 Accounting is the process of identifying, recording, and communicating economic events

of an organization to interested users. (Weygandt, J. et.al)

IDENTIFYING – this involves selecting economic events that are relevant to a particular
business transaction. The economic events of an organization are referred to as transactions. 

Examples of economic events or transactions - In a bakery business: 

• sales of bread and other bakery products. 

• purchases of flour that will be used for baking 

• purchases of trucks needed to deliver the products

RECORDING – this involves keeping a chronological diary of events that are measured in
pesos. The diary referred to in the definition are the journals and ledgers.

COMMUNICATING – occurs through the preparation and distribution of financial and other
accounting reports.

OTHER DEFINITIONS OF ACCOUNTING

 Systematic process of measuring and reporting of relevant and timely financial

information about the activities of an economic organization or unit.
 The art of recording, classifying, 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 result thereof. (AICPA)
 A service activity to provide quantitative information, primarily financial in nature,
about economic entities useful in making decisions. (PICPA)

Nature of Accounting

 Accounting is a systematic process. – It is a series of actions that produce something or

that leads to a particular result.
 Accounting is an art – a skill acquired by experience, study, or observation.
 Accounting is a service activity. – something that is done or work for a particular
purpose
 Accounting deals with financial information and transactions – Accounting records the
financial transactions and date after classifying the same and finalizes their result for a
definite period for conveying them to their users.
  Accounting is an information system – Accounting is recognized and characterized as a
storehouse of information. As a service function, it collects processes and communicates
financial information of any entity. This discipline of knowledge has been evolved out to
meet the need of financial information required by different interested groups.

Four Aspects of Accounting

1. Recording - writing down of business transactions chronologically in the books of accounts

as they transpire

2. Classifying – sorting similar and related business transactions into the tree categories of
assets, liabilities, and owner’s equity

3. Summarizing – preparing the financial statements from the transactions recorded in the
books of account that are designed to meet the information needs of its users

4. Interpreting – representing the qualitative and quantitative financial information about the
business transactions in a language comprehensible to the users of financial statements.

*** Accounting – the language of business: Users are able to determine the financial standing
of the company as well as its stability and growth.

Basic Function of Accounting in Business: Generation of relevant and timely information for
interested parties.

3. Brief History of Accounting

Egypt, Mesopotamia, Greek and Rome

Tools and Instruments used in ancient times:

 Abacus – functioned as a calculator in the ancient times was developed by the Sumerians in
5,000 BCE

 
Papyrus – developed by ancient Egyptians in 4,000 BCE. Not only allowed recording of commercial
transactions but also the transcriptions of religious text, music, literature and more.

 Clay tablets – considered to be among the oldest written tax accounting records unearthed by
Egyptian archaeologist Dr. Gunter Dreyer of the German Institute of Archaeology.

 Old stone labels – found in the tomb of King Scorpion 1 in Egypt representing accounts of
oil and linens which were believed to be paid to the king as taxes.

Mesopotamian Scribes – performed extensive duties in writing and recording in the Mesopotamian
civilization are the equivalent of present-day accountants.
Greeks – introduced money in the form of coins in 600 BCE and invented a Greek alphabet which
they used to facilitate record-keeping

Romans – introduced the used of annual budget which coordinated estimated revenues and taxes
paid by the citizen in relation to the nation’s expenditures. Cash books were maintained by household
for their expenses.

Domesday Book – contained all the real estate surveyed by William the Conqueror of England who
took possession of all properties in the name of the king upon his invasion.

Pipe Roll or the Great Roll of the Exchequer – the most ancient surviving accounting record in the
English language containing the yearly accounting of rents, fines, and taxes due to the King of
England, from 1130 to 1830.
 14th Century – the Birth of Double-Entry Bookkeeping

Luca Pacioli – otherwise known as the Friar Luca dal Borgo and considered to be the “Father of
Accounting” wrote the “De Computis et Scripturis (of Reckonings and Writings) which is composed
of 36 short chapters that describe bookkeeping that also included what is similar to the modern day
accounting cycle.

Bernedetto Cotrugli – He is the writer of Della Mercatura et del Mercante Perfetto (Trading and the
Perfect Trader) where the original idea of the double-entry bookkeeping was introduced.

19th Century – The Dawn of Modern Accounting in Europe and America

Industrial Revolution (England) – replaced hand tools with machine or power tools, otherwise
known as the factory system, transformed accounting into an actual profession requiring expertise of
accountants to gain corporate control of their flourishing businesses.
Queen Victoria (Scotland) – granted royal charter to the Institute of Accounts in Glasgow on July 6,
1854, thereby creating the profession of chartered accountant (CA), thus accounting became a formal
profession.

1887 – the birth of the first national US accounting society the American Association of Public
Accountants, the predecessor of the present American Institute of Certified Public Accountants.
(AICPA).

20th Century – The Evolution of Modern Accounting Standards

American Institute of Certified Public Accountants. (AICPA) – was tasked to set the accounting
and auditing standards  for the periodic reports vouched by certified public accountants until the
establishment of the Financial Accounting Standards Board (FASB) in 1973

GAAP – generally accepted accounting principles established by the two significant authorities in

the United States: Financial Accounting Standards Board (FASB) and the Governmental Accounting
Standards Board (GASB)

The Information Age

Also known as the Computer Age, Digital Age, or New Media Age where manual, tedious and
time consuming tasks were replaced by faster and more accurate computer methods.

21st Century – Accounting in the Modern Times

International Accounting Standards Board (IASB) – established in January 2001

Enron Scandal – The greatest corporate fraud case recorded in American history, caused Arthur
Andersen, one of the top audit firms in the US to close business

Sarbanes-Oxley Act – was passed by the US Congress in 2002 to protect investors from corporate
misinformation that imposed tougher restrictions on accountants conducting consultancy services.

The accounting profession in the 20th century developed around state requirements for financial
statement audits. Beyond the industry's self-regulation, the government also sets accounting
standards, through laws and agencies such as the Securities and Exchange Commission (SEC). As
economies worldwide continued to globalize, accounting regulatory bodies required accounting
practitioners to observe International Accounting Standards. This is to assure transparency and
reliability, and to obtain greater confidence on accounting information used by global investors.

4. Lesson Objectives

The Business Environment

Content Standards.  The learners demonstrate an understanding of the varied branches and areas of
accounting, and the external and internal users of financial information, various forms of business
organizations, and the types of business according to activities.

Performance Standards. The learners shall be able to 

• make a list of business within the community on the types of accounting services they require. 

• solve exercises in the identification of the branches of accounting described through the types of
services rendered. 

• Solve exercises and problems on the identification of users of information, types of decisions to be
made, and types of information needed by the users. 

• Cite users of financial information and identify whether they are external or internal users.

 Differentiate the forms of business organizations in terms of nature of ownership 

 Make a list of existing business entities in their community and identify the form of business
organization

 Differentiate the types of business according to activities and make a list of businesses in
their community according to their activities.

Learning Competencies. The learners shall be able to 

• Differentiate the branches of accounting. 

• Explain the kinds/types of services rendered in each of these branches. 

• define external users and internal and gives examples 

• identify the type of decisions made and describe information needed by each group of users 

• differentiate the forms of business organizations.

• identify the advantages and disadvantages of each form

• compare and contrast the types of business according to activities

• identify the advantages and business requirements of each type

Specific Learning Objectives. The learners will be able to

•identify the forms of business organizations by nature of ownership. 

• give examples of businesses in their respective communities and identify the form 
• identify the advantages and disadvantages of the four forms of business organization

5. The Business Environment- Branches of Accounting

The Different Branches of Accounting

Financial Accounting         Financial accounting is the broadest branch and is focused on the needs
of external users. Financial accounting is primarily concerned with the recognition, measurement and
communication of economic activities. This information is communicated in a complete set of
financial statements. It is assumed under this branch that the users have one common information
need. Financial accounting conforms with accounting standards developed by standard-setting
bodies. In the Philippines, there is a Council created to set these standards. 

Examples of these financial reports include: 

• balance sheet (statement of financial condition) 
• income statement (the profit and loss statement, or P&L)
• statement of cash flows

Financial accounting is primarily concerned with processing historical data. Although financial
accounting generally meets the needs of external users, internal users of accounting information also
use these information for their decision-making needs. 

Management (or Managerial) Accounting        Management accounting emphasizes the

preparation and analysis of accounting information within the organization. The objective of
managerial accounting is to provide timely and relevant information for those internal users of
accounting information, such as the managers and employees in their decision-making needs.
Oftentimes, these are sensitive information and is not distributed to those outside the business - for
example, prices, plans to open up branches, customer list, etc. Managerial accounting involves
financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and
similar areas. 
Government Accounting      Government accounting is the process of recording, analyzing,
classifying, summarizing, communicating and interpreting financial information about the
government in aggregate and in detail reflecting transactions and other economic events involving
the receipt, spending, transfer, usability and disposition of assets and liabilities. This branch of
accounting deals with how the funds of the government are recorded and reported. 

Auditing       There are two types of auditing: external and internal auditing. External auditing refers
to the examination of financial statements by an independent CPA (Certified Public Accountant) with
the purpose of expressing an opinion as to fairness of presentation and compliance with the generally
accepted accounting principles (GAAP). The audit does not cover 100% of the accounting records
but the CPA reviews a selected sample of these records and issues an audit report. Internal auditing
deals with determining the operational efficiency of the company regarding the protection of the
company’s assets, accuracy and reliability of the accounting data, and adherence to certain
management policies. It focuses on evaluating the adequacy of a company's internal control structure
by testing segregation of duties, policies and procedures, degrees of authorization, and other controls
implemented by management.

Tax Accounting      Tax accounting helps clients follow rules set by tax authorities. It includes tax
planning and preparation of tax returns. It also involves determination of income tax and other taxes,
tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters. 

Cost Accounting      Sometimes considered as a subset of management accounting, cost accounting

refers to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very
useful in manufacturing businesses since they have the most complicated costing process. Cost
accountants also analyze actual and standard costs to help managers determine future courses of
action regarding the company's operations. Cost accounting will also help the owner set the selling
price of his products. For example, if the cost accounting records shows that the total cost to produce
one can of sardines is PHP50, then the owner can set the selling price at PHP60. 

Accounting Education   This branch of accounting deals with developing future accountants by

creating relevant accounting curriculum. Accounting professionals can become faculty members of
educational institutions. Accounting educators contribute to the development of the profession
through their effective teaching, publications of their research and influencing students to pursue
careers in accounting. Accounting teachers share their knowledge on accounting so that students are
informed of the importance of accounting and its use in our daily lives.

Accounting Research    Accounting research focuses on the search for new knowledge on the
effects of economic events on the process of summarizing, analyzing, verifying, and reporting
standardized financial information, and on the effects of reported information on economic events.
Researchers typically choose a subject area and a methodology on which to focus their efforts. The
subject matter of accounting research may include information systems, auditing and assurance,
corporate governance, financials, managerial, and tax. Accounting research plays an essential part in
creating new knowledge. Academic accounting research "addresses all aspects of the accounting
profession" using a scientific method. Practicing accountants also conduct accounting research that
focuses on solving problems for a client or group of clients. The Accounting research helps standard-
setting bodies around the world to develop new standards that will address recent issues or trend in
global business.

6. Users of Accounting Information

INTERNAL USERS 

Internal users of accounting information are those individuals inside a company who plan, organize,
and run the business. These users are directly involved in managing and operating the business.
These include marketing managers, production supervisors, finance directors, company officers and
owners.

Accounting information is presented to internal users usually in the form of management accounts,
budgets, forecasts and financial statements. This information will support whatever decision of the
internal users.

EXTERNAL USERS 

External users are individuals and organizations outside a company who want financial information
about the company. These users are not directly involved in managing and operating the business. 

Most common types of external users:

 Potential Investors use accounting information to make decisions to buy shares of a

company. 
 Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of
granting credit or lending money. 
 Government regulatory agencies such as Securities and Exchange Commission (SEC),
Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social
Security System (SSS), and Local Government Units (LGUs).
      

Questions asked by internal users.

 Is cash sufficient to pay bills?

 What is the cost of manufacturing each unit of product?

 Can we afford to give employee pay raises this year?

 Which product line is the most profitable?
 Will the company be able to pay its debts when they come due?

Internal
Information Need Decisions Supported
Users
analyze the organization's performance and
income/earnings for the period,
position and take appropriate measures to improve
Management sales, available cash, production
the company results. sufficiency of cash to pay
cost
dividends to stockholders; pricing decisions
job security, consider staying in the employ of the
profit for the period, salaries
Employees company or look for other employment
paid to employees
opportunities
profit or income for the period,
considerations regarding additional investment,
resources or assets of the
Owners expanding the business, borrowing funds to
business, liabilities of the
support any expansion plans.
business

External Users Information Need Decisions Supported

Creditors include Terms of credit are set by
suppliers as well as creditors according to the
credit worthiness of an organization.
lenders of finance such assessment of their customers'
as banks. financial health.
credibility of the tax returns filed on Collection improvement and
Tax Authorities (BIR)
behalf of a company filing of cases on tax fraud 
make sure they can earn a
analyzing the feasibility of
Investors reasonable return on their
investing in a company
investment
for assessing the financial position to maintain a stable source of
Customers
of its suppliers supply in the long term.
ensuring that a company's disclosure to protect the interests of the
Regulatory Authorities of accounting information is in stakeholders who rely on such
(SEC, DOLE) accordance with the rules and information in forming their
regulations set decisions.

7. TYPES OF BUSINESS ORGANIZATIONS

SOLE

PARTNERSHIP

CORP

READING ASSIGNMENT: ACCOUNTING CONCEPTS AND PRINCIPLES

1. Introduction
  Accounting is considered the language of business. In order for business entities to determine
their financial performance, accounting is needed. 
 There are different forms of business entities according to its organization and operations. A
business can be organized as a sole proprietorship, a partnership or corporation. 
 A business can be operated as a service, merchandising and manufacturing entity. Sometimes
we want to determine our performance compared to similar companies, however, since there
are a lot of ways and assumptions to present financial reports, we need to have a generally
accepted rule for accounting.
  The purpose of our lesson for this session is for you to be able to identify the different
concepts and principles of accounting and identify if a specific situation follows or violates
an accounting principle.

2. Case Problem
Read and answer the text for 10 minutes. 

Petness First Petshop

Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account
for his business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with
the recorded expense of PHP60,000. He is not sure if he should include the following items as
expenses:

Salary expense 20,000

Rent expense 10,000

Utilities expense (at home) 15,000

Utilities expense (at the store) 10,000

Insurance expense 5,000

Withdrawals 10,000

TOTAL 60,000

What do think should not be included as expenses?

The activity is an application of the Business Entity Principle which is one of the most important
principles in accounting. Other principles of accounting will be discussed in the next section

3. Accounting Concepts and Principles

 Business entity principle – a business enterprise is separate and distinct from its owner or
investor.

Examples :

o  If the owner has a barber shop, the cash of the barber shop should be reported separately from
personal cash.

o  The owner had a business meeting with a prospective client. The expenses that come with that
meeting should be part of the company’s expenses. If the owner paid for gas for his personal use, it
should not be included as part of the company’s expenses.

o  Dr. Teng has a skin clinic and a spa. The skin clinic is considered as a separate entity distinct from
the spa and the owner. The expenses of the skin clinic should not be mixed with the expenses of the
spa and the personal expenses of Dr. Teng.

 Going concern principle – business is expected to continue indefinitely.

Example:

o  When preparing financial statements, of the skin clinic and the spa, the accountant assumes that
the businesses will not close or shut operations within the next years..

 Time period principle – financial statements are to be divided into specific time intervals.
One year is usually considered as one accounting period. (The two classifications of
accounting period is on page 19 of your FABM1 book)

Example :

o  Philippine companies are required to report financial statements annually.

o  The salary expenses from January to December 2015 should only be reported in 2015

o  Separate financial reports are prepared yearly for the skin clinic and the spa of Dr. Teng.

 Monetary unit principle – amounts are stated into a single monetary unit

Examples :

o  Jollibee should report financial statements in pesos even if they have a store in the United States.

o IHOP, an American multinational pancake house restaurant chain that specializes in breakfast
foods, should report financial statements in dollars even if they have a branch here in the Philippines

 Objectivity principle – financial statements must be presented with supporting evidence.

Example :

o  When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to
represent as evidence.  

o  When a company incurred a transportation expense, a voucher should be prepared as evidence.

 Historical Cost principle – accounts should be recorded initially at cost.

Example :

o  When Jollibee buys a cash register, it should record the cash register at its price when they bought
it.

o  When a company purchases a laptop, it should be recorded at the price it was purchased.

 Accrual Accounting Principle – revenue should be recognized when earned regardless of

collection and expenses should be recognized when incurred regardless of payment. On the
other hand, the cash basis principle in which revenue is recorded when collected and
expenses should be recorded when paid. Cash basis is not the generally accepted principle
today.

Example:

o  When a barber finishes performing his services he should record it as revenue. When the barber
shop receives an electricity bill, it should record it as an expense even if it is unpaid.

 Matching principle – cost should be matched with the revenue generated.

Example:
o When you provide tutorial services to a customer and there is a transportation cost incurred related
to the tutorial services, it should be recorded as an expense for that period.

 Disclosure principle – all relevant and material information should be reported.

Example:

o Land bought at two million pesos in 2001 should be recorded at historical cost in the 2016 financial
statements. However, the current market value of the three million pesos in the year 2016 may be
indicated in the financial statements for the year 2016 in the form of a footnote or parenthetical note.

 Conservatism principle – also known as prudence. In case of doubt, assets and income
should not be overstated while liabilities and expenses should not be understated.

Example:

o In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a
lower amount.

 Materiality principle – in case of assets that are immaterial to make a difference in the
financial statements, the company should instead record it as an expense.

Example:

o  A school purchased an eraser with an estimated useful life of three years. Since an eraser is
immaterial relative to assets, it should be recorded as an expense.

 Consistency principle – means that approaches used in reporting must be uniformly

employed from period to period to allow comparison of results between time periods. Any
changes must be clearly explained.

Example:

o  If a straight line method of depreciation is being used by the company then the method should be
uniformly used by the company in computing its annual depreciation.

1. ACCOUNTING EQUATION

   Objectives:  At the end of the lesson, the learner is able to

1.      Equate assets with liabilities and equity

2.     Solve problems using the accounting equation.

A. INTRODUCTION
An overview regarding the accounting equation:

Assets = Liabilities + Equity

• For every transaction, the accounting equation should always be balanced.

• Assets are resources owned by the business.

• Liabilities are obligations by the business.

• Equity is the residual interest of the owner of the business. Meaning, any assets left after paying
liabilities is the right of the owner of the business.

• There are four elements that affect equity:

(1) Investment – assets that are put up by the owner to start a business

(2) Withdrawal - assets withdrawn by the owner for personal use from the business.

(3) Revenue – or Income is the Increase in resources resulting from performance of service or selling
of goods.

(4) Expenses- is the decrease in resources resulting from the operations of business.