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0 10-July-2020
This chapter, you will learn about the definition of accounting, nature of accounting, functions of
accounting, users of accounting information, branches of accounting and forms of business
organization according to functions and according to ownership.
At the end of the chapter, the learners should be able to define the meaning of accounting and
determine the importance of accounting in their daily existence.
Definitions of Accounting
Accounting is an art of recording, classifying and summarizing in a significant way and in terms of
money, transactions and events that are, at least in part, of a financial nature and of interpreting the
results thereof to interested users.
LEARNING ACTIVI
LEARNING CONTENTS (NATURES OF ACCOUNTING)
Nature of Accounting
1. It's a discipline. Accounting is a discipline that observes professional standards and professional
ethics as well as other fields or professions such as medicine, law, engineering and others.
2. An activity of service. The accounting profession is not involved in the sale of goods. Instead, it is
involved in the provision of professional services, in particular in the performance of tasks, by
providing financial reports on the financial activities of economic entities.
3. The Arts and Sciences. As an art, accounting is designed to perform its service activities with the
utmost efficiency and in the best possible way, without wasting time and money. Others believe that
accounting is not only an art, but also a science, because it is regulated by accounting rules,
principles and theories.
Functions of Accounting
The primary function of accounting is to "provide financial reports to various end-users for economic
decision-making." (PAS #1)
1. Recording. This accounting function is used to ensure that all business transactions are
systematically recorded in the accounting books.
2. Classifying. It concerns a systematic analysis of recorded business transactions and events, with
a view to grouping those of a similar nature as a single cluster in an accounting element called
Assets, Liabilities or Capital.
3. Summarizing. This involves the presentation of classified data in a manner that is understandable
and useful to the end-users of accounting information.
4. Analyzing and interpreting. That is the final function of accounting. The financial data recorded
are analyzed and interpreted in such a way that end-users can make a meaningful assessment of
the financial condition and profitability of the business operations.
5. Communicating. After a meaningful analysis and interpretation, the accounting information must
be communicated to the intended end-user.
6. Protecting the business property. Accounting assesses the usefulness of business resources.
The basic function of accounting is described as the process of identifying, measuring and
communicating economic information to allow informed judgment on economic decisions.
The advanced or critical function of accounting is its audit function – to test the reliability of financial
reports, track fraud transactions, and locate and correct accounting errors.
Accounting information users may be classified on the basis of the extent of their participation in
business affairs – that is, internal users known as the management group, external users known as
the financing group and public groups.
1. The Management Group. Internal users are those who own and/or manage and manage a
business entity. In order to help them make relevant economic decisions to achieve the
firm's goal, the management group needs more detailed accounting information. Internal
financial reports are usually prepared solely for the use of internal users for efficient
operation and control.
2. The Finance Group & the Public Group. External users (financial and public groups) do not
own and/or manage and control the business entity. They do not have direct access to
business management, but use financial reports to meet some of their financial information
needs. The external users and their respective needs, as reflected in the financial reports,
shall include:
1. Investors. The investors need information to help them determine whether to buy, hold or
sell.
2. Lenders. Interested in the information that enables them to determine whether their loans
and related interest will be paid in due time.
3. Suppliers and other commercial creditors. Interested in the information that enables them to
determine whether the amounts due will be paid when due.
5. It is the government and its agencies. They are interested in the allocation of resources and
therefore in the activities of the company.
6. Public. Financial reports may assist people by providing information on trends and recent
developments in the prosperity of the enterprise and the range of its activities.
Branches of Accounting
Provides four (4) major specialized accounting fields, namely (1) Public Accounting, (2) Private
Accounting, (3) Government Accounting, and (4) Accounting Education.
Public Accounting (Public Accounting Practice) is said to be in public accounting when accountants
offer their professional services to clients for a fee, as do other professionals. An accountant who
engages in public accounting is not a client company employee.
1. External auditing focuses primarily on the critical review of the financial statements by an
independent CPA to express an opinion on the fairness of the content of the financial statements.
2. Tax Services deals with the accounting officer preparing the client's income tax, business and
transfer tax returns.
3. Management Advisory Services provides management assistance.
Private Accounting (Practice in Commerce and Industry) accountants are said to be in private
accounting when they are employed in a private company or a non-profit organization. Large
companies divide their accounting staff into departments according to specialized accounting
functions. The accounting divisions in this category are as follows:
1. Financial Accounting focuses on the recording of business transactions and the periodic
preparation of financial position and operating results reports.
2. Internal Auditing is concerned with determining the operational efficiency of the company
with regard to the protection of the assets of the company, the accuracy and reliability of the
accounting data and adherence to the management policies prescribed. This process is
known as financial internal auditing.
3. Tax Accounting includes the preparation of various tax returns and tax planning necessary
to minimize the impact of taxes on the company. Tax accountants are therefore specialists in
both tax compliance and tax planning.
4. Cost Accounting shall use these data as soon as they have been extracted from the cost
books to provide management planning and control information.
6. Accounting system design primarily involves the assessment of the company's control
system in order to identify any areas of improvement.
Government Accounting (Government Practice) focuses mainly on the proper custody and purpose
of government funds.
The company assumes one of the three forms of organization. The accounting procedures depend
on which type of organization it takes.
Sole Proprietorship – This business organization has a single owner called the owner, who is
generally also the manager. Small-scale enterprises and retail establishments tend to be the sole
proprietorship.
Partnership – a partnership is a business owned and operated by two or more persons who are
bound to contribute money, property or industry to a common fund, with a view to dividing the profits
between themselves. Each partner is personally liable for any debts incurred by the partnership.
1. Serving to earn revenue, this business provides services to clients in exchange for a fee.
3. Manufacturing this business converts raw materials into finished goods, which are to be sold at a
selling price.
LEARNING ACTIVITY
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SUMMARY
REFERENCES
Books:
Ferrer, Rodiel C. Millan, Zeus Vernon B.(2017). Fundamentals of Accountancy, Business and
Management Part 1
Ferrer, Rodiel C. Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy, Business and
Management Part 2
Frias, Solita A. Pefianco, Erlinda C. (2016). Fundamentals of Accountancy, Business, and
Management: A Textbook in Basic Accounting 2
Ballada, Win (2010) Basic Accounting
Aliling, Leonardo E., MBA,CPA.2013. Fundamentals of Basic Accounting.