Definition of Accounting

The following authorities on the field of accounting defined accounting as;

Accounting Standards Council (ASC) – A Service Activity.

The accounting function is to provide quantitative information primarily financial in nature, about economic entities, that is
intended to be useful in making economic decision.

American Institute of Certified Public Accountant (AICPA) – An Art, Accounting is an art of recording, classifying and
summarizing in a significant manner and in terms of money, transactions and events which are part at least of a financial
character and interpreting the results thereof.

American Accounting Association (AAA) - A Process Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by users of the information.

Accounting- as the "Language of Business"

Accounting- is the medium of communication through which financial reports are furnished to intended users for decision
making.

Accounting- helps business answer the following business questions:

Profitability – “How much is the increase in capital as a result of business operations?”

Liquidity – “Are there available funds to finance the business operations?”

Solvency – “Can the business pay its long-term obligations to others?”

Stability – “Can the business sustain its long-term profitability and cash flow?”

Capital Structure – “How much investments are from Capital or borrowed from Creditors?

Financial Flexibility – “Is there excess cash available for opportunities and uncertainties?

Accounting as the “Eyes of the Business”

Accounting- helps owners the following business activities:

Check on their financial progress

Prepare plans to the future

Avoid material mistakes

Analyze causes of changes

Choose the best amongst economic alternatives

Accounting are economic detectives using the audit function by verifying the truthfulness of financial reports

History of Accounting 3600 BC (approx.)

Record keeping already common from Mesopotamia, China, India to Central & South America. The oldest evidence of
this practice was the “clay tablet” 13th to 15 century (approx.)

1339 is the earliest recorded history of the “double-entry bookkeeping” (DEB) accounting system “Massari Ledgers of
Commune of Genoa” – The oldest DEB because of separate pages were used for debit and credit (T-Account or Ledger or
Venetian Method) In Florence Italy – DEB records wherein debits were written over credits (Florentine Method or Journal
Entries)

1494 – an Italian monk and mathematician, wrote “Summa de Arithmetica Geometria, Proportioni et Proportionalita”
the first book that was published containing a detailed chapter of In this book, Pacioli introduced three (3) important record
books;

Memorandum Book – for all information on a transaction

Journal Book – Book of Original Entry

Ledger Book – Book of Final Entry

1700s – French Revolution

The thorough study of accounting and development of accounting theory began 1760 – 1830 – Industrial Revolution

Mass production and great importance of Fixed Asset 1900s – Global Industrial Economy

Developing changes in accounting practice such as mergers, acquisitions and reporting systems 2000s – Technological
Advancements & Global Trade

Computer-assisted accounting practice and reporting were developed rapidly Globalization of business and diverse accounting
practice has been standardized in an international accounting setting

Four (4) SECTORS of the Accounting Practice

1. Public Accounting – This practice is when accountant offer their professional services for a fee and who engages NOT as
an employee of the company
External Auditing – primarily centers on the critical examination of financial statements by an independent CPA to
express an opinion regarding the fairness of the contents of the financial statements
Tax Services – deals with the accountant’s preparation of the client’s income tax returns, business and transfer taxes.
Managerial Advisory Services – provide assistance and advice to the management to their clients regarding finance,
budgeting, business policies, and organization procedures, systems, product costs, distribution and other business
activities.
2. Private Accounting – Accountants that engages as an employee of a private enterprise or non-profit organization

Financial Accounting – Primarily concerned with the recording and classifying of business transactions culminating in the
preparation of general-purpose financial statements or reports regarding the business’ financial position, operating results
and cash activities in accordance with the GAAP.

Internal Auditing – deals with determining the operational efficiency of the company regarding protection of the
company’s assets, accuracy and reliability of the accounting data.

Tax Accounting – embraces the preparation of various tax returns and tax planning necessary to minimize the impact of
taxes on the entity.

Cost Accounting – The determination of inventory costs and/or product costs of the manufactured goods. Data produced
from cost accounting are used by the management for planning, budgeting and controlling purposes.

Not-for Profit Accounting – Special accounting for charitable organizations, philanthropic foundations, religious groups,
governmental agencies, schools and cooperatives.

Socio-economic Accounting – concerns the measurement of the impact of business or governmental agency’s decision on
the public sector.

Accounting Systems Design – includes the evaluation of the company’s control system to find out any area of improvement

3. Government Accounting – focuses on the proper custody of government funds and their purposes. The following are
several agencies that many accountants are employed:
Bureau of Internal Revenue (BIR)
Commission on Audit (COA)
Department of Finance (DOF)
Department of Budget and Management (DBM)
Banko Sentral ng Pilipinas (BSP)
4. Accounting Education – involves teaching and preparation of curriculums in high schools, colleges, universities or
review centers of the following subjects:
Financial Accounting
Management Accounting
Taxation Other business-related subjects
Forms of Business Organization
Business – is any economic activity conducted primarily for profit. Below are the most common forms of business
1. Sole or Single Proprietorship – A business entity owned by one person called a sole proprietor
2. Partnership – A business entity owned by two (2) or more persons called partners who have agreed to contribute
money, property and industry to a common fund with the intention of dividing the profits among themselves (further
discussion will be undertaken on MODULE 3 and 4)
3. Corporation – A business registered as an artificial person under the operation of law. Its existence is evidenced by
its Articles of Incorporation and Corporate By-Laws registered with the Securities and Exchange Commission (SEC)
(further discussion will be undertaken on MODULE 5 and 6)
Business Activities
A business may be classified based on its primary activities. The common types of businesses as to their nature
or main activities are as follows:
1. Servicing – This Activity earns through rendering a service in exchange for a fee
2. Merchandising – The business engages in the buying and selling of goods. It ears primarily by marking up the
cost from purchased goods that it sells to customers.
3. Manufacturing – This business converts raw materials into finished goods that are to be sold at selling price.

The Accounting Process

This is also called the "accounting cycle", which refers to a series of repetitive activities of recording,
summarizing and reporting economic transaction from the beginning to the end of the accounting period.

Aspects of the Accounting Process

The following are the aspects of the accounting process:
1) Identifying - This includes recognizing business transaction or events that are reportable
2) Measuring - This assigns peso amounts to the accountable economic transactions and events.
3) Communicating - This constitute the preparation and distribution of accounting reports to potential users of
accounting information

Steps in the Accounting Cycle

There are nine (9) basic steps in the accounting cycle, which includes phases on recording, classifying, and
summarizing. On this module, the following steps will be discussed;
RECORDING PHASE
1. Analyzing the transaction (business document)
2. Journalizing CLASSIFYING PHASE
3. Posting SUMMARIZING PHASE
4. Preparing the unadjusted trial balance
5. Preparing adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing the post-closing trial balance
9. Preparing reversing entries Analyzing Business Transaction

This is where the accountant gathers information from source documents and determines the impact of the
transaction on the financial position as represented by the equation “assets equals liabilities plus equity”.

Impact of the transaction In order to determine if a transaction has an impact to the financial position of an entity, it
must be considered if it is either a) Accountable or b) Un-Accountable.

Accountable events are monetary transaction that are recorded in the Accounting Books Un-accountable events are
non-monetary events that are not recorded in the Accounting Books
Accountable Events
Accountable events can be further classified into two (2) namely:
1) Business Transactions - These involve the ordinary business activities of an entity depending on the industry.
There are two (2) types of business transactions namely:
External Business Transaction
These are arm's length transactions with an outside party in exchange of resources
Selling of Service or Merchandise
 Collection & Payment
Internal Business Transaction
These are transactions that takes place within the enterprise such as:
Conversion of Raw Materials to Finished Goods Supplies Withdrawn or transfer of supplies to another department

2) Accounting Events
These involve the occasional or non-ordinary business activities of an entity such as:
Losses due to Fortuitous Events (these are unforeseeable events or acts of God), ex. theft, earthquake, etc) Decline
in Market Value

Source Documents
It is important for accounting events to have documentation of the transaction. Source Documents enhances the
verifiability of a transaction because they are forms, evidence, legal or official paper that supports the economic
transactions

Journalizing
This is the process of recording the transactions in the appropriate journals. A journal is a chronological record of
transactions also known as the book of original entry. Although all transactions could be recorded in the general
journal, it is more efficient to use special journals in recording a large number of like transactions.

Special journals that enterprises usually use are:

Sales Journal – Only sales of merchandise on account are
Cash receipts journal – All types of cash receipts are
Purchase journal – Used to record all purchases on account (merchandise, equipment and supplies).
Cash disbursement journal – All payments of cash for any purpose are recorded.
Type of journal entries according to form:
Simple journal entry – One which contains a single debit and a single credit
Compound journal entry – One which has two or more elements and often representing two or more
Accounts are the storage units of accounting information and used to summarize changes in assets, liabilities and
equity including income and expenses.
The following are a broad classification of kinds of accounts: