CHAPTER 1- Introduction to Accounting (FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT -1)

Name some successful businesses here in the Philippines. ( Puregold, Globe, Toyota, Petron, CocaCola)

These businesses offer products which are distinct from one another. Have you ever wondered about the secret formula for a company’s
success? This discussion can go on and on for days without yielding a definite answer. Nonetheless, there is a common factor among
these businesses that contribute to their success –ACCOUNTING.

Accounting involves the processes of identifying, recording, and communicating financial information to internal and external users alike.
It helps quantify data for easier interpretation. Numbers is the language of business. In order to efficiently manage your business, you
need to know numbers. After gathering the data on the performance of the company, these are summarized and used as a guide for future
decision-making. Accounting is a tool used in achieving all these goals.

How will the manager know if the company doing well? How can he/she know if additional investments is needed in a particular segment
of the company? If not for accounting, managers will still be making decisions not based on solid foundation.

Definition of Accounting

Accounting is a system that helps business track events that affect them. This process involves identifying the events that affect a
business, recording these events, and communicating the summarized results of all events within a particular period to interested parties.

Almost all companies allot a significant amount of resources to the accounting process since it aids them in improving their business. For
example, the sale of Toyota cars is identified as an economic event that affects the company. The accountant will record this transaction
and consolidate all records by the month. The consolidated records can be used by the top management to identify potential problems
encountered by the company. This can also be used to attract potential investors. Clearly , accounting process is very beneficial to a
company.

Accounting

may be defined as the art and science of recording business transactions in a methodological manner so as to show: (a) the true state of
affairs of a business of a particular period of time and, (b) the surplus or deficiency which has accrued during a specific period."

Accounting is the science of recording, classifying and summarizing transactions so that relation with outsiders is exactly determined and
result of operation during a particular period can be calculated, and the financial position as the end of the period may be shown.

From the above definition, we can say that accounting helps us to have some information regarding the following:
1.The nature and amount of incomes.
2.The nature and amounts of expenses.
3.The nature and amounts of possible losses.
4.The nature and amounts of actual losses.
5.The size and volume of capital employed.
6.The increase or decrease in the volume of capital employed.
7.The nature and values of assets owned.
8.The nature and values of liabilities outstanding.
9.The specific amounts due to the business and their nature.
10. The amounts due to be paid to the government

The Accounting Process

The starting point of the accounting process is the identification of economic events relevant to a business. Examples of relevant
economic events are the sale of Toyota cars (as mentioned), provision of services by a hospital, payment to suppliers, and purchase of
equipment for the manufacturing of Bench shirts. To be identified as a relevant economic event, there should be a transfer of things with
value. The cash and equipment, cash or money is exchanged for the equipment. The cash and equipment both have value making the
purchase a relevant economic event. This analysis is also applicable to the other examples given.

The recording of relevant economic events is the next step in the accounting process. After a company identifies the relevant economic
events, it records those events which will serve as the history of its financial activities. Recording events should be done systematically
and chronologically for easier tracking and interpretation. Records of events are inputted in the co-called accounting books

Finally, after a lapse of a specific period (usually one year), companies summarize all the records economic events into accounting
reports. The most popular accounting reports are the financial statements. All similar events during the period are lumped together to
provide meaningful and presentable information. As such, all sales transactions during the period are added and presented as one
aggregate amount. This makes the information understandable to other parties

Scope of Accounting:

Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the
spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or
not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and
the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, there is also the need for
interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these
problems.

In the modern world, accounting system is practiced not only in all the business institutions but also in many non-trading institutions like
Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the
form of Municipality.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some
suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial
transactions.

The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its
scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of
continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting,
human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

Nature of Accounting:

We know that Accounting is the systematic recording of financial transactions and presentation of the related information of the
appropriate persons. The basic features of accounting are as follows:
1. Accounting is a process: A process is composed of multiple steps that lead to a common end goal. The enrollment process in your
school may involve reservation of slots , filling out documents, attending school orientations, and payment of necessary fees.

These steps all lead to you being enrolled in your school . Likewise, accounting is a process because it performs the functions of
identifying, recording, and communicating economic events with the end goal of providing information to internal and external parties.

.2. Accounting is an art. Art refers to a way of performing something. It entails creativity and skills to help us attain some objectives.
Accounting is an art of recording, classifying, summarizing, and finalizing financial data. Accounting is a combination of techniques and
its application requires applied skill and expertise. This is the reason why accounting can be considered as an art.

3. Accounting deals with financial information and transactions. Accounting deals only with quantifiable financial transactions.
These are the only events identified by the accountant, recorded in the books, and communicated to different parties. Non-financial
transactions are not the focus of the accounting process. However, non-financial data maybe used to interpret and better estimate some
financial data.

4. Accounting is a means and not an end. As mentioned earlier, accounting is a tool to achieve specific objectives. It is not the
objective itself. Imagine that you dream to go to Paris someday. Accounting can be thought of as the plane that will bring you to your
destination

5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service
function, it collects processes and communicates financial information of any entity. This discipline of knowledge has

FUNCTIONS OF ACCOUNTING IN BUSINESS

It appears from the previous analysis that Accounting is basically concerned with recording of the business transactions, designing the
types of records to be maintained, preparing the reports on the basis of those recorded data and transactions and interpreting those reports.
Finally, Accounting is concerned with Communication of the results of the recorded transactions in the form of Final Accounts consisting
of the Profit and Loss Account with different sections and the Balance Sheet with a number of reports and statements affixed at the end.
Thus, the following are the main functions of Accounting:

1.Keeping Systematic Record of business transactions. Recording transactions does not only involve entering the transactions in the
accounting books. The records should be systematic enough to enable easy understanding of readers. No matter how comprehensive the
records are, if they are not produced systematically, then they provide little to no value

2.Protecting Properties of the business. The accounting records serve as the evidence that properties of a business do exist or how
much of a particular resource does the company have. If the accounting records show that the amount of cash should be P 1M, any excess
and deficiency will be noticed immediately. Moreover, the accounting system helps in preventing employee fraud and misappropriation
of company resources.

3. Communicating results to Various parties in or Connected with the business.

The accounting reports produced at the end of each period are not only used by external parties (e.g. potential investors, government
agencies) but also by the management in their decision-making function. Communication of the results of operations of a company is
essential for all concerned parties to enable them to take well-informed decisions.

4.Meeting Legal Requirements: In the Philippines, the government requires some companies (particularly those with public
accountability) to provide financial reports quarterly, semi-annually, or annually. This procedure aims to protect the public by providing
them the necessary information to make sound decisions. The government also requires reports from heavily regulated industries such as
the energy and oil industries.
Accounting Functions can be sharply divided into two distinct departments:

A.Historical or Stewardship Function:

  This part relates to the past transactions of the business firm, Accounting records, classifies, reports, analyses and interprets the
transactions already effected. Accounting also calculates the profit or loss made during the year and prepares other financial statements
and the statement of Assets and Liabilities or the Balance Sheet and reports and results to the proprietors, managers and other interested
parties. 

B.Managerial Function: 
  Accounting is to render such service to the management as to aid different levels of the managerial staff to carry out the operations of the
business efficiently. Accounting is to present information in such a way as to assist management in the creation of policy and in the day to
day operation of an undertaking.
 Accounting is an advisory service function and is concerned with furnishing such information to the management as will facilitate
efficient planning, operational control and coordination of future activities of the enterprise. Thus, Accounting is to assist management in
establishing a plan for reasonable economic objectives and in making of rational decisions.

So in Accounting it helps in Budgetary Control, Cost Control, Material Control and Operational Control and also in minimizing
wastage, losses and errors and frauds.

HISTORY OF ACCOUNTING

It is believe that the history of accounting is thousands of years old can even be traced to ancient civilizations. A number of history books
suggest that the early development of accounting can be dated back to ancient Mesopotamia. During those times, people followed a
system of writing and counting money. The development of accounting maybe related to the taxation and trading activities of temples.

The reign of Emperor Augustus provided more evidence about the development of accounting. The roman government kept detailed
financial information of the deeds of Emperor Augustus regarding the stewardship of Roman resources.

This is evidenced by The Deeds of the Divine Augustus. The Roman historians Suetonius and Cassius dio recorded that in 23BC,
Augustus prepared an account which listed in public revenues, the amounts of cash in the treasury, in the provincial fisci (tax
officials) ,and in the hands of the public contractors; and that it included the names of the freedman and slaves from whom a detailed
account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus’ statement
that it was written out by Augustus himself.

Many consider the dissemination of the double-entry bookkeeping of Luca Pacioli in the 14 th century Italy is the most important event in
accounting history. In fact, Luca Pacioli is acknowledged as the father of modern accounting because of this. The double-entry
bookkeeping system is defined as any bookkeeping system that has a debit and a credit for each transaction. Luca Pacioli’s review of
arithmetic, Geometry , ratio and proportion is the first book printed with a treatise on bookkeeping . The double-entry bookkeeping
system is the system being used to this very day

The modern profession of the chartered accountant originated in Scotland in the 19 th century when Queen Victoria granted a royal charter
to the Institute of Accountants in Glasgow. At present times, accounting standards are already available to guide accountants in their
practice of the profession. Some of these standards include the PFRS ( Philippine Financial Reporting Standard) and the PAS (Philippine
Accounting Standards).