MODULE 1 WEEK 1

GRADE 11 FABM 1

Prepared by: ROLAND RUBIO

MCA Montessori School, Inc. “MODULE 1 WEEK 1”

"FOR EDUCATIONAL PURPOSES ONLY"

NATURE OF ACCOUNTING

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• WHAT ISisACCOUNTING?
Accounting the systematic process of measuring and
reporting relevant financial information about the
activities of an economic organization or unit. Its
underlying purpose is to provide financial information. It
is capable of being expressed in monetary terms.
• The American Institute of Certified Public Accountants
(AICPA) defines accounting as the art of recording,
classifying, and summarizing in a significant manner and
in terms of money, transaction, and events, which are in
part at least of a financial character, and interpreting the
result thereof.
• The Philippine Institute of Certified Public Accountants
(PICPA) defines accounting as a service activity. Its
function is to provide quantitative information, primarily
financial in nature, about economic entities, that is
intended to be useful "FOR
in EDUCATIONAL
makingPURPOSES
economic
ONLY"
decisions.
 NATURE OF ACCOUNTING
1. ACCOUNTING IS A SYSTEMATIC PROCESS
Process is a series of actions that produce something or
that lead to a particular result. As such, the performance of the
four aspects of accounting, which are recording, classifying,
summarizing, and interpreting, leads to communicating to its
users the relevant financial information needed by the parties.
2. ACCOUNTING IS AN ART
Art is a skill acquired by experience, study, or observation.
It is also defined as an occupation requiring knowledge or skill.
The four aspects of accounting require both knowledge and
skills through experience, study, or observation as a means to
produce the key end product which are the financial reports.
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3. ACCOUNTING IS A SERVICE ACTIVITY.
Service is the occupation or function of
serving. It is something that is done as work
or for a particular purpose. Combining the
meaning of the two words, accounting is a
work or occupation for serving a particular
purpose. Hence, since its purpose is to
provide financial information, the data that it
will process in terms of the four aspects of
accounting should be expressed in monetary
terms. In short, it is interested in activities
that can be measured and expressed in terms
of the value of money.
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 FOUR ASPECTS OF ACCOUNTING
1. RECORDING
Writing down of business transactions
chronologically in the books of account as they
transpire.
2. CLASSIFYING
Sorting similar and related business
transactions into the three categories of assets,
liabilities, and owner’s equity.
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3. SUMMARIZING
Preparing the financial statements from the
transactions recorded in the books of accountant
that are designed to meet the information needs of
its users.
4. INTERPRETING
Representing the qualitative and quantitative
financial information about the business
transactions in a language comprehensible to the
users of financial statements. By interpreting the
data in the financial statements, users are able to
determine the financial standing of the company
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 The Basic Function of Accounting in Business
The aspects of accounting can be summed up to one basic
function which is the generation of relevant and timely financial
information for interested parties. The data provided by accountants
can assist investors, government agencies, creditors, and management
in making sound decisions. The financial information provided about
the activities of an economic organization makes it easily
comprehensible for users to assess its financial position as of a given
time and results of operations for a given period. This qualitative
financial data used by users relating to specific business decisions
makes the language of business.

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 A BRIEF HISTORY OF ACCOUNTING
“It is believed that the very origins of writing itself may
have developed out of early marks used to keep account of
goods at ancient warehouses more than 5,300 years ago.
The notion that pre-numerical counting systems pre-dated
even written language, didn't come as a surprise to many
historians and archaeologists who have long since
recognized that the history of human civilization is largely
indistinguishable from the history of commerce.”

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 Ancient Accounting in Egypt, Mesopotamia,
ANCIENT TIMES
Greece, and Rome
 The abacus which functioned as a calculator in the ancient times,
was developed by the Sumerians in 5,000 BCE followed by the
papyrus which was developed by ancient Egyptians in 4,000 BCE.
The papyrus not only allowed recording of commercial transactions
but also the transcription of religious text, music, literature, and
more.
EGYPT
 Archaeologist Dr. Gunter Dreyer Of the German Institute of
Archaeology unearthed clay tablets considered to be among the
oldest written tax accounting records. In the tomb of King Scorpion
I in Egypt, he discovered Old stone labels believed to date back to
3,000 BCE or around 5,300 years ago. These old stone labels were
complete with marks representing accounts of oil and linens which
were believed to be paid"FOR
to EDUCATIONAL
the kingPURPOSES
as taxes.
ONLY"
MESOPOTAMIA
Mesopotamia had clay tokens and clay tablets to record their loans,
herds, crop, and system of trade. The scribes who performed extensive
duties in writing and recording in the Mesopotamian civilization are the
equivalent of present-day accountants. Aside from writing down
commercial transactions, scribes assured that the agreements were in
compliance with the detailed code requirements for commercial
transactions.
GREECE
In 600 BCE, they introduced money in the form of coins. Moreover,
they adopted the Phoenician writing system and invented a Greek
alphabet which they used to facilitate record-keeping. As early as those
times, bankers in Greece offered credit and helped people transfer funds
to banks in other cities as evidenced by the bankers' books of account.
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 ROME
The Romans introduced the use of an annual budget which coordinated
estimated revenues and taxes paid by the citizen in relation to the nation's
expenditures. A cash book was maintained by households for their
expenses.

ENGLAND
In England, William the Conqueror took possession of all properties
in the name Of the king upon his invasion. In 1086, the Domesday
Book contained all the real estate surveyed by William the Conqueror
and the taxes due to them. To date, the Pipe Roll or the Great Roll of
the Exchequer is the most ancient surviving accounting record in the
English language. This contains the yearly accounting of rents, fines,
and taxes due to the King of England, from 1130 to 1830.
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14th Century — The Birth of Double-Entry Bookkeeping
• During the 14th century, Luca Pacioli of Italy, otherwise known as Friar
Luca dal Borgo, a mathematician, friend and contemporary of Leonardo
da Vinci, and considered to be the "Father of Accounting" wrote Summa de
Arithmetica, Geometria, Proportioni et Proportionalita (Everything About
Arithmetic, Geometry and Proportion). One section of this book, De
Computis et Scripturis (Of Reckonings and Writings), is composed of 36
short chapters that describe bookkeeping. The accounting cycle, similar to
the modern day accounting cycle is also included in this book. The book
also explains the extensively used balance sheet of today, the method of
using memorandums, journals and ledgers, the use of accounts such as
assets, liabilities, owner’s equity, revenue and expenses, year-end closing
entries, and the use of the trial balance to prove a balanced ledger.

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Pacioli credited Benedetto Cotrugli, for the original idea of the
double-entry bookkeeping. Cotrugli's manuscript of Della Mercatura
et del Mercante Perfetto (Of Trading and The Perfect Trader), which
contains a brief description of the double entry of bookkeeping, was
never printed. Actually, not only Luca Pacioli, but the Italians are
broadly recognized to be the father of accounting for their marked
contribution to the improvement of trade and commerce. The
business-minded early capitalistic Venetia n merchants used double-
entry system of recording in the late 15th century to calculate their
earnings and profits.

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19th Century — The Dawn Of Modern Accounting in
Europe and America
• Domination of the Theories of accounts (rather than
accounting theories) marked not only the beginning but
also the latter part of the nineteenth century. In England,
the Industrial Revolution which replaced hand tools with
machine or power tools, otherwise known as the factory
system, transformed accounting into an actual
profession. Businesses continued to expand requiring the
expertise of accountants to gain corporate control of their
nourishing businesses.
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In Scotland, Queen Victoria granted a royal charter to the
Institute of Accountants in Glasgow on July 6. 1854, thereby
creating the profession Of chartered accountant (CA). Thus.
accounting became a formal profession. In the latter part
Of the 19th century, because large amounts of British
capital were invested in flourishing industries in the United
States, Scottish or British chartered accountants were sent
to the United States to audit British investments. Some of
these accountants decided to stay in America and became
provenances of various accounting firms which they set up
to practice their profession. The year 1887 saw the birth of
the first national US accounting society. The American
Association of Public Accountants which provided a formal
certification process for accountants was the predecessor
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 20th Century- The Evolution of Modern Accounting
Standards
The American Institute of Certified Public Accountants (AICPA), the first
national professional association for Certified Public Accountants (CPA), was formed
in the young but prosperous nation of the United States. Because Of the economic
depression, the Securities and Exchange Commission (SEC) was formed. Periodic
reports vouched by certified public accountants were filed by all publicly traded
companies who had to register with the SEC before selling their securities to tile
public. Thus, the AICPA was tasked to set the accounting and auditing standards for
these until the establishment Of the Financial Accounting Standards Board (FASB) in
1973. The FASB is the result of the demand for more reliable and comparable financial
reporting by the Congress and SEC. Thus, the FASB and the Governmental Accounting
Standards Board (GASB) are currently two of the significant authorities establishing
the generally accepted accounting Principles (GAAP) in the US. On the other hand. in
response to the continuing expansion of businesses, large accounting firms offered
consultancy services aside from their auditing function.

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 The Information Age
The Information Age, otherwise known as the Computer
Age, Digital Age, or New Media Age, has brought about a
significant change in the work load of accountants, Manual,
tedious and time-consuming tasks were replaced by faster and
more accurate computer methods. Transactions can be
consummated online with the help of the internet. Various
software applications in accounting have been developed to
expedite procedures and accommodate the numerous needs and
demands of the different businesses.

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21st Century — Accounting In the Modern Times
The 21st century opened with the replacement of the
International Accounting Standards Committee (IASC) by the
International Accounting Standards Board (IASB) established
in January 2001. In the same year, the Enron Scandal, the
greatest corporate fraud case recorded in American history,
caused Arthur Andersen, one of the top audit firms in the United
States to close business. In order to protect investors from
corporate misinformation, the Sarbanes-Oxley Act was passed
by the US Congress in 2002. This imposed tougher restrictions
on accountants conducting consultancy services.

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The year 2008 witnessed tougher times with the economic recession in
the United States. In response to the Great Recession, the Dodd-Frank
Act was signed into federal law on July 21, 2010. This contains sixteen
major areas of reform, including Financial Stability, Orderly
Liquidation Authority, Transfer of Powers to the Comptroller, the FDIC,
and the Fed, Regulation of Advisers to Hedge Funds and Others,
Insurance, Improvements to Regulation, Wall Street Transparency and
Accountability, Payment, Clearing and Settlement Supervision, Bureau
of Consumer Financial Protection, Federal Reserve System Provisions,
Improving Access to Mainstream Financial Institutions, Pay It Back Act,
Mortgage Reform, and Anti-Predatory Lending Act.

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With constant developments in modern technology and the globalization
of businesses, accountants continue to cope up with the changing trends.
Many countries including the Philippines have adopted the
International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS) in order to support
comparability and understandability of financial statements across the
globe. As a result, the accountants of today face greater and more
complicated responsibilities. In addition, technology today reduces the
time, effort, and cost of recordkeeping, minimizes errors as well as
processes, and summarizes large volumes of data input. As such,
accountants must always be updated with the latest innovations
affecting their profession.

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THE DIFFERENT BRANCHES OF
ACCOUNTING
1. Financial Accounting
Financial accounting deals with the theoretical framework covering
accounting principles and concepts relative to measurement and valuation as
applied to assets, liabilities, stockholder's equity, retained earnings, revenue, and
expense accounts in relation to the preparation and presentation of financial
statements. These financial statements include disclosure requirements as
governed by the generally accepted accounting principles (GAAP).
The financial information provided by financial accounting is used for
decision making by both internal and external users. Internal users include
owners, shareholders, and management while external users include creditors,
potential investors, employees, and government agencies.

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2. Management Accounting
The Institute of Management Accountants (IMA) defines management
accounting as a profession that involves partnering in management decision making,
devising planning and performance management systems, and providing expertise
in financial reporting and control to assist management in the formulation and
implementation of an organization's strategy.
3. Government Accounting
Section 109 of Presidential Decree (FID) No: 1445 states that government
accounting encompasses the process of analyzing, classifying, summarizing. and
communicating transactions involving the receipt disposition of government funds
and property. and interpreting the results thereof. The agencies responsible in
performing government accounting functions are the Commission of Audit (COA),
the Department of Budget and Management (DBM), and the Bureau of' Treasury
(BTr).

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4. Auditing
Auditing is the examination and review of accounting reports in order to
ascertain their fairness, propriety, and reliability. The independent auditor's
opinion provides reasonable assurance the financial statements under
examination fairly present the financial position rind results of operation in
accordance with generally accepted accounting principles (GAAP).
5. Tax Accounting
Tax services provided by accounts include the preparation of monthly
value added tax, percentage tax, expanded withholding tax returns, quarterly
and annual tax return, and any other taxes applicable to business. Accountants
work closely with clients in order to avoid tax problems with the Bureau Of
Internal Revenue (BIR) and other local agencies through proper tax
compliance while advising clients about ways and measures to minimize
taxes.
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6. Cost Accounting
Cost accounting includes the collection, determination, allocation,
assessment, interpretation, and control of cost data, particularly the cost of
production in a manufacturing concern. The cost of production includes the
raw materials„ direct labor, factory overhead, and all other costs involved
incident in each stage of production of the finished goods.

7. Accounting Education
Accounting education involves planned grading and formal teaching
in educational institution. The professional accountant imparts knowledge to
students enrolled in an accounting subject either in basic accounting or in
higher accounting subjects. Accountants in the academe usually take post
graduate studies to achieve the required tenure.

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8. Accounting Research
Accounting research involves conducting a careful and
diligent study aimed at discovering and interpreting facts,
revising accepted theories in the light of new facts, or the
practical application of such new or revised theories for the
generation of a new knowledge. It includes collecting
information about particular subject in order to decide and
implement new standards in accounting, presenting events
than might affect the profession, or discovering new theories
than will have an impact on existing accounting knowledge.

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Users of Financial Information
Internal Users
Internal users are the primary users of financial information who
are inside the reporting entity and are directly involved in managing the
company’s daily operations. They are the decision makers who make the
strategic and operational decisions for the company.
1. Investors/ Owners/ Stockholders
These parties provide the financial resources to keep the business
going. They decide whether to -invest or not depending on the estimated
amount or income on the investment. Upon investment, they would want.
to know the financial position or results of operation of their business
investment.

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2. Management
Organizational managers use financial information to
set goals for their companies. Managers evaluate their
progress towards these goals and use financial data as a
guide for future management actions.
3. Employees
Although the employees are not directly involved in the
decision making of the company, they are nonetheless
interested in the financial information of the company to
determine if they have a future in the company.

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External Users
External users are secondary users of financial information who are
parties outside the company. They may not be directly involved in the
company’s operations but their decisions may significantly affect the
business entity.
1. Financial Institutions/ Creditors- Before extending credit,
financial institutions use financial information to determine the capacity
of the business organization to pay its obligations and their interests at the
appropriate time.
2. Government- Financial information is important for tax purposes
and in checking of compliance with Securities and Exchange Commission
(SEC) requirements.

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3. Potential Investor/Creditors
Before making an investment or extending credit,
potential investors or creditors may not only be interested in the
company’s current financial position and results of operations,
but also in the company’s financial history. This should give
them the assurance that their investment will yield a reasonable
rate of return or the credit extended will be paid within a
reasonable period of time.

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 Types of Business Organization
1. Sole/Single Proprietorship- is a business owned and managed
by only one person.
ADVANTAGES:
a. There are minimal costs and requirements in the information.
b. The owner can withdraw the assets and profits of the business
anytime at his or her discretion.
c. Decision making is solely in the hands of the owner.
d. The duration of the life of the business solely depends on its owner.
DISADVANTAGES:
e. Resources are limited as the capital is provided only by the owner.
f. The reliability of the owner is unlimited as he or she is accountable
to all creditors of the business.
g. Infusion of knowledge in the management of the business is limited
to one person only, which is the owner.
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2. Partnership- is a business organization owned and managed by two or more people
who agree to contribute money, property, or industry to a common fund for the purpose of
earning a profit.
ADVANTAGES
a. There are minimal costs and requirements in the formation.
b. There are more funds contributed from the investment of the partners.
c. There is infusion of more knowledge, experience, and skills from two or more partners.
d. There can be division of labor between or among partners.
DISADVANTAGES
a. The partners are liable for the actions of each partner as a result of mutual agency.
b. A general partner has unlimited liability if the other partners are limited partners or are
insolvent.
c. Disagreement between or among partners can lead to the withdrawal of one or more
partners.
d. The death, retirement, withdrawal, or incapacity of a partner results in the dissolution of
the partnership,
e. Admission of new partner depends upon the approval of the other partners.

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3. Corporation -is a form of business organization managed by an elected board of
directors. The investors are called stockholders and the unit of ownership is called
share of stock.
4. Cooperatives -Under Section 3 of Republic Act 6938, a cooperative is a duly
registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end,
making equitable contributions to the capital required and accepting a fair share of the
risks and benefits of the undertaking in accordance with universally accepted
cooperative principles.
-is an association of small producers and consumers who come together voluntarily to
form a business which they own, manage and patronize.

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Legal Requirements in the Formation of a Business
The sole proprietorship is the easiest business to register. It is
registered with Department of trade and Industry (DTI) under
its Bureau of Trade Regulation an Consumer Protection.
For a partnership the business is registered with the Securities
and Exchange Commission (SEC) upon submission of the
following documents:
a. Proposed Articles of Partnership
b. Name Verification Slip
c. Bank Certificate Deposit

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Alien Certificate of Registration, Special Investors Resident Visa or
proof of other types of visa (in case of foreigners)
Proof of Inward Remittance (in case of non-resident aliens)
For a corporation, the following are the incorporation documents
required to be filed] with the Securities and Exchange Commission
(SEC):
a. Articles of Incorporation
b. By-laws
c. Treasurer's Affidavit which should state compliance with the
authorized subscribed and paid-up capital stock requirements.
d. Bank Certificate which should state that the paid-up capital portion of
the authorized capital stock has been deposited to the issuing
bank.
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What should be stated upon registration of a
corporation?
a. The name of the corporation which must not be identical,
or deceptively or confusingly similar to- any existing
corporation
b. The purpose of the corporation
c. Principal Office of the corporation
d. The term or life of the corporation which should not
exceed fifty(50) years. This corporate lifetime may,
however, be extended for another fifty(50) years but the
extension must not be affected earlier than five years
before the expiration of its term.
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For a cooperative, the business is registered with the
Cooperative Development Authority (CDA) upon submission
of the following documents.
a. Economic Survey
b. Nota Articles of Cooperation and By-Laws
c. Bonds of accountable officer of officers
d. Notarized sworn statement of the treasurer certifying that
required subscription and payment of the authorized share capital
and paid-up capital have been fulfilled.

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 Three Types of Business Activities/
Operations
I. Service type of business operation engaged in the rendering
of service. A service type of business earns based on the skill or quality
of service it offers. In order for the business to grow, its people or
employees have to be trained. For example, a well- known hair cutter
cannot perform all the hair and makeup services to his or her customers.
He/She must train employees to replicate the quality of the service
he/she renders. Constant monitoring, evaluating, and updating of
knowledge of the staff are necessary. He/She has to continuously
maintain, if not improve, the quality Of service offered to his/her
customers,
Examples: dental clinic, barber shop, laundry service
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2. Trading/ Merchandising is a type of business
engaged in the buying and selling of goods. Merchandising
includes the process of managing and marketing- the
products sold to its customers. Sales have to be optimized in
order to make money. Customer demands have to be
satisfied with the quality of products sold. The tedious
processes of forecasting purchasing, pricing, and marketing
of products in order to generate sales are essential in the
trading or merchandising business.
Examples: grocery, sari store

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3. Manufacturing is engaged in the production of items to
be sold. If involves the purchasing and converting of raw
materials to finished goods. This type of business incurs
overhead costs aside from the wages and used in the production
of goods. A rise in price in one of these costs causes an increase
in the price goods produced. Aside from this, there are certain
expenses incurred even during periods of non-manufacturing
such as rent, insurance, worker benefits, and machine
depreciation. Hence, careful planning is involved in
manufacturing.
Example: shoe factory, food processing
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GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
-These are broad, general Statements or “rules” and “procedures” that
serve guides in the practice of accounting.
-These are standards, assumptions, and concepts with general
acceptability,
-These are measurement techniques and standards used in the presentation
and preparation of financial statements.
Accounting system comprises the methods used by a business to keep
records of its financial activities and to summarize these accounts in
periodic accounting reports.
Transaction is a completed action which can be expressed in monetary
terms.
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Fundamental Concepts
1. Entity Concept regards the business enterprise as separate and
distinct from its owners and from other business enterprises.
Example: Dr. Teng has a skin clinic and a spa. The skin clinic is
considered as a separate entity distinct from the spa and the owner, Dr.
Teng. The expenses of the skin clinic should not be mixed with the
expenses 01 the spa and the personal expenses of Teng. The two
businesses are considered to be separate economic units, separate and
distinct from their owner. As such, they should be treated as different
from each other, although owned and operated by only one person.
Hence, the personal expenses of Dr. Teng should not be mixed with the
expenses of any of the businesses.

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2. Periodicity is the concept behind providing financial accounting
information about the economic activities of an enterprise for specified time
periods. For reporting purposes, one year is usually considered as one accounting
period.
Example: Separate financial reports are prepared yearly for the skin clinic and
the spa of Dr. Teng. Hence, Dr. Teng can measure the income of the two businesses
manually.
An accounting period may be classified as either of the following:
a. Calendar year - a twelve-month period that starts on January 1 and ends on
December 31
b. Fiscal year - a twelve-month period that starts on any month of the year
other than January and ends twelve months after the starting period, e.g., a
business whose fiscal year starts May l, 2016 ends its fiscal year On April 30,
2017.
Note: A natural business year is any twelve-month period that ends when
business activities are at their lowest point.
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3. Going Concern is a concept which
assumes that the business enterprise will
continue to operate indefinitely.
Example: In preparing the financial
statements of the skin clinic and the spa,
the accountant assumes that the
businesses will not close nor shut
operations within the next years.

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Basic Accounting Principles
1. Objectivity principle states that all business transactions that
will be entered in the accounting records must be duly supported by
verifiable evidence.
Example: Payments must be supported by official receipts and bank
deposits must be supported by deposit slips.

2. Historical cost means that all properties and services acquired

by the business must be recorded at their original acquisition cost.
Example: Land bought in 2001 for two million pesos should be
recorded at two pesos even though its market value in the year 2016 is
already three million pesos.

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3. Accrual principle states that income should be recognized
at the time it is earned as when goods are delivered or when services
have been rendered. Likewise, expenses should be recognized at the
time they are incurred, such as when goods and services are actually
used and not at the time when the entity pays for those goods and
services.
Example: A resort cannot consider as income the advance payment
of a customer who paid his two-week resort accommodation in
advance until the customer has checked in. This is because the resort
has not yet rendered the service to the customer. As such, the
advance payment by the customer should be considered as liability
on the part of the resort in the form of services to be rendered.

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4. Adequate disclosure states that all material facts Chat will significantly
affect the financial statements must be indicated.
Example: Land bought at two million pesos in 2001 should be recorded at historical
cost in the 2016 financial statements. However, the current market value of three million
pesos in the year 2016 may be indicated in the financial statements for the year 2016 in
the form of a footnote or parenthetical note.
5. Materiality means that financial reporting is only concerned with information
Significant enough to affect decisions. This refers to the relative importance of an item
or event. An item is considered significant if knowledge of it would influence prudent
users of the financial statements.
Example: Items of insignificant amount such as paper clips can be charged outright to
expenses.

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6. Consistency means that approaches used in reporting
must be uniformly employed from period to period to allow
comparison of results between time periods. Any changes
must be clearly explained.
Example: If the straight line method of depreciation is being
used by the company, then the method should be uniformly
used by the company in computing its annual depreciation.

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Sources:
Lao Ong, Flocer, (2016).Fundamental of Accountancy, Business,
and Management 1.Quezon City, Philippines; C&E Publishing ,I
nc.
https://cdn.hipwallpaper.com/i/12/27/8RSCYV.jpg

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