Introduction to Accounting

At the end of the period, the learner will be able to:

a) Define accounting;
b) Describe the nature of accounting;
c) Explain the functions of accounting in business;
d) Narrate the history/origin of accounting.
What is Accounting?
 Accounting is the systematic process of identifying, recording,
summarizing, and reporting economic information to decision makers.
Accounting is a way of organizing financial information to make it more
meaningful and useful.
Accounting is also often described as the language of business.
 The Philippine Institute of Certified Public Accountants (PICPA)
defines accounting as a “system that measures business activities, processes
given information into reports, and communicates finding decision-makers.”
 The American Institute of Certified Public Accountants (AICPA) defines
accounting as an art. It is an art if recording, classifying, and summarizing in
a significant manner and in terms of money, transactions, and events which
are, in part at least, of a financial character, interpreting the results thereof.”
 “History/Origin of Accounting”
Accounting is an old discipline that dates back to thousands of
years, but the one closest to what we now have dates back to 1400 in Italy.
The Italian mathematician, scholar, and philosopher Fra Luca Pacioli
published Summa de Arithmetica, Geometrica, Proportioni et
Proporionalita (Everthing about Arithmetic, Geometry and Proportion)
in 1494. It contained descriptions of the practice of accounting at that
time. Because of this work, Pacioli has been referred to as the “Father of
Accounting.”
Nature of Accounting
We know Accounting is the systematic recording of financial
transactions and presentation of the related information of the
appropriate persons. The basic features of accounting are as follows:
1. Accounting is a process: A process refers to the method of
performing any specific job step by step according to the objectives,
or target. Accounting is identified as a process as it performs the
specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like collection
of data recording, classifycation summarization, finalization and
reporting.
2. Accounting is an art: Accounting is an art of recording, classifying,
summarizing and finalizing the financial data. The word ‘art’ refers to the way
of performing something. It is a behavioural knowledge involving certain
creativity and skill that may help us to attain some specific objectives.
Accounting is a systematic method consisting of definite techniques and its
proper application requires applied skill and expertise. So, by nature accounting
is an art.

3. Accounting is means and not an end: Accounting finds out the financial
results and position of an entity and the same time, it communicates this
information to its users. The users then take their own decisions on the basis of
such information. So, it can be said that mere keeping of b accounts can be the
primary objective of any person or entity. On the other hand, the main objective
may be identified as taking decisions on the basis of financial information
supplied by accounting. Thus, accounting itself is not an objective, it helps
attaining a specific objective. So it is said the accounting is ‘a means to an end’
and it is not ‘an end in itself.’
4. 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. So, from starting to the end, at every stage, accounting deals
with financial information. Only financial information is its subject
matter. It does not deal with non-monetary information of non-financial
aspect.
5. 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.
Functions of Accounting in Business
As a language of business, accounting is primarily utilized whenever
there are business transactions. Any business activity can affect many interested
parties. Thus, it is the main function of accounting to provide quantitative
financial information that is useful in making economic decisions.
The following are the types of financial statements and the informations they
provide.
1. Statement of Comprehensive Income – this financial statement is also
known as the profit and loss statement. It shows the result of the company’s
performance as a result of operations at a particular period of time. Also called
income statement, this type of financial statement indicates whether the
entity has gained or lost from the operations by detailing its income and
expenses.
2. Statement of Changes in Equity – throughout the organization’s existence,
its capital changes as it receives investments or as it experiences withdrawal of
investments, generates income, and pays for expenses. These activities are all
recorded in the statement of changes in equity. Thus, this type of financial
statement provides information about the entity’s financial and investing
activities.
3. Statement of Financial Position – this type of financial statement is also
called balance sheet. This presents the entity’s assets, liabilities, and capital at a
given point in time. The data in this statement provide information about the
entity’s financial condition or position in the business.
4. Statement of Cash Flows – the statement of cash flows provides information
about the entity’s cash inflows and outflows resulting from its operations,
investment, and financing. Thus, it shows the balance of cash flow from the
beginning until the end of a given period.