Introduction to Accounting debt/liabilities of the business.

Chapter 1  Cash inflows and outflows

resulting from business operations
ACCOUNTING DEFINED
Ex:
Accounting has been defined in so many
-Management analyzes the existing
ways:
debts/liabilities of the business to check if
 Accounting is the art of recording,
it could still handle additional debt as a
classifying and summarizing, in a
result of borrowing from the bank. Cash
significant manner; and in terms of
inflows and outflows are analyzed to see
money, transactions and events
other possible sources of financing or to
which are in part at least of a
determine how the business would repay
financial character, and interpreting
the bank loan, if it ever materializes.
the results thereof.
(Committee on Accounting Terminology of the American
- If the company applies for a loan,
Institute of Certified Public Accountants) then the bank's loan officer will then
require the company to submit financial
 Accounting is the process of information to be able to determine
identifying, measuring, and whether to approve or reject the loan
communicating economic application
information to permit informed
judgment and decision by users of
the information. ACCOUNTING – THE LANGUAGE
(American Accounting Association )
OF BUSINESS

 Accounting is a service activity. Its -Accounting is the language used

function is to provide quantitative to communicate financial information to
information, primarily financial in interested parties such as business owners,
nature, about economic entities, management, employees, the government,
that is intended to be useful in etc.
making economic decisions. Through accounting, different
(Accounting Standards Council)
users of financial information understand
what is happening in the business
BASIC PURPOSE OF ACCOUNTING enterprise.

-Is to supply financial information

to users to help them make informed BUSINESS DEFINED
judgments and better decisions.
Business - (or enterprise or firm) is an
Accounting provides the following organization engaged in the trade of goods,
information: services, or both to consumers.
 The resources and obligations of
the business Profit-oriented business - goal is to earn
profit to increase the wealth of owners.
 Interest being paid on the current
 -includes food manufacturers, gas  Sari-sari stores
stations, bookstores, etc.  Bookstores and drugstores
 Hardware stores
Non-profit organization- is an
organization that uses surplus revenues to Manufacturing Business - buys goods
achieve its goals rather than to distribute called raw materials, then converts them
them as profit or dividends. into finished products.
-They are permitted to generate -The manufacturing business is the
surplus revenues but they must be retained most complex because of the conversion
by the organization for its self- of the raw materials into finished goods.
preservation, expansion or plans.
- Ex: Charitable organizations and Ex:
educational are non profit oriented A shoe manufacturing business
buys raw materials (leather, rubber, and
supplies such as thread, glue, laces and
TYPES OF BUSINESS ENTERPRISES ringlets), uses the skills of workmen to
ACCORDING TO ACTIVITY convert these raw materials into shoes, and
sells the finished shoes to customers at a
Service Business - offers services and price higher than the cost of producing
typically generate a profit by charging a them.
fee. This is the simplest among the three.

Ex: LEGAL FORMS OF Business

 Educational institutions charge (BUSINESS ownership)
tuition and miscellaneous fees for
educational services Sole Proprietorship - has only one owner,
 Jeepneys, bus lines, airlines and the proprietor.
other transportation businesses -The proprietor may operate on
charges fares. his/her own, or may employ others as
 Agencies collect agency fees from business operations expand.
clients in exchange for security and -Many successful business
janitorial services. undertakings started as sole
 Accountants, doctors, lawyers, proprietorships because this is the most
architects give professional advices basic legal form of business.
and earn profit by charging
professional fees. Ex:
 Mobile phone repair services
Merchandising Business or Trading  Gravel-and-sand enterprises
Concern - buys goods and sells them  Cottage industries and other small-
without any alteration made on their state scale
or condition.
Advantages:
Ex:  Easiest to form
  Less complex business transactions Disadvantages:
 Minimal regulatory requirements  Disagreements regarding ideas and
 Decisions can be made and management style
implemented faster.  It may be dissolved by an
 The proprietor enjoys all the profits agreement, withdrawal, death, or
earned by the business. incapacity of a partner.
 Unlimited liability
Disadvantages:
 Limited ability to raise capital Corporation - an artificial being created
o A business only expands in by law. As such, the corporation can sue
proportion to the resources and be sued. Is managed mainly by the
contributed by the proprietor board of directors
and on what the proprietor's -A corporation has standardized
expertise is. procedures for its creation, organization,
 Proprietor does not receive the management and liquidation as specified
benefit of a second opinion in the Corporation Code.
 Proprietor bears the risks and -most complex form of business
losses of the enterprise. organization.
 Unlimited liability
Stockholder - a person who invests and
becomes an owner of the corporation.
Partnership - an association of two or Each share purchased, a stockholder is
more persons issued a certificate of stock.
-Partners agree on how the -They may transfer their shares
business will be managed, the amount of without the need to obtain the consent of
capital contributions from each partner, other stockholders.
how profits/losses will be divided among
them, and the form and mode of settlement Advantages:
in case of withdrawal or death of any of  Greatest capacity to raise capital,
the partners. this is done by selling shares of
-Are governed by the Civil Code of stock to the public.
the Philippines.  Unlimited life. After 50 years then
can be renewed.
Advantages:  Limited liability (the liability of the
 Easier to organize compared to a stockholders is limited to the
corporation. investments).
 Management of the business is  Can easily raise capital
usually shared among partners, so
more ideas are exchanged and Disadvantages:
brainstormed, resulting to better  High cost of forming and managing
decision- making.  Subjected to greater scrutiny,
 Can raise more capital compared to regulation, control and supervision
sole proprietorships. by the government.
  Complex management management. It processes raw data and
 converts them into meaningful information
 Has limited powers, as stated in the that will be useful for decision-making.
Corporation Code of the
Philippines and its own Articles of
Incorporation.
 Subjected to double taxation.

ECONOMIC DECISIONS

-Reliable information is needed,

this comes in the form of accounting
information. Also requires great skill,
timing, and sound professional judgement
-Management makes decision as to
the proper selling price goods should be
sold, and management needs the total cost
of these goods and the selling prices of
competitors.
-Management must decide when to
place an order for goods to be acquired.
For them to do so they need to know the
lead time, from the time of placing an
order to the time of the goods are
delivered; they likewise need to know the
balance of the goods still on hand and the
quantity of goods expected to be sold
during the lead time, among many others.

FINANCIAL INFORMATION
-Decision making process requires
financial and non-financial information.

Financial information - a summary of all

the transactions of the business over a
period of time.

Bookkeepers/ Accountants - records the

Transactions of the business

Accounting - a service function to

 USERS OF FINANCIAL Regulators - interested in the
STATEMENTS allocation of resources and the
activities of enterprises. They also
 Investors - The “providers of risk require information in order to
capital”. Are concerned with the regulate the activities of
risk inherent in and return provided enterprises, determine taxation
by, their investments. They need policies and as the basis for
information to help them determine national income and similar
whether they should buy, hold or statistics.
sell their investments, and to assess  The public - Enterprises affect
the ability of the enterprise to pay members of the public in a variety
dividends. of ways. For example, enterprises
 Owners - need financial may make a substantial
information to determine if the contribution to the local economy
business is profitable and whether in many ways including the
to continue, improve or drop it. number of people they employ and
 Employees -needs information their patronage of local suppliers.
about the stability and profitability Financial statements may assist the
of their employers, and so they can public by providing information
assess the ability of the enterprise about the trends and developments
to provide remuneration, retirement in the prosperity of the enterprise
benefits and employment and the range of its activities
opportunities.
 Lenders/Creditors - needs
information to determine whether THE ACCOUNTANCY PROFESSION
their loans and interest will be paid
when due. -While accounting as an
 Suppliers and other trade information system is not a new concept,
creditors - needs information to accountancy as a profession is relatively
determine whether amounts owing new. Accounting is a profession because it
to them will be paid when due. has the attributes required of a profession,
Trade creditors are likely to be as shown below:
interested in an enterprise over a -Mastery of a particular
shorter period than lenders unless intellectual skill, acquired by training and
they are dependent upon the education. Accounting requires a person to
continuation of the enterprise as a finish a degree in Bachelor of Science in
major customer. Accountancy and to pass a very rigorous
 Customers - needs information government examination administered by
about the continuance of an the Professional Regulatory Board of
enterprise especially when they Accountancy. Only then can he/she use the
have a long-term involvement with, title “Certified Public Accountant” (CPA).
or are dependent on, the enterprise. -Adherence by its members to a
 Government and their agencies/ common code of values and conduct
established by its administrating body,
including maintaining an outlook which is and six (6) members, all of whom
essentially objective. The Code of Ethics is are appointed by the President of
mandatory for all CPAs. It provides the Republic of the Philippines.
guidance for CPAs whenever they
encounter “what is the right thing to do” CPA BOARD EXAMS
situations. -Passing the CPA Board Exams is
Acceptance of a duty to society as a requirement in order to join the
a whole (usually in return for restrictions accountancy profession. Any person
in use of a title or in the granting of a applying for examination shall establish
qualification). Investors, creditors, the following requisites to the satisfaction
employers and other sectors of the of the Board that he/she:
business community, as well as the  is a Filipino citizen;
government and the public at large rely on  is of good moral character;
CPAs for sound financial accounting and  is a holder of the degree of
reporting, effective financial management Bachelor of Science in
and competent advice on a variety of Accountancy conferred by a
business and taxation matters. school, college, academy or
institute duly recognized and/or
accredited by the CHED or other
THE PHILIPPINE ACCOUNTANCY authorized government offices; and
ACT OF 2004  Has not been convicted of any
-The accountancy profession is criminal offense involving moral
governed by law. Republic Act No. 9298, turpitude.
the Philippine Accountancy Act of 2004,  The licensure examination for
was signed into law with the following certified public accountants shall
objectives: cover, but are not limited to, the
 The standardization and regulation following subjects:
of accounting education; o Management Services
 The examination for registration of o Regulatory Framework for
certified public accountants; Business Transactions (RFBT)
 The supervision, control, and o Auditing
regulation of the practice of o Financial Accounting and
accountancy in the Philippines
Reporting (FAR)
 Article II of the Republic Act No. o Advance Financial
9298 creates the Professional
Accounting and Reporting
Regulatory Board of Accountancy,
(AFAR)
the agency tasked to enforce the
o Taxation
provisions of the Philippine
Accountancy Act. It is also granted
 To be qualified as having passed
the right to issue, suspend, revoke,
the licensure examination for
or reinstate CPA certificates for the
accountants, a candidate must
practice of the profession. The
obtain a general average of
Board is composed of a chairman
seventy-five percent (75%), with
 no grades lower than sixty-five professional accounting services to the
percent (65%) in any given subject. public. CPAs charge professional fees for
 In the event a candidate obtains the these services. Examples of services
rating of seventy-five percent provided by CPAs are:
(75%) and above in at least a
majority of subjects as provided for  Auditing – this is the most
in this Act, he/she shall receive a common service being provided by
conditional credit for the subjects CPAs. It involves the independent
passed. Such candidate shall take examination of financial statements
an examination in the remaining for the purpose of expressing an
subjects within two years from the opinion on the fairness of these
preceding examination, and if the statements. Users of audited
candidate fails to obtain at least a financial statements have
general average of seventy-five reasonable assurance that the
percent (75%) and a rating of at information they are using are free
least sixty-five percent (65%) in from material misstatements due to
each of the subjects reexamined, fraud or error.
he/she shall be considered as failed  Tax services – this includes the
in the entire examination. preparation of tax returns for
 Candidates who fail two (2) various clients, provision of advice
complete examinations shall be on tax matters, and representation
disqualified from taking another set of clients in tax cases. CPAs have a
of examinations unless he/she reputation of being experts in
submits evidence to the satisfaction accounting and taxation.
of the Board that he/she enrolled in  Management consulting services
and completed at least twenty-four – involves providing advisory/
(24) units of subject given in the consulting services to clients on
licensure examination. matters of accounting, finance,
business policies, organization
SECTORS OF ACCOUNTING procedures, budgeting, product
PRACTICE costing and the conduct of
CPAs generally practice their profession in operations.
four sectors:
 public practice, COMMERCE AND INDUSTRY
 commerce and industry, Accountants are employed in various
 education or the academe, and the positions, such as:
 government.  vice-presidents for finance,
 chief accountant (controller),
PUBLIC PRACTICE  cost accountant,
This sector includes individual  internal auditor, or
practitioners, small accounting firms,  budget officer.
medium sized and multinational
accounting firms that render independent
 The highest accounting officer in a involves the set-up, update and
business organization is known as the maintenance of accounting records.
controller (or comptroller).
Accountants in commerce and Accounting is conceptual and goes
industry (or private accountants) assist beyond bookkeeping.
management in planning and controlling a
company’s operations. Accounting includes the
interpretation of information recorded
EDUCATION under bookkeeping. Bookkeeping may be
 This area employs accountants as done even by properly trained non-
professors, reviewers, or accountants, while the practice of
researchers. accountancy can only be done by certified
 They take steps to clarify and public accountants.
address emerging accounting issues
encountered by accountants in BRIEF HISTORY OF ACCOUNTING
other sectors.
 They share the results of discussion -Accounting traces its roots to the
and research with colleagues in Middle East region, where as early as 8500
other sectors. BC, tradesmen use clay objects to
 Educators also prepare aspiring represent commodities such as flocks of
CPAs for the Licensure sheep, jars of spices and oil, bolts of
Examinations. clothing and other goods.
-Some archaeologists later
GOVERNMENT unearthed clay tablets marred with
Accountants may be hired as: symbols and other writings – and
 staff interpreted them to mean records of goods
sold and other statistics kept at that time.
 auditor
-The ancient civilizations of
 budget officer
Babylon, Greece and Egypt also used clay
 consultant in government units
tablets (in later years, papyri were used as
like:
the medium for record-keeping). These
o Commission on Audit,
records document wage payments,
o Bureau of Internal Revenue,
material requisitions and costs of labor,
o Department of Finance, which only show that accounting is
o Department of Budget and already in use even during Biblical times.
Management, and the In the 13th to 15th centuries, with
o Securities and Exchange the growth of trade and commerce, more
Commission. systematic record-keeping methods were
developed. Florentine, Venetian and
ACCOUNTING AND BOOKKEEPING Genoan merchants used these methods to
DISTINGUISHED keep track of their business. Double- entry
records first appeared in Genoa in 1340
Bookkeeping - the procedural or AD.
mechanical aspect of accounting. It
 manage the business to periodically
LUCA PACIOLI AND THE SUMMA account for the performance of the
In 1494, Friar Luca Pacioli wrote a corporation.
book which contains discussions on the Between management and the
double-entry bookkeeping system. The shareholders, a potential conflict of
book was entitled Summa de Arithmetica, interest exists – management may be too
Geometria, Proportioni et Proportionalita optimistic in the way they report the
(Everything about Arithmetic, Geometry, financial condition and results of
Proportions and Proportionality), a operations of the business; owners, on the
summary of the existing mathematical other hand, want a true and fair view of the
knowledge at the time. Because of the status of the business. This conflict of
Summa, Friar Pacioli was considered the interest led to the demand for financial
Father of Double-Entry Bookkeeping. statement audits.

THE INDUSTRIAL REVOLUTION FIELDS OF ACCOUNTING

In the mid-18th to the mid-19th More complex accounting policies
centuries, the Industrial Revolution altered and procedures were developed to suit the
the way goods are produced: from the changing needs of users of financial
artisan/craftsman method to the assembly- information. Standards were developed to
line method. Large volumes of promote uniformity in the selection and
commodities were produced in factories application of accounting policies and
and commerce boomed. With this procedures. Different fields of accounting
development came the problem of emerged, each one addressing a different
accounting for the costs involved in particular need:
assembly-line manufacturing, particularly  Financial accounting - focuses on
overhead costs. Cost accounting, the the preparation and presentation of
specialized field of accounting which deals general-purpose financial
with the allocation of costs to products, statements with the aim of meeting
was developed to address this problem. most of the needs of external users.
The corporate form of business  Management accounting -
organization was created to accommodate concerned with financial reporting
the need for increasingly large amounts of for internal users, such as
funds which are required to finance the management. These users have
expansion of business during this period. control over the accounting system
The funds accumulated were used mainly and can specify precisely the type
to acquire machinery, build factories, and of reports needed for use in
streamline manufacturing methods and decision-making.
processes.  Cost accounting - measures a
With the birth of corporations, a business’s costs to help
business can have many owners. The management in controlling
owners are gradually separated from the expenses. Cost accounting records
business operations, and other people are guide managers in setting prices for
hired to manage the enterprise. Because of their products and services to
this, there was a need for those who
 achieve greater profits. CHAPTER SUMMARY
 Tax accounting - has two aims:
compliance with the tax laws and Accounting - is an information system
minimizing the company’s tax bill that provides quantitative information for
through legal means. Accountants use by decision-makers.
provide tax planning and tax -is the process of identifying,
consultancy services, such as measuring and communicating economic
giving advice to clients on what information to permit informed judgment
type of investments to make and on and decision by users of the information.
how to structure business
transactions Basic purpose of accounting - is to
 Government accounting - supply financial information to users of the
encompasses the process of information to help them make informed
analyzing, classifying, judgments and better (economic)
summarizing and communicating decisions.
all transactions involving the
receipt and disposition of Accounting as a language - used to
government funds and property and communicate financial information to
interpreting the results thereof. In interested parties such as business owners,
other words, the focus of management, employees, the government,
government accounting is the etc.
proper custody, disposition and
accounting for public funds. Bookkeeping - is the procedural or
 Accounting and Information mechanical aspect of accounting.
Technology - The advent of Accounting is broader compared to
Information Technology (I.T.) bookkeeping.
revolutionized accounting and gave
it a big boost in terms of efficiency -Businesses aim to earn income or profit
and timeliness. Accounting by providing services or selling goods.
procedures that used to be time-
consuming can now be performed Nature of businesses- either service
with speed and accuracy by businesses, merchandising businesses, or
computers. Accounting manufacturing businesses.
applications have been written to
suit different kinds of business Legal form of businesses - classified
organizations. It is comforting to according to the ownership of a business:
note that computers can take over as either sole proprietorships, partnerships,
most of the clerical aspects of or corporations.
accounting, but they can never Accounting as a profession:
replace the professional judgment  Mastery of a particular intellectual
of an accountant. skill
 Adoption of a common code of
values or conduct
  Acceptance of a duty or
responsibility to society.

CPAs generally practice their profession in

four sectors:
 Public practice
 Commerce and industry
 Education or the academe
 Government.