INTRODUCTION TO

ACCOUNTING
FABM-1 CH1
Presentation by
Sir Crisson Fermalino
WHAT IS ACCOUNTING?
accounting?

It involves the processes of:

identifying
recording
communicating
....financial information.
(Weygandt, J. et.al) 2
ACCOUNTING
IDENTIFYING RECORDING COMMUNICATING

This involves This involves Occurs through the

selecting economic keeping a preparation and
events that are chronological diary distribution of
relevant of events that financial andother
toaparticular aremeasured in accounting reports.
business transaction. pesos.

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PURPOSE OF ACCOUNTING
The purpose of accounting is to help end-users
see the true picture of the business in financial
terms. To achieve this purpose, the financial
reports prepared by accountants must be
understandable, relevant, and for general-
purpose. It must contain information that is
complete, neutral and free from error.

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OVERALL OBJECTIVE
The overall objective of financial reporting
is to provide general-purpose financial
statements about the reporting entity that
is useful to present potential usergroups,
especially stockholders and creditors to
assist them in making sound economic
decisions as capital providers.
To achieve this accounting objective, a
business entity must prepare general-
purpose financial statements. General-
purpose financial reporting help users
who lack the ability to demand all the
financial information they need from
an entity.
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ACCOUNTING PROCESS
1. IDENTIFICATION OF ECONOMIC EVENTS
Relevant economic events are existing transfer of things
with value.
2. RECORDING OF RELEVANT ECONOMIC EVENTS
After a company identifies the relevant econimic events,
it records those evnts which serve as history of its
financial activities.
3. SUMMARIZE ALL RECORDS INTO
ACCOUNTING REPORTS
Companies summarize all the recorded events into
ccounting reports. All similar events are lumped together
to provide meaningful and presentable information. 6
NATURE OF ACCOUNTING
Accounting is....

a PROCESS a MEANS, not an end.

an ART an INFORMATION SYSTEM

deals with FINANCIAL INFO

AND TRANSACTIONS

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NATURE OF ACCOUNTING
A PROCESS AN ART
it performs the functions It entails creative
of identifying, recording, performance with
and communicating creativity and skills to
economic events with help gain objectives. It is a
the end goal of providing combination of
information to internal techniques and its
and external parties. application and its
application requires
applied skill and expertise.
FINANCIAL INFO
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.
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NATURE OF ACCOUNTING
A MEANS
Accounting is a tool to
achieve specific
objectives, it is not the
objective itself. Just like a
plane that will bring you
to your destination.
AN INFO SYSTEM
Accounting is recognized
and characterized as a
storehouse of
information. As a service
function, it collects,
processes, and
communicates fianncial
information of any entity.
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FUNCTIONS OF
ACCOUNTING

The primary function of accounting is “to

provide financial reports to various end-
users for economic decision-making.”

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 FUNCTIONS OF
ACCOUNTING
1. Recording
This accounting function is employed to ensure that
all businesstransactions are recorded in a
systematic manner in property books of accounts.

The recording is done in the “Journal Book” and

subsidiary books such as cash journal, purchase journal,
and sales journal. Only transactions that are financial
innature are recorded in the books of accounts 11
 FUNCTIONS OF
ACCOUNTING
2. Classifying
It is concerned with systematic analysis of
recorded business transactions and events, with a
view to group those that are similar in nature as
one cluster in an accounting element called Assets,
Liabilities, or Capital.

The classifying work of accounting is done in the

“Ledger Book.” 12
 FUNCTIONS OF
ACCOUNTING
3. Summarizing
This involves presenting the classified data in
manner which is understandable and useful to the
end-users of accounting information.

This process leads to preparation of a (a) Trial

Balance, (b) Statement of Comprehensive Income
and (c) Statement of Financial Position.
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 FUNCTIONS OF
ACCOUNTING
4. Analyzing and Interpreting
This is the final function of accounting. The
recorded financial data are analysed and
interpreted in a manner that the end-users can
make a meaningful judgment about the financial
condition and profitability of the business
operations.
The data is also used for preparingthefuture plan
and framing of business policies. 12
 FUNCTIONS OF
ACCOUNTING
5. Communication

This is done thorough the distribution of accounting

reports such as Statement of Comprehensive
Income and Statement of Financial Position
including additional information in the form of
accounting ratios, graphs, diagrams, Statement of
Cash Flows, and Notes to Financial Statements.
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 ory of account
ist ing
H Accounting, as a language of
business, is an old as civilization.
 THE CRADLE OF CIVILIZATION
Around 3600 BC, record-keeping was already
common from Mesopotamia, China and India to

HISTORY OF
Central and South America.

ACCOUNTING The oldest evidence of this practice was the

“clay tablet” of Mesopotamia, 90%of which
dealt with commercial transactions, accounts
Accounting, as a language of
payable and receivable.
business, is an old as civilization.
It has evolved in response to
economic and social needs of
Tithes to ruling theocratic class were
men. It started with a simple
faithfully recorded in many occasions
recordingof repetitive
as to both quantity and value.
exchanges.
Evolution of Double-Entry System
The earliest known examples of
thistechnique are the mercantile books
of Ferris Bonis of Montauban.
However the evolution of double-entry accounting
system has an Italianinfluencein the 13 th to 15th
century.

In Genoa, the oldest double-entry books entitled

“Massari (Treasury Officials) Ledgers of Commerce of
Genoa” were written in 1340. These werebooks were
known as a perfect double-entry form because
separate pages were used for debit and credit.
Evolution of Double-Entry System
In Florence, there were double-entry records wherein
debits were written over credits. It is also in Florence
that manuscripts of “Partnership and Association
Contracts” reflecting how partners’ capital, division of
profit and losses, and dissolution of partnership were
computed.

In present system, the Florentine Method is observed

in the Journal Entries with doubl-entry bookeeping.
Double-Entry Bookkeeping
The double-entry bookkeeping system is based on thedual aspect concept
which says that in every business transaction, two effects of recording are to
be made – the value received (debit) and the value parted with credit).

The basic principle of bookkeeping is the

principle of balance. It is a principle that
distinguishes double-entry bookkeepimg
form mere record keeping.
Cash and Capital
The transaction regarding the initial investment of the owner is recordedtwiceinthe general journal –
one is Cash (debit side) which represents the value receivedby the business, and the other is Capital
(credit side), the corresponding reciprocal value parted with or the obligation of the business to hold in
trust the investmentof the owner.

Venice of Northern Italy had key

influence in the use of the
double-entrybookkeeping
system in 1400s

In 1494, Luca Pacioli (1447-1517), an Italian

monk and mathematician, wrote Summa de
Arithmetica, the first book that was
published containing a detailed chapter of
double-entry bookkeeping which enable Luca Pacioli is known as the “Father of Modern Accounting” even if
others to study and use it. he was neither an accountant nor a merchant.
The Present – The Development of Modern
Accounting Standards and Commerce
Modern accounting originated in Scotland in the 19th
century when QUeen Victoria granted a royal charter to
the Institude of Accountants in Glasgow

The accounting profession in the 20 th century developed around state

requirements for financial statement audits. Beyond the industry’s self-
regulation, the government also sets accounting standards, through laws
and agencies such as Securities and Exchange Commission (SEC).

As economies worldwide continued to globalize,

accounting regulatory bodies required accounting
practitioners to observe International Accounting
Standards. This is to assure transparency and reliability,
and to obtain greater confidence on accounting
information used by global investors.