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INTRODUCTION TO ACCOUNTING

Definition of Accounting

“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 decision.”
---Accounting Standard Council (ASC)

“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 financial character and interpreting the
results thereof.”
---American Institute of Certified Public Accountants (AICPA)

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

Nature of Accounting

Implicit in the definitions cited earlier are the following characteristics of accounting:
1. A Service Activity. Accounting provides vital assistance through the making of financial reports
regarding the financial activities of economic activities. It helps users to understand financial
reports from which to draw sound economic decisions.
2. A Process, an Art and a Discipline. Accounting involves identifying, measuring, and
communicating economic information to effect informed judgement. It is also a discipline that
observes accounting standards and professional ethics. Accounting practice is guided by
distinctive standards, rules, methods and procedures to come up with reliable general-purpose
financial reports.
3. The Language of Business. Accounting is the medium of communications through which
financial reports are furnished to different parties for decision making. It is an information system
that measures business activities, processes information into reports and communicates the
reports to the decision makers. Accounting interprets and communicates that true status of the
business in terms of its operating results and financial condition.

Accounting thus plays an essential role to businessmen. It helps them to easily find out needed
information anytime to answer the following business questions:

a. How much is the increase in capital as a result of business operation? (PROFITABILITY)

b. Are there available funds to finance the business operation? (LIQUIDITY)
c. Can the business pay its long-term obligation to others? (SOLVENCY)
d. Can the business sustain its long-term profitability and cash flow? (STABILITY)
e. How much borrowed capital and owner’s capital are invested in the business? (CAPITAL
STRUCTURE)
f. Is there excess cash available for investment opportunities and other uncertainties?
(FINANCIAL FLEXIBILITY)
4. Accounting deals with financial information and transactions. Accounting deals only with
quantifiable financial transactions. These are the only events identified by the accountants,
recorded in the books, and communicated to different parties. Non-financial transactions are not
the focus of the accounting process. However, non-financial data may be used to interpret and
better estimate some financial data.
5. Accounting is a means and not an end. Accounting is a tool to achieve specific objectives. It
is not the objective itself. Imagine that you dream to go to Paris someday. Accounting can be
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thought of as the plane that will bring you to your destination.

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6. Accounting is an information system. Accounting is recognized and characterized as a
storehouse of information. As a service function, it collects processes and communicates
financial information of any entity. This discipline of knowledge has been evolved out to meet
the need of financial information required by different interested groups.

7. The Eyes of the Business. Bookkeeping, records, as the initial part of accounting activities,
enable the owner of a business to check on his financial progress. Adequate accounting records
assist the owner to prepare plans for the future, avoid material mistakes, analyze the causes of
changes that take place, and draw the best choice among economic alternatives. Accountants
are economic detectives. Auditing, as an advanced part of accounting activity, verifies the
truthfulness of the financial reports concerning the business results of operation and financial
condition.
Functions of Accounting
Accounting Standard Council (ASC) provides that “Accounting is a service activity. Its function is to
provide quantitative information, primarily financial in nature, about economic activities, that is intended
to be useful in making economic decision.”
The primary function of accounting, then, is to prepare financial reports and provide information
to economic decision makers.
The basic function of accounting is described in the definition of accounting by the American
Accounting Association (AAA) namely: Identifying, Measuring, and Communicating economic
information.
The advanced or critical function of accounting is its Audit Function---to test the reliability of the
financial reports, trace fraudulent transactions and locate and rectify accounting errors.

From the foregoing definitions, the main function of accounting can be summarized s follows:
1. Keeping systematic record of business transactions
2. Protecting properties of business
3. Communicating results to various parties in or connected with the business
4. Meeting legal requirements.
History of Accounting
It is believed that the history of accounting is thousands of years old and can even be traced to ancient
civilization. A number of history books suggest that the early development of accounting can be dated
back to ancient Mesopotamia. During those times, people followed a system of writing and counting
money. The development of accounting may be related to the taxation and trading activities of temples.

The reign of Emperor Augustus (63BC-14AD) 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 evidenced by the Res Divi Augusti
(The Deeds of the Divine Augustus). The Roman historians Suetonis and Cassius Dio recorded that in
23BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash
in the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of the publican (public
contractors); and that it included the names of the freedmen and slaves from whom a detailed account
could be obtained. The closeness of this information to the executive authority of the emperor is attested
by Tacitus’ statement that it was written out b Augustus himself.

Many consider the dissemination of the double-entry bookkeeping of Luca Pacioli in the fourteen
century Italy is the most important event in accounting history. In fact Luca Pacioli is acknowledged as
the Father of Modern Accounting because of this. The double-entry bookkeeping system is defined as
any bookkeeping system that has a debit and a credit for each transaction. Luca Pacioli’s Summa de
Arithmetica, Geometria, Proportioni et Proportionalita (Review of Arithmetic, Geomentry, Ratio and
Proportion) is the first book printed with a treatise on bookkeeping. The double-entry bookkeeping
system being used to this very day.
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This 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 already available to guide accountants in their practice of the
profession. Some of these standards include the PFRS (Philippine Financial Reporting Standard) and
the PAS (Philippine Accounting Standards).

The Branches of Accounting

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

1. Financial Accounting is 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 benefits of the
internal and external users.

Financial Statements should provide information useful to a wide range of users in their
economic decisions. This is the main reason why accounting standards such as the Philippine
Financial Reporting Standards (PFRS) and the Philippine Accounting Standards (PAS) are
created. The PFRS and 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.

Likewise, standardized financial statements are also useful for creditors. Besides enhancing
comparability, standardized financial reports improved the understandability of the company’s
financial statements. Creditors will be able to assess the riskiness of a company through the
well-presented financial statements.

General Purpose Financial Statements

Are the financial statements prepared to accommodate the information needs of persons who
have no capability to request or acquire information directly from the company?
If the answer is YES, the financial statements are called general purpose financial statements.
Otherwise, the financial statements are called special purpose financial statements.

Primary Users of General Purpose Financial Primary Users of Special Purpose Financial
Statements Statements
 Investors  Top management
 Creditors  Department Managers
 Shareholders/Stockholders  Other internal parties
 Government Agencies
 Auditors
 Other interested outside parties

Management Accounting 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. As such, management reports need not follow accounting
standards such as PFRS and PAS. Additionally, unlike financial reports that are generated quarterly,
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semi-annually or annually, management reports can be done daily, weekly or whenever managers
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require a specific report. Management reports typically contain information regarding the amount of
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cash on hand, the level of sales revenue for a particular period, costs incurred or even the comparison
of actual results with budgeted amounts,

Aside from the frequency and the intended users of reports, management accounting differs from
financial accounting in the nature of information produced. Financial accounting summarizes financial
information gathered within a specified period. Thus, financial accounting provides information that is
historical. Meanwhile, management accounting information is forward-looking. It contains forecasted
information used by managers in planning.

Roles of Management Accountants

According to the Chartered Institute of Management Accountants (CIMA), chartered
management accountants perform the following roles:
 Advise managers about the financial implications of projects
 Explain the financial consequences of business decisions
 Formulate business strategy
 Monitor spending and financial control
 Conduct internal business audits
 Explain the impact of competitive landscape
 Bring a high level of professionalism and integrity to the business

Management Accounting Skill Set

In addition to strong accounting fundamentals, management accountants should also possess
the following strategic business and management skills:

 ANALYSIS. Management accountants 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. At the same time, management accountants should give
recommendations on how to manage such risks.
 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 PFRS and PAS, management accountants are still expected to follow the CIMA code of ethics.

Government Accounting

According to Section 109 of Presidential Decree 1445, government accounting is defined as an

accounting system which “encompasses the process of analyzing, recording, classifying, summarizing
and communicating all transactions involving the receipt and disposition of government funds and
property and interpreting the results thereof.”

Sec 110 of the same decree lays down the objectives of government accounting:

1. To provide information concerning past operations and present conditions.

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

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Government accounting is used by all government agencies. Due to the specialized nature of
government transactions, stricter should be put in place to prevent the misuse of the country’s
resources. The creation of the New Government Accounting System (NGAS) aims to address this
concern.

New Government Accounting System (NGAS)

One of the main features of NGAS is that it enhances responsibility accounting in all agencies. Simply
stated, responsibility accounting relates financial results to a particular responsibility center.

Government Accounting Process

Government accounting starts after the declaration of the General Appropriation Act (GAA). The
GAA is enacted budget of the country for the upcoming year. The GAA has the force of law and its
states how much an agency can spend for the year.

The government accounting process involves the Commission on Audit( COA), the Department of
Budget and Management (DBM), the Bureau of Treasury (BTr) and all other government agencies.

The COA is responsible for the keeping of the government’s general accounts. The COA is tasked to
keep and update the accounting books of the whole organization. Moreover, the COA disseminates
accounting rules and regulations to be used by all agencies.

In accordance with Section 2, Chapter 1 Title XVII, Book IV of the Administrative Code of the
Philippines. “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 objective. The Department shall be responsible for the efficient and sound utilization of
government funds and revenues to effectively achieve the country’s development objectives.”

The BTr is responsible for the safekeeping of the national funds. It serves like a bank where the funds
are kept. Although its main role is the safekeeping of funds, the BTr is also responsible for the
management and control of the disbursements of such funds. Furthermore, the agency is also
responsible in maintaining accounts of financial transactions of all natural government agencies.

Auditing

Financial Statements prepared by a company are often the only source of information an interested
outside party has regarding the results of the company’s operations. Information included in the
financial statements greatly influences the decisions made by the users. Because of this, there seems
to be a conflict of the interest between the users and the source of the financial statements.

The users of the financial statements want information about the company that is truthful, reliable
and relevant. In making their economic decisions, users want to use information that depicts the
current condition of the company. On the other hand, management usually wants to present
information indicating good results. Some managers will even falsify or manipulate the records of
financial transactions just to show decent results. This is exactly what happened in Enron.

With the users’ need for truthful, reliable and relevant information and the management’s tendency
to manipulate results, financial statements will provide value upon being audited.

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 company’s financial
statements are presented truthfully. Accountants that perform the auditing procedure are
specifically called auditors. Auditors, aside from having the competence to perform their roles,
should also be independent from the company being audited. Independent auditors have no
connection with the company. If an employee of the company is the one who examines and
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evaluates the financial statements, the fear of the users that the results are manipulated will not be
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alleviated.
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An audit of the financial statements improves their credibility. Financial statements hat underwent the
process of auditing are called audited financial statements. A set of the financial statements will only
be useful to users after it has gone through the process of auditing Audited financial statements are
accompanied by the auditor’s opinion. These auditors’ opinion will be the basis whether or not the
financial statements are prepared truthfully and without any material errors.

Tax Accounting

Taxes are the lifeblood of the government. Without the taxes the citizens pay, the government
cannot perform its functions. Thus, it is imperative that the collection of taxes be unhindered.

Tax accounting follows the pronouncements of the National Internal Revenue Code of the Philippines
(NIRC). The NIRC is to Tax Accounting as the PFRS and PAS are to Financial Accounting.

Financial accounting generates reports known as the financial statements while tax accounting
produces tax returns to be filed to the appropriate government agencies.

Cost Accounting

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

 Cost Object- anything that you wish to find the cost of
 Cost driver- an activity that is a cause of the incurrence costs
 Direct cost- costs that can be economically be traced to a cost object
 Indirect Cost- costs that cannot be traced to a cost object
 Fixed costs- costs that do not change within relevant range of activity
 Variable costs- costs that change as the level of activity or production increases

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, business laws, and taxation. Although the
subject usually highlights the business environment, the scope of the topics in BSA also covers other
fields such as banking and finance, government, non-profit organizations and the academe.
Students of the course are also trained to create and understand computerized accounting system
to cope with the rapidly changing technology.

Board Exam

Before a BSA graduate can practice accountancy, he/she needs to pass the Certified Public
Accountant Licensure Exam. The COA Licensure Exam is comprehensive composed of six subjects.
Each subject will be takes within 3 hours. A candidate should achieve a general average of at least
75% with no ratings below 65% in any of the six subjects in order to pass the exam.

Accounting Research

Accounting research, as the name suggests, is a branch of accounting that deals with the creation
of new knowledge. Combining the models produced by the hard science in research and testing
with financial statements, stock prices, surveys, and experiments, 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 impact clients and employers
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 Discerning how the accounting profession affects the capital market through academic
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accounting research
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Researchers in accounting field also apply the scientific method like their counterparts in the
sciences. With the evolving field of accountancy, it is like expected that accounting research will
continue to play a vital role in the future.

References:
Florendo, J. (2016). Fundamentals of Accountancy, Business and Management 1 (1st ed.). Quezon City: Rex Bookstore,
Inc.
Lao Ong, F. (2016). Fundamentals of Accountancy, Business and Management 1 (1st ed.). Quezon City: C&E Publishing,
Inc.
Valencia, E., & Roxas, G. (2009). Basic Accounting (3rd ed.). Baguio City: Valencia Educational Supply.
Camerino, D. (2016). Fundamentals of Accountancy, Business and Management 1 (1st ed.). Makati City: DIWA
LEARNING SYSTEMS INC.
Rante, G. (2013). Fundamentals of Accounting. Mandaluyong City: Millenium Books, Inc.

References:
Florendo, J. (2016). Fundamentals of Accountancy, Business and Management 1 (1st ed.). Quezon City: Rex Bookstore, Inc.
Lao Ong, F. (2016). Fundamentals of Accountancy, Business and Management 1 (1st ed.). Quezon City: C&E Publishing, Inc.
Valencia, E., & Roxas, G. (2009). Basic Accounting (3rd ed.). Baguio City: Valencia Educational Supply.

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