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Basic Accounting

INTORDUCTION
Accounting is the system that measures business activities,
process that information into reports and communicates the
results to decision-makers.
Accounting quantifies business communication.

Accounting History is the study of the evolution in


accounting thought, practices and institutions in response to
changes in the environment and societal needs. It is also
considered the effect that this evolution has worked on the
environment.

Accountants can be called a scorekeepers of business.


DEFINITION 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 used in making
economic decision. Statement of Financial Accounting
Standard No. 1 (Accounting Standards Council, 1983, par.1)
Accounting is an information system that measures, process
and communicates financial information about an economic
entity. Statement of Financial Accounting Concepts No.1
(Norwalk, Conn,: Financial Accounting Standard Board, 1987,
par 9.)
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgements and decision by users of the information.
American Accounting Association (New York: AICPA, 1970,
par.40)
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.
American Institute of Certified Public Accountants (New York:
AICPA, 1953, par 9.)
EVOLUTION OF ACCOUNTING
Accounting History is important to accounting pedagogy,
policy and practice.

The history of accounting is very ancient like thousands of


years. But the history of accounting profession is very young.
It is indeed that modern civilization is impossible without
accounting.
Origin:
The origins of accounting are generally attributed to the work
of Luca Pacioli, and Italian Renaissance mathematician. The
concept of accounting comes from his book. But it is
considered the first book on -counting was Della Mercatura e
del Mercante Perfetto written by Benedetto Cotrugli in 1458
and published in 1573.
LucaPacioli: Luca Pacioli was born in Sansepolcro, Italy in
1445. He was a Franciscan mock. But he was famous as an
Italian Renaissance mathematician. Pacioli was a close friend
and tutor to Leonardo da Vinci and a contemporary of
Christopher Columbus. Pacioli was died in 1517 at his
birthplace. Now he is known as the father of accounting.
The Book: Modern accounting is based on the book Summa
de Arithmetica, Geometric, Proportions et Proportionality
which means an Overview of arithmetic, geometry and
proportions. It was publish in 1494 in Venice. This book
contains 36 chapters on bookkeeping. Present accounting
concept comes from the chapter De Computes et Scriptures
which means of reckoning and writings. In his text he
described a system to ensure that financial information was
recorded efficiently and accurately.

History Chronology: Modern accounting is developed through


the following five stages:

of business concerns - proprietorship, partnership, and


corporation were established.

(1)

Accounting in the Primitive Age.

(2)

Accounting in the Middle Ages.

(3)

Accounting in the Pre-Industrial Revolution Age.

(5)
Accounting in the Twentieth Century and Present
Time: After the year 1900 to date is known as modern
accounting age. Within this period all types of branches of
accounting like costing, management accounting, auditing,
taxation, government accounting, socioeconomic accounting,
human resource accounting etc are perfectly established. In
recent years, electronic accountings like software, ebusiness, e-commerce, website etc are very popular to the
users for easiness, cheapness, and fastness.

(4)
Accounting from Industrial Revolution to Nineteenth
Century.
(5)
Time.

Accounting in the Twentieth Century and Present

They are briefly discussed below:

Types of Accounting

(1)
Accounting in the Primitive Age: The times before
476 year are known as primitive age of accounting. In this
period accounting is limited upto counting. At that time the
business activities were operated through barter system.

Types and Activities (7)

(2)
Accounting in the Middle Age: The period from the
year 476 to 1453 is known as the middle age of accounting.
In this period business activities were expanded from one
country to another country. At that time the business
activities were operated through monetary system.
(3)
Accounting Pre-Industrial Revolution Age: The period
from the year 1454 to 1760 is known as the pre-industrial
revolution of accounting. In this the golden period for
accounting establishment. In this period some books on
accounting written and published like Luca Pacioli's Summa,
Cotrugli's Della etc.
(4)
Accounting from Industrial Revolution to Nineteenth
Century: The period from the year 1760 to the end of
nineteenth century is known as postindustrial period of
accounting. In this period some branches of accounting like
cost accounting is originated. In this period some accounting
standards and institutions like the Institute of Accountants in
Edinburgh is established. Also in this period, the three types

Services-Sellings people time


Trader- Buying and Selling products
Manufacturer- Designing products, aggregating
components and assembling finished products
Raw Materials- Growing or extracting raw materials
Infrastructure- Selling the utilization of infrastructure
Financial- Receiving deposits, lending and investing
money
Insurance- Pooling premiums of many to meet claims of
few

Forms of Buss. Org. (3)

Sole Proprietorship
One owner
Small service-type business and retail
establishment
Receives all the profits and absorbs all losses and
debts
Entity Concepts
Partnership
Owned and operated by two or more persons who
bind themselves to contribute MONEY, PROPERTY,
or INDUSTRY TO A COMMON FUND, with and
intention of DIVIDING the profit among themselves.

Each partner is personally liable for any debt


incurred by the partnership.
Separate Org.
Corporation
Owned by Stockholders.
An artificial being created by operation of law,
having the rights of succession and the powers,
attributes and properties expressly authorized by
the law or incidence to its existence.
Stockholders are not personally liable.
The corporation is a separate legal entity

Payments to purchase intangible assets


Payments to purchase investments (i.e., equity
securities of other entities)
Making loans to other entities

Activities in Buss. Org (3)

Investing Activities*
Investing activities generally involve long-term
assets
Primary Sources owners and creditor
Involve purchasing and disposing assets
necessary for business operations.
Different businesses need to acquire different types
of assets such as land, property, plant, equipment,
patents, copyrights, cash, accounts receivable, etc.

(*)Investing activities is one of the ways to


acquire assets.

Business and Operating Activities


Manufacturing- Manufacturing and selling goods
Retail- Buying and re-selling goods
Service- Selling and providing services
(*)Operating cash receipts (inflows):
Revenue from the sale of goods and services
Interest income (i.e., return on loans)
Dividends income (i.e., return on equity securities)
Royalties, fees, commissions, and other revenue
Operating cash payments (outflows):

Cash flows from investing activities are usually


reported in the second section of the statement of cash
flows. Typical investing cash flows are presented below.
Cash inflows from investing activities:

Selling fixed assets


Selling intangible assets
Selling investments
Collecting principal on loans made to other entities*

(*) Collecting interest payments on loans made to


other entities is reported as an operating activity because
interest revenue involves income determination.
Cash outflows from investing activities:
Payments to purchase fixed assets

Operating Activitites
Involve the cash effects of transactions that enter
into the determination of net income, such as cash
receipts from sales of goods and services and cash
payments to suppliers and employees for
acquisitions of inventory and expenses.
day-to-day business activities of a company which
determine the company's net income (loss).

Payments
Payments
Payments
Payments
Payments
insurance

to employees for services


to suppliers for inventory
to lenders for interest
to government for taxes
to others for operating expenses (e.g.,
premiums)

Financing Activity
Financing activities include the inflow of cash from
investors, as well as the outflow of cash
to shareholders as dividends as the company
generates income. Other activities which impact
the long-term liabilities and equity of the company
are also listed in the financing activities.
Financing activities liability and stockholders;
equity items and include:

Obtaining cash from creditors and repaying the


amounts borrowed.

Obtaining capital from owners and providing them with


a return, and return of, their investment.

be hard to determine where a business or person


has spent their money. Accounting is used in
personal and business situations.
During the recording phase, transactions have to
be classified into categories. This is for tax
purposes. In taxation there are different categories
that can provide savings.

Micro, Small and Medium enterprises

Micro
With asset, before financing, of P 3.0 (Before 1.5)
million or less
Employ not more than 9 workers
Small
With asset, before financing, of above P3.0 (Before
1.5) to 15 million
Employ 10-99 workers
Medium
With asset, before financing, of above P 15. To P
100.
Employ 100-199 workers

Classifying
In order to determine how much one spent in each
of the categories one has to classify the records.
For example in a business, office supplies can be
deducted from the taxes. Dining and entertainment
can also be used as a deduction.

Summarizing
After the recording phase and the classification
stage comes summarizing the various categories
into a linear sheet of information that is easier to
read. From this one can discover how much was
spent, what was kept, what was paid out, where
and other information.

Purpose of Accounting
From the illustration presented, and for a
straightforward answer, it is clear that the ultimate
purpose of accounting is to provide information to
different users. The users utilize the information in
making economic decisions.
Phases of Accounting
The four phases of accounting are as follows:

Recording
Recording is the first phase of accounting in which
all monetary information is recorded in order to
make a record that can be used for various needs.
Accounting records are used for taxes, budgeting,
reporting and business plans.
Without recording the monetary transactions it will

The summarizing stage makes the interpretation of


the data that much easier. One has to be able to
interpret the data to find out what may be
changed, what has changed, and where the person
or company is going financially. Often in the
interpretation things such as where one can budget
better or where one needs to find money for the
next year can be found.
Interpreting
If you look at it from a business standpoint there
may be equipment that is needed so interpreting
the data can help find the extra money for the

equipment. It can also be used as a phase to


determine stock information.

1. From owners, to know what is happen time to time.


2. From managers, to help plan and control.

Double-Entry bookkeeping and Its Evolution


In Paciolis Book, he introduce the double-entry accounting
system-In which for every debit dare (should give) there exist
a debit habere (should have or should receive).
Modern bookkeeping system-still based on principles
established in the 15th century.

Two main specialization in Accounting:


1. Financial Accounting, supply of info. To the owners of
entity.
2. Management Accounting, supply of info. To the
managers of the entity.

In Summa,

Internal and External Users

The memorandum is the book where all transactions are


recorded, prepared chronological order, in a narrative
description of the businesss economic events.

The users may be classified into internal and external users.

The Journal is the merchants private book. The entries are


made here. Prepared chronological order, in a narrative
description of the businesss economic events.

The Ledger is an alphabetical listing of all the businesss


accounts along with the running balance of each particular
account.
*An annual balancing to determine the success or failure of
the business and to find errors.
Why has a recording system devised in medieval period
lasted for so long?

Internal users refer to managers who


use accounting information in making decisions related
to the company's operations.
External users, on the other hand, are not involved in
the operations of the company but hold some financial
interest. The external users may be classified further
into users with direct financial interest owners,
investors, creditors; and users with indirect financial
interest government, employees, customers and the
others.

Fundamental Concept

1. It provides an accurate record of what has


happened to a bus. Over a specified time.
2. The information extracted can help the owner to
operate bus. Much more effectively.
In essence, the system provides the answer to 3 basic
question which the owners want to know: What profit has the
bus. Made? How much does the bus. Owe? How much is
owed to it?

Paciolis system had to be adapted for the modern bus.


Practice so that it can satisfy the demand for information
from two main sources:

Entity Concept
Most basic concept in Accounting.
Stands apart from other organization and
individuals as a separate economic unit.
Transaction of diff. entities should not be accounted
for together.
Each entity should be evaluated separately.
Periodicity Concept
Allows user to obtain timely information to serve as
a basis on making economic decision about future
activities.
Stable Monetary Unit
The Philippine peso is a reasonable unit of measure
and that its purchasing power is relatively stable.

It allows accountant to add or subtract peso


amount.
This is the basis for ignoring effect of inflation in the
accounting records.
Common Financial Denominator

Accounting Principles
Established by GAAP

Relevance
Meaningful and useful to those who need to know
something about a certain organization.
Objectivity
Is not influenced by a bias or judgement of those
who furnish.
Connotes reliability, trustworthiness, verifiabilityfinding out whether the info. Is correct.
Feasibility
In can be implemented without undue complexity
or cost.

Basic Principles

Objectivity Principle
Based on the most reliable data available.
Reliable data are verifiable when they can be
confirmed by independent observers.
Without this principles records would be based on
whims and opinions and therefore subject to
disputes.
Historical Cost
Acquired asset should be recorded at their actual
cost and not at what management thinks they are
worth as at reporting date.
Revenue Recognition Principle
Recognized in the accounting period when goods
are delivered or services are rendered or
performed.
Expense Recognition Principle

Recognized in accounting period when goods and


services are used up to produce revenue and not
when the entity pays for those goods and services.
Adequate Disclosure
All relevant information that would affect the users
understanding and assessment of the accounting
entity be disclosed in the financial statement.
Materiality
Financial reporting is only concerned with
information that is significant enough to affect
evaluations and decision.
Because of this basic accounting principle or
guideline, an accountant might be allowed to
violate another accounting principle if an amount is
insignificant. Professional judgement is needed to
decide whether an amount is insignificant or
immaterial.
Consistency Principle
Use the same accounting method from period to
period to achieve comparability over time within a
single enterprise.

Accountancy in the Philippines


Although accounting has been practiced in the Philippines
since the Spanish period and possibly even before, the seeds
of Philippine accountancy as a recognized profession were
planted on March 17, 1928, when Act No. 3105 was approved
by the Sixth Legislature. Entitled 'An Act Regulating the
Practice of Public Accounting; Creating the Board of
Accountancy; Providing for Examination, for the Granting of
Certificates, and the Registration of Certified Public
Accountants; for the Suspension or Revocation of Certificates;
and for Other Purposes,' the law paved the way for local
accountants to do the work which, up to that time was
performed by foreign accountants in the country. Since then,
both the profession and the body that directly regulates it
have grown rapidly.
From 43 registered accountants in 1923, the number of CPAs
has grown to over 100,689 by 1999. Many of these

professionals have distinguished themselves not only in the


field of accountancy itself but in many other areas of human
endeavor.