Chapter 1 Fundamentals of Acctg

FUNDAMENTALS
OF
ACCOUNTING
INTRODUCTION
The word account in everyday language is often used as a substitute for an
explanation or a report of a certain action or event. In order to explain or to
report, of course, you need remember what transpired or what happened. Since
it is not easy to remember, you may need to keep some written record. In effect,
such records can be said to form basis of the rudimentary accounting or
reporting system.
Accounting is relevant in all walks of life, and it is absolutely essential in the
world of business.
Accounting is a system that measures business activities, processes that
information into reports and communicates the results to the decision makers.
Accounting quantifies business communication. For this reason, accounting is
called the language of business.
No business could operate long without knowing how much it is earning ad
how much it is spending. Accounting providesthe business with these
information and more.
DEFINITIONS OF ACCOUNTING
• - the art of recording, classifying and summarizing in a
significant mannner and in terms of money, transactions
and events which are, in part at least, of a financial
character, and interpreting the results thereof
• - 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
DEFINITIONS OF ACCOUNTING
• - is a process of identifying, measuring and
communicating economic information to permit informed
judgements and decisions by users of the information
• - is an information system that measures, processes and

communicates financial information about an identifiable
economic entity
DEVELOPMENT OF ACCOUNTING
• Primitive Accounting
- People used tokens, such as cones, disks, pellets,
spheres to represent commodities to keep records. Later on
these were replaced by symbols impressed on wet clays.
Some experts consider this stage of record keeping as the
beginning of the art of writing.
• Middle Ages
- This period started the development of more formal
account-keeping methods . This is attributed tot he
merchants band bankers of Florence, Venice and Genoa.
Although the system is primitive, accounts were not related
in any way, balancing of accounts were lacking, stytematic
bookkeeping evolved from these method. The double entry
records first appeared in Genoa in 1340 A.D.
- Double-Entry bookkeeping is not a discovery of science, it
is the outcome of continued effort to meet the changing
necessities of trade.
• Middle Ages cont.
- Fra Luca Pacioli - known as the father of double-Entry

Bookkeeping
- Nicolas Petri - first person to group similar transactions in

a separate record and enter the monthly totals in a journal,
rather than recording all transactions in a series.
• Industrial Revolution and Corporate Organization
- The revolution which occured in England from 18th -mid

19th century, changed them method of producing
commercial good from the handicraft method to factory
system. With this change came the problem of coting of
large volume of product, thus the special field of cost
accounting.
• Information Age
- The tremendous advances in information technology have

revolutionized accounting in recent years. Tasks those are
time-consuming when done manually can now be done with
speed, precision, consistency and reliability by computers.
There is in abundance of applications and modules to suit
the businesses' various needs.
BRANCHES OF ACCOUNTING
Bookkeeping - mechanical task involving the collection of
basic financial data. The data are first entered in special
records known as books of account, then extracted and
summarized in the form of profit and loss account and a
balance sheet,
The bookkeeping usually ends when the basic data are

entered in the books of account and the accuracy of each
entry has been tested.
• Auditing - forms a most important branch of accountancy. Once
account has been prepared, they have to be checked in order to
ensure that they do not present a distorted picture. The checking
of accounts and reporting on them is known as auditing.
-External Auditors - appointed by the shareholders of the company. Their job

is to protect the interest of the shareholders.
-Internal Auditors - employed by the company to perform routine tasks and

undertake detailed checking of company's accounting procedures.
• Financial Accounting - is a more specific term applied to
the preparation and subsequent publication of highly
summarized financial information.
• Cost Bookkeeping, Costing and Cost Accounting -

Cost bookkeeping is the process that involves the
recording of cost data in the books of account. Cost
Accounting makes use of the data extracted from cost
books in providing information for managerial planning
control.
• Financial Management is a relatively new branch of accounting
that has grown rapidly in the recent years. Financial managers are
responsible for setting up financial objectives, making plans based
and safeguarding all the financial objectives of the entity.
• 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 is a highly complex technical branch of
accounting. Accountants involved in tax work are
responsible for computing the amount of tax payable by
both business entities and individuals.
ACCOUNTANCY IN THE PHILIPPINES
Philippine Accountancy was recognized in the Philipines
on March 17, 1923, when Act. Ni. 3105 was approved by
the Sixth Legislature. Entitled “An act Regulating the
Practice of Public Accounting; Creating the Board of
Accountancy (BOA); Providing for Examination, the
Granting of Certificates, and the Registration of Certified
Public Accountants (CPAs).
Characteristics of the Accountancy Profession
• Accountancy as a profession because it possesses the
following attributes:
- all members of the accountancy profession are Certified Public
Accountants
- CPAs have their own body of language.
- CPAs adhere to a Code of Ethics
- Like other professionals, CPAs are members of a national
organization, the PICPA, whose role is to ensure the continued
improvement of the accountancy profession to meet the
demands of the times.
Scope of Practice
• Public Accountancy shall constitute in a person, be it his/her
individual capacity, or as a partner or as a staff member in an
accounting firm, holding out himself/herself as one skilled in the
knowledge, science and practice of accounting, and a qualified
person to render professional services as a certified public
accountant (CPA).
• Practice in Commerce and Industry shall constitute in a person

involved in decision making requiring professional knowledge in
the science of accounting,, or when such employment or position
requires tht th holder thereof must be a CPA.
Scope of Practice
• Practice in Academe/Education - shall constitute in a person in an

educational institution which involve teaching of accounting, auditing,
management advisory services, finance, business law, taxation and
other technically related subjects.
• Practice in Government - shall constitute in a person who holds, or

is appointed to, a position in an accounting professional group in
government or in a government-owned and/or controlled corporation,
including those performing propriety functions, where decision-
making requires professional knowledge in the science of accounting,
or where a civil service eligibility as a CPA is a prerequisite.
Code of Ethics
A distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the public interest.
In acting in the public interest of a professional accountant,
one must observe with the ethical requirements of the
Code.
A professional accountant is defined as “an individual who

holds a valid certificate issued by the Board of Accountancy,
whether he/she be in public practice, industry, commerce,
public sector or education”.
Code of Ethics
A professional accountant is required to observe the following
fundamental principles:
Integrity - professional accountant should be straightforward and
honest in all professional and business relationships.
Objectivity - professional accountant should not allow bias, conflict
of interest or undue influence of others to override professional or
business judgement
Professional competence and due care - professional accountant
should act with diligence and in accordance with applicable technical
and professional standards when providing professional services.
•
• Confidentiality - professional accountant should respect
confidentiality in dealing with confidential information
acquired as a result of professional and business
relationship with clients.
• Professional Behavior - professional accountant should

comply with relevant laws and regulations and should
avoid any action that discredits the profession.

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FUNDAMENTALS

• - is a service activity. Its function is to provide

• - is an information system that measures, processes and

- Fra Luca Pacioli - known as the father of double-Entry

- Nicolas Petri - first person to group similar transactions in

- The revolution which occured in England from 18th -mid

- The tremendous advances in information technology have

The bookkeeping usually ends when the basic data are

-External Auditors - appointed by the shareholders of the company. Their job

-Internal Auditors - employed by the company to perform routine tasks and

• Cost Bookkeeping, Costing and Cost Accounting -

• Management Accounting incorporates cost accounting data and

• Practice in Commerce and Industry shall constitute in a person

• Practice in Academe/Education - shall constitute in a person in an

• Practice in Government - shall constitute in a person who holds, or

A professional accountant is defined as “an individual who

• Professional Behavior - professional accountant should

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