Activity 1: Introduction to Accounting (Review of Accounting)

1. Explain why Accounting is both SCIENCE and ART.

Accounting is widely considered as practical art, one’s creative skills and judgements
must be used in several applications particularly when reporting financial statements to an
entity. Practical art is the use of techniques and skills through scientific method arriving to
practical use, just like in the field of accounting where universally accepted method(GAAP)
is established to follow in presenting financial findings. This Generally Accepted Accounting
Principles (GAAP) ‘is the principle of accounting applied in the bookkeeping process of an
economic entity.’

Accounting is also a science because it follows a systematic process from gathering to

classifying, organizing and presenting financial data of an economic entity.

When the two combines, accounting as defined by the American Institute of Certified
Public Accountants (‘AICPA’), ‘ 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.’

2. The Committee on Accounting Terminology of 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, transactions and events which are in
part at least of a financial character, and interpreting the results thereof’. Identify the
ATTRIBUTES of a transaction.

Attributes of a Transaction
It must have two parties involved- transaction are done by two entities (e.g.
business-suppliers, business-customers, business-investors, etc.)
 It must have a two-fold effect in the elements of accounting- the transaction may
increase or decrease the value of two or more elements of accounting be it in
asset, liability, equity, revenue or expense.
 The transaction involves financial value exchange
 It must be backed up by source documents both for the two parties (e.g. official
receipt, vouchers, sales invoice, billing statement etc.)
 There is a change in the financial position of the business
3. Compare and Contrast BOOKKEEPING and ACCOUNTING

Comparison Bookkeeping Accounting

Accounting cycle Bookkeeping requires the Accounting covers the whole
steps of journalizing up to process of accounting cycle
preparing trial balances. from identifying, recording,
up to preparing financial
 statements and
communicating the
informations to internal and
external users.
Interpretation and Analysis No interpretation and Interpretation and analyzation
Skills analyzation of data needed or of data are important because
required. conveying informations that
are analyzed and interpreted
is one function of accounting
and it is helpful in making
economic decision for the
business entity.
Tools Journal and Ledgers Balance Sheet, Profit & Loss
Account and Cash Flow
Statemen
In conclusion, Bookkeeping is part of the Accounting process particularly in recording data.

4. List five (5) USERS of accounting information and identify their SPECIFIC INFORMATION
NEEDS.
1. Owner (internal user)- the owner needs to know the accounting information presented
in the financial statements to assess the profitability of products in what they have
earned or loss, the growth of the business, and what is needed to strengthen its
weaknesses.

2. Lenders (external user)- e.g. banks and creditors, accounting information are needed
by lenders to assess the capability of the business to pay back loans and interests on
time and the substantial securable assets and liquidity.

3. Suppliers (external user)- suppliers also use the accounting information needed to
assess the credit-worthiness of their partners before offering goods and services on
account that will also benefit their business.

4. Government (external user)- the government uses accounting information such as

revenue or profit of the business to impose taxes and monitor regulations that protect
stakeholders.

5. Investors – investors need accounting information to assess the profitability of the

business and the potential of it in long-term growth and engagement.

5. In developing generally accepted accounting principles, certain basic assumptions are made.
These assumptions provide a foundation for the accounting process. Two underlying assumptions
were mentioned in the Framework for the Preparation and Presentation of Financial Statements
issued by the ASC: Accrual Basis and Going Concern. However, the Accounting Entity
Assumption, Monetary Unit Assumption, and the Periodicity Assumption are also important
 postulates on which the accounting process is based. Briefly define and explain each of these
underlying assumptions and provide examples.

 Accounting Entity Assumption- this presumes that a business enterprise has an existence
separate from the private financial affairs of its owner e.g. when a business owner bought
a car for his personal use, no records or transaction was done for the business.
 Monetary Unit Assumption- this assumption states that only those transactions with
monetary value are recorded in the books of accounts of business e.g. fixed assets such as
a truck or building can be recorded, however, employee skill levels, quality of customer
service, etc. are not recorded because they are not in monetary value; when a business
purchase an equipment for Php 5000 in 2010 but due to inflation, the equipment is priced
at Php 10000 in the current year, it won’t be adjusted in the balance sheet and the inflated
price is ignored; when a truck is damged, only the insurance expenses shall be recorded
to get the truck in working condition, not the loss.
 Periodicity Assumption- this assumption states that business activity can be divided into
measurement intervals to report financial entities on a monthly, quarterly or annual
period. When a time frame is identified, internal controls on financial reporting can then
be put into place to ensure its proper implementation.
Example, XYZ Limited provides services worth PHP10,000 to ABC Limited
during the first quarter of the year. ABC Limited will make payment for these services in
cash next quarter. According to time period assumption, if XYZ Limited prepares its
financial reports at the end of the first quarter of the year, it will have to record this
revenue of PHP10,000 in its income statement for the first quarter.
 Accrual Basis – accounting system that recognizes revenues when earned and expenses
when incurred e.g. when a business provides service on account, it will be recognized as
account receivable for debit and service fee for credit, opposite to the cash method that it
will only be recorded when the customer paid.
 Going Concern- this assumes that a business will continue on and foresee the business,
neither the intention nor the necessity of liquidation, ceasing trading or seeking protection
from creditors pursuant to laws or regulations to shut down in the future e.g. prepayment
and accruals of expenses.
A company manufactures a chemical known as Chemical-X. Suddenly, the
government imposes a restriction on the manufacture, import, export, marketing and sale
of this chemical in the country. If Chemical-X is the only product that company
manufactures, the company will no longer be a going concern.
Instructions:
1. Use this word document as your answer sheet.
2. Submit this document (as your answer sheet) to this link (hold the control key (CTRL) then click
the link): https://ucbcfedu-my.sharepoint.com/:f:/g/personal/wlsabala_uc-
bcf_edu_ph/Ek7UtrJ73epFvxHGh4ols3UByywc0sDeVOaZxQ9T8bYagA
3. Deadline will be until midnight.