Unit 1 : Introduction to

Accounting

History Of
Accounting

profession !
"
•
said to be the oldest

( C.) Egypt
'
in
•
evidence of
accounting records can be found in the Babylonian Empire 4500 B.
,
pharaohs and in the

"
( C.)
"

Code of Hammurabi 2250 B. tablets which accounts For commercial transactions

through clay .

•
record keeping became a
necessity For governments to sustain social orders .

•
The Italian Renaissance brought the artistic accomplishments of man to new heights .

•
Venice was the business cradle of Europe and it was here among merchants that

"
"

Double
Entry System Of
accounting was invented and practised .

"

Fra dealing
"

period Luca Pacioli an Italian his summa with record keeping and double entry
-

monk wrote
•
During this
, , ,

accounting .

'' ' '

• gumma → 3 book of records : (1) Memorandum BOOK -

For all information on transaction
(2) Journal BOOK -
For the
,

original entry ,
(3) Ledger Book .
-
For the final entry .

Fra Luca Pacioli

" "

•
The Father Of
Accounting

•
born in 1445 in Sansepolcro , Tuscany .

• mathematician and . Friend of Leonardo da Vinci .

Summa dc Arithmetical Geometric proportion i Ct

Proportionality
, ,

•
written by Fra Luca Pacioli

" "
• In 1494
,
he published the Famous book summa de Arithmetical ,
Geometric ,
Proportion i et Proportional ite

( the collected knowledge of Arithmetic

, Geometry ,
Proportion and Proportionality .
)

•
One section OF this book dedicated description of
was the double entry accounting
-
to .

one of the first books published Gutenberg

•
was on the
press .

was translated into German Russian Dutch English

•

, ,
and .
,

Other Evidence Of Developments Of Accounting

1.) Florentine and Venetian Approach

Florentine Approach

Journal Entries

↳ each transaction resulting in at least one account

being debited and at least one account being credited ,
with total debits

equal to the total credits .

 Venetian Approach

Ledger Postings

↳ accounts are recorded in bilateral Form Where debits are recorded on the left side of the with credits on the
, page

side .

Savary Commercial Code

Jacques Savary (1622-1690) ,

known as the chief Architect of the commercial code of France in 1673 ( called the Code of
Savary )

↳ introduced the use of

"
historical cost
"

as the basis of valuation .

↳ also called
,
"

transaction cost
"

Napoleonic Commercial Code .

"

Napoleon Bonaparte initiated the codification France 's Civil which named him code of
"
in March
of law was after
,
the Napoleon

21 1804 .
,

•
During 1807
,
the Code of Commerce amended and supplemented the Code of
Napoleon

↳ this law dictates that

"
assets must be value of
"

and not
carried at their market on the
day inventory

on the basis of historical cost .

Schmalenbach

1955)
"
•
Eugen Schmalenbach (1873 -

,
a writer and professor , introduced the use of chart of Accounts
"
in Poland since the World War

II .

•
He believed that Chart of Accounts contains simplified listing of accounts used by companies in commercial transactions
a all to be
recording all .

Definitions of
Accounting

ASC →
Accounting is a service activity .
Its Function is to provide quantitative information
, primarily financial in nature
,
about economic entities
,

making economic
that is intended to be useful in decision .

is
AICPA →
Accounting 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 Accounting is the
process of
identifying , measuring ,
and
communicating economic information to permit informed

judgement and decision

by the users of the information .

Definition by American
Accounting Association

Identifying

•
analytical component

•
the
recognition or non -
recognition of business activities as

" "

Accountable Events

"
is
•
An event is accountable or quantifiable when it has effects on.
Assets Liabilities and Capital and called Economic
, ,

"

Activity .
Economic Activity may be :

(1) External / Exchange transaction →

involving one enterprise and another

(2) Internal Transaction →

involving the enterprise only .

Measuring

technical component
•

assigning
•
of Peso amounts to the accountable economic transaction / events .

•
there must be a common financial denominator .

"

•
e. g. .
Fair market value
,
historical cost
,
current replacement cost net realizable value or
present or discounted value .

, ,

Communicating

component
•
Formal

process of preparing and

distributing accounting reports to
potential users of
accounting information

•
implicit in the communication process are :

(a) recording / jovrnalizing -

systematically maintaining a record of all economic transactions

(b) classifying -

sorting / grouping
of similar and interrelated economic transactions into classes

(c) summarizing -

preparation of financial statements .

Users of Financial Information

Accounting Profession

Regulatory : Board OF
Accountancy
•
Body .

•
Licensure Examination

• Issuance of license

•
Membership to different organization ( e.
g. PICPA
,
NACPAE ,
ACPAPP etc .
)
,
 Branches of
Accounting

(a) Public
Accounting -
external
auditing ,
taxation
,
management advisory services

(b) Private
Accounting -
as employees in a
company doing financial accounting ,
cost accounting ,
budgeting , accounting information

system ,
tax
accounting ,
internal auditing

specialized Areas : Forensic Accounting ,

Information
Technology Services ,
Environmental
Accounting ,
International
Accounting

(c) Government
Accounting -
deals with the receipts / disposition of
government funds like the works Commission of
,
of
provincial ,

Audit ( ( OA )
,
Budget Officers of government offices .

(d) Accounting Education -

becoming a member of the academe .

Types of Business Enterprise .

Service security and

Business - renders services to clients for a Fee like schools ,
airlines ,
restaurants
, ,
janitorial services , beauty salon
,

professionals like doctors lawyers ,

accountants etc
, , .

Merchandising Business which their

one buys and sells without
altering original Form It
-

goods .

may be either

retail basis It maintains held For in OF business operation

on a or wholesale .

inventory which are sale the normal cause .

'

e. g. .
grocery ,
drugstores ,
bookstore ,
department stores
,
and hardware business .

Manufacturing Business one which buys raw materials the into Finished goods then sells it at a price
-
same
, processes ,

higher than the The include materials

cost .
costs
normally the
price of raw
,
labor costs
,
and
manufacturing overhead .

Types of Business Organization

(a) Sole Proprietorship

owned by one called the applicable business

person normally for
•

proprietor with small capital .

the receives profits suffers losses and is liable

•
owner any , any , personally for all debts of the business .

BUT
distinction the business economic unit and the
accounting
•
there is no legal bet .
as an the owner
,

records of the business activities are kept separate from the records and activities
personal of the owner .

Advantages :

•
case of and exit
entry
•
Full ownership control

all
profits directly to owners / suffers losses
•
go

•
tax savings

• few government regulation

Disadvantages ;

•
Unlimited liability

•
Limitations in raising capital

lack OF
continuity
•
(b) Partnership

owned
by
•
two more associated partners who agreed to contribute or
industry into a
or persons as
, money , property ,

common fund with intention of

dividing profits / losses .

Often used to
including CPAs
•
organize service -

type businesses professional practice such as by lawyers , ,

doctors

and architects .

' ' "

•
A partnership Agreement is executed by the partners and sets Forth such terms as initial investment
,

duties OF each partners ,

division of net income ( loss ) ,
and settlement to be made
upon death or withdrawal .

Each unlimited liability For debts The activities partnership

•
the of the of
partner has personal partnership . the

must kept separate From the affairs the

be personal of partners .

Advantages :

• Ease of information

•
Additional sources of capital

•
management base

•
tax implications

Disadvantages :

•
unlimited liability

difficulty in
transferring ownership
•

lack
continuity
•
of

• limitation in
raising capital

(c) Corporation

• organized as a separate legal entity under the law and having ownerships divided into

transferable snares OF stock .

•
Stockholder / shareholders ) →
Owners of the shares of the Corporation
" "
•
Articles of Incorporation → document that must be executed by the incorporators

and it
have approved by the Securities and Exchange Commission ( SEC ) together the

Corporation 's Bylaws .

•
Stockholders may transfer all or part of their shares to other investors at any time without dissolving the

it unlimited
Corporation since enjoys an life .

Corporation advantages :

•
limited liability

•
unlimited life

in ownership
•
ease transferring
 •

ability to raise capital

Disadvantages :

•
Time and cost in formation

More regulation
•

◦
Taxes

advantages :
cooperative

unlimited life
•

ease in
transferring ownership
•

ability to raise capital

•
democratic organization

•
exempt From taxes

regulations
•
less

disadvantages :

one vote
policy
•
one member

participation be
lacking
'
•
members may

GAAP
Generally Accepted Accounting Principles

conventions
Encompass and procedure
•

necessary define is accepted

the ,
rules
,
to what
accounting

practice .

•
rules procedure practice ,
and standards Followed in the
preparation and presentation of Financial statements .
, ,

•
promulgated by the
Accounting standards Council ( ASC ) and now the Financial Reporting Standard Council ( FRSC ) .

Financial Reporting Standards Council ( FRSC )

the default ASC

replaces now
•

standard
•
accounting setting body created by the PRC upon

recommendation by the Board Of

Accountancy .

Function :

to standards accepted in the Philippines

•
establish and improve accounting that will be
generally .

issue Philippine ) Philippine Financial

Reporting Standards ( PFRS )
Accounting Standards ( and
•
the PAS
.