MODULE 1

Introduction Accounting

Overview

This module discusses definition of Accounting, its purpose and phases, users of
financial information, the types of business organization and nature of business operations.

Module Objectives

At the end of this module, the student is expected to be able to:

1. Define accounting and explain its role in business.

2. Explain the need for non-accountants to study accounting
3. Distinguished the different types and the nature of activities of business organization

Course Materials

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 useful in
making economic decision. (SFAS 1)

● Accounting is an Information System – that measures, processes and communicates

financial information about an economic entity. (SFAS1)

● Accounting is a process of identifying, measuring and communicating economic

information to permit informed judgement and decisions by users of the information
(AAA).

● 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. (AICPA)

Phases of Accounting

1. Recording – is the process of recording business transaction in the book of original

entry which we called the Journal. This process is what we call journalization. A
complete journal entry is one with a debit, credit entries and accompanied with a
simple explanation. The date of the transaction must also be recorded.

Business Transaction is an event or transaction wherein there are:

a. Two parties involved. It can be 2 individuals (buyer & seller), an individual and a
business (the owner and the business) or 2 businesses (the company & a bank)
b. Exchange of rights or things or obligations. Example, when A buys a T-shirt
from Z Boutique for P500.00.
The two parties involved are A and Z Boutique

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 A receives T-shirt from Z and Z Boutique received the payment of P500.
c. It can be measured in terms of Peso Values. Meaning what one party receives
must be quantified in terms of how much? In the example given in letter b. how
much is the T-shirt? P500. How much money did Z Boutique receives? P500.

2. Classifying – The phase of Accounting that involves grouping of similar items. Here,
we classify and group together the accounts used in journalization into three broad
categories: Assets, Liabilities and Equity. This is done through Posting. Posting is the
process of transferring what we have recorded in the Journal into another book of
accounts which we called the Ledger or the book of final entry.

3. Summarizing – is the process of preparing Financial Statements. After preparing

journal entries, it will be posted in the ledger and from there a financial statements can
be prepared.

Set of Financial Statement

a. Income Statement – the statement that will shows the result of business operation
for a given period of time. This will show how profitable is the business. Its contents
are: revenues or income and cost and expenses

Results of Operation

Net Income if the revenues or income exceeds cost and expenses.

Revenue > Cost and expenses

Net Loss if cost and expenses exceeds revenues or income

Revenue < cost and expenses

Break even a point when the business earned no income and incurred no loss.
Revenue = cost and expenses

b. Balance Sheet – the statement that will give information on the financial condition of
the business. How stable or how liquid is the business. Its contents are Assets,
Liabilities and Owner’s Equity.

Assets – refers to rights and and things of value owned by the business.
Example: Cash, Computer, Building, Accounts Receivable

Liabilities – refers to amounts owed to others, or obligations to pay or to render

services.
Example: Accounts Payable, Salaries Payable

Owner’s Equity – the financial interest of the owner over the assets of the business.
This includes the investment made by the owner, share in income less withdrawals.
Or the excess of Assets over its Liabilities. In equation form this is express as

Owner’s Equity = Assets - Liabilities

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 4. Interpreting – financial statement are useless if it is not accompanied by analysis or
interpretation. To make the financial statement useful to the different users it must be
analyzed and interpreted using ratios and percentages.

Accounting as a Language of Business

Accounting is often described as the language of business because it is the medium of

communication between the business and the various parties interested in its financial
activities.

Accounting transmit financial information by means of periodic reports or financial

statement. This is the reason why the subject Basic Accounting is required in any course.
The success of anyone who is engaged in the field of business depends to a great extent on
his ability to understand, interpret and use the messages contains in the financial
information.

Reasons why Non-BSA students should study Accounting

1. To make sure that you follow legal requirements. Once you become a senior officer or
manager of the company, you will be required by law to disclosed publicly some
information regarding the business activities. These information are usually written
using technical language and presented in highly prescribed format. The responsibility
of complying with the law rest on the senior officer of the company. While the
accountants can help in the preparation of the financial reports but the total responsibility
cannot be delegated to them. It is the senior manager who has the full responsibility and
therefore they must know something about the accounting process.

2. To help you do a better job. Large companies or organization almost certainly have
some form of internal information supply. You might be involve either or both receiving
or supplying the information. Its purpose is to help you and other managers do your job
more efficiently and effectively. It can help you plan and monitor your department’s
activities and budget. It will also be a great help in making decisions.

Types of Business Organization

1. Sole or Single Proprietorship – a business owned by only one person called the
proprietor and usually the manager. This is suitable for small businesses engaged in
providing services or retail business. The owner receives all profits, absorb all losses
and solely responsible for all business obligations.

2. Partnership – a business owned and operated by two or more persons who bind
themselves to contribute money, property or industry to a common fund, with the
intention of dividing profits among themselves. The owners are called Partners.

3. Corporation – an artificial being created by operation of law, having the rights of

succession and the powers, and attributes expressly authorized by law or incident to its
existence. The owners are called stockholders or shareholders.

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Leonila J. Generales, CPA, MBA
Nature/Types of Business Operation

Type Activity Structure Example

Service Selling people’s time Hiring skilled staff/
Software
workers and selling Development
their time Accounting
Legal
Manpower services
Trader/ Buying and selling of Buying a range of Wjolesaler
Merchandising goods or commodities manufactured goods Retailer
consolidating them and Hardware
making them available Grocery store
near their intended
customer or online
Manufacturing Designing products, and Buying raw materials, All the factories
producing finished and converting them inside the AFAB.
products into a finished product
with the help of labor
and equipment

Users of Accounting Information:

A. Internal Users – those who make decisions directly affecting the internal operations of
the business.

● Managers - they need accounting data in order to measure the effectiveness

and efficiency of their performance.
● Employees – they need accounting information in order to assess whether they
are receiving the right compensation and to check if they can bargain for more
benefits and for security of their job.
● Officers – they are interested to know if the company are doing well so they can
plan for possible expansion or to cost cut.
● Business Owners – they need to know whether they are receiving a fair return
of what they have invested, to add or to withdraw their investment.

B. External Users - are those that have financial interest in the business but they are not
involved in the day to day activities of the business.

● Suppliers – they need to know the credibility of the business before they
transact with them and the terms of their transaction.
● Creditors – they are interested in the financial data of the borrower in order to
decide whether to grant or not to grant loan and how much.
● Customers – are interested to know if the business can supply the needed
demand and to continue to provide similar services in the future or whether the
company is true to their commitment to fulfill warranty obligations.

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Leonila J. Generales, CPA, MBA
 ● Government Agencies – like BIR (Bureau of Internal Revenue) to determine if
the company is paying the right amount of taxes, the SEC (Securities and
Exchange Commission requiring all business to submit financial report for
monitoring purposes.
● Public in General – businesses provides substantial assistance to the general
public in the form of employment and contribute in the enhancement of the local
economy.

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Leonila J. Generales, CPA, MBA