CHAPTER 1: INTRODUCTION TO ACCOUNTING
For
DEFINITION OF ACCOUNTING
 The Accounting Standards Council defined
“Accounting” as 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 decisions.
 The Committee on Accounting Terminology of
the American Institute of Certified Public
Accountants defined “Accounting” as the art of
recording, classifying, and summarizing in a
significant manner in terms of money,
transactions and events which are in part at
least of a financial character and interpreting
the results thereof.
 The American Accounting Association in its
Statement of Basic Accounting Theory defined
“Accounting” as the process of identifying,
measuring, and communicating economic
information to permit informed judgment and
decision by users of the information.
ACCOUNTING AS SCIENCE AND ART
1. As a social science, accounting is a body of
knowledge which has been systematically
gathered, classified and organized.
2. As a Practical Art, accounting requires the use of
creative skills and judgment (Millan, 2019).
WHAT IS A BUSINESS TRANSACTION?
- It is an event that has a direct effect on the operation
of the economic unit and can be expressed in terms of
money.
Ex. Buying and Selling of goods, renting a building,
paying employees, buying new office equipment, buying
new office equipment and any other activity of a
business that involves exchanges of values in monetary
items
ACCOUNTING HAS A NUMBER OF COMPONENTS:
1. Identifying as the analytical component.
2. Measuring as the technical component.
3. Communicating the formal component.
1. IDENTIFYING - This accounting process is the
recognition or non-recognition of business activities as
“Accountable events”.
NOT ALL BUSINESS ACTIVITIES ARE ACCOUNTABLE.
example, the hiring of employees, the death of the
entity president and the entering into a contract are all
business activities but such events are not accountable,
because they cannot be quantified or expressed in
terms of a unit of measure.
 Economic activities may be classified as external
and internal.
 External Transactions or exchange transactions
are those economic events involving one entity
and another entity.
Examples: Purchase of merchandise from a
supplier, borrowing money from a bank, sale of
merchandise to customer and payment of
salaries to employees.
 Internal Transactions are economic events
involving the entity only.
Examples: Production and Casualty Loss
 Production is the process by which resources
are transferred into products.
 Casualty is any sudden and unanticipated loss
from fire, flood, earthquake and other event
ordinarily termed as an act of God.
2.MEASURING- is the assigning of peso amounts to the
accountable economic transactions and events.
Financial statements WITHOUT monetary amounts
would be largely unintelligible or incomprehensible. The
Philippines peso is the unit of measuring accountable
economic transactions.
4 MEASUREMENT BASES OR FINANCIAL ATTRIBUTES
1. Historical Cost- this is identified as the original
acquisition cost.
2. Current Cost- this is identified as replacement
cost or the current purchase price
3. Realizable Value—this is identified as current
selling price or the amount that could currently
be obtained by selling the asset in an orderly
disposal.
4. Present Value- This is the discounted value of
the future net cash inflows that the asset is
expected to generate in the normal course of
business.
3.COMMUNICATING- is the process of preparing and
distributing accounting reports to potential users of
accounting information. Implicit in the communication
process are the recording, classifying and summarizing
aspects of accounting.
 Recording or Journalizing- is the process of
systematically maintaining a record of all
 economic business transactions after they have
been identified and measured.
 Classifying- is the sorting or grouping of similar
and interrelated economic transactions into
their respective classes.
 Summarizing- is the preparation of financial
statements which include the statement of
financial position, income statement, statement
of comprehensive income, statement of
changes in equity and statement of cash flows.
 Interpreting- The accountant’s interpretation on
the financial statement is needed. Analysis
reports are submitted together with the
financial statements.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
1. Quantitative Information – Information
expressed in numbers, quantities, or
units
2. Qualitative Information- Information
expressed in words or descriptive form.
Qualitative information is found on the
notes to financial statements as well on
the face of the other components of the
financial statements.
3. Financial Information- Information expressed
in money, financial information is also
quantitative information because
monetary amounts are normally
expressed in numbers (Millan, 2019)
BRIEF HISTORY OF ACCOUNTING
Accounting can be traced as far back as the prehistoric
times. Since the dawn of civilization when mankind
began to engage in trade, perhaps more than 10,000
years ago, methods of record keeping, and accounting
have been invented.
As early as 8500B.C, accounting has already existed.
Archaeologists have found clay tokens as old as 8500
B.C. In Mesopotamia which were usually cones, disks
spheres, and pellets. These tokens correspond to
commodities like sheep, clothing or bread. They were
used in the Middle West in keeping records. After some
time, the tokens were replaced by wet clay tablets.
During such time, experts concluded this to be the start
of the art of writing other ancient civilizations keeping
account records are Babylonia (4,500 BC), Egypt
(2,250BC), China and Greece.
In the Middle Ages (13th and 15th centuries), trades
flourished in places such as Florence, Venice and
Genoa) this has brought advancement in account
keeping methods. In 1211 A.D, one of the systems in
accounting was kept by a Florentine Banker. However,
the system was primitive as the concept of equality for
entries was absent. Double Entry records first came out
during 1340 AD in Genoa.
In 1494, the first systematic record keeping dealing with
the “double entry recording system” was formulated by
Fr. Luca Pacioli, a Franciscan monk and mathematician.
The double entry recording system was included in
Pacioli’s book titled “Summa di Arithmetica Geometria
Proportioni et Proportionalita published on November
10, 1494 in Venice.
In this book, Pacioli introduced three important books
of records, namely
a) Memorandum Entry- For all information on a
transaction
b) Journal Book- For the original entry
c) Ledger Book- For the final entry
The concept of Double Entry Recording is being used up
to this day. Thus, Fr. Luca Pacioli is considered as the
Father of Modern Accounting. (Millan, 2019 and Roxas,
Valencia, 2018)
FUNCTION OF ACCOUNTING IN BUSINESS
Accounting is often referred to as the “Language of
Business” because it is fundamental to the
communication of financial information.
Accounting has the following two broad functions in a
business:
1. To provide external users with information
that is useful in making among others,
investment and credit decisions
2. To provide internal users with information
that is useful in managing the business
(Millan, 2019).
USERS OF ACCOUNTING INFORMATION
1. Internal Users- Those who are directly
involved in managing the business.
Examples: Business Owners who are
directly involved in managing the
business, Board of Directors, Managerial
Personnel
2. External Users- Those who are not directly
involved in managing the business.
Examples: Existing and Potential
Investors, Lenders, Government
Agencies, Non-Managerial Employees,
 Customers, Public. (Millan, 2019)
How much Budget Report
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS capital is (Special Purpose
TO USER’S NEEDS needed to Information)
manufacture a
1. General Purpose Accounting Information- It is new product?
an information designed to meet the
common needs of most statement users,
it is provided by financial accounting and GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
is prepared primarily for external users. Accounting rules, procedures, and practices came to be
2. Special Purpose Accounting Information- Is known as Generally Accepted Accounting Principles
information designed to meet the (GAAP).
specific needs of particular statement
users. It is provided by management Simply stated, Generally Accepted Accounting Principles
accounting or other branches and is represent the rules, procedures, practice and standards
prepared primarily for internal users. followed in the preparation and presentation of
(Millan, 2019) financial statements.
EXAMPLES OF DECISIONS AND TYPES OF Generally Accepted Accounting Principles are like Laws
INFORMATION NEEDED TO MAKE THOSE DECISIONS that must be followed in financial reporting. FINANCIAL
REPORTING STANDARDS COUNCIL (Replaces the ASC)
USER EXAMPLE OF EXAMPLE OF
DECISION/S TO INFORMATION On November 18, 1981, The Philippine Institute of
MAKE NEEDED Certified Public Accountants, the national professional
body of CPA’s in the Philippines, created the Accounting
1. Existing - Audited Financial Standards Council(ASC) as the accounting standard
External Investor: Statements of the body in the Philippines, to establish and improve
User business to aid in accounting standards that will be generally accepted in
(Investor) Whether to hold analysing the value the Philippines.
or sell of the company
investment in In 2004, The Philippine Regulations Commission (PRC)
(General Purpose created the Financial Reporting Standard Council (FRSC)
stocks Information) replacing the ASC. The FRSC was created to assist the
Potential Board of Accountancy (BOA) to carry out its powers and
Investor: functions provided under Republic Act No. 9298, The
Philippine Accountancy Act of 2004.
Whether or not
to buy shares of The approved accounting standards of the FRSC are
stocks known as the Philippine Financial Reporting Standards
(PFRS) and Philippine Accounting Standards (PAS) which
Lender: fully took effect on January 1, 2005, statements of the
2. Whether or not - Audited Financial
FRSC are known as “Philippine Accounting Standards or
External to extend loan Statements of the
PAS and Philippine Financial Reporting Standards or
User to a business business to aid in
PFRS.”
(Lender or Supplier: analysing the
Supplier) Whether or not company’s ability to CAREER FIELDS IN ACCOUNTING
to extend credit pay its debts
to a business (General Purpose 1)Public Accounting- composed of individual
Information) practitioners, accounting firms and large multinational
organizations that render independent expert financial
Whether or not Analysis of the services to the public in a professional fee basis. (Dean
3. Internal to increase the effects of sales
User Ester F Ledesma)
sale price of a volume and sales
(Manager) product prices to earnings Professional Accountants who work in public accounting
(Special Purpose firms are usually Certified Public Accountants (CPA’s). A
Information) Public Accountant may perform one or more of the
following services: (Arenas T, Chua, M. & Villarina F.
(2018)
a. Auditing- In performing an Audit, the
accountant makes an independent
examination of the financial statements
of a business enterprise. The auditor
evaluates the accounting system of
business enterprise and carefully
examines the records to see to it that
transactions have been properly
recorded. After conducting his
examination, the auditor issues a report
expressing an opinion as to the fairness
of the financial statements.
b. Management Advisory Services-
includes the design, installation and
improvement of firm’s general
accounting system and other system
deemed necessary for controlling and
distributing manufacturing costs.
Individuals who provide management
advisory services need not be CPA’s. in
fact they need not be Accountants at
all. The area of Management Advisory
Services includes financial planning and
control, the development or
improvement of an accounting or
computer system, financial forecasting,
and advice on mergers and
consolidations.
c. Tax Services- It includes giving advice in
the possible tax consequences of a
certain financial decisions, preparing
income tax returns and representing
clients before government agencies
such as BIR during a tax audit.
2)Private Accounting- An accounting job done in private
business enterprises. The accountant works as an
employee of a business enterprise. They may be
employed in various capacities. (Arenas T, Chua, M. &
Villarina F. (2018)
 The Chief Accounting Officer of a business
enterprise is called Controller.
 The Chief Financial Officer is called Finance
Manager.
TASKS IN PRIVATE ACCOUNTING
a. General Accounting- performing the
entire accounting process, from
identifying to recording transactions
and the preparation of financial
statements for the use of management.
b. Cost Accounting- it has something to do
with controlling, determining and
controlling costs particularly those costs
in producing a product or service.
c. Budgeting- Provides management a
plan for future operations after this
plan has been applied, summaries and
reports comparing the actual
accomplishments with the plan are
provided.
d. Internal Auditing- Establishes
accounting procedures are being
followed throughout the year. The task
of conducting a review of the
company’s operations to determine
adherence to management policies and
measuring efficiency of operations.
e. Accounting/ Management Information
System- task of designing and setting up
a manual or computerized accounting
system.
3.) Government Accounting- Accounting for the national
government and its instrumentalities such as provinces,
towns and cities. They are of concerned with public
funds. (Arenas T, Chua, M. & Villarina F. (2018)
Example of government agencies requiring the services
of professional accountants are the commission on
Audit (COA), Bureau of Internal Revenue (BIR), Bangko
Sentral ng Pilipinas, GSIS, and Bureau of Custom.
4.Accounting Education- is another Professional field
where the accountant assumes the role of researcher,
teacher and reviewer. (Vera Cruz- Manuel, Z. (2018)
 Researcher- investigates and makes a study
creating, applying, relating or improving
accounting theories and business concepts that
suit the changes taking place in a particular
business or industry.
 Accounting Professor- is responsible for the
formation of competitive accountants and
consultants and teaching subjects such as
accounting, auditing, management advisory
services and other subjects.
 Accounting Reviewer- helps prepare the
candidates for the CPA Licensure Examination.
AREAS OF SPECIALIZATION: (Vera Cruz- Manuel,
Z. (2018), (Dean Ester F. Ledesma)
 Basic Accounting or Bookkeeping- is the routine
activity of recording, classifying and
 summarizing business transactions in a
systematic manner. It is the procedural aspect
of accounting.
 Financial Accounting- involves the preparation
and interpretation of Financial Statements
primarily for external users.
 Cost Accounting- deals with the recording,
classifying and summarizing the details of
material, labor and overhead necessary to
produce and sell a product or service.
 Managerial Accounting- is the presentation of
accounting data primarily for management who
are considered the internal users. The special
reports will assist managers in planning,
directing and controlling the operation of the
business as well as in managing enterprise
resources.
 Auditing- deals with independent verification
and examination of the accounting records for
the purpose of giving an opinion on the fairness
of its presentation.
 Government Accounting- deals with the
administration or uses of public funds, to bring
about service to the community.
 Fiduciary Accounting (Trust Accounting, Estate
Accounting, Receivership Accounting)- Handling
of accounts managed by a person entrusted
with the custody and management of property
for the benefit of another. (Examples: Banks,
Insurance Companies, Mutual Trust, Pension
Plans)
 Environment Accounting- The area of
accounting that focuses on programs, activities
and projects that are focused on care for
Mother Earth.
 Social Responsibility Accounting- Reporting of
programs and projects that have to do with the
upliftment of the welfare of the people of a
community or nation.
PHILIPPINE REGULATORY AGENCIES
The practice of the accounting profession, among
others, is governed by regulatory bodies such as the
Professional Regulation Commission, Board of
Accountancy and the Philippine Institute of Certified
Public Accountants. The financial reports prepared are
also affected by the rulings and promulgations issued
out by the Securities and Exchange Commission, Bangko
Sentral ng Pilipinas, and the Bureau of Internal Revenue.
 Professional Regulation Commission
This is a government body in charge of regulating and
licensing the practice of a profession like accounting,
medicine, engineering, nursing and others. Among its
primary functions are the following:
a) Maintaining and enforcing professional
examinations
b) Promulgating and implementing
standards and ethics in the practice of
profession
c) Providing legal and other regulatory
services such as hearing formal
complaints
d) Acting on valid complaints by
suspending and revoking license of an
erring professional.
 Board of Accountancy
Republic Act 3105 regulated on March 17, 1978, the
practice of accounting by creating the Board of
Accountancy. It is under the jurisdiction of the PRC and
is tasked in setting up and promulgating a set of
professional standards and ethics in the practice of the
accounting profession. It is composed of a chairman and
six members appointed by the President of the
Philippines upon the recommendation of the PRC. It
constantly monitors the practice of accountancy in the
Philippines by conducting exams to CPA candidates,
granting certificates to board passers, registering and
suspending members, conducting dialogues with
accountancy students, examinees, and accountants.
 Securities and Exchange Commission (SEC)
SEC was established on October 26, 1936 under C.A 83.
Its task is to safeguard public interest. It regulates
business operations specifically of partnerships and
corporations, entities granted license/ franchise to
operate, and foreign companies doing business in the
country.
 Bangko Sentral ng Pilipinas (BSP)
BSP Regulates the operations of all banks, as well as all
importations (goods coming into the country) and
exportations (goods going out to other countries) of
goods. It also closely monitors foreign currency
transactions and the Philippine Peso exchange rate
ensuring its stability through a series of measures it
undertakes.
 Bureau of Internal Revenue (BIR)
BIR ensures compliance of tax and license requirements
by all businesses. People and business entities earning CERTIFIED NATIONAL INSTITUE
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