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INITAO COLLEGE
Jampason, Initao, Misamis Oriental
1st Semester, S.Y. 2023 - 2024
Course Code: EC1
Course Title: Intermediate Accounting and Business Application
Unit: 3 (Lecture)
Facebook Group: EC1_BSBA1-Initao College 2023

MODULE 2: August 14 – 18, 2023

Duration: 3 hrs
Desired Learning Outcomes:
 Describe the nature of accounting
 Understand the functions of accounting in business
 Discuss the significance of accounting in business
INTRODUCTION

Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper or an
accountant at a small firm, or by extensive finance departments with dozens of employees at larger
companies. The reports generated by various streams of accounting, such as cost accounting and managerial
accounting, are invaluable in helping management make informed business decisions. –
investopedia.com
ABSTRACTION

In all activities and organizations (business or non-business) which require money and other economic
resources, accounting is required to account for these resources. In other words, wherever money is involved,
accounting is required to account for it. Accounting is often called the language of business. The basic function
of any language is to serve as a means of communication. Accounting also serves this function.
ANALYSIS
Definitions 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 decisions.

Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information.

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 a financial character, and interpreting the results thereof.

Accounting is an information system that measures, processes and communicates financial information about
an identifiable economic entity.

When an aspiring entrepreneur starts a business, the office is full of excitement, enthusiasm and great
expectations. Employees are hired to answer the phones, and salespeople are selling. The owner is buying
raw materials, and the workforce is manufacturing the products. But how is the company doing? Is it making a
profit? Everyone is working really hard, so they must be doing something right. So how do you keep the score
of the game? This is where accounting in business steps in.

Accounting is often referred to as “Language of Business”. It is a means of communicating financial

The Role of Accounting

The purpose of accounting is to provide financial information to the stakeholders of the business –
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management, investors and creditors. Accounting measures and summarizes the activities of the company
and communicates the results to management and other interested parties.

Managers need accurate and timely financial data to make intelligent decisions, and accountants are the ones
who produce this information. While the accounting process collects the data and presents it in various types
of reports, the accountants help interpret the meanings of the reports and suggest ways to use these details to
solve business problems.

Phases of Accounting

Business transactions are the economic activities of a business. Recording these historical events is a
significant function of accounting. Before the effects of transactions can be recorded, they must be measured.
In order that accounting information will be useful, it must be expressed in terms of a common financial
denominator – money. Money serves as both a medium of exchange and a measure of value.

By simply measuring and recording transactions, the resulting information will be of limited use. To be useful in
making decisions, the recorded data must be classified and summarized. Classification reduces the effects of
numerous transactions into useful groups or categories.

Summarization of financial data is achieved through the preparation of financial statements or financial reports.
These usually summarize the effects of all business transactions that occurred during some period. After going
through the preceding phases, it is imperative that the result of the summarization phase be interpreted or
analysed to evaluate the liquidity, profitability and solvency of the business organization. Accounting provides
the decision-makers with information to make reasoned choices among alternative uses of scarce resources in
the conduct of business and economic activities.

BRANCHES OF ACCOUNTING
The main branches of accounting and their brief descriptions are the following:

Auditing
Auditing is the accountancy profession’s most significant service to the public. There are two main
classifications of audit – external and internal. An external audit is the independent examination that ensures
fairness and reliability of the reports that management submits to users outside the business entity. The result
of the examination is embodied in the independent auditor’s report. External auditors are appointed from
outside the organization. The external auditor’s job is to protect the interests of the users of the financial
statements. By contrast, internal auditors are employees of the company. They are appointed by, and answer
to, the company’s management though they work independently of the accounting and other departments. To
differentiate further, internal auditors perform routine tasks and undertake detailed checking of the company’s
accounting procedures, whereas external auditors are likely to go in for much more selective testing.

Bookkeeping
Bookkeeping is a mechanical task involving the collection of basic financial data. The data are first entered in
the accounting records or the books of accounts, and then extracted, classified and summarized in the form of
income statement, balance sheet and cash flows statement. The bookkeeping procedures usually end when
the basic data have been entered in the books of accounts and the accuracy of each entry has been tested. At
that stage, the accounting function takes over. Bookkeeping is a routine operation, while accounting requires
the ability to examine a problem using both financial and non-financial data.

Cost Accounting
Cost accounting deals with the collection, allocation, and control of the cost of producing specific goods and
services. This accumulation and explanation of actual and prospective cost data is important to control current
operations and to plan for the future. Cost accounting now forms one of the main sub-branches of
management accounting.

Financial Accounting
Financial accounting is focused on the recording of business transactions and the periodic preparation of
reports on financial position and results of operation. It is the more specific term applied to the preparation and
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subsequent publication of highly summarized financial information. The information supplied is usually for the
benefit of the owners of the entity, but it can also be used by management for planning and control purposes.
It will also be of interest to other parties, e.g. employees and creditors.

Financial Management
Financial management is a relatively new branch of accounting that has grown rapidly. Financial managers are
responsible for setting financial objectives, making plans based on those objectives, obtaining the finance
needed to achieve the plans, and generally safeguarding all the financial resources of the entity.

Management Accounting
Management accounting incorporates cost accounting data and adapts them for specific decisions which
management may be called upon to make. A management accounting system incorporates all types of
financial and non-financial information from a wide range of sources.

Taxation
Tax accounting includes the preparation of tax returns and the consideration of the tax consequences of
proposed business transactions or alternative courses of action. Accountants with this specialization aim to
comply with the existing tax statutes but are also in constant legal search for ways to minimize tax payments.

Government Accounting
It is concerned with the identification of the sources and uses of resources consistent with the provisions of
city, municipal, provincial or national laws. The government collects and spends huge amount of public funds
annually so it is necessary that there is proper custody and disposition of these funds.

FUNCTIONS OF ACCOUNTING

A person who is involved in the process of bookkeeping and accounting is called an accountant. With the
coming up accounting as a specialized field of knowledge, an accountant has a special place in the structure
of an organization, because he performs certain vital functions. The following paragraphs examine the
functions of accounting and what role does an accountant play in discharging these functions.

An accountant is a person who does the basic job of maintaining accounts as he is the man who is engaged in
bookkeeping. Since the managers would always want to know the financial performance of the business. An
accountant prepares profit and loss account which reports the profits/losses of the business during the
accounting period. Balance Sheet is a statement of assets and liabilities of the business at a point of time, is
also proposed by all accountants. Since both statements are called financial statements, the person who
prepares them is called a financial accountant.

Accounting information serves many purposes. A part from revealing the level of performance, it throws light
on the causes of weakness and deviation from plans (in any). In this way, an accountant becomes an
important functionary who plays a vital role in the process of management control, which is a process of
diagnosing and solving a problem. Seen from this point of view, an accountant can be referred to as a
management accountant.

Tax planning is an important area as far as the fiscal management of a company is concerned. An accountant
has a suggestive but very specific job to do in this regard by indicating ways to minimize the tax liability
through his knowledge of concessions and incentives available under the existing taxation framework of the
country.

An accountant can influence a company even by not being an employee. He can act as a man who verifies
and certifies the authenticity of accounts of a company by auditing the accounts. It is a strictly professional job
and is done by persons who are formally trained and qualified for the purpose. They have an educational
status and a prescribed code of conduct like the Philippine Institute of Certified Public Accountants (PICPA).

Accounting Data for Decision-Making

Running a business requires accurate data about the company's assets, liabilities, profits and cash position.
Accounting provides this crucial information. Accounting plays a significant role in evaluating the viability of
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investments. Proper consideration of an investment demands a careful analysis of costs and projections of
expectations for future cash flows.

Consider the decision managers often face of whether to invest in a new factory plant or expand the existing
facilities. A choice might be to invest ₱1 million in a new production facility or spend ₱300,000 to expand a
production line. Each approach will have a different return on investment. So, which one should management
choose? The company's accountants will analyze the figures for each investment, calculate the rate of return
for each project and present their findings to management.

This is a situation where accounting procedures produce the relevant financial data that management needs to
make intelligent decisions. They also have to explore the various ways to finance these investments.
Decisions must always be backed up with valid facts and figures.

Accounting for Planning

Successful organizations create plans to achieve their objectives. These plans include cash flow projections,
sales planning, purchases of fixed assets and projecting inventory levels. An accounting analysis of historical
data will provide the basis for making forecasts and developing plans to meet those targets.

Using Accounting Data for Budgeting

Budgets are essential to running a successful business. Accounting uses historical data to form the basis for
future budgets and cost controls. With this information, managers can prepare overhead expense budgets and
sales plans, and create cash flow projections. Then they monitor the regular accounting reports to make sure
costs stay within the budgets.

Cost Accounting for Products

Manufacturing companies use cost accounting to calculate the cost of making products, determine break-even
sales volumes and set optimum inventory levels. Managers need to know how much it costs to make their
products to develop pricing strategies that allow the company to make a reasonable profit.

An important responsibility of management is to control costs. However, to do this, managers must have
predetermined standard costs of operations to use as yardsticks for measurement.

Take, for example, a company that manufactures ceramic cups. The company's accountants have determined
that manufacturing costs for one cup include ₱10.00 in materials, ₱20.00 in labor and applied production
overhead of ₱5.00 per unit. The total cost of production for a ceramic cup is ₱35.00. The selling price is
₱58.00, giving the company a gross profit margin of 40 percent.

With these figures in hand, management can monitor production costs on a weekly or monthly basis to make
sure the costs of production do not exceed these standards. If accounting reports show a discrepancy above
the intended cost of manufacturing, then management knows to step in, find the cause of the problem and
take corrective action.

Accurate accounting of manufacturing costs for each product is essential to the development of a sales plan
and a projected product mix. More than likely, each product will have a different gross profit contribution, and
management must establish sales goals for each item to reach the overall gross profit level needed to cover
overhead and produce the target net profit.

REFERENCES:
Ballada, W., & Ballada, S. (2007). Basic Accounting, Made Easy - 12th Edition. Manila: DomDane Publishers
& Made Easy Books.
https://www.investopedia.com/terms/a/accounting.asp
Shekhar, C. Introduction to accounting. Retrieved from: http://www.ddegjust.ac.in/studymaterial/bba/bba-
104.pdf
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Woodruff, J. (2018, December 3). The role of accounting in business. Retrieved from Chron:
https://smallbusiness.chron.com/role-accounting-business-459.html#:~:text=business%20steps%20in.-,The
%20Role%20of%20Accounting,management%20and%20other%20interested%20parties.