Sales have to be optimized in order to make money. Customer demands have to be satisfied with the
quality of products sold. The tedious processes of forecasting, purchasing, pricing, and marketing of
products in order to generate sales are essential in the trading or merchandising business.
Examples: grocery, sari-sari store

3. Manufacturing is engaged in the production of items to be sold. It involves the purchasing

and converting of raw materials to finished goods. This type of business incurs overhead costs aside
from the wages and materials used in the product of goods. A rise in price in one of these costs
causes an increase in the price goods produced. Aside from this, there are certain expenses incurred
even during periods of non-manufacturing such as rent, insurance, worker benefits, and machine
depreciation. Hence, careful planning is involved in manufacturing.
Examples: shoe factory, food processing

Evaluation

1. Among the functions of accounting, which is the most important? In your own words, why do you
think it is deemed the most important?
2. Differentiate the forms of business organizations. Be able to identify the advantages and
disadvantages of each form of business organization.
3. Survey on the different businesses in your locality. Identify these businesses and classify them
according to their activities. List down at list 5 for each classification. Provide the complete
business name, business address and owner/s.

References:

Ballada, Win, Ballada, Susan, Basic Accounting. DomDane Publishers & Made Esasy Books. 2018

Tan, Lorenzo G. et al, Fundamentals of Accounting 1. F&B Educational Inc.,2018.

Frias, Solita A, Pefianco, Erlinda C., Fundamentals of Accountancy, Business And Management: A
Textbook In Accounting 1. Phoenix Publishing House, 2020.

Ong, Flocer Lao. Fundamentals of Accountancy, Business And Management 1. C&E Publishing, Inc. 2016