INFORMATION SHEET 1.

1-1

Definition and Functions of Bookkeeping and Accounting

Learning Objective:

After reading this INFORMATION SHEET, YOU MUST be able to:

1. Define Bookkeeping and Accounting and understand their functions.

NEED FOR ACCOUNTING

Introduction

Human beings have limitations, Everyday transactions cannot be

retained in the human brain for quite a period of time without confusions and
complications. To avoid these, transactions and other important events
should be recorded. Such written records serve as reference for future recall.
In business, several parties are interested to its records to seek answers
to their questions and bases for their decisions. These parties can be classified
into direct users or those who have direct interest to business records and
indirect users or those who are indirectly interested to the accounting
information of the business. Among the direct users are the following:
1. Owner. He is interested to know whether the business should be
maintained, increased, decreased or disposed completely.
Further, he is interested to know whether he is getting a fair
return of his investment.
2. Management. To management, financial information serves as a
measure for making future financial decisions and measure of its
effectiveness.
3. Investor. An investor is interested in the financial statement for
making future financial decisions and a measure of its
effectiveness.
4. Creditors. Creditors are interested in the financial statement to
determine the company’s ability to pay.
5. Employees. Employees are interested in information to enable
then to assess the ability of the firm to provide remuneration and
other benefits.
6. Government. The government needs accounting information to
regulate the firm’s activities and determine the basis for taxation
policies.

Why study Accounting?

In order to appreciate and understand the financial reports of the

business, one should have an understanding of how the data are gathered
and recorded. All these understanding are gained in the study of Accounting.
Accounting could also be one’s profession – a work which interesting and
highly rewarding.

Definition of Accounting

The Committee on Terminology, American Institute of

Accountants defined Accounting as 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.

Role and purpose of Accounting

The role and purpose of accounting is to provide useful and timely

information about the financial activities of an individual, business, or other
organization. In addition, accounting provides information to other
stakeholders to use in assessing the economic performance and condition of
the business. Without realizing it, you may have participated in an
accounting transaction today.

Four Phases of Accounting

Based on the definition, Accounting has four phases namely, recording,

classifying, summarizing, and interpreting.

Recording. This is technically called bookkeeping. Some people

confuse bookkeeping and accounting as one and same. However, bookkeeping
is only part of Accounting – the record phase. In this phase, transactions are
recorded systematically and chronologically in the proper accounting books.
There are two kinds of bookkeeping: the single entry bookkeeping and the
double entry bookkeeping. The single entry bookkeeping does not show the
two-fold effects of business transactions. It show only the debit or credit of
each transaction. The double entry bookkeeping however reflects the two-fold
effects of business transactions. It has a debit and credit.

Classifying. In this phase, items are sorted and grouped. Similar items
are classified under the same name. They may classified as asset accounts,
liability accounts, capital accounts, revenue accounts and expense accounts.
This classification is useful to the needs of the management.

Summarizing. After each accounting period, data are recorded and

summarized through financial statements. These reports are submitted to the
management at the end of each accounting period or as the need arises.
 Interpreting. Usually, due to technicality of accounting reports, the
accountant’s interpretation on the financial statement is needed. In this case,
analysis reports are submitted together with the financial statements.

Bookkeeping

A mechanical task involving the collection of basic financial data. The

bookkeeping procedures usually end when the basic data have been entered
in the books of account and the accuracy of each entry has been tested. At
that stage the accounting function takes over. Accounting tends to be used
as a generic term covering almost anything to do with the collection and use
of basic financial data. It should, however, be more properly applied to the
use to which the data are put once they have been extracted from the books
of account. Bookkeeping is a routine operating, while accounting requires the
ability to examine a problem using financial and non – financial data.

Source: Arganda, A.M. Accounting Principles 1 Textbook/Workbook;

National Bookstore, 2007
 Self-Check 1.1-1

Name: Date:
Section: Score:

A. Multiple Choice

Direction: Choose the best answer of the given choices. Use a separate
sheet of paper in answering.

1. 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.
a. Accounting
b. Bookkeeping
c. Financial Accounting
d. Managerial Accounting
2. Phase where items are grouped under the same name.
a. Bookkeeping
b. Recording
c. Classifying
d. Summarizing
3. Interested on the company’s ability to pay its obligation.
a. Employees
b. Debtor
c. Creditor
d. Management
4. Typically called bookkeeping
a. Accounting
b. Recording
c. Classifying
d. Interpreting
5. One who records, sort and file accounting information.
a. Bookkeeper
b. Accountant
c. Accounting Clerk
d. Auditor
6. A mechanical task involving the collection of basic financial data.
a. Accounting
b. Bookkeeping
c. Recording
d. Journalizing
 ANSWER KEY 1.1-1

A. Multiple Choice Questions

1. A
2. C
3. C
4. B
5. A
6. B