ACCOUNTING

DEFINITION
 ASC DEFINITION
– 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.
 AICPA DEFINITION
• 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.
 AAA DEFINITION
– Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgment and decision by users of the
information.

– This definition has stood the test of time

– Accounting has a number of component

• IDENTIFYING (Analytical component)

• MEASURING (Technical)

• COMMUNICATING (Formal)
 IDENTIFYING
• the recognition or non recognition of
business activities as accountable events.
– Accountable events
• quantifiable
• Economic activities

– Economic activities of an entity are referred to as

“transactions”

classification of transactions

1.) external or exchange transactions

– Involves one entity and another entity

2.) internal transactions

– Involves the entity only
 MEASURING
• This is the assigning of peso amounts to the
accountable economic transactions and events.

• Peso is the unit of measure

(Quantifiability aspect)

• The value of Peso does not change over time

(Stability)
 COMMUNICATING
• The process of preparing and distributing
accounting reports to potential users of
accounting information.

• Identifying and measuring are pointless if the

information is not communicated to the users.

• Implicit in the communication process are:

– Recording
– Classifying
– Summarizing
 RECORDING
• the process of systematically maintaining a record
of all economic business transactions after they
have been identified and measured.

• JOURNALIZING
• Journal - Book of original entry
 CLASSIFYING
- the sorting or grouping of similar and interrelated
economic transactions into their respective
classes.

- accomplished by posting to the ledger

which is a group of accounts categorized into
Assets, Liabilities, Owner’s Equity, Revenue
and Expenses accounts.
 SUMMARIZING
- the preparation of financial statements.
- The end product of the accounting process
Important points on the definition
– Quantitative information

– Financial in nature

– Useful in decision making

 Key product of this information
system (ACCOUNTING)

• A set of financial statements

BASIC OBJECTIVE OF ACCOUNTING

• To provide quantitative financial

information about a business that is useful
to statement users particularly owners and
creditors, in making economic decisions.
ACCOUNTING VERSUS AUDITING
– Accounting embraces auditing

– Accounting is constructive. It ceases when FS are

already prepared.

– Auditing is analytical. The work of an auditor

begins when the work of an accountant ends.
ACCOUNTING VERSUS BOOKKEEPING
– Bookkeeping is procedural, and concerned with
the “how” of accounting

– Accounting is conceptual, concerned with the

“why” of accounting or the justification for any
action adopted
FINANCIAL ACCOUNTING VERSUS
MANAGERIAL ACCOUNTING
Financial Accounting
– is primarily concerned with the recording of business
transactions and the preparation of FS which is
general purpose.
– emphasizes reporting to creditors and investors.

Managerial Accounting
– is the accumulation and preparation of financial
reports for internal users only
– is needed by management in planning, controlling
and evaluating the entity’s operations.