DEFINITION OF ACCOUNTING

Accounting is a process of
identifying recording and
communicating economic
information that is useful in
making economic decisions.
ESSENTIALS ELEMENTS OF THE
DEFINITION OF ACCOUNTING
IDENTIFYING
the accounting analyzes each
business transaction and identifies
whether the transaction is an
“accountable event” or “non-
accountable event”. This is because
only “accountable events” are
recorded in the books of accounts.
“non- accountable events” are not
recorded in the books of accounts.
“Accountable events” (or
‘economic event’) are those
that affect the assets, liabilities,
equity, income and expenses of
a business. Sociological and
psychological matters are
outside the scope of
accounting
“Account” is the basic storage of
information in accounting, e.g.,
“cash,” “land,” “sales,” etc.
RECORDING
The accountant recognizes (i.e.,
records) the “accountable events” he
has identified. This process is called
“journalizing.”
after journalizing, the accountant
then classifies the effects of the event
on the “accounts.” this process is
called “posting”
 COMMUNICATING
At the end of each accounting period, the
accountant summarizes the information
processed in the accounting system in order to
produce meaningful reports. This is important
because information processed in the accounting
system is useless unless it is communicated to
interest users. Accounting information is
communicated to interested users through
accounting reports, the most common form of
which is the FINANCIAL STATEMENTS.
NATURE OF ACCOUNTING
Accounting is a process with the
basic purpose of providing
information about economic
activities intended to be useful in
making economic decisions.
TYPES OF INFORMATION
PROVIDED BY ACCOUNTING
Quantitative Information

Information expressed in
numbers, quantities, or units.
Qualitative Information

Information expressed in words or

descriptive form. Qualitative
information form. Qualitative
information is found in the notes to
financial statements as well as on the
face of the other components of
financial statements.
FINANCIAL STATEMENTS

Information expressed in money,

financial information is also
quantitative information because
monetary amounts are normally
expressed in numbers.
ACCOUNTING AS SCIENCE AND
ART
As a SOCIAL SCIENCE, accounting is a body of
knowledge which has been systematically
gathered, classified and organized.
As a PRACTICAL ART, Accounting requires the
use of creative skills and judgment.
ACCOUNTING AS AN INFORMATION
SYSTEM

A system is one that consists of an

INPUT, a PROCESS, and an output.
 in an accounting system, the inputs
are the accountable events; the
processes RECORDING, CLASSIFYING
and SUMMARIZING; and the output is
the accounting report that is
communicated to the users
BOOK KEEPING AND ACCOUNTING
BOOK KEEPING

Refers to the process of recording the

accounts or transactions of an entity.
Book keeping normally ends with the
preparation of the trial balance.
Unlike accounting bookkeeping
does not required the interpretation of
the significance of the information
processed.
ACCOUNTING

On the other hand, covers the

whole process of IDENTIFYING,
RECORDING and
COMMUNICATING information to
interested users.
 FUNCTIONS OF ACCOUNTING IN
BUSINESS

Accounting is often referred to as a

“LANGUAGE OF BUSINESS” because it is
fundamental to the communication of
financial information.
Accounting has a two broad
functions in a business
To provide non-owners of a business
(external users) with information and
credit decisions; and
To provide business owners and
managers (internal users) with
information that is useful in managing
the business.
Managing a Business
Good management is the key to a business’
success. On the other hand ,
mismanagement is, one way or another, the
cause of every business’ failure.
Management therefore, is no laughing
matter. It cannot be taken lightly. To be a
good manager, one most must equip
himself or herself with the right management
tools – and one important management tool
is accounting
MANAGEMENT

Is a process of establishing

common objectives, coordinating
efforts towards those objectives,
and efficiently and effectively
utilizing available resources so as
to achieve certain goals.
Managing a business requires more
than just technical skills. A business
manager is likened to a musical
conductor who leads a group of
musicians to perform a musical piece
to the best of their abilities.
A successful business manager sees the
“BIG PICTURE” and understands each
detail. He or she has the ability to think
“inside and outside of the box” and to
make both long-term (strategic) and
short-term (tactical) plans.
As a future business professional, you
need to understand each of the following
major facets of a business
FINANCE
Refers to how a business
generates and manages its funds.
Finance is responsible in
providing adequate resources
needed for the other facets to
function properly.
PRODUCTION
Refers to how goods are produced or
services are rendered. Production is
responsible for the quality of goods
and services and the efficiency by
which they are produced or
rendered.
MARKETING
Refers to how goods or services are
communicated to customers.
Marketing is responsible in creating
value for customers. Marketing is
responsible in creating value for
customers and building strong
customer relationships.
ACCOUNTING
Provides a measure of how well
the other facets of the business
are performing. Accounting is
responsible providing useful
information that aids in making
business decisions.
ACCOUNTING AS A MANAGERIAL
TOOL
As mentioned earlier, accounting
is an essential managerial tool.
This is because provides
information that helps a business
manager perform his or her
management functions.
PLANING
Involves the process of mapping
out or arranging in details how a
business goal is to be achieved.
ORGANIZING
After plan is formulated, a manager
needs to organize his or her personal
and other resources according to the
plan. Organizing involves ASSIGNING
RESPONSIBILITIES and GRANTING
AUTHORITY to personnel.
STAFFING
Involves the process of selecting,
training and developing employees.
This function is commonly referred to
as HUMAN RESOURCE MANAGEMENT.
 DIRECTING
After a plan is formulated and resources are
organized and made available, a manager
needs to lead his personnel to ensure that
each is performing his or her responsibilities
towards the organization’s common goal to
the best of his or her ability.
Directing involves MOTIVATING, COMMUNICATING,
GUIDING and ENCOURAGING personnel.
CONTROLLING
After the other elements are in place,
a manager needs to continuously
monitor results against goals and
take corrective actions necessary to
ensure that the plan remains on track.
 EXAMPLES IN WHICH ACCOUNTING IS USED IN MAKING
MANAGEMENT DECISIONS

FUNCTIONS MANAGEMENT DECISION ACCOUNTING INFORMATION

1.) PLANNING • The need to • The current

improve sales and past levels
and the of the business’
business’ sales
ability of doing • Forecast of
so. sales.
2.) ORGANIZING • Do we need • The current
additional productive
production capacity of
facilities and existing facilities
equipment to and equipment.
cater the planned • Marketing costs
increase sales? spent in the past in
• Do we have the the relation to the
ability to spend sale generated
more on our • The amount of
marketing available cash
activities? and the business;
ability to generate
additional
financing
3.) STAFFING • Do we need to • The number of
employ additional current employees
personnel compared to the
current level of
productivity
• The amount of
available cash
needed to employ
additional
employee

4.) DIRECTING • Are the employees • Records of

properly motivated, personnel training
informed, guided and development
and encouraged in costs.
meeting the • Records daily sales
business goal of
increasing its sales?
5.) CONTROLLING • Have we meet • Variance analysis
our goal of on differences
increasing our between actual
sales? sales and
expected sales
Accounting as managerial tool is likened to a
GLOBAL POSITIONING SYSTEM (GPS) attached
to a car. It shows exactly where you are
(FINANCIAL POSITION) and where you have
been (FINANCIAL PERFORMANCE). This
information is vital in determining your ability
to get to your next destination ( strategic and
short-term goals.)
 EXAMPLES IN WHICH ACCOUNTING IS USED INVESTMENT AND
CREDIT DECISIONS.

EXTERNAL USER OF DECISION ACCOUNTING INFORMATION

INFORMATION
1.) INVESTOR • Shall I invest in this • The financial
business? Is this performance of the
profitable business
undertaking?
2.) CREDITOR • Shall I lend money • The ability of the
to this business? business to
Does this business generate revenue
have the ability to and cash flows from
pay back my loan? its operations
 BRIEF HISTORY OFACCOUNTING
Accounting can be traced as far back as the prehistoric
times. Since the dawn of civilization when mankind
began to engage in trade, perhaps more than 10,000
years ago, method of record keeping and accounting
have been invented.
As early as 8500 B.C accounting has already existed.
Archeologists have found clay tokens as old as 8500 B.C
in pellets. These tokens correspond to commodities like
sheep, clothing or bread. They were used in the middle
west in keeping records. After some time, the tokens
were replaced by wet clay tablets. During such time,
experts concluded this to be the start of the art of writing.
Other ancient civilizations keeping account
records are babylonia (4500 B.C), Egypt (2250
B.C.), CHINA AND GREECE
In the middle ages (13th and 15th centuries), trade
flourished in places such as florence, venice and
genoa. This has brought advancement in account
keeping methods. In 1211 A.D. one of the systems
in accounting was primitive as the CONCEPT OF
EQUALITY for entries was absent. DOUBLE ENTRY
RECORDS first came out during 1340 A.D in
Geona.
In 1494, the first systematic record keeping
dealing with the “double entry recording
system” was formulated by FRA LUCA PACIOLI,
a franciscan monk and mathematician. The
“DOUBLE ENTRY RECORDING SYSTEM “ was
included in PACIOLI’s book titled “SUMMA DU
ARITHMETICA GEOMETRIA PROPORTIONI and
PROPORTIONISTA” published on November 10,
1494 in Venice.
The concept of “DOUBLE ENTRY RECORDING” is
being used to this day. Thus, Fra Luca Pacioli is
considered as the FATHER OF MODERN
ACCOUTNING.