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Fundamentals of Accountancy, Business and Management 1

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Fundamentals of Accountancy, Business and Management 1

Handout#1
Introduction to Accounting
(ABM_FABM11-IIIa-1-1 to 8).

At the end of this module, you are expected to:


a. define accounting;
b. describe the nature of accounting;
c. narrate the history/origin of accounting; and
d. define internal and external users and give examples

Accounting is part of our daily life. It is essential in the world of business because it functions as its
language and provides information that is useful in decision making.

Accounting is a process of identifying, recording, and communicating economic events such of an


organization to related users (Weygandt, 2005). Economic events include purchase of materials, sale of
goods, and acquisition of machinery which are measured in monetary terms and are recorded in the
financial statements.
Identifying – involves in the selection of the economic events which are important to a particular
business transaction. Examples of transactions in a merchandising store are sales of merchandise,
purchases of merchandise, and purchases of delivery truck.
Recording – is the act of keeping a chronological record of events that are measurable in accounting
documents like journals and ledgers.
Communicating – refers to the process of communicating financial reports to the users of financial
information.
Nature of Accounting
1. Accounting is a service activity. It helps decision makers by giving them financial reports that
will guide them in making sound decisions.
2. Accounting is a process. It refers to the method of performing any specific job step-by-step
according to the objectives. It performs the specific task of collecting, processing, and
communicating financial information.
3. Accounting is both an art and a discipline. It is considered an art because one records, classifies,
summarizes, and finalizes financial data. The way something is done is referred to as “art”. It is a
behavioral knowledge involving an established creativity and skill to help one achieve distinct
objectives.
4. Accounting deals with financial information and transactions. It records financial transactions
and data, categorizes these, and finalizes the results given for a specified period. Accounting
only deals with financial and not with non-monetary or non-financial aspects of an information.
5. Accounting is known and characterized as a storehouse of information. It collects, processes,
and communicates financial information of any entity.

History of Accounting In history,


accounting is as old as civilization. It was developed in response to various social and economic needs of
men. It started as a simple recording of monotonous exchanges. Its history shares the similarity with
that of finance and business.

Evolution of Accounting
• The Cradle of Civilization (3600 B.C.) – In Mesopotamia, record-keeping was done through “Clay
Tablet” as evidence of recording transactions. From India and China to Central and South America, the
clay tablet records the business transactions like accounts receivable and accounts payable.

• Double-Entry Bookkeeping (14th Century) - The most relevant event in accounting history is generally
considered to be the dissemination of doubleentry bookkeeping-by Luca Pacioli (Father of Accounting, in
14th century Italy). Pacioli was much revered in his day and was a friend and fellow of Leonardo da Vinci.
The Italians of the 14th to 16th centuries are recognized as the fathers of modern accounting and were
the first to use Arabic numerals than Roman, and for following business accounts. Summa de
Arithmetica was written by Luca Pacioli, the first book issued that contained a detailed chapter on
double-entry bookkeeping.

• French Revolution (1700s) – In this period, the development of accounting theory has begun and was
influenced by social upheavals.

• The Industrial Revolution (1760-1830) – The focus on this era are fixed assets and mass production
.
•The Beginnings of Modern Accounting in Europe and America (19th Century) - The modern and
formal accounting profession emerged in Scotland in 1854. Most accountants stayed in the U.S.,
establishing accounting practices and becoming the origins of several U.S. accounting firms. The first
national U.S. accounting society was established in 1887. The American Association of Public
Accountants was the initiator of the current American Institute of Certified Public Accountants (AICPA).
•The Present (20th Century) – In the present time, accounting standards were established, and
practitioners follow the rules of international organizations or groups like AICPA. Modern accounting
standards were given more attention and time.
External and Internal Users of Accounting Information
External Users –are the individuals or organizations outside the company who are not involved in
operating the business.

1. Creditors – users who need accounting information to determine the credit integrity,
worthiness of the organization, and credit terms.
2. Tax Authorities (Bureau of Internal Revenue) - a government agency that verifies the accuracy
of financial data to ensure the credibility of the tax returns filed by the business.
3. Investors – users who need accounting information to evaluate and examine the feasibility of
investing in a company.
4. Customers – users who evaluate the financial information of its supplier to keep stable source of
supply in the long term.
5. Regulatory Authorities -government agencies like Securities and Exchange Commission (SEC),
Department of Trade and Industry (DTI), Department of Labor and Employment (DOLE) were
established to supervise if businesses comply with legal requirements in running a business.

Internal Users – individuals inside the organization who plan, organize, and run the business. They are
directly involved in managing and operating the business. Internal users are also called as “primary
users” of accounting information and some of these users are the marketing managers, supervisors,
finance directors, company officers, and owners.

The following are the internal users of accounting:

1. Management - to know the income/earnings for the period, sales, available cash, and production cost
are the reasons why the management needs the accounting information. They also analyze the
organization's performance and position and take appropriate measures to improve the company
results, sufficiency of cash to pay dividends to stockholders as well as the pricing decisions.

2. Employees – for job security, they use financial information as factor to consider in staying
employment or to look for other employment opportunities.

3. Owners – they use financial information to know the profit or income for the period, resources, or
assets of the business. Liabilities of the business are needed by the owners. They also use financial
information in considerations regarding additional investment, expanding the business, and borrowing
funds to support any expansion plans.

References
Anastacio, Ma. Flordeliza. 2011. Financial Management (With Industry Based Perspective). Manila: Rex
Book Store. Deped K To 12 Curriculum Guide, Fundamentals Of Accountancy, Business And
Management 1. 2016.
Gilbertson, Claudia. 2010. Fundamentals Of Accounting. 8th ed. Australia: Cengage Learning. Teaching
Guide For Senior High School, Fundamentals Of Accountancy, Business And Management 1. 2016.
Quezon City: Commission on Higher Education.

Pefianco, Erlinda C. 1996. The Accounting Process: Principles And Problems. Makati: Goodwill Trading.

Padillo, Nicanor, Jr. 2011. Financial Statements Preparation, Analysis And Interpretation. Manila: GIC
Enterprises. Young, Felina C. 2008. Principles Of Marketing. Manila: Rex Book Store.

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