BASIC ACCOUNTING (BAACCEN)

UNIT 1: INTRODUCTION TO ACCOUNTING

Accounting
 Classifying
 Decision-Making
 Recording
 Economic Entities
 Reasoned Choices
 Interpreting
 Summarizing
 Quantitative Information

What is Accounting?
 Service activity
 Provide quantitative information, primarily financial in nature
 About economic entities
 Intended to be useful in making economic decisions
 Making reasoned choices among alternative course of action

ACCOUNTING
 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.
 It 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 decisions.
 It is the process of identifying, measuring and communicating economic information to permit informed judgements and
decisions by users of the information.

Recording (Journal)
 Transactions must be analyzed first before they are being recorded
 Some would start at JOURNALIZING with the presumptions that transactions have already been analyzed.
 Function of accounting which involves the routine and mechanical process of writing down the business transactions and
events in the book of accounts in a chronological manner called journalizing.

Classifying (Ledger)
 Entries from the journal are transferred to the ledger account per account
 Function of accounting which involves sorting or grouping of similar transactions and events into their respective kind
and classes. This is actually the process of transferring the entries from the journal to the ledger called “posting”.

Summarizing (Trial Balance)

 Accounts from ledger, presented in an organize fashion together with corresponding amount.
 Function of accounting which involves the completion of the financial statements and the accounting requirements as
well. This starts from striking a trial balance, plotting down of adjusting entries in the worksheet and the preparations of
closing entries, post-closing trial balance and reversing entries.

Interpreting the Results (Financial Statements)

 Deals with the using of Financial Statements.
 Function of accounting which involves the “analytical and interpretative works”. It is then, that when financial statements
are analyzed, interpreted and is communicated to those interested parties where these could be of great help to
management as a basis for making a sound decision.

ACCOUNTING PROCESS
1. Analyze Business Transactions
 2. Journalize Transactions
3. Post to Ledger Account
4. Prepare Trial Balance (Unadjusted)
5. Adjusting Entries
6. Prepare Adjusted Trial Balance
7. Prepare Financial Statements
8. Make Closing Entries
9. Post Closing Trial Balance
10. Reversing Entries

NATURE OF ACCOUNTING
 ART
 FINANCIAL
 PROCESS
 INFORMATION SYSTEM

1. Accounting is the language of business

It is the bridge of communication between the business and the users of financial information. Businessmen
around the world speak and use accounting terminologies in conversing with each other such as yield, productivity,
incentives, profit margin, carrying value of an investment, etc.
2. Accounting is an art
There is beauty in accounting when we speak of “creativity” in its application. By preparing the financial
statements alone and to consider the various processes of its completion when we apply techniques, skills and expertise,
which are already works of art.
3. Accounting is a service activity
It collects, processes and communicate financial information to draw sound economic decisions.
4. Accounting is a process
There are various steps involved in completing the accounting cycle. It has undergo the process of identifying,
measuring and communicating to attain sound economic decision by users including management.

FUNCTION OF ACCOUNTING
 Maintenance of systematic records
 Financial results of an entity can be communicated
 Meeting legal requirements
 Protecting assets of a business
 Assistance to management

BRANCHES OF ACCOUNTING

Financial Accounting
 Branch of accounting that deals primarily with the traditional recording of financial transactions which would eventually
result to the preparation of financial statements that will serve the information needs of various users such as investors,
creditors, government agencies, public, etc…
 Leads to the preparation of a general-purpose financial statements as compared to a specific-purpose financial statements
which are used by management to guide them in the decision-making process for the company.

Management Accounting
 Branch of accounting that focuses on the gathering of financial and informative data intended for use by management.
 Management wants to compare actual results of operation against the budgeted amounts and finding the difference which
is called “variance”.
  Variance plays an important role in the analysis, can either be favorable or unfavorable.
 Management accounting shows financial data or information that have yet to happen in the future.

Cost Accounting
 Branch of accounting that is primarily concerned with gathering, accumulation and control to determine the cost of
production of goods and services and setting-up of selling price thereafter.

Government Accounting
 Branch of accounting that deals with the proper custody of public funds in both national and local government such as
cities, provinces, municipalities and barangays.

Auditing
 Branch of accounting that is divided into two (2) types; Internal and External Auditing.
 Established accounting procedures are being followed throughout the year. It determines strict adherence to managerial
policies and measures the efficiency of operations.
 These are usually performed by its own employees or staff of the company while the latter is performed by an
independent professional accountant or a CPA who is engaged by the company to critically examine the books of
accounts and renders an opinion on the fairness of financial statements being examined.
 Financial statements after the examination are called Audited Financial Statements and accompanied by an Independent
Auditor’s Report (Auditor’s Opinion) which adds credibility of the reports to be furnished to users of financial
statements, such as management, customers, government, investors, employees, public, suppliers and other trade
creditors, etc.

Tax Accounting
 Branch of accounting that deals with the inherent power of state to collect taxes. Tax accounting produces tax returns to
be filed to appropriate government agencies.
 The most challenging aspect of tax accounting is not the preparation itself, but rather the tax planning which is
anticipating the tax effect of business transactions in a manner that will minimize the tax burden

Accounting Education
 Branch of accounting that deals primarily with upgrading the quality of teaching in accounting education through
attending the required Continuing Professional Development (CPD) as prescribed by the Board of Accountancy.

Accounting Research
 Branch of accounting that deals with continued research studies relating to professional growth and advancement in the
field of accountancy that will result to the discovery of new accounting procedures, principles and standards that are
tailored-fit to our global economy.

DIFFERENCES OF ACCOUNTING & BOOKKEEPING

Accounting

 Analysis and interpretation of financial information, conduct of audit and preparation of financial statements.
 Requires complete and accurate bookkeeping records necessary in the performance of its responsibility which is the
analysis and interpretation of the financial reports.

Bookkeeping
 Routine recording of economic activities. It is mechanical in process
 The process of recording “systematically” the business transactions in a “chronological manner”. It is systematic because
it follows the procedure and principle. It is chronological because the transactions are recorded in order of the date of
occurrence.

In conclusion…
 The relationship of Bookkeeping and Accounting can be transcribed into a common saying that “one is useless without
the other”.
 In short, while the bookkeeper does the “how accounting is done”, which refers to the mechanical aspects, the
professional accountant does the “why accounting is done” which refers to the analytical and interpretative aspects of
accounting.
 In other words, accounting starts where bookkeeping ended.
USERS OF ACCOUNTING INFORMATION

Internal Users

 Owners – one who puts in money or property (called capital) in a business venture with the objective of making his
money or capital grow from the profits earned by the business.
 Manager – responsible for organizing, planning, directing and controlling the operation of the business. A manager must
also be a good steward, protecting the business resources and helping it grow in value.

External Users
 Investors – shareholders need information to help them determine whether they should invest more, hold or sell their
shares. They are also interested in information which enable them to assess the ability of the enterprise to pay dividends.
Dividends are shareholder’s share in corporation’s profit.
 Creditor/Lender – interested in information which enable them to determine whether their loans and interest thereon
will be paid when due. Assesses the ability of the business, borrower to pay the principal debt and an additional charged
called interest.
 Government – uses the accounting reports in several ways. As tax collector, it investigates tax returns and assesses
truthfulness of the reported profit and the tax liability to be paid by the business. Requires information to regulate the
activities of the enterprise, determine taxation policies and as a basis for national income and similar statistics.
 Employees – interested in information about the stability and profitability of the enterprise. Interested in information
which enable them to assess the ability of the enterprise to provide remuneration, retirement benefits, and employment
opportunities. Wants higher wages, benefits, good working conditions and security of tenure.
 Suppliers – offers goods or merchandise on cash basis or on credit term depending on the paying ability of the business.
Interested in information which enable them to determine whether amounts owing to them will be paid on maturity.
 Tax Authorities – determine whether the amount of declared tax if tax return is correct.
 Customers – assesses the company’s ability to continuously supply the goods they need at the right price and quality.
Interested in information about the continuance of an enterprise especially when they have a long-term involvement with
or are dependent on the enterprise.
 General Public -