Professional Documents
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Introduction to Accounting
What I Need to Know
This module was designed and written with you in mind. It is here to help
you master the introduction to accounting. The scope of this module permits it to
be used in many different learning situations. The language used recognizes the
diverse vocabulary level of students. The lessons are arranged to follow the
standard sequence of the course. But the order in which you read them can be
changed to correspond with the textbook you are now using.
The module is divided into three lessons, namely:
Lesson 1 – Definition and Nature of Accounting
Lesson 2 – History of Accounting
Lesson 3 – External and Internal Users
What I Know
The following are statements about the definition and nature of accounting. Write O
if you believe that the statement is part of the definition and nature of accounting
and write X if it does not.
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What’s In
Mahinhin sold 2 pairs of shoes to Maganda for ₱350.00 each. She bought it
from the supplier for ₱250.00 each.
1. How much is Mahinhin’s total sales?
2. How much is the total cost for the two pairs of shoes?
3. How much is Mahinhin’s total profit?
What’s New
What you have just done is an example of simple accounting. To better
understand accounting, let us first know its definition.
The word “accounting” comes from the French word “compter”
meaning to count or score. Other accounting terms are derived from
Latin, such as “debit” – “he owes” and “credit” – “he trusts”.
What is It
Accounting Defined
“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 financial character, and interpreting the results
thereof.”
-American Institute of Certified Public Accountants
(AICPA)
“Accounting is the process of identifying, measuring and
communicating economic information to permit informed judgment and
decision by users of the information.”
-American Accounting Association (AAA)
“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.”
-Financial Reporting Standards Council (FRSC)
There are three (3) important activities implied by the given definitions –
identifying, recording, and communicating economic events of the organization to
intended users. These activities make up the accounting process. Take a look at
the illustration
below.
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IDENTIFYING – This involves selecting economic events that are relevant to a
particular business transaction. The economic events of an organization are
referred to as transactions.
RECORDING – This involves keeping a chronological diary of events that are
measured in pesos and cents. The diary referred to in the definition are the
journals and ledgers which will be discussed in future chapters.
COMMUNICATING – This occurs through the preparation and distribution of
financial and other accounting reports it also includes the analysis and
interpretation of data for the users.
You should also note that the accounting process includes the bookkeeping
function, but it only involves the recording of economic events. It is therefore just
one part of the accounting process.
Based on the definition of accounting as we have discussed earlier, we could
derive the following features or natures of accounting:
1. Accounting is a service activity. Accounting aids decision makers by providing
them financial reports that will guide them in coming up with sound decisions.
2. Accounting is a process. A process refers to the method of performing any
specific job step by step according to the objectives or targets. Accounting is
identified as a process, as it performs the specific task of collecting, processing, and
communicating financial information. In doing so, it follows some definite steps like
the collection, recording, classification, summarization, finalization, and reporting
of financial data.
3. Accounting is both an art and a discipline. Accounting is the art of recording,
classifying, summarizing, and finalizing financial data. The word ‘art’ refers to the
way something is performed. It is behavioral knowledge involving a certain
creativity and skill to help us attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper application
requires skill and expertise. So, by nature, accounting is an art. Because it follows
certain standards and professional ethics, it is also a discipline.
4. Accounting deals with financial information and transactions. Accounting
records financial transactions and data, classifies these and finalizes their results
given for a specified period of time, as needed by their users. At every stage, from
start to finish, accounting deals with financial information and financial
information only. It does not deal with non-monetary or non-financial aspects of
such information.
5. Accounting is a means and not an end. 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.
6. 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 evolved to meet the need for financial information as required by
various interested groups.
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What’s More
What I Can Do
Answer the following on separate sheet of paper.
A. Identify what organization gave the following definitions of accounting.
1. “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 financial character, and interpreting the results
thereof.”
2. “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.”
3. “Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by users of
the information.”
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Assessment
Write your thoughts! On a sheet of paper, write a brief description to answer the
following questions in relation to the meaning and nature of accounting.
1. What does “accounting” mean?
2. What statements can describe the nature of accounting? Give three
statements and elaborate each in your own words.
3. Do you agree on the statement, “Accounting is the language of business”?
Why or why not?
Additional Activities
Using this link, https://www.youtube.com/watch?v=dbeEeKA_3UQ&feature=share
watch a video presentation on the definition of accounting that will enhance your
understanding of the concept.
Answer Key
What I Know
What I can do
1. X
Assessment A. 2. O
1. American Institute of 3. X
Answers may Certified Public
Accountants
What's 4. O
vary. Write 5. X
explanations
2. Financial Reporting More 6. X
Standards Council
that clearly 7. X
3. American Accounting
1.Communicating 8. O
demonstrates Association
2.Identifying 9. X
in-depth B.
3.Recording 10. O
understanding 1. service activity
2. discipline
4.Recording
of the concept 5. Communicating
3.deals with financial
and give What's In
information
sufficient details
4. Information system
to the 1. ₱700
5. means and not an end
discussion. 2. ₱500
6.process
7. art
3. ₱200
What I Know
The items below are about the historical developments in accounting. Read
each item carefully and choose the letter of your choice. Write your answers on
your answer sheet.
1. He is known as the Father of Accounting.
a. Jerry of Jericho b. Josiah Wedgwood
c. Frederick Taylor d. Luca Pacioli
2. In which civilization are accountants called the "eyes and ears" of the
king?
a. Egyptian b. Babylonian
c. Sumerian d. Roman
3. Which of the following is a significant development in accounting during
the 14th century?
a. Use of tally sticks b. Birth of the Father of
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Accounting
c. Use of clay envelopes d. Rise of cost accounting
4. During the 19th century, what significant development happened in
accounting?
a. William Seward Burroughs invented and patented the first
workable adding machine.
b. The book entitled "Summa de Arithmetica, Geometria: Proportioni
et Proportionalita" was written.
c. Queen Victoria granted a royal charter to the Institute of
Accountants in Glasgow.
d. There was an increased dependence on digitalization and smart
technologies.
5. In which century did William Seward Burroughs invent and patent the
first workable adding machine?
a. 17th Century b. 18th Century
th
c. 19 Century d. Present
6. He is the Father of Cost Accounting.
a. Josiah Wedgwood b. William Seward Burroughs
c. Luca Pacioli d. Dr. Gunter Dreyer
Lesson
2 History of Accounting
Theodore Roosevelt once said, “The more you know about the past, the
better prepared you are for the future.” In order to understand the accounting that
we are practicing today and to adapt to future developments, it is a must to know
how it all started.
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Accounting started as a simple recording of repetitive exchanges and has
evolved in response to various social and economic needs of men.
This module will give you a glimpse of the past and will help you appreciate
the present.
What’s In
Define Accounting by completing the sentence below.
What’s New
The accounting that we are using today is a result of the developments that
transpired in the past. The complex system of accounting that we have today began
with simple day to day transactions which evolved significantly throughout the
centuries.
What is It
HISTORY OF ACCOUNTING
Evidences show that accounting dates back to as early as the ancient
civilizations. The following section narrates the evolution of accounting.
Jericho
The first accountant known was “Jerry of Jericho”. He was
someone who needed to keep track of what was stored in the
temple or king’s granary.
Egypt
Dr. Gunter Dreyer of the German Institute of Archaeology
recently discovered numerous inscribed bone labels attached to
bags of oil and linen in the tomb of King Scorpion I at Abydos,
Egypt.
The labels dated back 5300 years are the world's earliest
known writing. It describes inventory owners, amounts, and
suppliers.
In ancient Egypt, the accountant was called the "eyes and ears"
of the king.
“Zero” was not yet invented.
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These evolved into cuneiform.
Use of sealing tablets
Babylonia
59 symbols were built from just two symbols.
Greece
The public economy of the Athenians had a highly developed
system of accounting and auditing.
Accounts were kept by clerks and controlled by “checking
clerks.”
Accountability was assured by public exposure of accounts on
stone.
Rome
Practices of private life led to public accounting process
Transactions were first entered in a “day book” (memorandum
or “adversaria” in Latin).
Monthly, the entries were transferred to the ledger (“codex
tabulae”). The codex could be used in court to substantiate
contracts and claims.
In government, there was separation of responsibilities.
Use of tally sticks started.
63BC-14AD
The Roman government kept detailed financial information of
the deeds of Emperor Augustus regarding the stewardship of
Roman resources.
This is evidenced by Res Gestae Divi Augusti (The Deeds of the
Divine Augustus)
In 23BC, Augustus prepared a rationarium (account) which
listed public revenues, the amounts of cash in the aerarium
(treasury), in the provincial fisci (tax officials), and in the hands
of the publicani (public contractors); and that it included the
names of the freedmen and slaves from whom a detailed
account could be obtained.
14th Century
The year Luca Pacioli, the Father of Accounting was born.
He wrote the book entitled "Summa de Arithmetica, Geometria:
Proportioni et Proportionalita".
One section of the book was devoted to methods of recording
merchant transactions, including ideas about double-entry
bookkeeping.
17th Century (The French Revolution)
The thorough study of accounting and development of
accounting theory began during this period. Social upheavals
affecting government, finances, laws, customs, and business
had greatly influenced the development of accounting.
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Rise of cost accounting
Josiah Wedgwood – Entrepreneur & Cost Accountant
18th Century
William Seward Burroughs invented and patented the first
workable adding machine in 1885 in St. Louis, Mo.
Production increased dramatically after 1900.
19th Century
The beginning of Modern Accounting in Europe and America
The modern, formal accounting profession emerged in Scotland
in 1854 when Queen Victoria granted a Royal Charter to the
Institute of Accountants in Glasgow, creating the profession of
the Chartered Accountant (CA).
Present
At present times, accounting standards are already available to
guide accountants in their practice of the profession. Some of
these standards are the GAAP, IFRS/PFRS and the IAS/PAS.
These standards are continually developed and improved to
suit and accommodate the changing needs of businesses and
various organizations.
The most notable development in the present is the increased
dependence on digitalization and smart technologies, continued
globalization of the accounting profession, and the imposition
of increased regulations on the profession.
What’s More
On a separate sheet of paper, copy, and arrange the following events correctly
as they appear in the timeline of accounting by writing the numbers 1-5 on the
space provided.
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development in accounting with its period by writing the letter of your answer on a
separate sheet of paper.
Assessment
On a separate sheet of paper, copy the table below and narrate the history of
accounting by giving one significant development in each period.
Additional Activities
Using this link, https://www.youtube.com/watch?v=hWK6ilRTGig&feature=share
watch a video presentation on the brief history of accounting. Carefully observe and
list down at least three (3) similarities in the video and in this module.
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Answer Key
What I Know
The following are users of financial information. Classify each of the following as
either external user by writing E, or internal user by writing I. Use a separate sheet
of paper for your answers.
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3 Information
What’s In
On a separate sheet of paper, copy, and arrange the following events correctly
as they appear in the timeline of accounting by writing the numbers 1-5 on the
space provided.
What is It
The users of accounting information are divided into two (2) broad groups: External
Users and Internal Users.
Management Customers
Financial
Creditors
Information
Potential Investors
Employees
Government
Academe
Owners General Public
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External Users
External users are parties outside of the organization but affect and are
affected by the organization. They are communicated with accounting
information usually in the form of financial statements. The purpose of
financial statements is to cater for the needs of such diverse users of
accounting information in order to assist them in making sound financial
decisions.
a) Customers – They are the main source of income of businesses and they
acquire goods and services for a fee. Customers have interest in the
accounting information for assessing the financial position of a business,
especially, when they have a long term involvement with, as it enables to
maintain a steady source of business.
b) Creditors – They are the providers of additional funds when the initial
investment of owners is exhausted and lend resources to businesses
usually in the form of money. Creditors are interested in accounting
information because it enables them to determine the credit worthiness
of the business. The credit terms and standards are set on the basis of
the financial health of a business, so, it helps them to analyze by using
the accurate information accordingly.
c) Potential Investors – They are the providers of additional funds when the
initial investment or owners is exhausted and they invest resources in
the business hoping to earn decent returns. They need the information
because they are concerned with the risk inherent in investing and the
returns. Since it is important to assess the feasibility of making
investments in the company, they need to analyze before they provide
any financial resources to the company.
d) Government – This is an external user whose primary role is to regulate
businesses and studies financial statements to determine amount of
taxes payable. Government wants to know earnings or sales for a
particular period for the purpose of taxation.
e) Academe – They use accounting information primarily for academic
purposes. The academe is not confined in the accountancy field but for
other fields of study like banking and finance, entrepreneurship, and
economics similarly make use of financial statements.
f) General Public - The general public is the last group considered to be an
external user. Citizens and residents of the country even though they do
not plan to transact with the business. They use financial statements to
gauge the condition of the economy. By analyzing the financial
statements of the companies, the public can properly respond to the
various economic cycles.
Internal Users
Internal users refer to the members of a company's management and other
individuals who use financial information in running and managing the
business. They work within the company and make decisions for the
business.
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accounting information to evaluate the performance of the organization
and position, so that the necessary measures may be taken to bring
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Academe Professors, Uses accounting
lecturers, students information in
and researchers teaching
accountancy,
researches
loopholes, and
possible
improvements in the
field
General public Common people not Concerned with the
connected with the overall performance
company of the economy, use
financial
information to
estimate economic
performance
Management Board of Directors, Uses financial
Top Management, information in
middle-level making business
managers, decision
supervisors
Employees Laborers, Field Check if the
workers, non- business is
managerial profitable enough to
employees provide
compensation and
other benefits
Owners or Founders of the Concerned with the
stockholders company, owners, returns earned from
stockholders, their investments,
partners, owners taking active
proprietors roles in the
operations of the
business.
What’s More
Match the user of accounting information in column A to the decisions made using
the accounting information in column B. Write the letter of you answer only. Use a
separate sheet for your answers.
A B
A. They use accounting information
for studying the field of
1. Employees accountancy and to be able to
produce future accountants and
business managers.
B. They study the financial records
2. Academe of the company to determine the
taxes payable.
C. They check whether the
3. Owners company is profitable enough to
pay salaries and compensation.
4. Customers D. They look at financial statements
so they will know how much
return on investment they have
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earned from the company.
E. They are interested whether a
company will continue to honor
5. Government
product warranties and support
its product lines.
F. They primarily use financial
reports in order to respond
accordingly to the issues of the
company.
What I Have Learned
External users are parties outside of the organization but affect and are
affected by the organization.
Examples
customers
creditors
potential investors
government
academe
general public
Internal Users refer to the members of a company's management and other
individuals who use financial information in running and managing the
business.
Examples
Management
Employees
Owner
What I Can Do
The following are statements about the internal and external users of
financial information. On a separate sheet of paper write TRUE if the statement is
true and FALSE if otherwise.
1. Financial Statements are beneficial to a wide range of internal and external
users.
4. The difference between potential and existing investors is the fact that potential
investors have already taken the risk.
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an external user.
a. Employees b. Investors
c. Customers d. Creditors
5. Which of the following is an external user of financial information
a. Government and their b. Supervisors
agencies
c. Stockholders d. Laborers
6. These users are interested in information that will enable them to assess the
ability of an entity to provide retirement benefits and employment opportunities.
a. Employees b. Creditors
c. Clients d. Board of Directors
7. Of all the external users, which group would most least likely examine a
company’s financial statements?
a. Government b. General Public
c. Customers d. Creditors
8. Statement 1: Potential Investors are Internal users.
Statement 2: Existing Investors are Internal users.
a. Statement 1: True ; Statement 2: True
b. Statement 1: True ; Statement 2: False
c. Statement 1: False ; Statement 2: True
d Statement 1: False ; Statement 2: False
9. Which of the following does NOT fall under the category of customers?
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a. Adam, A client of SGV Auditing Firm
b. Ben, a regular purchaser of deodorant in 7/11
c. Carl, an individual collecting annual payments from Z Company
d David, a loyal gamer of a computer shop
10. Ms. Adira is a professor in accountancy in the BS Accountancy program of the
University of the Philippines. She is also a stockholder of TwinSoles Company.
In the point of view of TwinSoles Company, Adira is _____.
1. In your own point of view, which external user benefits the most from
accounting information? Explain.
2. How about among the internal users? Explain.
Answer Key
What's In
What I can Assessment
do What I Know Answers may
1. I vary. Write
1. True
explanations
2. False 2. E
that clearly
3. False 3. I
demonstrates
4. False 4. E
in-depth
5. True 5. E
What's More understanding
6. True 6. E of the concept
7. False 1. C 7. E and give
8. False 2. A 8. I sufficient details
9. True
3. F 9. E to the
4. E 10. I
10. False 5. B discussion.
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