FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1

LESSON 1: INTRODUCTION TO ACCOUNTING

Lesson 1.1 The Nature of Accounting and Lesson 1.2. History of Accounting
Content Standards. The learners demonstrate an understanding of the definition, nature, function and history of
accounting.
Specific Learning Objectives. At the end of this lesson, the learners will be able to
• define accounting and describe its nature;
• explain the functions of accounting in business;
• give examples of business transactions and decisions requiring the need for accounting;
• and narrate the history of accounting

A. INTRODUCTION:
QUESTIONS to PONDER:
• Do your parents ask how you spend your allowance every day?
• When deciding between buying a bottle of soft drinks or fruit juice, what is the basis of your decision? Do you
compare the prices of both and then decide?
• When going home, do you sometimes choose to walk from school rather than riding a jeepney because you want to
save?
B. LESSON PROPER: LESSON 1.1 WHAT IS ACCOUNTING?
• Accounting is the process of identifying, recording, and communicating economic events of
an organization to interested users. (Weygandt, J. et.al)

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.
Examples of economic events or transactions - In a bakery business:
• sales of bread and other bakery products.
• purchases of flour that will be used for baking
• purchases of trucks needed to deliver the products

RECORDING – this involves keeping a chronological diary of events that are measured in pesos. The diary referred to in
the definition are the journals and ledgers.

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COMMUNICATING – occurs through the preparation and distribution of financial and other accounting reports.

OTHER DEFINITIONS OF ACCOUNTING

• Systematic process of measuring and reporting of relevant and timely financial information about the activities of an
economic organization or unit.
• The art of recording, classifying, summarizing in a significant manner and in terms of money, transactions, and events
which are in part at least of a financial character, and interpreting the result thereof. (AICPA)
• A service activity to provide quantitative information, primarily financial in nature, about economic entities useful in
making decisions. (PICPA)

Nature of Accounting
• Accounting is a systematic process. – It is a series of actions that produce something or that leads to a particular
result.
• Accounting is an art – a skill acquired by experience, study, or observation.
• Accounting is a service activity. – something that is done or work for a particular purpose
• Accounting deals with financial information and transactions – Accounting records the financial transactions and
date after classifying the same and finalizes their result for a definite period for conveying them to their users.
• 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 been evolved out to meet the need of financial
information required by different interested groups.
https://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html
Four Aspects of Accounting
1. Recording - writing down of business transactions
chronologically in the books of accounts as they transpire
2. Classifying – sorting similar and related business transactions into the three categories of assets, liabilities, and owner‟s
equity
3. Summarizing – preparing the financial statements from the transactions recorded in the books of account that are
designed to meet the information needs of its users
4. Interpreting – representing the qualitative and quantitative financial information about the business transactions in a
language comprehensible to the users of financial statements.

*** Accounting – the language of business: Users are able to determine the financial standing of the company as
well as its stability and growth.
Basic Function of Accounting in Business: Generation of relevant and timely information for interested parties.

Focus Group Discussion:

Mr. Johnny is a retired government employee who is good at baking. One day he decides to put up a bakery shop in
your barangay. He renovates a portion of his house to serve as the area for the production of bread. He purchases baking
equipment and raw materials to produce five different types of bread. Mr. Johnny also hires Joseph to help him with the
baking and, at the same time, to be in-charge of sales. Mr. Johnny pays Joseph on a weekly basis. Every day, Mr.
Johnny‟s wife deposits the daily cash sales in their bank account at XY Savings Bank.

Question: With the help of accounting, what possible decisions or questions of Mr. Johnny can accounting provide
an answer to?

Let’s watch! Now that we understand the definition, nature, and function of accounting, let us now watch the
video. Please click the link below.

Watch
https://www.youtube.com/watch?v=hwJby9ztwvE

MOTIVATION (10 POINTS) After watching the video, answer the following:
1. What are the processes involved in accounting?
____________________________________________________________________________________________
__________________________________________________________________________________________
2. What is the basic function of accounting?

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 ____________________________________________________________________________________________
__________________________________________________________________________________________

3. Who do you think are the users of financial reports?

___________________________________________________________________________________________
___________________________________________________________________________________________

LESSON 1.2 BRIEF HISTORY OF ACCOUNTING

Egypt, Mesopotamia, Greek and Rome

Tools and Instruments used in ancient times:

• Abacus – functioned as a calculator in the ancient times was developed by the Sumerians in 5,000 BCE

• Papyrus – developed by ancient Egyptians in 4,000 BCE. Not only allowed recording of commercial transactions but
also the transcriptions of religious text, music, literature and more.

• Clay tablets – considered to be among the oldest written tax accounting records unearthed by Egyptian archaeologist
Dr. Gunter Dreyer of the German Institute of Archaeology.

• Old stone labels – found in the tomb of King Scorpion 1 in Egypt representing accounts of oil and linens which were
believed to be paid to the king as taxes.

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Mesopotamian Scribes – performed extensive duties in writing and recording in the Mesopotamian civilization are the
equivalent of present-day accountants.

Greeks – introduced money in the form of coins in 600 BCE and invented a Greek alphabet which they used to facilitate
record-keeping
Romans – introduced the used of annual budget which coordinated estimated revenues and taxes paid by the citizen in
relation to the nation‟s expenditures. Cash books were maintained by household for their expenses.
Domesday Book – contained all the real estate surveyed by William the Conqueror of England who took possession of all
properties in the name of the king upon his invasion.

Pipe Roll or the Great Roll of the Exchequer – the most ancient surviving accounting record in the English language
containing the yearly accounting of rents, fines, and taxes due to the King of England, from 1130 to 1830.

14th Century – the Birth of Double-Entry Bookkeeping

Luca Pacioli – otherwise known as the Friar Luca dal Borgo and considered to be the “Father of Accounting” wrote the
“De Computis et Scripturis (of Reckonings and Writings) which is composed of 36 short chapters that describe
bookkeeping that also included what is similar to the modern day accounting cycle.

Bernedetto Cotrugli – He is the writer of Della Mercatura et del Mercante Perfetto (Trading and the Perfect Trader)
where the original idea of the double-entry bookkeeping was introduced.

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 19th Century – The Dawn of Modern Accounting
in Europe and America
Industrial Revolution (England) – replaced hand tools with machine or power tools, otherwise known as the factory
system, transformed accounting into an actual profession requiring expertise of accountants to gain corporate control of
their flourishing businesses.

Queen Victoria (Scotland) – granted royal charter to the Institute of Accounts in Glasgow on July 6, 1854, thereby
creating the profession of chartered accountant (CA), thus accounting became a formal profession.

1887 – the birth of the first national US accounting society the American Association of Public Accountants, the
predecessor of the present American Institute of Certified Public Accountants. (AICPA).

20th Century – The Evolution of Modern Accounting Standards

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American Institute of Certified Public Accountants. (AICPA) – was tasked to set the accounting and auditing
standards for the periodic reports vouched by certified public accountants until the establishment of the Financial
Accounting Standards Board (FASB) in 1973
GAAP – generally accepted accounting principles established by the two significant authorities in the United States:
Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GSAB)

The Information Age

Also known as the Computer Age, Digital Age, or New Media Age where manual, tedious and time consuming tasks were
replaced by faster and more accurate computer methods.

21st Century – Accounting in the Modern Times

International Accounting Standards Board (IASB) – established in January 2001
Enron Scandal – The greatest corporate fraud case recorded in American history, caused Arthur Andersen, one of the top
audit firms in the US to close business.
Sarbanes-Oxley Act – was passed by the US Congress in 2002 to protect investors from corporate misinformation that
imposed tougher restrictions on accountants conducting consultancy services.
The accounting profession in the 20th 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 the
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.

Lesson 1.3. The Business Environment

Content Standards. The learners demonstrate an understanding of the varied branches and areas of accounting, and the
external and internal users of financial information, various forms of business organizations, and the types of business
according to activities.
Performance Standards. The learners shall be able to
• make a list of business within the community on the types of accounting services they require.
• solve exercises in the identification of the branches of accounting described through the types of services rendered.
• Solve exercises and problems on the identification of users of information, types of decisions to be made, and types of
information needed by the users.
• Cite users of financial information and identify whether they are external or internal users.
• Differentiate the forms of business organizations in terms of nature of ownership
• Make a list of existing business entities in their community and identify the form of business organization
• Differentiate the types of business according to activities and make a list of businesses in their community according
to their activities.
Learning Competencies. The learners shall be able to
• Differentiate the branches of accounting.
• Explain the kinds/types of services rendered in each of these branches.
• define external users and internal and gives examples
• identify the type of decisions made and describe information needed by each group of users
• differentiate the forms of business organizations.
• identify the advantages and disadvantages of each form
• compare and contrast the types of business according to activities
• identify the advantages and business requirements of each type
Specific Learning Objectives. The learners will be able to
•identify the forms of business organizations by nature of ownership.
• give examples of businesses in their respective communities and identify the form
• identify the advantages and disadvantages of the four forms of business organization
• describe and give examples of the three types of business activities
The Different Branches of Accounting

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Financial Accounting
Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is
primarily concerned with the recognition, measurement and communication of economic activities. This information is
communicated in a complete set of financial statements. It is assumed under this branch that the users have one common
information need. Financial accounting conforms with accounting standards developed by standard-setting bodies. In
the Philippines, there is a Council created to set these standards.

Examples of these financial reports include:

• balance sheet (statement of financial condition)
• income statement (the profit and loss statement, or P&L)
•statement of cash flows

Financial accounting is primarily concerned with processing historical data. Although financial accounting generally
meets the needs of external users, internal users of accounting information also use these information for their decision-
making needs.

Management (or Managerial) Accounting

Management accounting emphasizes the preparation and analysis of accounting information within the organization.
The objective of managerial accounting is to provide timely and relevant information for those internal users of
accounting information, such as the managers and employees in their decision-making needs. Oftentimes, these are
sensitive information and is not distributed to those outside the business - for example, prices, plans to open up
branches, customer list, etc. Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas.

Government Accounting
Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and
interpreting financial information about the government in aggregate and in detail reflecting transactions and other
economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. This branch
of accounting deals with how the funds of the government are recorded and reported.

Auditing
There are two types of auditing: external and internal auditing. External auditing refers to the examination of financial
statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to
fairness of presentation and compliance with the generally accepted accounting principles (GAAP). The audit does not
cover 100% of the accounting records but the CPA reviews a selected sample of these records and issues an audit report.
Internal auditing deals with determining the operational efficiency of the company regarding the protection of the
company‟s assets, accuracy and reliability of the accounting data, and adherence to certain management policies. It
focuses on evaluating the adequacy of a company's internal control structure by testing segregation of duties, policies
and procedures, degrees of authorization, and other controls implemented by management.

Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It
also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally,
evaluation of the consequences of tax decisions, and other tax-related matters.

Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and
analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most
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 complicated costing process. Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations. Cost accounting will also help the owner set the selling price of
his products. For example, if the cost accounting records shows that the total cost to produce one can of sardines is
PHP50, then the owner can set the selling price at PHP60.

Accounting Education
This branch of accounting deals with developing future accountants by creating relevant accounting curriculum.
Accounting professionals can become faculty members of educational institutions. Accounting educators contribute to
the development of the profession through their effective teaching, publications of their research and influencing
students to pursue careers in accounting. Accounting teachers share their knowledge on accounting so that students are
informed of the importance of accounting and its use in our daily lives.

Accounting Research
Accounting research focuses on the search for new knowledge on the effects of economic events on the process of
summarizing, analyzing, verifying, and reporting standardized financial information, and on the effects of reported
information on economic events. Researchers typically choose a subject area and a methodology on which to focus their
efforts. The subject matter of accounting research may include information systems, auditing and assurance, corporate
governance, financials, managerial, and tax. Accounting research plays an essential part in creating new knowledge.
Academic accounting research "addresses all aspects of the accounting profession" using a scientific method. Practicing
accountants also conduct accounting research that focuses on solving problems for a client or group of clients. The
Accounting research helps standard-setting bodies around the world to develop new standards that will address recent
issues or trend in global business.

USERS OF ACCOUNTING INFORMATION

AND THEIR INFORMATION NEEDS
INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan, organize, and run the business.
These users are directly involved in managing and operating the business. These include marketing managers, production
supervisors, finance directors, company officers and owners.
Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and
financial statements. This information will support whatever decision of the internal users.

EXTERNAL USERS
External users are individuals and organizations outside a company who want financial information about the company.
These users are not directly involved in managing and operating the business.
Most common types of external users:
• Potential Investors use accounting information to make decisions to buy shares of a company.
• Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending
money.
• Government regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of Internal Revenue
(BIR), Department of Labor and Employment (DOLE), Social Security System (SSS), and Local Government Units
(LGUs).

Questions asked by internal users:

• Is cash sufficient to pay bills?
• What is the cost of manufacturing
each unit of product
• Can we afford to give employee
pay raises this year?
• Which product line is the most
profitable?
• Will the company be able to pay its
debts as they come due?

Internal Users Information Need Decisions Supported

income/earnings for the period, sales,
Management
available cash, production cost
analyze the organization's
performance and position and take
appropriate measures to improve the
company results. sufficiency of cash
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profit for the period, salaries paid to
Employees
employees
profit or income for the period,
Owners resources or assets of the business,
liabilities of the business
to pay dividends to stockholders;
pricing decisions
job security, consider staying in the
employ of the company or look for
other employment opportunities
considerations regarding additional
investment, expanding the business,
borrowing funds to support any
expansion plans.

External Users Information Need Decisions Supported

Creditors include suppliers as well as
credit worthiness of an organization.
lenders of finance such as banks.
credibility of the tax returns filed on
Tax Authorities (BIR)
behalf of a company
make sure they can earn a reasonable
Investors
return on their investment
for assessing the financial position of
Customers
its suppliers
ensuring that a company's disclosure
of accounting information is in
Regulatory Authorities (SEC, DOLE)
accordance with the rules and
regulations set
Terms of credit are set by creditors
according to the assessment of their
customers' financial health.
Collection improvement and filing of
cases on tax fraud
analyzing the feasibility of investing
in a company
to maintain a stable source of supply
in the long term.
to protect the interests of the
stakeholders who rely on such
information in forming their
decisions.

TYPES OF BUSINESS ORGANIZATIONS

Do you know that….?

Do you know that with your daily allowance you can own a company?
Your daily allowance can be used to buy shares of stock of a corporation and that you will become the owner of
such a company?

“Suppose you want to open your own sari-sari store that will need PHP10,000 to start and you
SOLE/SINGLE
used your PHP10,000 savings to start the said business. You are the sole owner of the said
PROPRIETORSHIP
sari-sari store. This type of business is called sole/single proprietorship.”
“What if the needed amount to start your dream sari-sari store is PHP50,000 and you only
have PHP25,000 cash savings. You ask Juan, your friend if he is willing to invest his
PARTNERSHIP
PHP25,000 and become part owner of the sari-sari store. Assuming he agrees, what form of
business organization was created?”
“Assuming your dream is to open a grocery store and not just a sari-sari store but you will
need PHP1,000,000 to start the said business. You have only PHP25,000, your friend Juan has
CORPORATION PHP25,000, and your mother is willing to invest her PHP50,000, but still these are not enough
to start your dream grocery store. Where will you get the money to raise the PHP1 million?
You may consider setting up a corporation?”
“Assuming all the mothers in your barangay decided to open a sari-sari store where all the
members can buy in cash or in credit. Some mothers were also taught how to sew dresses and
bags as part of the project of the group. These bags are then sold to a certain company. Aside
from that, the organization provides seminars to the members on various topics involving
COOPERATIVE
mothers and their roles. At the end of the year, the profits are distributed among the members
based on their capital contribution. The amount of their purchases in the sari-sari store during
the year is also computed and they receive something out of the profit/surplus based on their
purchases. This form of business organization is called a cooperative.

1. Sole/single proprietorship. A form of business is owned by one person; the simplest, and the most common
form of business organization. It is not separate from the owner. The business and the owner are inseparable.
Advantages of sole/single proprietorship.
• The owner keeps all the profits.
• The owner makes all the decisions.
• It is easy to form and operate.
Disadvantages of sole/single proprietorship.
• The life of the business is limited to the life of the owner. Once the owner dies, the business will cease to operate
under the name of the proprietor.

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 • The amount of capital is limited only by the wealth of the proprietor.
• Infusion of knowledge in the management of the business is limited to one person only, which is the owner.

*The Department of Trade and Industry is the government agency that regulates the trade names of sole/single
proprietorship businesses.
**Misconception: Once a person dies the business is continued by his relatives.
***Upon death of the old owner, the business legally ceases. The one taking over is considered as the new owner.
2. Partnerships. A form of business owned by two or more persons. The details of the arrangement between the
partners are outlined in a written document called articles of partnership. Profits are divided among partners based on
their agreed sharing. The owner is called a partner.
Advantages of a partnership
• Higher capital because two or more persons will contribute to the common fund.
• It is easy to operate like a sole/single proprietorship
Disadvantages of a partnership
• The profits are divided among the partners.
• A partner can be held liable for the acts of the other partners.
• In a lawsuit, the personal properties of the partners can be held beyond their contributions and may be used to answer
for any liability of the partnership.
3. Corporations
• A corporation is a business organized as a separate legal entity (artificial person) under the corporation law with
ownership divided into transferable shares of stocks
• Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
• The corporation begins its existence from the date the Articles of Incorporation is approved by the Securities and
Exchange Commission (SEC).
• The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private
corporations in the Philippines.
• The owners are called stockholders or shareholders.
• The word „Corporation/Incorporation/Corp./Inc.‟ appears in the name of the entity.
• The voting rights of a shareholder is generally based on the percentage of ownership.
• The management of the business is delegated by the shareholders to the Board of Directors
• The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for
example at PHP10 per share.
• The proof of ownership is evidenced by a stock certificate.
Advantages of a corporation
• Can easily raise additional funds by selling shares of stocks to the public.
• Shareholders are not personally liable for the debts of the corporation. The extent
of their liability is limited to their equity (ownership) in the corporation.
Disadvantages of a corporation
• It is relatively complicated to set up.
• Subject to several legal restrictions as listed in the Corporation Code of the
Philippines
4. Cooperatives
• A cooperative is a duly registered association of persons with a common bond of
interest, voluntarily joining together to achieve their social, economic and cultural needs.
• The owners are called members who contribute equitably to the capital of the cooperative.
• The members are expected to patronize their products and services.
• The word „cooperative‟ appears in the name of the entity.
• This form of business organization is regulated by the Cooperative Development Authority (CDA). The teacher may
introduce the role of CDA as a government agency regulating the cooperatives.
Advantages of a cooperative
• Enjoys certain tax exemption privilege
• Promotes the concept of sharing resources
Disadvantages of a Cooperative
• Limited distribution of surplus
• Requires continuous education programs for members.
• The members have active and direct participation in the business of the cooperative.

D. ENRICHMENT 1:
What kind of information do users need that can be answered by accounting? What are the decisions supported by this
information? Fill up the table by choosing the answers from the choices given below. (10 POINTS)
External Users Information Need Decisions Supported
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 POTENTIAL INVESTORS

BANKS

SUPPLIERS

BIR

DOLE

• salaries and other benefits paid to employees

• taxes paid by the business
• Income or profit of the business
• liabilities or amount owed by the business to its suppliers
• resources or assets of the business
• Is the owner paying the correct taxes?
• Is it profitable for me to invest in this business?
• Do I extend credit to this company? For how long?
• Does this company have sufficient resources to pay its loan? Stock certificate

LEGAL REQUIREMENTS IN THE FORMATION OF A BUSINESS

The sole proprietorship is the easiest business to register. It is registered with the Department of Trade and Industry
(DTI) under the Bureau of Trade Regulation and Consumer Protection.

For a single proprietorship, the business is registered with Securities and Exchange Commission (SEC) upon submission
of the following documents:
a. Proposed Articles of Partnership
b. Name Verification Slip
c. Bank Certificate of Deposit
d. Alien Certificate of Registration, Special Investors Resident Visa, or proof of other types of visa (in case of
foreigners)
e. Proof of Inward Remittance (in case of non-resident aliens)

For a corporation, the following are the incorporation documents required to be filed with the Securities and Exchange
Commission (SEC):
a. Articles of Incorporation
b. By-Laws
c. Treasurer‟s Affidavit which should state compliance with the authorized subscribed and paid-up capital stock
requirements.
d. Bank Certificate which should state that the paid-up capital portion of the authorized capital stocks has been
deposited to the issuing bank.

What should be stated upon registration of a corporation?

a. The name of the corporation which must not be identical, or deceptively or confusingly similar to any existing
corporation
b. The purpose of the corporation
c. Principal office of the corporation
d. The term or life of the corporation which should not exceed fifty (50) years. This corporate lifetime may, however, be
extended for another fifty years but the extension must not be effected earlier than five (5) years before the expiration
of its term.

For a cooperative, the business is registered with the Cooperative Development Authority (CDA) upon submission of
the following documents.
a. Economic Survey
b. Notarized Articles of Cooperation and By-Laws
c. Bonds Accountable officer or officers
d. Notarized sworn statement of the treasurer certifying that the required subscription and payment of the authorized
share capital and paid-up capital have been fulfilled.

3 TYPES OF BUSINESS ACTIVITIES/OPERATIONS

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 *Because of the nature of their business operations, the presentation of their statement of comprehensive income and
the content of the statement of financial position may differ from each other.
• by providing services
• by selling goods

Three types of business organizations:

1. Service Business This type of business offers professional skills, advice and consultations.
Examples: barber shops and beauty parlors, repair shops, banks, accounting and law firms
2. Merchandising Business This type of business buys at wholesale and later sells the products at retail. They
make a profit by selling the merchandise or products at prices that are higher than their purchase costs. This type of
business is also known as "buy and sell".
Examples are: book stores, sari-sari stores, hardware stores
3. Manufacturing Business This type of business buys raw materials and uses them in making a new product,
therefore combining raw materials, labor and expenses into a product for sale later on.
Examples are: shoe manufacturing businesses, car manufacturing plants

Additional information:
There are businesses that may be classified under more than one type of business. A bakery, for example, combines raw
materials in making loaves of bread (manufacturing), sells hot pan de sal (merchandising), and caters customers‟ orders in
small coffee table servings of ensaymada and hot coffee (service).

MRS. ROSE JEANNIE G. NABONG

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