LESSON 1: INTRODUCTION TO ACCOUNTING

Dennis Rodman is born in Dallas, USA and deserted by his father at age three. His
mother, Shirley, raised Rodman in a housing project. At 20, he was working as a
janitor at the Dallas Airport for $5.0 an hour, but a year later he was arrested there
for stealing fifty watches; the charges were dropped when authorities were able to
recover the goods. Rodman had given them to friends.

Then, when he was 21, a local junior college basketball scout suggested that Rodman,
who had grown a good half-foot since high school, to try basketball. He tried and failed
at frist but on the second try at Southeastern Oklahoma State, he made All-American
and the grades required to stay in school. Rodman was 25 – ancient for a rookie –
when he finally landed in the National Basketball Association (NBA).

Though Rodman proved his talent as a pivotal member of the two-time champion
Detroit Pistons, it took him a long time to catch up in the salary game. He has long
been one of the league’s best rebounders, grabbing an average of 15 boards a game,
but until 1997, he never earned more than $2.5 million in a single year.

During the 1995 playoffs, on a day off, Rodman was sitting in his kitchen pondering
his financial woes with Manley. Manley is his best friend and agent. His $3,800 Ferrari
payment was more than a week late. A $9,000 alimony dollars he’d borrowed from
Pistons to buy his first house years earlier had gone unpaid for five years now, had
balloon to $745,000 including interest. There are still other dues. All told, Rodman
was close to $1.0 million in Debt. Turning to his friend, he said plainly, “I need you to
make me some money, Bro.”

Manley’s first move was to line up Rodman in autograph sessions for $50 per
signature. He negotiated with Rodman’s creditors, telling them if they wanted to get
paid in full they’d have to wait awhile, and if they wanted cash today, they could take
a discount. And he put together a seven-figure deal to publish Rodman’s
autobiography, Bad as I Wanna Be (Delacorte, 1996) which became an instant
bestseller.

Rodman agreed to be placed by Manley on $1,000 weekly allowance. He exchanged his

American Express card for a debit card. In the midst of Rodman’s financial makeover,
another lucky break: Rodman was traded to Chicago Bulls. At first, he was not up to
the idea. But Manley convinced that playing with Michael Jordan and Scottie Pippen
was the best conceivable way to boost his marketing muscle.

By the end of the 1996 NBA season, Rodman had $1.0 million in the bank, a chunk of
it from the $150,000 bonus he earned for helping the Bulls make their way to the NBA
Championship. He was on track to hit $2.0 million by the end of the year. Plus, he
now has a sizeable investment portfolio. He made a killing in Oakley – maker of the
sunglasses he wears “every damn day.”
In 1997, according to the Chicago press, Rodman signed $8.0 million deal with the
Bulls. He has endorsement deals with Kodak, Converse and Carl’s Jr. among others.
He did a movie with Jean Claude Van Damme. He has two more books in production
and more scripts than he can count. Appearances in MTV and in wrestling. Romantic
episodes with Madonna and other celebrities. Rodman, who spends $100 to change
his hair from blue to orange to white to whatever, is now out of the NBA because of his
eccentricities but nonetheless he’s come very far.

What role does accounting play in the life of Dennis Rodman? Rodman, through the
efforts of Manley, used accounting information in one form or another. His manager
utilized “budgeting” to help Rodman with his finances. Manley tapped his financial
sense in coming out with the idea of “wait awhile to be paid in full or cash today but at
a discount.” He certainly did a lot of financial analysis when he positioned Rodman in
strategic investments and endorsement deals. Manley needed and relied on accounting
information to guide him in his dealings for Rodman. It is his single most important
business tool in steering his client, Rodman, from the brink of bankruptcy to financial
prosperity.

Learning Objectives

At the end of this lesson, the learners should be able to:

1. Define accounting
2. Describe the nature of accounting
3. Explain the functions of accounting in business
4. Narrate the history or origin of accounting
5. Give examples of business transactions and decisions requiring the need for
accounting

Definitions of Accounting

Accounting is a service entity. 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 Standards Council, 1983).

Accounting is an information system that measures, processes and communicates

financial information about an economic entity (Financial Accounting Standards Board,
1978).

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information
(American Accounting Association, 1966)

Accounting is an 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, 1953)

Nature of Accounting

Accounting is a service activity. Accounting provides assistance to decision makers by

providing them financial reports that will guide them in coming up with sound
decisions.

Accounting is an information system: Accounting is recognized and characterized as a

storehouse of information. As a service function, it collects processes and
communicates financial information of any entity. This discipline of knowledge has
evolved to meet the need for financial information as required by various interested
groups.

Accounting is a process: A process refers to the method of performing any specific job
step by step according to the objectives or targets. Accounting is identified as a
process, as it performs the specific task of collecting, processing and communicating
financial information. In doing so, it follows some definite steps like the collection,
recording, classification, summarization, finalization, and reporting of financial data.

Accounting is both an art and a discipline. Accounting is the art of recording,

classifying, summarizing and finalizing financial data. The word ‘art’ refers to the way
something is performed. It is behavioral knowledge involving a certain creativity and
skill to help us attain some specific objectives. Accounting is a systematic method
consisting of definite techniques and its proper application requires skill and
expertise. So by nature, accounting is an art. And because it follows certain standards
and professional ethics, it is also a discipline.

Accounting deals with financial information and transactions: Accounting records

financial transactions and data, classifies these and finalizes their results given for a
specified period of time, as needed by their users. At every stage, from start to finish,
accounting deals with financial information and financial information only. It does not
deal with non-monetary or non-financial aspects of such information.

Functions of Accounting in Business

Accounting is relevant in all walks of life, and it is absolutely essential in the world of
business. Accounting is the system that measures business activities, processes that
information into reports and communicates the result to decision-makers. Accounting
quantifies business communication. For this reason, accounting is called the language
of business. The task of learning accounting is very similar to the task of learning a
new language.

The following is the functions of accounting:

Keeping Systematic Record of Business Transactions

Recording transactions does not only involve entering the transactions in the
accounting books. The records should be systematic enough to enable easy
understanding of readers. No matter how comprehensive the records are, if they are
not produced systematically, then they provide little no value.
Protecting Properties of the Business

The accounting records serve as the evidence that properties of a business do exist or
how much of a particular resource does a company have. If the accounting records
show that the amount of cash should be P1,000,000 any excess and deficiency will be
noticed immediately. Moreover, the accounting system helps in preventing employee
fraud and misappropriation of company resources.

Communicating Results to Various Parties in or Connected with the Business

The accounting reports produced at the end of each period are not only used by
external parties (e.g., potential investors, government agencies), but also by the
management in their decision-making function. Communication of the results of
operations of a company is essential for all concerned parties to enable them to take
well-informed decisions.

Meeting Legal Requirements

In the Philippines, the government requires some companies (particularly those with
public accountability) to provide financial reports quarterly, semi-annually or
annually. This procedure aims to protect the public by providing them the necessary
information to make sound decisions. The government also requires reports from
heavily regulated industries such as energy and oil industries.

History of Accounting

Accounting is as old as civilization itself. It has evolved in response to various social

and economic needs of men. Accounting started as a simple recording of repetitive
exchanges. The history of accounting is often seen as indistinguishable from the
history of finance and business.

Following is the evolution of accounting:

The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia, China and
India to Central and South America. The oldest evidence of this practice was the “clay
tablet” of Mesopotamia which dealt with commercial transactions at the time such as
listing of accounts receivable and accounts payable.

14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the

dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’)
in 14th century Italy. Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are
widely acknowledged as the fathers of modern accounting and were the first to
commonly use Arabic numerals, rather than Roman, for tracking business accounts.
Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a
detailed chapter on double-entry bookkeeping.
French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during
this period. Social upheavals affecting government, finances, laws, customs and
business had greatly influenced the development of accounting.

The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during
this period.

19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen
Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating
the profession of the Chartered Accountant (CA).

In the late 1800s, chartered accountants from Scotland and Britain came to the U.S.
to audit British investments. Some of these accountants stayed in the U.S., setting up
accounting practices and becoming the origins of several U.S. accounting firms. The
first national U.S. accounting society was set up in 1887. The American Association of
Public Accountants was the forerunner to the current American Institute of Certified
Public Accountants (AICPA).

In this period rapid changes in accounting practice and reports were made.
Accounting standards to be observed by accounting professionals were promulgated.
Notable practices such as mergers, acquisitions and growth of multinational
corporations were developed. A merger is when one company takes over all the
operations of another business entity resulting in the dissolution of another business.
Businesses expanded by acquiring other companies. These types of transactions have
challenged accounting professionals to develop new standards that will address
accounting issues related to these business combinations.

The Present - The Development of Modern Accounting Standards and Commerce

The accounting profession in the 20th century developed around state requirements
for financial statement audits. Beyond the industry's self-regulation, the government
also sets accounting standards, through laws and agencies such as the Securities and
Exchange Commission (SEC). As economies worldwide continued to globalize,
accounting regulatory bodies required accounting practitioners to observe
International Accounting Standards. This is to assure transparency and reliability,
and to obtain greater confidence on accounting information used by global investors.

Nowadays, investors seek investment opportunities all over the world. To remain
competitive, businesses everywhere feel the need to operate globally. The trend now for
accounting professionals is to observe one single set of global accounting standards in
order to have greater transparency and comparability of financial data across borders.