LESSON 1

INTRODUCTION TO ACCOUNTING

LEARNING OBJECTIVES:

1. To define the word accounting from the different perspectives as well as the accounting
equations.
2. To let the students have an application of the accounting equations.

LEARNING CONTENT:

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
decisions(Statement of Financial Accounting Standards No. 2, “Basic Concepts and Accounting
Principles Underlying Financial Statements of Business Enterprises”(Manila: Accounting Standards
Council, 1983),par. 1)

Accounting is an information system that measures, processes and communicates financial

information about an economic entity. (Statement of Financial Accounting Concepts No. 2, “Objectives
of Financial Reporting by Business Enterprises”(Norwalk, Conn.: Financial Accounting Standards Board,
1978), par.9

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,
“A Statement of Basic Accounting Theory” (Evanson, III.: American Accounting Association, 1966),
par.1; Accounting Principles Board, Statement No. 4, “Basic Concepts and Accounting Principles
Underlying Financial Statements of Business Enterprises”(|New York:AICPA,1970), par. 40)

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

ACCOUNTING EQUATION

Financial statements tell us how a business is performing. They are the final products of the
accounting process. But how do we arrive at the items and the amounts that make up the financial
statements? The most basic tool of accounting is the accounting equation. This equation presents the
resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in
the assets. It states that assets must always equal liabilities and owner’s equity. The basic accounting
model is:

ASSETS = LIABILITIES + OWNER’S EQUITY

 Note: the assets are on the left side of the equation opposite the liabilities and owner’s equity.
This explains why increases and decreases in assets are recorded in the opposite manner (“mirror image”
as liabilities and owner’s equity are recorded. The equation also explains why liabilities and owner’s
equity follow the same rules of debit and credit.

The logic of debiting and crediting is related to the accounting equation. Transactions may
require additions to both sides (left and right sides), subtractions from both sides (left and right sides), or
an addition and subtraction on the same side (left or right side) but in all cases the equality must be
maintained as shown below:

ASSETS LIABILITIES OWNER’S EQUITY

= +

REFERENCE: BASIC ACCOUNTING MADE EASY BY WIN BALLADA, CPA,CBE,MBA