Lesson 1

Accounting
→ defines accounting as the art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions (American Institute of Certified Public Accountants (AICPA)

→ ACCOUNTING is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic

events of an organization to interested users." (Weygandt, J. et. al)

What is Accounting?
a. IDENTIFYING
→ this involves selecting economic events that are relevant to a particular business
transaction. The economic events of an organization.

b. RECORDING
→ chronologically, listing down of accountable events.
 Journal is often called the book of original entry.

c. COMMUNICATING
→ or reporting the results to users of financial information.
 This involves the preparation of accounting reports called financial statements.

Types of Financial Statements

1. Balance Sheet/Statement of Financial Position
2. Income Statement/Statement of
3. Comprehensive Income
4. Statement of Cash Flow
5. Statement of Changes in Equity
6. Notes on the Financial Statements

Nature of Accounting
1. a service activity
→ Accounting provides assistance to decision makers by providing them financial reports
that will guide them in coming up with sound decisions.

2. a process
→ A process refers to the method of performing any specific job step by step according to
the objectives or targets. steps like the collection, recording, classification,
summarization, finalization, and reporting of financial data.

3. both an art and a discipline

→ art’ refers to the way something is performed. accounting is a systematic method
consisting of definite techniques and because it follows certain standards and professional
ethics, it is also a discipline.
4. deals with financial information and transactions
→ Accounting records financial transactions and data, classifies these and finalizes their
results given for a specified period of time, as needed by their users.

5. an information system
→ Accounting is recognized and characterized as a storehouse of information.

New Section 1 Page 1

Lesson 2
Function of accounting in business
 Why is accounting considered as the language of business?
 Accounting is the means by which business information is communicated to business
owners and stakeholders.

 Accounting helps the users of these financial reports to see the true picture of the
business in financial terms.

History of Accounting
1. The Cradle of Civilization
 The oldest evidence of this was the “clay tablet” of Mesopotamia dealt with commercial
transactions at the time such as listing of accounts receivable and accounts payable.

2. 14th Century - Double-Entry Bookkeeping

 The dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’)
in 14th century Italy. Luca Pacioli wrote Summa de Arithmetica, the first book published
that contained a detailed chapter on double-entry bookkeeping.

3. French Revolution (1700s)

 Social upheavals affecting government, finances, laws, customs and business had greatly
influenced the development of accounting.

4. The Industrial Revolution (1760-1830)

 Mass production and the great importance of fixed assets were given attention during this
period.

5. 19thc. The Beginnings of Modern Accounting in Europe and

America
 The first national U.S. accounting society was set up in 1887. the current American Institute
of Certified Public Accountants(AICPA).

 Accounting standards to be observed by accounting professionals were promulgated.

Notable practices such as mergers, acquisitions and growth of multinational corporations
were developed.

6. The Present - The Development of Modern Accounting Standards

and Commerce
 Beyond the industry's self-regulation, the government also sets accounting standards,
through laws and agencies such as the Securities and Exchange Commission (SEC).

Users of Accounting Information

→ Users of accounting information are collectively referred to as stakeholders.

New Section 1 Page 2

Lesson 3
Classification of Stakeholders
1. External Users
→ are individuals and organizations outside a company who want financial information

2. Internal Users
→ are those individuals inside a company who plan, organize, and run the business.

Types of External Users

a. Potential Investors
→ use accounting information to make decisions to buy shares of a company.

b. Creditors
→ use accounting information to evaluate the risks of granting credit or lending money.

External Users (Secondary Users(

1. Investors and stockholders
→ They are interested in the financial information whether they are going to buy, hold or
sell their investment in the business.

2. Creditors/Lenders
→ Lenders, for example banks, need information which helps them assess the business,
ability to repay its loan and interest when they fall due.

3. Suppliers
→ Suppliers assess the business’ ability to repay its obligation upon the maturity.

4. Government and their agencies

→ The government usually obtains financial information from individuals and organizations,
for purposes of taxation and licensing.
5. Public
Information set forth in the financial statements may provide the public with the trends
and recent developments in the prosperity of the company.

Internal Users (Primary Users)

a. Owners or Partners
→ Owners or Partners in a business need accounting information to assess whether their
capital investments are profitable or not, and whether to grant or not additional
compensation to their employees.

b. Managers
Information set forth in the financial statements assists the managers in carrying out
their day to day functions. Managers need to face regular decisions.

c. Employees
→ Employees assess the stability and profitability of their company.

New Section 1 Page 3