FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS & MANAGEMENT 1

Definition, Nature, Function, History of
Accounting and the External and
Internal Users of Financial Information
Quarter 3, Module 1
Fundamentals of Accountancy, Business & Management 1
Senior High School
Locally-Developed Module
Quarter 3- Module 1: Definition, nature, Function, History of
Accounting and the External and Internal Users of Financial
Information
First Edition, 2021

All rights reserved. No part of this module may be reproduced or transmit-

ted to any form or by any means, electronic or mechanical, including pho-
tocopying, recording, or by any information storage and retrieval system
without written permission from the publisher and authors.
Published by the Schools Division Office (SDO) Dagupan City
OIC, Schools Division Superintendent: Aguedo C. Fernandez
Asst Schools Division Superintendent: Marciano U. Soriano

Development Team of the Module

Writer: Filipina Q. Calaunan
Editor: Mark Christopher C. Braganza
Reviewers: Reymond C. Villare
Renata G. Rovillos
Layout Artist: Michael Angelo C. Gatchalian
Management Team: Maria Linda R. Ventenilla
Edilberto R. Abalos
Renata G. Rovillos
Cherry A. Cayabyab
Rosalind R. Lomibao

Department of Education-SDO Dagupan City

Office Address: Burgos Street, Poblacion Oeste, Dagupan City
Telefax: (075) 515-6009
E-mail Address: dagupan.city@deped.gov.ph

Rabo, J.S, et al (2016). Fundamentals of Accountancy,
Business and Management I. Quezon City. Vibal
Group, Inc.
Published by the Commission on Higher Education,
2016 .Teaching Guide for Senior High School.
Quezon City. 4th Floor, Commission on Higher
Education, C.P. Garcia Ave., Diliman.
Ong, F.L,(2014). Fundamentals of Accounting Textbook for
Beginners (forth edition). Quezon City. C & E
Publishing, Inc.
26
THE DEFINITION, NATURE, FUNCTION, HISTORY
OF ACCOUNTING AND THE EXTERNAL AND
INTERNAL USERS OF FINANCIAL INFORMATION
In this module the learners are able to cite specific
examples in which accounting is used in making business
decisions, solve exercises and problems on the identification of
users of information, type of decisions to be made, and type of
information needed by the users and cite users of financial
information and identify whether they are external or internal
users.
In this module you will learn to:
• define accounting ABM_FABM11-IIIa-1
• describe the nature of accounting ABM_FABM11-IIIa-2
• Narrate the history/origin of accounting ABM_FABM11-IIIa-4
• Define external users and give examples ABM_FABM11-IIIa-7
• Define internal users and give examples ABM_FABM11-IIIa-8
In doing this module, the following
are some reminders:
1. Take the pretest before
answering the module.
2. Read the instructions carefully
before doing each task.
3. Answer all the exercises.
4. Take the posttest.
5. Use a separate sheet in
answering all the activities.
1

Directions: Encircle the letter of the best answer.
1. Which of the following is not a basic component of financial
statement?
A. Statement of Financial Position
B. Income Statement
C. Statement of Changes in Cash
D. Statement of Cash Flows
It’s time to check your answers!
Remember, honesty is important so
that you can effectively assess your
learning. Don’t feel pressured, I know
you did your best! Let’s now have a
look at these answers for the Posttest
and activity 2&3

2. Economic activities relate to transactions that affect

10. B
A. Financial Position
9. F
B. Financial Performance
8. G
C. Cash Flows
7. J the business.
D. All of the above
6. A operation or management of
5. E directly involved in the
15. A
3. Which of the following is not an output of the accounting
4. H B. External. They are not
14. B
process?
3. D
13. C
2. I taxes.
12. A
A. Statement of Financial Position
1. C declaring or paying the correct
11. D
B. Notes to Financial Statements
II check whether you are
10. A
C. Income Statement
10. External your accounting records to
9. A
D. None of the above
9. Internal local government may review
8. D
8. External appropriate taxes paid. The
7. D
4. Which of the following activities did not result in a business
7. External renewed every year, with
6. C
transaction that is financial in nature?
6. External city or municipality. This is
5. A
5. Internal are allowed to operate in the
4. A
A. Hiring of a staff
4. Internal business permit before you
3. C
B. Purchase of machine
3. Internal local taxes and check the
2. D
C. Borrow of money from a friend
2. External whether you are paying your
1. C
D. Receipt of electricity bill
1. External II. A. Yes. LGU will check
Posttest
I I. Refer to pages 10-11
Activity 2 Activity 3

2 25
 5. Which professional organization below defines accounting as
a service activity?

It’s time to check your answers! A. Accounting Standards Council

Remember, honesty is important so
that you can effectively assess your
learning. Don’t feel pressured, I know
you did your best! Let’s now have a
look at these answers for the Pretest
and Activity 1.
B. American Association of Certified Public Accountants
C. American Accounting Association
D. Philippine Institute of Certified Public Accountants
6. Because accounting is an art, _________________.
A. it refers to something that can be performed
B. it refers to a behavioral knowledge
C. it refers to a skill that can be enhanced
D. all of the above

7. Accounting being regarded as the performance of specific

Bartolomes Pacioli
actions such as identifying, measuring, and communicating
15. Frater Luca
financial information is through the nature of accounting
14. Financial Statements
as__________.
15. A 13. Classifying
14. A 12. Recording
A. a process
13. C 11. Stewardship Function
B. an art
12. D 10. service activity
C. a skill
11. C Accounting
D. a service activity
10. A 9. Father of Modern
9. B 8. language of business
8. The management or owners report on how well the business
8. C 7. Information System
fares which is a reflection of how well they run the business.
7. A 6. money
What functions of accounting to business does this primarily
6. D 5. art
refer to?
5. A 4. process
3. Financial Statements
4. A A. To support daily operations of the business
B. To help interested users come up with informed
3. D 2. systematic
Decisions.
2. D 1. Business Transactions
C. To fulfil the stewardship function of the management
1. C Activity 1
Pretest
D. All of the above

24 3
9. The English translation of Summa de Arithmetica, 11. These are the internal users of financial reports who are
Geometria, Proportiono et Proportionalita is ___________. interested in determining the return of investment in the
business
A. Details of calculation and recording A. management
B. Everything about Arithmetic, Geometry, and Proportion B. employees
C. Everything about Accounting, Geometry, and C. owners
Proportion. D. creditors
D. Details of Recording and Journalizing
12. The following are the external users who make decisions about
10. It refers to preparing the financial statements from the their relationship to the enterprise, except_________.
transactions recorded in the books of account designed to meet A. taxing authorities
the information needs of its users. B. regulatory agencies
A. summarizing C. suppliers
B. recording D. employees.
C. classifying
D. interpreting 13. Which of the following statements about users of accounting
information is correct?
11. These are the internal users of financial reports who are A. Management is an external user.
interested in determining the return of investment in the B. Tax authorities are internal users.
business. C. Creditors are external users.
A. management D. Employees are external users.
B. employees
C. owners 14. The responsibility to review the work of the accountants and
D. creditors. issue opinions as to the fairness of financial statements rests
with _____________.
12. The following are the external users who make decisions A. the external auditor
about their relationship to the enterprise, except_________. B. the board of directors
A. taxing authorities C. the internal auditors
B. regulatory agencies D. management
C. suppliers
15. Which of the following is an internal user of a company’s
D. employees. financial information?
A. board of directors
B. stockholders in the company
C. holders of the company’s bonds
D. creditors with long-term contracts with the company
4 23
6. Because accounting is an art, _________________.
A. it refers to something that can be performed 13. Which of the following statements about users of accounting
B. it refers to a behavioral knowledge information is correct?
C. it refers to a skill that can be enhanced
D. all of the above A. Management is an external user.
B. Tax authorities are internal users.
7. Accounting being regarded as the performance of specific C. Creditors are external users.
actions such as identifying, measuring, and communicating
financial information is through the nature of accounting D. Employees are external users.
as__________. 14. The responsibility to review the work of the accountants and
A. a process issue opinions as to the fairness of financial statements rests
B. an art with _____________.
C. a skill
D. a service activity A. the external auditor
B. the board of directors
8. The management or owners report on how well the business C. the internal auditors
fares which is a reflection of how well they run the business. D. management
What functions of accounting to business does this primarily
refer to? 15. Which of the following is an internal user of a company’s
A. To support daily operations of the business financial information?
B. To help interested users come up with informed
decisions A. board of directors
C. To fulfil the stewardship function of the management B. stockholders in the company
D. All of the above C. holders of the company’s bonds
9. The English translation of Summa de Arithmetica, D. creditors with long-term contracts with the company
Geometria, Proportiono et Proportionalita is ___________.
A. Details of calculation and recording
B. Everything about Arithmetic, Geometry, and Proportion
C. Everything about Accounting, Geometry, and
Proportion.
D. Details of Recording and Journalizing
10. It refers to preparing the financial statements from the
transactions recorded in the books of account designed to
meet the information needs of its users.
A. summarizing C. classifying
B. recording D. interpreting

22 5
 Directions: Choose the letter of the correct answer.
BASIC FINANCIAL STATEMENTS
1. Which of the following is not a basic component of financial
Financial statements are one of the most important statement?
documents in starting your own business. For one, it helps fulfil the A. Statement of Financial Position
stewardship function of the owners and managers. Stewardship B. Income Statement
function means that the businesses should be transparent on the C. Statement of Changes in Cash
performance and standing of the business to its stakeholders. D. Statement of Cash Flows
Financial statements or reports reflect the financial standing and 2. Economic activities relate to transactions that affect
economic activities of the business. These economic activities may A. Financial Position
relate to transactions that can affect the financial position, financial B. Financial Performance
performance and a cash flows of the business. C. Cash Flows
D. All of the above
A complete set of financial statements being prepared 3. Which of the following is not an output of the accounting pro-
periodically by a business is composed of the following: cess?
1. Statement of Financial Position; A. Statement of Financial Position
2. Income Statement; B. Notes to Financial Statements
3. Statement of Changes in Equity;. C. Income Statement
4. Statement of Cash Flows; and D. None of the above
5. Notes, comprising of a summary of significant accounting
policies and other explanatory information. 4. Which of the following activities did not result in a business
transaction that is financial in nature?
It is important to note that the financial statements are the A. Hiring of a staff
outputs of the accounting process. B. Purchase of machine
C. Borrow of money from a friend
The objective of financial statements is to provide D. Receipt of electricity bill
information about the financial position, financial performance, and 5. Which professional organization below defines accounting as
cash flows of a business that is useful to key personalities who are a service activity?
making economic decisions. To meet this objective, financial A. Accounting Standards Council
B. American Association of Certified Public Accountants
C. American Accounting Association
D. Philippine Institute of Certified Public Accountants
6 21

We’re almost done! Here’s a recap of what
we have learned today. Review them once
again, and get ready for the Post Test on the
next page! You’re doing great! Keep it up!
• According to American Accounting Association (AAA),
accounting is the process of identifying, measuring, and
communicating economic information to permit
informed judgment and decisions by users of the
information.
• 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, transactions, and events which
are in part at least of financial character, and
interpreting the results thereof.
• The Accounting Standard Council (ASC) see
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.
Users of Accounting Information
Internal Users External Users
1.managers 1. potential investors 2. creditors and potential
2. Employees/ creditors 3. customers 4. suppliers 5. tax
Labor unions authorities 6. regulatory bodies 7. public
3.owners
20
statements provide information about a business’ assets,
liabilities, equity, income and expenses, contributions by and
contributions to owners in their capacity as owners, and cash
flows.
Business transactions take place once a business venture
starts operation. Business transactions are the interactions
between business and other stakeholders. Stakeholders include,
but are not limited to, customers, suppliers, investors, and
government offices. These transactions can be very simple like
photocopying supplies or very complex like applying for a bank
loan that requires submission of business and legal documents.
Business transactions have to be identified, measured, and
documented through an accounting process. Doing so can make
it easier for the owners and managers to prepare the financial
statements for a particular period or as of a specific time.
DEFINITION OF ACCOUNTING
After explaining the definition and function of financial
statements, we can now define accounting. The following are
three widely-accepted definitions of accounting.
• According to American Accounting Association (AAA),
accounting is the process of identifying, measuring, and
communicating economic information to permit informed
judgment and decisions by users of the information.
• 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, transactions, and events which are in part at
least of financial character, and interpreting the results
thereof.
• The Accounting Standard Council (ASC) see 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.
7
FOUR ASPECTS OF ACCOUNTING
1. RECORDING-writing down of business transactions
chronologically in the books of account as they transpire
2. CLASSIFYING—sorting similar and related business
transactions into the three categories of assets, liabilities, and Activity 3
owner’s equity I. Give examples of decisions or questions that can be supported by
3. SUMMARIZING—preparing the financial statements from accounting information.
the transactions recorded in the books of account 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. By interpreting the data in the financial
statements, users are able to determine the financial standing of
the company as well as its stability and growth potential. Users
interpret financial information relating to specific business II. A. ‘What if you are from a Local Government Unit (City/
decisions. This makes accounting the language of business. Municipality)? Do you think the local Government (City/Minicipality)
will be interested with your accounting reports/record?”
NATURE OF ACCOUNTING
From the three definitions above, we can see the
unifying themes that describe the nature of accounting.
Accounting is an art. The word ”art” refers to the design of
how something can be performed. It is a behavioral knowledge
involving creativity and skill. By the very nature that accounting
activity is systematic, it has definite techniques and its proper B. “ Are the officers of the Local Government Unit internal or
application requires a particular skill and expertise. external users? Why?
Accounting deals with transactions that are financial in
nature. The definition of ASC requires that business
transactions have to be measured in terms of money. All other
transactions that are non-monetary are not within the scope of
accounting.

8 19
________3. To determine whether debts owed to them will be
paid when due.
________4. To determine the correctness of the tax returns filed
by the company.
________5. To decide whether to invest in the company.
________6. To decide whether they should withdraw or increase
their investments.
________7. To know whether an entity will continue to honor
product warranties.
________8. To ensure that the company’s disclosure of
accounting information is in accordance with the rules and
regulations.
________9. To find out the financial capacity of the company in
order to bargain for benefits.
________10. To assess the capability of the business to pay its
obligation including the related interests on maturity date.
18
A “process” is a systematic series of actions directed towards a
particular outcome. As a process, accounting performs specific
actions such as identifying, measuring, and communicating
financial information. It has to follow logical steps in the
accounting cycle like recording, classifying, and summarizing
financial transactions, and communicating the results after.
Accounting is also an “ information system”. An
information system is a set of interrelated components that work
together to achieve a common purpose. It also serve as
repository of collected financial data, proposed financial
information, and communicated financial statements.
Accounting is a means and not an end. Although
accounting has a tangible output in the form of financial
statements, it still underscores that users have the liberty to
make economic decisions based on the management
assertions in the financial statements. Using this logic,
accounting indeed paves the way to an end and it is not the end
itself.
For businessmen, entrepreneurs, managers, and
stakeholders, accounting is a service activity. It is concerned
with providing the service of ensuring that financial statements
are made available to users on a timely basis.
FUNCTIONS OF ACCOUNTING IN BUSINESS
The functions of accounting in business can be
attributed to the three fundamental objectives of an information
system. An information system in itself, accounting performs
the following task:
A. To fulfill the stewardship function of the management (or
owners);
B. To help interested users come up with informed decisions;
and
C. To support daily operations of the business.
9
 These tasks validate why accounting is considered as the
language of business. It serves as a means of communication Activity 2
between the business and interested users, whether internal or
I. Directions: The following are users of financial statements.
external. It facilitates the smooth flow of information in and out of
the business. The management or owners report on how well the Identify if the users mentioned below is external or internal.
business fares which is a reflection of how well they manage the _______________1. customers
business. Interested users, on the other hand, use these reports to
_______________2. Bureau of Internal Revenue
make informed decisions based on the past performance and the
current financial conditions of the business. In management _______________3. labor unions
accounting, financial information from accounting are used to come _______________4. factory mamager
up with recommendations on how to improve the operational _______________5. Vice-President of Finance
effectiveness and efficiency of the company.
_______________6. Security and Exchange Commision
Example: _______________7. investors
_______________8. suppliers
Mr. Lee is a retired government employee who is good at baking.
_______________9. factory workers
One day he decides to put up a bakery shop in your barangay. He
renovates a portion of his house to serve as the area for the _______________10. bank company
production of bread. He purchases baking equipment and raw
materials to produce five different types of bread. Mr. Lee also hires
II. Directions: Match the items below by writing the letter on the
John to help him with the baking and, at the same time, to be in-
charge of sales. Mr. Lee pays John on a weekly basis. Everyday, space provided.
Mr. Lee’s wife deposits the daily cash sales in their bank account at
ABC Savings Bank. With the help of accounting, what possible
A. owners C. management
decisions or questions of Mr. Lee can accounting provide an
answer to? B. creditors D. suppliers
E. potential investors H. Bureau of Internal Revenue
Answers: F. employees I. public
• Is my business earning?
G. regulatory bodies J. customers
• How much daily or monthly sales do I need in order to recover
my fixed cost? (break-even)
________1. To plan, organize, and run the business.
________2. To know how the business helps the economy.

17
10

8. The three basic functions of accounting in business is
supportiveof the fact that accounting is being regarded as the
______________________.
9. Because of the enormous impact of his work in the field of
accounting, Frater Luca Bartolomes Pacioli is being regarded as
the “________________________”.
10. For businessmen, entrepreneurs, managers, and stakeholders,
accounting is a _____________________.
11. ____________________means that the business should be
transparent on the performance and standing of the business to its
stakeholders.
12. _________________refers to writing down of business
transactions chronologically in the books of account as they
transpire.
13. _________________ refers to sorting similar and related
business transactions into the three categories of assets, liabilities,
and owner’s equity.
14. ______________________ are the outputs of the accounting
process.
15. ________________________ popularized the system of
recording business transactions using memorandum books, journal
books, and ledger books.
16
• Do I need to hire additional workers to help me with my
production?
• Can I afford to set up a new store in another place? Where do I
get the funds?
• Can I afford to pay a bank loan?
HISTORY OF ACCOUNTING
The origins of accounting can be traced from the
Renaissance period. Particularly, the Italian monk and
mathematician Frater Luca Bartolomes Pacioli wrote Summa de
Arithmetica, Geometria, Proportioni et Proportionalita ( Everything
About Arithmetic, Geometry, and Proportion) which was published
in Venive in November 1494. It included a 24-page treatise on
bookkeeping, Particularis de Computis et Scripturiz ( Details of
Calculation and Recording), specifically on the subjects of
recordkeeping and double-entry accounting.
Pacioli was born in Borgo San Sepolcro. He lived in Venice
and became the tutor of the three sons of a rich merchant, Antinio
de Rompiasi. Pacioli popularized the system of recording business
transactions using memorandum books, journal books, and ledger
books. This system of bookkeeping was largely influenced by how
commercial establishments then in Venice kept tract of their
business transactions. This is probably something that he had
learned from his exposure to the Venetian merchants.
Aside from Pacioli, there are also other Italian personalities
who wrote about double-entry accounting during that time.
However, it is only his work that had a huge impact on the
field of accounting. It is for this reason that he is regarded as the
“Father of Modern Accounting”.
11
USERS OF ACCOUNTING INFORMATION
Activity 1
Accounting communicates financial information to decision
Directions: Fill in the blanks. On the space provided, write the term
makers. Different decision makers are users of these accounting
(word or phrase) that is being described or completes the thought of
information. Users of accounting information are collectively
each statement.
referred to as stakeholders. These stakeholders can be classified
as internal and external users.
1. __________________are the interactions between businesses
and other stakeholders.
INTERNAL USERS
2. Because accounting is ___________, definite techniques and
The internal users are those who make decisions that affect
their application require particular skill and expertise.
the internal operations of the company. They are the following:
3. __________________ are the means by which a business
A. Managers– they plan, organize, and run a business
communicates to interested users significant information about its
economic activities.
B. Employees/labor unions– they assess the company’s
profitability and stability, its consequence on their future salary and
4. According to AAA, accounting is the _____________ of
job security.
identifying, measuring, and communicating economic information to
permit informed judgments and decisions by users of the
C. Owners - they provide the capital to the business. Owners need
information.
these accounting information to help them decide whether they
should withdraw or increase their investments. They are interested
5. According to AICPA, accounting is the_____________ of
to know the returns on their investment.
recording, classifying, and summarizing in a significant manner and
in terms of money, transactions, and events which are in part of
The common information needs of the internal users are the
least of financial character, and interpreting results thereof.
following:
6. The definition provide by the ASC requires that business
transactions have to be measured in terms of ___________.
1. Do we have enough cash to pay bills?
2. How much is the cost of producing each unit of product?
7. A/An __________________________ is a set of interrelated
components that work together to achieve a common purpose.

12 15
• Tax authorities - they use financial reports to determine the
credibility of the tax returns filed on behalf of the company. They
are interested to know if the business paid the correct amount
of taxes.
• Regulatory bodies - they want to ensure that the company’s
disclosure of accounting information is in accordance with the
rules and regulations set in order to protect the interest of the
stakeholders who rely on such information. Example of these
regulatory bodies are the Securities and Exchange Commission
(SEC) and the Bangko Sentral ng Pilipinas (BSP).
• Public - they use the financial information to know how the
business helps the economy and whether employment is
available in the company.
14
3. Can the company afford to give salary increase?
4. Which product line is more profitable
5. How much is the company’s sales growth for the month?
6. How much is the tax payable to the government.
The accounting information provided to internal users can
be in the form of management reports, budgets, and financial
statements.
EXTERNAL USERS
The external users of financial reports are those who make
their decisions based on the company’s financial information. They
are the following:
• Potential investors - they need information to help them
decide whether they should invest or not in the business.
Through past performances or operating results of the
company, they would want to know potential returns on their
investment should they decide to invest.
• Creditors and potential creditors - they assess the credit
worthiness and the capability of the business to pay its
obligation including the related interests on maturity date.
• Customers - they assess the financial position of their suppliers
which is necessary for them to maintain a stable source of
supply in the long term. They are interested to know whether
the business will continue to honor its product warranties.
• Suppliers - they use the financial statements of their customers
to determine whether the debts owed to them will be paid when
due or whether the customers has enough funds or resources to
pay the goods to be delivered or the services to be rendered.
13