HANDOUT 1

TOPIC: Introduction to Accounting: Definition, Nature, and History

CONTENT STANDARD:
The learners demonstrate an understanding of the definition, nature, function,
and history of accounting.

Introduction

There is numerous successful business both locally and intentionally. Some top-of-mind
companies include Microsoft, Apple, Coca-Cola, and Procter & Gamble. Here in the
Philippines, surging businesses include Puregold, Petron, Globe, and many others.
Obviously, these businesses offer products which are distinct from one another. Have you
ever wondered about the secret formula for a company’s success? This discussion can go
on and on for days without yielding a definite answer. Nonetheless, there is a common
factor among these businesses that contribute to success – accounting.

Definition and Nature of Accounting

Accounting is, broadly speaking, 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.

Accounting is 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 (Statement of Financial Accounting Standards No. 1, “Basic
Concepts and Accounting Principles Underlying Financial Statements of Business
Enterprises: (Manila: Accounting Standards Council, 1983), par. 1).

Accounting is an information system that measures, processes and communicates

financial information about an economic entity (Statement of Financial Accounting
Concepts No. 1, “Objectives of Financial Reporting by Business Enterprise” (Norwalk,
Conn.: Financial Accounting Standards Board, 1978), par. 9)

Accounting is a process of identifying, measuring and communicating economic

information to permit informed judgements and decisions by users of the information
(American Accounting Association, “A Statement of Basic Accounting Theory” (Evanson,
Ill.: American Accounting Association, 1966), par. 1; Accounting Principles Board,
Statement No. 4, “Basic Concepts and Accounting Principles Underlying Financial
Statements of Business Enterprises” (New York: AICPA, 1970), par. 40)

Accounting is 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 a
financial character, and interpreting the results thereof (American Institute of Certified
Public Accountants, “Review and Resume”, Accounting Terminology Bulletin No. 1(New
York: AICPA, 1953), par.9)

Accounting as a Process
“Accounting is the process of identifying, recording, and communicating, economic
events of an organization to interested users.” (Weygant, J. et al)
a. IDENTIFYING – this involves selecting economic events that are relevant to a particular
business transaction.
b. RECORDING – this involves keeping a chronological diary of events that are measured
in pesos.
JE, LPT | ABMS112 – Fundamentals of Accountancy, Business and Management 1
 c. COMMUNICATING – occurs through the preparation and distribution of financial and
other accounting reports

Functions of Accounting

a. Measurement. Accounting measures past performance of the business entity and depicts
its current financial position.
b. Forecasting. Accounting helps in forecasting future performance and financial position
of the enterprise using past data.
c. Decision making. Accounting provides relevant information to the users of accounts to
aid rational decision-making.
d. Comparison and Evaluation. Accounting assesses performance achieved in relation to
targets and discloses information regarding accounting policies and contingent liabilities
which play an important role in predicting, comparing and evaluating the financial
results.
e. Control. Accounting also identifies weaknesses of the operational system and provides
feedbacks regarding effectiveness of measures adopted to check such weaknesses.
f. Government Regulation and Taxation.

History of Accounting

Accounting is as old as civilization itself. It has evolved in response to various social and
economic needs of men. Accounting started as a simple recording repetitive exchanges.
The history of accounting is often seen as indistinguishable from the history of finance and
business.
Below is the accounting history timeline:

2500 BC – 400 BC
Historical accounting records have been found in ancient civilizations like the Egyptian,
Roman, and Greek Empires as well as ancient Arabia. Accounting records were kept by
rulers for taxing and spending on public works. Egyptians carried on with accounting records
and invented the first bead and wire abacus. In 423 BC the auditing profession was born to
double check storehouses as to what came in and out the door. The reports that were taken
by these accountants were given orally hence the name “auditor.”

1300-1400
The Italians of the Renaissance period are regarded as the fathers of modern accounting.
Keeping of accounting records spread across many of the Italian Republics around this
period. Double-entry accounting originated from Venice, Italy. Earliest records in Venice
indicated the use of accounting system including the use of journal. An Italian monk, Luca
Pacioli who is known as the father of accounting, writes his famous paper “Everything about
Arithmetic, Geometry, and Proportion.” In his paper he revealed that several merchants
kept books of debits which means “he owes” as well as credits which means “he trusts.” His
paper is the first published work on double-entry bookkeeping.

1500-1700
As time progressed innovations were added to the double entry records. Two branches of
accounting emerged namely Financial Accounting and Management Accounting.
Financial Accounting is for presentation to gain investors while Management Accounting is
for efficient management of business
operations. The center of commerce moved away from Italy to Northern Europe. France
adopted its first official accounting code in 1673.

1700-1800
Accounting really took off during the Industrial Revolution. The Industrial Revolution saw the
growth of England to immense prosperity. Great Britain became a major producer of coal,
iron and cotton textile. It developed into a financial center. The advent of industrial age

JE, LPT | ABMS112 – Fundamentals of Accountancy, Business and Management 1

and the emergence of large corporations led to the separation of the owners from the
managers of business. Due to this development, the need to report the status of the business
enterprise took on increasing importance, to ensure that managers acted according to the
wishes of the owners. Transactions between businesses became more complex,
necessitating improved approaches for reporting financial information.

1900 – present
As business practices developed, accounting and reporting practices also developed. The
United States of America and the United Kingdom became the pioneers in the
development of accounting theories due to their economic ascendancy and commercial
leadership.

Around the world, differing national traditions, legal systems, capital markets and business
practices led to the development of different financial reporting practices. However, the
evolution of multinational companies led to the conduct of international business
operations across national borders. Business transactions became complicated, and
goods, services and capital investments were transferred worldwide. Thus, there was a need
to bring into common basis the system of measurement and communication of economic
activities. This issue was addressed by the accounting profession through the creation of the
International Accounting Standards Committee (IASC) in 1973. The committee’s primary
objective is to develop a set of uniform global accounting standards, called International
Accounting Standards and to promote the application of these standards. This move
eventually led to the development of the International Financial Reporting Standards
(IFRSs).

Before 1981, accounting principles adopted by the Philippines were patterned from the
generally accepted accounting principles (GAAP) developed by the US. Currently, the
Philippines has fully adopted the IFRS.

The 20th century marked the evolution of the economy into a post-industrial age – the
information age – in which the ‘products’ are information services. The computer, as the
information processor, has been the driver of the information age.

Modern Day – Cloud Accounting

The most recent change in the last few years is the switch from stand-alone accounting
packages to cloud accounting where employees, bookkeepers and accountants can all
access the software online at the same time. This development allows people to work from
home and sharing information with the relevant people.

JE, LPT | ABMS112 – Fundamentals of Accountancy, Business and Management 1