Reviewer in Accounting

Definition of Accounting

“Accounting is a service activity to provide quantitative information, primarily financial in nature,

about economic entities, that is intended to be useful in making economic decisions, in making
reasoned choices among alternative courses of action”.

Purpose of Accounting

The purpose of accounting is to accumulate and report on financial information about an entity.
This information is then used to reach decisions about how to manage the business, or invest in
it, or lend money to it. This information is accumulated in accounting records.

History of Accounting

- Accounting traces its roots to the Middle East region, where as early as 8500 BC, tradesmen use
clay objects to represent commodities such as flocks of sheep, jars of spices and oil, bolts of
clothing and other goods. Some archeologists unearthed clay tablets marred with symbols and
other writings and interpreted them to mean record of goods sold and other statistics at those
times.
- The Ancient Civilization of Babylo”, Greece and Egypt also used clay tablets. (In later years, papyri
were used as the medium for record keeping). These records show wage payments, materials
requisitions and costs of labor, which only shows that Accounting has already been in used even
during Biblical times.
- In 1494, Friar Luca Pacioli, the Father of Modern Accounting and Bookkeeping, wrote a book
which contains discussions on the double-entry bookkeeping system. The book was entitled
summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic,
Geometry, Proportions, and Proportionality). It summarizes the existing mathematical
knowledge at that time. Friar Pacioli was considered the father of double-entry bookkeeping.
- In the mid-18th to the mid-19th centuries, the Industrial Revolution altered the way goods are
produced from the artisan/craftsman method to the assembly-line method. Cost Accounting,
which deals with the assignment of costs to products, emerged during this period. Also, during
this period, the corporate form of business organization was created to accommodate the need
for the increasing large amounts of funds which was required to finance the expansion of
business.

Branches of Accounting

- Financial Accounting
- Managerial Accounting
- Cost Accounting
- Auditing
- Tax Accounting
- Government Accounting

Financial Accounting. Financial accounting involves recording and clarifying business transactions along
with preparation and presentation of general-purpose financial statements.

Managerial Accounting. Managerial accounting works to improve the company’s administration,

enhance its profit, and provide management with financial reports that influence planning and budgets.
This branch of accounting performs forecasting to advise management on the best business practices to
meet goals and maintain profit. Managerial accounting includes conducting internal examinations
through cost to volume profit (CVP) or break-even point (BEP) analysis, factors that affect decision
making.
Cost Accounting. This branch considers all factors of manufacturing to accurately determine the cost of a
project or venture. Cost accounting analyzes manufacturing costs to prepare and present reports that
inform decision-makers on how to reduce cost, or when to spend more. It monitors projects for waste
and cost control. Cost accounting regularly analyzes actual costs over budget to determine future
monetary actions.

Auditing. Auditors examine and monitor a business for accurate reporting, compliance with tax laws and
regulations, and financial integrity. This involves verification, inspection and other procedures to check
the accuracy of reports.

Tax Accounting. Tax accounting follows state and federal tax rules during tax planning or in the
preparation of tax returns. This branch reports on the effect of taxes on a business and may offer
advisory services on minimizing taxes or the consequences of tax decisions. Tax accountants calculate
income and other taxes depending on the structure of the business. Since taxes and income brackets
vary from entity to entity, tax accounting is well-versed in tax laws surrounding sole proprietorships,
corporations.

Government Accounting. Government accounting oversees and records state and national fund
allocation and disbursement. Government accounting tracks the movement of money through various
agencies and ensures budget requirements are kept or met. Government accountants work in state and
national programs such as healthcare, housing and education.

Accounting Entity

An accounting entity is a clearly defined economic unit for which a separate set of accounting
records is maintained. The organization should engage in clearly identifiable economic activities,
control economic resources, and be segregated from the personal transactions of its officers,
owners, and employees.
The accounting entity concept states that the transactions associated with a business must be
separately recorded from those of its owners or other businesses. Doing so requires the use of
separate accounting records for the organization that completely exclude the assets and liabilities of
any other entity or the owner.
Role of Accounting in Business

A Business is an organization in which basic resources are applied to the activities involved in the
production and distribution of goods and services to customers or clients. The objective of most
businesses is to maximize profits. Of course, some businesses would operate with a purpose other
than to raise profits, like to provide benefits to society. Although some of these concepts and
principles apply to not-for-profit businesses as well.

In general, accounting as an information system, provides reports about economic activities and
condition of a business. Accounting is used to record and report the financial effects of business
activities and, that is why it is called the “language of business.” Without accounting information,
many important financial decisions would be thoughtlessly made. It provides the necessary
information needed in the formulation and execution of business and non-business policies. For
example, Accounting reports summarizing the profitability of a product help management decide
whether to continue selling a product or not. Business must have an orderly way to keep tract of the
countless and varied financial transactions that occur. An accounting system allows them to develop
financial records that can be used to prepare reports on the financial state of the business.
Managers can look at the summarized information from the reports and determine if the business is
operating at a profit. They can also determine problems arising in the operations by studying these
reports. Business establishments and the government acknowledge accounting as an essential tool
of management.
 Processes of Accounting

- Identifying and analyzing the business transactions

- Recording or Bookkeeping
- Classifying and summarizing
- Communicating or Reporting

a. Identifying and analyzing the business transactions- through accounting, economic activities are
identified from the many events in a business. These activities which are of financial character are called
business transactions and are measured in terms of money.

c. Recording or Bookkeeping – A systematic and chronological record of financial transactions is to be

maintained. The recording of transactions can either be manually or electronically and according to the
date of occurrence.

d. Classifying and summarizing is the sorting or grouping of similar and interrelated transactions in their
respective class. For instance, all transactions involving cash are grouped to report a single net cash
figure.

e. Communicating or Reporting – business transactions in a given period are recorded, classified into
groups and summarized. This process allows accountants to prepare reports called financial statements.
In order to create useful reports, financial information must be maintained in an organized way.

Users of Accounting Reports

- Internal Users
- External Users

1. Internal users – Internal reports like financial reports are used by those who direct the day-to-
day operations of a business enterprise. These individuals are collectively referred to as
“Management” and the related area of accounting is called management accounting.
Management accounting focuses on the information needed for planning, implementing plans,
and controlling costs. Managers use accounting information as the basis for making business
decisions. Accurate accounting records contributes to a business’ success and help to avoid
failure and bankruptcy. Failure to understand accounting information can result in poor business
decisions. Training in accounting helps managers and owners make better business decisions.
Managers and executives who work inside a company have access to specialized management
accounting information that is not available to outsiders.

2. External Users External financial reports, included in the firm’s annual report, are used by
individuals and organizations that have an economic interest in the business but are not part of
its management. Information is provided to these “external users” in the form of general
purpose financial statements and special reports required by government agencies.

Examples of Internal Users:

1. Owners or Stockholders
2. The Board of Directors or any policy decision making body
3. Chief Executive Officers, Treasurer, and other officials
4. Managers (Upper Level, Middle or Low level)
5. Other key employees
 Example of External Users:

1. The Bank and other Lenders (for loan or borrowing concerns)

2. Potential Investors (with regards to earning capability of the entity)
3. Suppliers (for trading or contracting)
4. Customers (for long-term warranty, etc.)
5. Employees’ Unions (to determine the reasonableness of their benefits)
6. Competitors (for marketing competitions)
7. Government Agencies (for compliance purposes)
8. The Media (for reporting to the public)

Forms of Business Organizations

- Single or Sole Proprietorship

- Partnership
- Corporation
- Cooperative

1. Single or Sole proprietorship – where the owner of the business is only one person and is called a
proprietor. It is the easiest form of business to organize as it does not need to comply with many
legal formalities and requires only a small amount of investment to start the business, but you do
need to obtain any necessary licenses and permits to operate legally. It is less complicated to
operate and decisions are made faster since only one owner decides. The owner entitled to all
profits and are responsible of all business debts, losses and liabilities.
2. Partnership – where there are two or more investors who contributed money, property or industry
to a common fund with the intention of dividing the profits among themselves; owners are called
partners. The partners draw up and sign a formal business agreement called the Articles of Co-
Partnership. It tells the amount of the capital contribution or how much of the business owned by
each partner, their duties and responsibilities, and the terms of distribution of profits and losses
among them. A partnership is easier to organize than a corporation. Better decisions are made since
there are two or more owners.
3. Corporation – a business owned by five or more persons where such business becomes an artificial
being created by the operation of law, having the rights of succession, and the powers and
attributes expressly authorized by law or incident to its existence. This means that the corporation
itself not the shareholders is held liable for the actions and debts the business incurs. Thus, to
organize a corporation, there are more legal requirements to comply with in comparison with the
other two forms of business organizations. Owners of a corporation are stockholders or
shareholders.
4. Cooperative – a business organization owned by and operated for the benefit of those using its
services. They are common in healthcare, retail, agriculture, art, some schools, universities, shipping
industries (manpower pooling) and restaurant industries. Profits and earnings generated by the
cooperative are distributed among the members, also known as user owners. Typically, an elected
board of directors and officers run the cooperative while regular members have voting power to
control the direction of the cooperative. Members can become part of the cooperative by
purchasing shares, though the amount of shares they hold does not affect the weight of their vote.

Types of Businesses Activities

- Service Business
- Merchandising Business
- Manufacturing Business
 1. Service business – a business that performs an activity for a fee is said to be engaged in a
service business. Examples: car repair shop, a law office, dental clinic, dress shop, trucking
and delivery service.
2. Merchandising business – a business that deals with buying and selling of goods. Examples:
a department store, a hardware store, a grocery, a sari-sari store, a drugstore.
3. Manufacturing business – a business the buys goods to be converted to another form of
good to be sold. Examples: a toy factory, a car company, a meat processing plant, a furniture
company.

• Identification:

1. A service activity to provide information, primarily financial in nature, about economic entities,
which involves identification, recording and summarizing financial transactions.
2. Who is the Father of Modern Accounting who wrote a book which contains discussions on the
double-entry bookkeeping system in 1494?
3. This branch of accounting has the objective to produce general-purpose financial statements.
4. A clearly defined economic unit for which a separate set of accounting records is maintained.
This include government and business organizations, among others.
5. This concept states that the transactions associated with a business must be separately recorded
from those of its owners or other businesses.

• Enumeration:

1. What are the processes involved in accounting? How is bookkeeping relates to accounting?
2. Who are considered Internal Users of Accounting? Give at least three examples.
3. Who are considered External Users of Accounting? Give at least five examples.
4. What are the different forms of business organizations as to structure and ownership?
5. What are the different types of business organizations as to activities?

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