MODULE 1 – INTRODUCTION TO ACCOUNTING

INTRODUCTION
ACC1 – FINANCIAL ACCOUNTING AND REPORTING
Accounting has evolved, as in the case of medicine and law, in response to the social
and economic needs of society. As business and society become more complex,
accounting develops new concepts and techniques to meet the ever-increasing needs
for financial information. Without such information, may complex economic
developments and social programs may never have been undertaken.
Accounting is relevant in all walks of life, and it is absolutely essential in the world of
business. Accounting is the system that measures business activities, processes that
information into reports and communicates the results to decision-makers.

LEARNING OUTCOMES:

After reading this module, the learner should be able to:

1. Define accounting.
2. Describe the nature and purpose of accounting.
1 3. MODULE 1 – INTRODUCTION TO ACCOUNTING
Give examples of branches of accounting.
4. State the function of accounting in a business.
5. Differentiate between external and internal users of accounting information.
6. Sate the forms of business organization.
7. State the types of business according to their activities.

TIME:

The time allotted for this module is 8 hours.

LEARNER DESCRIPTION

The participants in this module are 1st year college students taking up BS in
Accountancy.
 MODULE CONTENTS:

LESSON 1: Definition, Nature and Function of Accounting

ACC1 – FINANCIAL ACCOUNTING AND REPORTING
Definition: Accounting is a process of identifying, recording and communicating
economic information that is useful in making economic decisions.

Essential elements of the definition of accounting

1. Identifying – The accountant analyzes each business transaction and identifies
whether the transaction is “accountable event” or “non-accountable event.” Only
“accountable events” are recorded in the books of accounts. Accountable events
are those that affect the assets, liabilities, equity, income or expenses of a
business.
2. Recording – The accountant recognizes (i.e., records) the identified “accountable
events.” This process is called “journalizing.” After journalizing, the accountant
then classifies the effects of the event on the “accounts.” This process is called
“posting.”
3. Communicating – At the end of each accounting period, the accountant
summarizes the information processes in the accounting system in order to
2 produce meaningful reports. The MODULE 1 –processed
information INTRODUCTION TO ACCOUNTING
in an accounting system
is communicated to interested users through accounting reports (e.g., financial
statements).

Nature of accounting
Accounting is a process with the basic purpose of providing information about economic
activities that is intended to be useful in making economic decisions.

Types of information provided by accounting

1. Quantitative information – expressed in numbers, quantities or units.
2. Qualitative information – expressed in words or descriptive form
3. Financial information – expressed in money. It is also quantitative information
because monetary amounts are normally expressed in numbers.

Bookkeeping vs Accounting
Bookkeeping  refers to the process of recording the accounts or transactions of an
entity and normally ends with the preparation of the trial balance.
Accounting  covers the whole process of identifying, recoding, and communicating
information to interested users
 Functions of Accounting in Business
Accounting is considered the “language of business” because it is essential in the
communication of financial information.

ACC1
Accounting has the following two broad – FINANCIAL
functions ACCOUNTING AND REPORTING
in a business:
1. To provide external users with information that is useful in making, among others,
investment and credit decisions; and
2. To provide internal users with information that is useful in managing the
business.

Activity 1:
1. Which of the following does not properly describe accounting?
a. It is a process by which useful information is generated.
b. It is a social science.
c. It requires the application of creative skills and judgement.
d. It is often referred to as the “language of the soul.”

2. In not less than one sentence, explain each item above whether it properly
describe accounting or not.
3 MODULE 1 – INTRODUCTION TO ACCOUNTING
References:
Chapter 1 of Financial Accounting and Reporting by Prof. Zeus Millan.

LESSON 2: Users of Accounting Information

Users of accounting information are broadly classified into two, namely:

1. Internal users – those who are directly involved in managing the business.
Examples are:
a. Business owners who are directly involved in managing the business
b. Board of directors
c. Managerial personnel
2. External users – those who are not directly involved in managing the business.
Examples are:
a. Existing and potential investors
b. Lenders and creditors
c. Government agencies
d. Non-managerial employees
e. Customers
f. Public
 Types of accounting information classified as to user’s needs

Accounting information may be either (a) general purpose or (b) special purpose.
1. General purpose accounting ACC1information is provided
– FINANCIAL by financial
ACCOUNTING AND accounting
REPORTINGand
is prepared primarily for external users.
2. Special purpose accounting information is provided by management accounting
or other branches of accounting and is prepared primarily for internal users.

Financial accounting focuses on the information needs of external users, while

management accounting focuses on the information need so internal users.

Activity 2:
1. Which of the following is considered an internal user of financial information?
a. Rank and file employees of the reporting entity
b. Stockholders of the entity who are not directly involved in managing the
entity
c. Lenders and other creditors
d. The entity’s management

4 2. Which type of information needs of users

MODULE do general TO
1 – INTRODUCTION purpose financial
ACCOUNTING
statements cater to?
a. common needs
b. specific needs
c. a and b
d. caring needs

3. Which of the following is least likely to be a decision made by an external user of

the financial information of an entity?
a. whether to buy, hold or sell investment stocks
b. whether to extend loan or other forms of credit
c. whether to obtain additional financing
d. all of these are decisions that external users make

References:
Chapter 1 of Financial Accounting and Reporting by Prof. Zeus Millan.
 LESSON 3: Branches of Accounting

The common branches of accounting include the following:

1. Financial accounting – is theACC1 – FINANCIAL
branch ACCOUNTING
of accounting AND REPORTING
that focuses on general
purpose financial statements
a. General purpose financial statements are those statements that cater to
the common needs of external users, primarily the potential and existing
investors, and lenders and other creditors
b. Financial accounting is governed by the Philippine Financial Reporting
Standards (PFRSs).

2. Management accounting – involves the accumulation and communication of

information for use by internal users. An offshoot of management accounting is
management advisory services which includes services to clients on matters of
accounting, finance, business policies, organization procedures, product costs,
distribution, and many other phases of business conduct and operations.

3. Government accounting – refers to the accounting for the government and its
instrumentalities, focusing attention on the custody of public funds, the purpose
5 or purposes to which those funds are committed,
MODULE and the TO
1 – INTRODUCTION responsibility
ACCOUNTING and
accountability of the individuals entrusted with those funds.

4. Auditing – involves the inspection of an entity’s financial statements or business

processes to ascertain their correspondence with an established criterion.

5. Tax accounting – is the preparation of tax returns and rendering of tax advice,
such as the determination of tax consequences of certain proposed business
endeavors.

6. Cost accounting – is the systematic recording and analysis of the costs of

materials, labor, and overhead incident to the production of goods or rendering of
services.

7. Accounting education – refers to teaching accounting and accounting-related

subjects in an organized learning environment. It is a process of facilitating the
acquisition of knowledge and skills regarding one or more of the other branches
of accounting.

8. Accounting research – pertains to the careful analysis of economic events and

other variables to understand their impact on decision. Accounting research
 includes a broad range of topics, which may be related to one or more of the
other branches of accounting, the economy as a whole, or the market
environment.

Activity 3: ACC1 – FINANCIAL ACCOUNTING AND REPORTING

1. This branch of accounting deals with the preparation of general purpose financial
statements.
a. General accounting
b. Management accounting
c. Financial accounting
d. Auditing

2. General purpose financial statements are intended to meet

a. all the information needs of all users – external and internal alike.
b. the common needs of both external and internal users.
c. the common needs of external users, primarily investors, lenders and
other creditors.
d. both the common and specific needs of external users.

References:
6 MODULE
Chapter 1 of Financial Accounting and Reporting 1 – INTRODUCTION
by Prof. Zeus Millan. TO ACCOUNTING

LESSON 4: Forms of Business Organization

A business is an activity where goods or services are exchanged for money. A person
who is engaged in business is called an entrepreneur or businessman. Businesses in
the Philippines are organized in one of the following:
1. Sole or single proprietorship – is a business that is owned by only one individual.
It is the most common and simplest form of a business organization. The
business owner is called a “sole proprietor.”

2. Partnership – is a business that is owned by two or more individuals who entered

into a contract to carry on the business and divide among themselves the
earnings therefrom. The business owners are called partners.

3. Corporation – is also owned by more than one individual. However, unlike a

partnership, a corporation is created by operation of law rather than a contract.
Ownership in a corporation is represented by shares of stocks. The owners are
called stockholders or shareholders.
 4. Cooperative – is also owned by more than one individual. However, a
cooperative is formed in accordance with the provisions of The Philippine
Cooperative Code of 2008. The owners of a cooperative are called members.

Activity 4: ACC1 – FINANCIAL ACCOUNTING AND REPORTING

1. This type of business organization is created by a contractual agreement
between two or more individuals.
a. corporation
b. cooperative
c. partnership
d. sole proprietorship

References:
Chapter 1 of Financial Accounting and Reporting by Prof. Zeus Millan.

LESSON 5: Types of Business according to Activities

The following are the major types of business according to activities they undertake:
1. Service business – one that offers services as its main product rather than
7 physical goods. A service businessMODULE may1 –offer professionalTOskills,
INTRODUCTION expertise,
ACCOUNTING
advice, lending service, and similar services. Examples of services businesses
include:
a. Schools
b. Professionals (accounting firm, law firm, electrician, etc.)
c. Hospitals and clinics
d. Banks and other financial institutions
e. Hotels and restaurants
f. Transportation and travel (taxi operator, travel agency, etc.)
g. Entertainment and event planners (wedding planners, concert promoters,
etc.)

2. Merchandising (Trading) business – is one that buys and sells goods without
changing their physical form. Examples of merchandising businesses include:
a. General merchandise resellers (grocery stores, department stores,
hardware stores, pharmacies, online stores, sari-sari stores, etc.)
b. Distributors and dealers (rice wholesaler, vegetable dealers, 2 nd hand car
dealers, etc.)

3. Manufacturing business – is one that buys raw materials and processes them
into final products. Unlike a merchandising business, a manufacturing business
 changes the physical form of the goods it has purchased in a production process.
Examples of manufacturing businesses include:
a. Car manufacturers (Toyota, Isuzu, Volkswagen, etc.)
b. Technology companies (Apple, Samsung, Sony, etc.)
ACC1 –(San
c. Food processing companies FINANCIAL
Miguel ACCOUNTING AND Swan,
Pure Foods, Silver REPORTING
etc.)
d. Factories (clothing factories, animal feeds factories, plastic wares
factories, etc.)

Activity 5:
1. Which of the following refers to a manufacturing business?
a. Buying and selling of goods in their original form
b. Sale of a skill0set and not necessarily a physical object
c. Ability or potential to mass-produce
d. Absence of ability to stock goods for future sale

2. A disadvantage of a partnership
a. better decisions – “two heads are better than one.”
b. business risk is assumed by more than one owner.
c. unlimited life.
d. unlimited liabilities of the partners.
8 MODULE 1 – INTRODUCTION TO ACCOUNTING
3. This type of business organization has the tendency to become monopolistic. It
can hamper the economy by funneling wealth to only few individuals (i.e., the
organization’s top owners) restricting the redistribution of wealth to the majority of
the members of the society.
a. Cooperative
b. Sole proprietorship
c. Partnership
d. Corporation

References:
Chapter 1 of Financial Accounting and Reporting by Prof. Zeus Millan.

ONLINE READING MATERIALS:

 Read Chapter 1 of Financial Accounting and Reporting by Prof. Zeus Millan.