Introduction to Accounting

Accounting is “the process of identifying, measuring, and communicating economic

information to permit informed judgment and decision by users of the information.” –
(American Association of Accountants)
3 Important Activities
1. IDENTIFYING - It is the process of analyzing events and transactions to determine whether
or not they will be recognized. Only accountable events are recognized.
Type of Events
I. External Events – events involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving
b. Non-reciprocal transfer –“one way” transaction
c. External event other than transfer – an event that involves changes in the economic
resources or obligations of an entity caused by an external party or external source but
does not involve transfer of resources or obligations.
II. Internal Events – events that do not involve an external party.
a. Production – the process by which resources are transformed into finished goods.
b. Casualty – an unanticipated loss from disasters or other similar events.

2. MEASURING – involves assigning numbers, normally in monetary terms, to the economic

transactions and events.
Measurement
The several measurement bases used in accounting include, but not limited to the
following:
1. Historical cost
2. Fair value
3. Present value
4. Realizable value
5. Current cost, and
6. Sometimes inflation-adjusted costs.
 The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a
mixture of costs and values.

3. Communicating – the process of transforming economic data into useful accounting

information, such as financial statements and other accounting reports, for dissemination
to users.
 The most important event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in
14th century Italy. Pacioli was much revered in his day, and was a friend and contemporary
of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as
the fathers of modern accounting and were the first to commonly use Arabic numerals, rather
than Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the
first book published that contained a detailed chapter on double-entry bookkeeping.

Basic Purpose of Accounting

The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.
Types of Accounting Information Classified as to users’ needs
 General Purpose accounting information – designed to meet common needs of most
statement users. This information is governed by the Philippine Financial Reporting
Standards (PFRS).
 Special Purpose accounting information – designed to meet the specific needs of
particular statement users. This information is provided by other types of accounting.

Basic Accounting Concept

 Double-entry system – each accountable events is recorded in two parts – debit and
credit.
 Time Period – the life of the business is divided into series of reporting period.
 Materiality Concept – information is material if its omission or misstatement could influence
economic decisions.
 Accrual Basis of Accounting – effects of transactions are recognized when they occur (and
not as cash is received or paid) and they are recognized in the accounting periods to
which they relate.
Common Branches of Accounting

 Financial Accounting – focuses on general purpose financial statements.

 Management Accounting – focuses on special purpose financial reports for use by an
entity’s management.
 Cost Accounting – the systematic recording and analysis of the costs of materials, labor,
and overhead to production.
 Auditing – the process of evaluating the correspondence of certain assertions with
established criteria and expressing an opinion thereon.
 Tax Accounting – the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.
 Government Accounting – refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes for which
those funds are committed, and the responsibility and accountability of the individuals
entrusted with those funds.

4 Sectors in the Accounting Practice

1. Public Practice – involves the rendering of audit or accounting related services to more
than one client on a fee basis.
2. Practice in Commerce and Industry – refers to employment in the private sector in a
position which involves decision making requiring professional knowledge in the science
of accounting and such position requires that the holder thereof must be CPA.
3. Practice in Education/Academe – employment in an educational institution which
involves teaching of accounting, auditing, management advisory services, finance,
business law, taxation, and other technically related subjects.
4. Practice in the Government – employment or appointment to a position in an
accounting professional group in the government or in a government-owned and/or
controlled corporation where decision making requires professional knowledge in the
science of accounting, or where civil service eligibility as CPA is a prerequisite.
Accounting Standards in the Philippines

 Philippine Financial Reporting Standards (PFRSs) are standards and interpretations adopted
by the Financial Reporting Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRS)
2. Philippine Accounting Standards (PAS)
3. Interpretations
The Need for Reporting Standards
 Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
 The term “generally acceptable” means that either:
a. The standard has been established by an authoritative accounting rule-making body;
or
b. The principle has gained general acceptance due to practice over time and has been
proven to be most useful.
 The process of establishing financial accounting standards is a democratic process in that
a majority of practicing accountants must agree with a standard before it becomes
implemented.