CHAPTER 1: INTRODUCING FINANCIAL ACCOUNTING

I. DEFINITIONS OF ACCOUNTING

A. Accounting is the art of analyzing, 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.

 Its function is to provide quantitative information, primarily financial in nature,

about economic entities that is intended to be useful in making economic
decisions.

B. Accounting is the language of business and

is called this because all organizations set up
an accounting information system to
communicate data to help people make better
decisions.

C. Accounting is a system that identifies

records and communicates relevant, reliable,
and comparable information about an
organization’s business activities.

• Identifying means selecting transactions and

events relevant to an organization.

• Recording means keeping a chronological log

of transactions and events measured in currency
and classified and summarized in a useful format.

• Communicating means preparing accounting

reports such as financial statements, and
analyzing and interpreting these reports.

D. Accounting is a process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the
information.

II. HISTORY OF ACCOUNTING

Fra Luca Pacioli is considered to be the ―Father of

double-entry accounting.‖ He is from Venice, Italy.
Pacioli is known to be the author of "Summa de
Arithmetica, Geometria, Prortioni et Proportionalita" or
"Everything about Arithmethic, Geometry, Proportions
and Proportionality"
Nicolas Petri is the first person to group similar transactions in a separate record
and entered the monthly totals in the journal, rather than recording all transactions in
a series.

Benjamin Workman is the author of The American Accountant, earliest known

American accounting textbook.

III. BRANCHES OF ACCOUNTING

A. Accountancy and Accounting

B. Auditing (more of the attest function)
 Checking of the prepared Financial Statements
 External (those performed only by CPAs)
 Internal (either performed by CPAs, or any other professionals with background
of internal audit)
C. Bookkeeping
 mechanical task involving the collection of basic financial data.
 the bookkeeping procedures usually end when the basic data have been
entered in the books of account and the accuracy of each entry has been
tested.
D. Cost Bookkeeping, Costing and Cost Accounting (more detailed for accounting
goods used in business)
E. Financial Accounting - for the benefit of the owners of the entity and other parties
like investors and lenders
F. Financial Management - finance, investments, stocks
G. Management Accounting - for the benefit of the managers of the entity for making
better decisions.
H. Taxation – Highly complicated branch of accounting more on tax and government
I. Forensic Accounting - for detection of illegal transactions, and also for detection
of fraud and unethical conduct of business
J. Government Accounting - providing quantitative information about government
funds for better economic decisions.

IV. SCOPE OF PRACTICE

A. Public Practice (external auditors, tax and management consultants)
B. Commerce and industry (accounting clerk, controller, internal auditors)
C. Academe (professors, deans, department heads, researchers)
D. Government (BIR Commissioners, Commission on Audit, Dept. of Budget &
Management, Dept. of Finance)
V. USERS OF ACCOUNTING INFORMATION

A. External Information Users

External Users—are NOT directly involved in running the

organization.

They have limited access to an organization’s information.

External users’ business decisions depend on information that

is reliable, relevant, and comparable. These financial
statements are called general-purpose financial statements.

Examples: shareholders (investors), lenders, directors,

customers, suppliers, regulators, lawyers, brokers, and the press.

a. Lenders (creditors)
 They look for information to help them assess whether an organization is
likely to repay its loans with interest.
 Examples: banks, savings and loans, co-ops, and mortgage and finance
companies.

b. Shareholders (investors)
 Owners of a corporation.
 Use accounting reports in deciding whether to buy, hold, or sell stock.
c. External (Independent) Auditors
 Examine financial statements to verify that they are prepared according to
generally accepted accounting principles (GAAP).

d. Regulators
 Often have legal authority over certain activities of organizations.
 BIR who requires organizations to file accounting reports in computing taxes.

e. Suppliers
 Use accounting information to judge the soundness of a customer before
making sales on credit.

f. Customers
 Use financial reports to assess the staying power of potential suppliers.

B. Internal Information Users

Internal Users are those directly involved in managing

and operating an organization.

Internal Controls—are procedures set up to protect

company property and equipment, ensure reliable
accounting reports, promote efficiency, and encourage
adherence to company policies.

• Examples: good records, physical controls (locks,

passwords, guards), and independent reviews

a. Board of Directors
 Oversees stockholders interests in an organization.

b.Research and Development Managers

 Need information about projected costs and revenues of any proposed
changes in products and services.

c. Purchasing Managers
 Need to know what, when, and how much to purchase.

d. Human Resource Managers

 Need information about employees’ payroll, benefits, performance, and
compensation.

e. Production Managers
 Depend on information to monitor costs and ensure quality.
f. Distribution Managers
 Need reports for timely, accurate, and efficient delivery of products and
services.

g. Marketing Managers
 Use reports about sales and costs to target consumers, set prices, and
monitor consumer needs, tastes, and price concerns.

h. Service Managers
 Require information on the costs and benefits of looking after products and
services.