FUNDAMENTALS OF ACCOUNTANCY AND BUSINESS

MANAGEMENT 1
INTRODUCTION TO ACCOUNTING

Objectives:
At end of the lesson, you should be able to:
1. Define accounting:
2. Describe the nature of accounting;
3. Explain the functions of accounting in business;
4. Narrate the history or origin of accounting, and
5. Cite specific examples in which accounting is used in making
business decisions.

Accounting

 A system that helps businesses track events that affect them.

 This process involves identifying the events that affect a business, recording these events and
communicating the summarized results of all events within a particular period to interested
parties.

The Accounting Process

 Identification of economic event relevant to a business

 Recording of relevant economic events
 Companies summarize all the recorded economic events into accounting reports.

Nature of Accounting

 Accounting is a process - a process is composed of multiple steps that lead to a common end
goal.
 Accounting is an art - art refers to a way of performing something.  Accounting is the art of
recording, classifying, summarizing and finalizing financial data.
 Accounting deals with financial information and transactions - Accounting deals only with
quantifiable financial transactions.
 Accounting is a means not an end - Accounting is a tool to achieve specific objectives.
 Accounting is an information system - Accounting is recognized and characterized as a
storehouse of information.

Functions of Accounting

 Keeping systematic record of business transactions

 Protecting properties of the business
 Communicating results to various parties in or connected with the business
 Meeting legal requirements
Keeping Systematic Record of Business Transactions - the records should be systematic enough to
enable easy understanding of readers.
Protecting Properties of the Business - The accounting records serve as the evidence that properties of a
business do exist or how much of a particular resource does a company have.

Communicating Results to Various Parties in or Connected with the Business - the accounting
reports produced at the end of each period are not only used by external parties (ex. Potential investors,
government agencies), but also by the management in their decision-making functions.

Meeting Legal Requirements - the government requires some companies (particularly those with public
accountability) to provide financial reports quarterly, semi-annually or annually.

History of Accounting

 Early development of accounting can be dated back to ancient Mesopotamia.

 The reign of Emperor Augustus provided more evidence about the development of accounting.
The Roman Government kept detailed financial information of the deeds of Emperor Augustus
regarding the stewardship of Roman resources. This is evidence by the Deeds of the Divine
Augustus.
 Double Entry of Bookkeeping of Luca Pacioli in the 14th Century Italy is the most important
event in accounting history. Review of Arithmetic, Geometry, Ration and Proportion is the first
book printed with a treatise on bookkeeping.
 The modern profession of the chartered accountant originated in Scotland in the nineteenth
century when Queen Victoria granted a royal charter to the Institute of Accountants in Glasgow.
 At present times, accounting standards are available to guide accountants in their practice of the
profession. These standards include the PFRS (Philippine Financial Reporting Standard) and the
PAS (Philippine Accounting Standards).

BRANCHES OF ACCOUNTING

THE STORY OF NUMBERS

 A field of accounting called forensic accounting deals with activities that solve cases of theft and
fraud. Forensic accounting combines accounting, auditing and investigative skills in conducting
investigations. Unlike the criminal dramas that focus on murders, forensic accounting is used to
study the numbers of a company to find any inconsistency and to unearth wrongdoings of
company employees.
 Accounting is a broad field of study. It ranges from the usual recording of company transactions
to case-solving activities.

OBJECTIVES:

 Differentiate the branches of accounting;

 Explain the kind or type of services rendered in each of these branches;
 Make a list of businesses within the community on the types of accounting services they require;
and
  Solve exercises in the identification of the branches of accounting described through the types
of services rendered.

8 BRANCHES OF ACCOUNTING:

 Financial Accounting
 Management Accounting
 Government Accounting
 Auditing
 Tax Accounting
 Cost Accounting
 Accounting Education
 Accounting Research

FINANCIAL ACCOUNTING

 A branch of accounting primarily handling the recording of financial transactions of a business.

 The financial transactions are later summarized into standardized accounting reports, more
popularly known as the financial statements, for the benefit of internal and external users.
 Financial statement should provide information useful to a wide range of users in their
economic decisions.
 Philippine Financial Reporting Standard (PFRS) and the Philippine Accounting Standards (PAS)
supply guidelines on how companies should prepare their financial statements.
 Standardized financial statements allow the users to compare the results of operations of
different companies regardless of size and nature.
 Financial accounting caters the need of both internal and external users.
 Financial accounting’s main goal is to provide the information needs of external users that have
no capability to request information directly from management.

GENERAL PURPOSE FINANCIAL STATEMENTS

Primary Users of General Purpose Primary Users of Special Purpose

Financial Statements Financial Statements
• Investors • Top management (e.g., Board of
• Creditors directors of a company, CEO, CFO,
• Shareholders / Stockholders COO)
• Government Agencies • Department managers (e.g., sales
• Auditors manager, production manager)
• Other interested outside parties • Other internal parties
Evaluate the performance Utilized by internal parties to guide
of the company them in the decision-making process for
the company
MANAGEMENT ACCOUNTING

 It is a branch of accounting which focuses on the preparation of financial reports used by

managers in their day-to-day decision making.
 Reports generated using management accounting are for internal users only.
 Management reports need not follow accounting standards such as the PFRS and PAS.
 Management reports can be done daily, weekly, or whenever managers require a specific
report.
 Management reports typically contain information regarding the amount of cash on hand, the
level of sales revenue for a particular period, costs incurred or even the comparison of actual
results with budgeted amounts.
 Management accounting contains forecasted information used by managers in planning.

Roles of Management Accountants

 Advise managers about the financial implications of projects

 Explain the financial consequence of business decisions
 Formulate business strategy
 Monitor spending and financial control
 Conduct internal business audits
 Explain the impact of the competitive landscape
 Bring a high level of professionalism and integrity to the business

Management Accounting Skill Set

 Analysis. Management accountant should be able to analyze information and use it to make
business decisions.
 Strategy. Management accountants should be able to formulate business strategies that will
increase the company’s wealth and create value for the company’s shareholders.
 Risk. Management accountants should be able to identify risks that can potentially have
detrimental effects to the company.
 Planning. Management accountants should be able to apply accounting techniques in the
planning and budget creation phase of a business.
 Communication. Management accountants should be able to identify what information the
management needs and also explain the numbers to non- financial managers.

Ethical Code

 Even though management reports do not follow the requirements imposed by accounting
standards like the PFRS and PAS, management accountants are still expected to follow the CIMA
code of ethics.

GOVERNMENT ACCOUNTING
  Defined as accounting system which encompasses the process of analyzing, recording,
classifying, summarizing and communicating all transactions involving the receipt and
disposition of government fund and property and interpreting the result thereof.
 Government accounting is used by all government agencies.
 The creation of the New Government Accounting System (NGAs) aims to address this concern.

Objectives of Government Accounting

 To provide information concerning past operations and present conditions

 To provide a basis for guidance for future operations
 To provide for control of the acts of public bodies and offices in the receipt, disposition and
utilization of funds and property.
 To report on the financial position and the results of operations of government agencies for the
information and guidance of all persons concerned.

New Government Accounting System (NGAS)

 It enhances responsibility accounting in all agencies.

 Responsibility accounting relates financial result to a particular responsibility center. If there is a
problem with the handling of funds, people in that agency will be the ones accountable.
 This system of placing accountability in each agency discourages misappropriation and misuse of
public funds.

Government Accounting Process

 Government accounting starts after the declaration of the General Appropriations Act (GAA).
 The GAA has the force of law and it states how much an agency can spend for the year.
 The government accounting process involves the Commission of Audit (COA), the Department of
Budget and Management, the Bureau of Treasury (BTr), and all other government agencies.
 The COA is responsible for the keeping of the government’s general accounts.
 The Department of Budget and Management shall be responsible for the formulation and
implementation of the National Budget with the goal of attaining our national socio-economic
plans and objectives.
 The BTr is responsible for the safekeeping of the national funds. It serves like a bank where the
funds are kept.

AUDITING

 Is an unbiased examination and evaluation of the financial statements of an organization.

 Auditing is a process that includes numerous steps to determine whether or not a company’s
financial statements are presented truthfully.
 Accountants that perform the auditing procedures are specifically called auditors.
 An audit of the financial statements improves their credibility.
  Financial statements that underwent the process of auditing are called audited financial
statements.
 The auditor’s opinion will be the basis whether or not the financial statements are prepared
truthfully and without any material errors.

TAX ACCOUNTING

 Tax accounting records some financial transactions in a different manner.

 It adheres to some guidelines in the PFRS and PAS, but it is not required to implement
everything written in such standards.
 Tax accounting follows the pronouncements of the National Internal Revenue Code (NIRC).
 Tax accounting produces tax returns to be filed to the appropriate government agencies.

COST ACCOUNTING

Is a branch of accounting that provides information for management accounting and financial
accounting.

Terms Used in Cost Accounting

• Cost – the resource sacrificed to achieve an objective. (ex. money)

• Cost Object – anything that you wish to find the cost (ex. Cost of a pair of jeans)

• Cost driver – an activity that is a cause of the incurrence of costs (ex. The number of working hours is
related to the amount of salaries of company pays)

• Direct Cost – costs that economically be traced to a cost object (ex. Labor, materials)

• Indirect Cost – costs that cannot be traces to a cost object (ex. Costs of supplies used in the factory)

• Fixed Cost – costs that do not change within a relevant change of activity (ex. Rent of a factory
building)

• Variable Cost – costs that change as the level of activity or production increases (ex. Materials, selling
cost)

ACCOUNTING EDUCATION

• The Bachelor of Science in Accountancy (BSA) in the Philippines is normally a 5-year program
composed of subjects in accounting, audit, administration and business laws and taxation.

• Most schools use a combination of diverse teaching techniques to explain accountancy to students.
• This is to enable students to have a feel of the application of accounting in real life.

ADMISSION REQUIREMENT FOR BSA

• Must be a high school graduate

• Must have college entrance examination of above average or depending on the specific rating set by
school

• Aside from the college entrance examination, must pass the separate aptitude test specific for BS
Accountancy

• Must pass the interview conducted by the college admission officer

• Some schools require a high school QPA of 85% and above with no grade less than 80% in all subjects

• There are schools who require students to have an 85% or higher average rating in the National
Secondary Assessment Test (NSAT)

• As set by CHED, all schools must conduct in English Proficiency examination to all BS in Accountancy
applicants

• Admission for Philippine Educational Placement Test (PEPT) passers mainly depends on school’s
discretion since some colleges and universities offer only selected courses

BOARD EXAM

• Before a BSA Graduate can practice accountancy, he/she needs to pass the Certified Public Accountant
Licensure Examination.

• The CPA Licensure Exam is a comprehensive test composed of seven subjects.

• A candidate should achieve a general average of at least 75% with no rating below 60% in any of the
seven subjects in order to pass the exam.

ACCOUNTING RESEARCH

• Is a branch of accounting that deals with the creation of new knowledge.

• We can gain a specific perspective and basis on the following:

 Deciding and implementing new accounting and auditing standards

 Presenting unusual economic transactions in the financial statements
 Learning how new tax laws impacts clients and employers
 Discerning how the accounting profession affects the capital markets through academic
accounting research
• Researchers in the accounting field also apply the scientific method like their counterparts in the
sciences.