Fundamentals of Accounting, Business and

Management (FABM) 1

ALCASAR PACALNA MAONGCO, CPA, REB, MM

Faculty, Accountancy Department, CBAA, MSU Main
What is Accounting?

The American Institute of Certified Public Accountants

(AICPA) defined 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."
FINANCIAL ACCOUNTING
 NATURE AND SCOPE OF
ACCOUNTING
NATURE OF ACCOUNTING

Accounting as an art
Accounting as a science
Accounting as an ideology
Accounting as a language
Accounting as a historical record
Accounting as a commodity
Accounting as an economic reality
Accounting as an information system
Accounting as an art
The word ‘art’ refers to the way of performing something.
Accounting is the art of recording, classifying and summarizing
financial data. Accounting is a systematic method that consists of
definite techniques and their appropriate application, which
requires applied skills and expertise.

Accounting as a science
‘Science’ is all about obtaining knowledge about a systematic
pattern through observation and investigation. Similarly, accounting
is the science of recording and pre- sending the financial data of
an economic entity by observing and investigating the economic
events through established methods.
Accounting as an ideology
Ideology refers to a system of ideas and views regarding certain
concepts or practices carried out in the world. Different ideologies
form the basis of different economic or political theories and
policies. Accounting is also considered as an ideology because it is
considered as a means of justifying the current social, economic
and political arrangements.

Accounting as a language
Accounting is also called the language of business because the
activities of an organization are reported in the form of financial
reports and statements using accounting language. Accounting
defines a certain set of procedures that are used to create
financial data for a business.
Accounting as a historical record
Historical accounting records of an organization help in
getting information on past transactions of a business as
well as profits earned and losses made.

Accounting as a commodity
Accounting information is viewed as a commodity. It is
so because there is demand for such accounting
information in the financial markets. For example, share
market investors study the financial and accounting
reports of companies before buying their shares.
Accounting as an economic reality
Acco u n ti n g i s als o co n s i dered to b e a mean s o f
demonstrating the current financial position of an
organization. Accounting professionals must try to mirror
the current economic reality in the financial statements
of an organization..

Accounting as an information system

Th e res u lt an t o u t p u t ( i n t erp ret at i o n o f dat a) i s
communicated to various users such as the government,
suppliers, researchers, investors, managers, creditors,
etc. through various channels such as electronic and print
media..
 NATURE AND SCOPE OF
ACCOUNTING
SCOPE OF ACCOUNTING

The scope of accounting has been widening with the changes in the
economy and societal demands. It extends to business, trade, government,
financial institutions, individuals and families and various other avenues.

Business organizations
Non-profit organizations
Government organizations
Professionals
Individuals
Business Organizations
Accounting is widely applicable in the business sector. It
is rightly called ‘Language of Business’. The main
objective of every business is to earn profits. Financial
transactions of a business concern are recorded in the
books of accounts to ascertain operating results and
determine the financial position..

Non-profit Organizations
Accounting also has scope in non-profit organizations.
These organizations record their transactions such as
the donations received, subscription given by members
and all the expenditures. To do so, statements such as
receipt and payment account, income and expenditure
account and balance sheet are prepared as per the rule
of accounting..
Government Organizations
The scope of accounting also exists in central and state-
owned organizations. These organizations use the
system of accounting for various purposes such as
determining the income, calculating expenditure and
proper running of the administration. Apart from that,
interpretation and evaluation of accounting data is
required for performing national planning, pre- paring
financial budget, determining national progress or regress
and so on..

Professionals
Professionals like engineers, doctors, lawyers and
sportspeople also maintain their accounts to keep a tab
on their income and expenditure and determine their
income tax liability..
Individuals
Individuals also perform financial transactions to earn their livelihood. They also do
some form of accounting to obtain financial information; thereby making personal
economic decisions.
Fin an cial Accou n t in g deals w it h t h e t h eoret ical
framework covering accounting principles and concepts
relative to measurement and valuation as
applied to assets, liabilities, stockholders’ equity,
retained earnings, revenue and expenses accounts in
relation to the preparation and presentation of financial
statements. These financial statements
include disclosure requirements as governed by the
generally accepted accounting principles (GAAP).
The Institute of Management Accountants (IMA)
defines management accounting as a profession that
involves
partnering in management decision making, devising
planning and performance management systems, and
providing expertise in financial reporting and control
t o as s is t man agemen t in t h e f ormu lat ion an d
implementation of organization’s strategy.
Government Accounting Au dit in g is t h e examin at ion an d review of
accounting reports in order to ascertain their
Sect i on 109 D ecr ee (PD ) No. 1445 s t at es t h at fairness, propriety and reliability
government accounting encompasses the process of
analyzing, classifying, summarizing and communicating all
transactions involving the receipt and disposition of
government funds and property, and interpreting the
results thereof.
Tax services provided by accountants Cost Accounting includes the collection,
include the preparation of monthly value determin ation , allocation , assessmen t,
as s ed t ax , p ercen t age t ax , ex p an ded interpretation, and control of cost data
withholding tax returns, quarterly and annual
tax returns, and any other taxes applicable to
business.
Accounting education involves planned Accounting research involves conducting a
grading and formal teaching in a educational careful and diligent
institution study aimed at discovering and interpreting
facts, revising accepted theories on the
ligh ts o f n ew facts, o r th e practical
application of such new or revised theories
for the generation of a new knowledge.
“Summa de Arithmetica, Geometria, Proportioni et
Proportionalita”.
Don Vicente Fabella
Accrual principle
Conservatism principle
Consistency principle
Cost principle
Economic entity principle
Full disclosure principle
Going concern principle
Matching principle
Materiality principle
Monetary unit principle
Reliability principle
Revenue recognition principle
Time period principle
Assets are normally shown at
cost price in the balance sheet,
and this cost is the basis for all
subsequent accounting for the
asset. The balance sheet does
not show the current value of
an asset.
Financial statements should
disclose fully and
completely all significant
information.
Expenses are matched to
revenues within an accounting
period. Profit is therefore the
difference between revenue and
expenses not cash received and
paid. This accounting concept is
sometimes referred to as the
accruals accounting concept.
The main task of accounting is to calculate the
capital, liabilities, assets, and profit or loss of a
business and to serve the people interested in
the consequences. The main objective of
accounting is to publish important information
in this regard.

According to this principle, it is necessary to

judge the relevance of all such information
when recording all information.

Th e mat erialit y prin ciple st at es t h at t h e

economic impact of all issues or events is of
little or no consideration to the needs of users,
these issues are of no importance at all and
they cannot be published.
Revenue is considered as
earned income when it is
realized, this is at the time
the goods or services are
passed to the customer and
the customer incurs liability
for them.
Accounting is a means by which necessary financial information about business enterprise is communicated.
There are many users of accounting information who need financial information of enterprise in order to make
important decisions.
 Internal Users
Owners:
Owners contribute capital in the business and thus are exposed to maximum risk.
Naturally, they are interested in knowing the profit earned or loss incurred by the
business besides the safety of their capital. The financial statements give the
information about profit or loss and financial position of the business.

Management:
The management makes extensive use of accounting information to arrive at informed
decisions such as determination of selling price, cost controls and reduction, investment
into new projects, etc.

Employees and Workers:

Employees and workers are entitled to bonus at the year-end, which is linked to the profit
earned by an enterprise. Therefore, the employees and workers are interested in
financial statements. Besides, the financial statements also reflect whether the
enterprise has deposited its dues towards Employees’ Provident Fund and Employees’
State Insurance, etc., or not with the appropriate authorities.
 External Users
Banks and Financial Institutions:
Banks and financial institutions are an essential part of any business as they provide loans
to businesses. Naturally, they watch the performance of the business to know whether it
is making progress as projected to ensure the safety and recovery of the loan advanced.
They assess it by analysing the accounting information.

Investors and Potential Investors:

Investment involves risk and also the investors do not have direct control over the
business affairs. Therefore, they rely on the accounting information available to them and
seek answers to questions such as—what is the earning capacity of the enterprise and
how safe is their investment?

Creditors:
Creditors are those parties who supply goods and/or services on credit. It is a common
business practice that a large number of suppliers remain invested in credit sales. Before
granting credit, creditors satisfy themselves about the credit-worthiness of the business.
The financial statements help them immensely in making such an assessment.
 External Users
Government and its Authorities:
The government makes use of financial statements to compile national income accounts
and other information. The information available to it enables it to take policy decisions.
Government levies varied taxes such as excise duty, GST and income tax. These
government authorities assess correct tax dues after an analysis of the financial
statements.

Consumers:
Consumers require accounting information for establishing good accounting control so that
cost of production may be reduced with the resultant reduction in the prices of products
they buy. Sometimes, prices of some products are fixed by the government, so it needs
accounting information to fix fair prices so that consumers and producers are not
exploited.
 BUSINESS ENTITY
An organization
Uses economic resources
Provides goods or service to customers
Exchange for money or goods and
services

Comes in different types and form of

ownership
Service Business

A service type of business which provides

customers with intangible products (products that
are not seen, felt or touched).

Service based firms offer professional skills,

ability, advice, and other similar products. Examples
of businesses offering services are: salons, repair
shops, schools, banks, accounting firms, law firms
etc.
Merchandising Business

A merchandise buys products at wholesale price from the

wholesale and sells the product at retail price to the
consumer.

Merchandising businesses are "buy and sell" businesses.

They make profit when they sell the products at prices
higher than their cost price.

A merchandising business sells a product without changing

its original form. Examples of merchandising businesses are:
grocery stores, convenience stores, distributors, and other
resellers.
Manufacturing Business

A manufacturing business purchases products with the aim

of using them as materials to make a new product. They
usually buy capital good.

Thus, the manufacturer transform the products after

purchase. A manufacturing business puts together raw
materials, labor, and overhead costs in its production
process. The manufactured goods (end products) will then
be sold to the wholesalers, retailers or consumers
depending on the channel of distribution used.
Hybrid Business

Hybrid businesses undertake in more than one

type of business. They involve in manufacturing,
merchandising and services.

A r e s t aur ant , f o r ins t anc e , p ut s t o ge t he r

ingredients in preparing a meal (manufacturing),
s e lls chille d wine (me rchandis ing), and f ills
customer orders (service).