INTRODUCTION TO

ACCOUNTING
 Learning Objective
• To define accounting and
explain its nature and
functions
Key Understanding
 Understanding of the meaning of
accounting and its functions in
making business decisions

Key Question
 What is accounting?
 What Is Accounting?

• It is a system that helps businesses track events that

affect them.
• This process involves identifying the events that affect
a business, recording these events, and
communicating the summarized results of all events
within a particular period to interested parties.
• Almost all companies allot a significant amount of
resources to the accounting process since it aids
them in improving their business.
 What Is Accounting?

• For example, the sale of Toyota cars is identified as

an economic event that affects the company. The
accountant will record this transaction and
consolidate all records by the end of the month. The
consolidated records can be used by the top
management to identify potential problems
encountered by the company. This can also be
used to attract potential investors. Clearly,
accounting process is very beneficial to a company.
 Accounting: Defined

• Accounting Standards Council (ASC):

Accounting 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
 Accounting: Defined

• American Institute of Certified Public

Accountants (AICPA): Accounting is an art or
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 and interpreting
the results thereof.
 Accounting: Defined

• American Accounting Associations (AAA):

Accounting is the process of identifying,
measuring, and communicating economic
information to permit informed judgment and
decision by users of the information.
 Accounting: Defined

• Weygandt, J. et. al: Accounting is the process

of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an
organization to interested users.
 The Accounting Process

• The starting point of the accounting process is the

identification of economic events relevant to a business.
Examples of relevant economic events are the sale of Toyota
cars, provision of services by a hospital, payment to suppliers,
and purchase of equipment for the manufacturing of Bench shirts.
• To be identified as a relevant economic event, there should be a
transfer of things with value. Normally, for the purchase of
equipment, cash or money is exchanged for the equipment. The
cash and equipment both have value making the purchase a
relevant economic event.
 The Accounting Process

• The recording of relevant economic events is the next

step in the accounting process.
• After a company identifies the relevant economic events, it
records those events which will serve as the history of its
financial activities.
• Recording events should be done systematically and
chronologically for easier tracking and interpretation.
• Records of events are inputted in the so-called accounting
books.
 The Accounting Process

• Finally, after a lapse of a specific period (usually one year),

companies summarize all the recorded economic events
into accounting reports.
• The most popular accounting reports are the financial
statements. All similar events during the period are lumped
together to provide meaningful and presentable information.
As such, all sales transactions during the period are added
and presented as one aggregate amount. This makes the
information understandable to other parties.
 Group Activity

• Think of at least two types of business belonging to

different industries (e.g., Petron from the oil industry and
Jollibee from the food industry). Give five examples of
economic events that each company identifies and
records in its respective accounting books. Discuss why
these events or transactions are recorded in the
accounting books.
 Nature of Accounting
1. Accounting is a process: A process is composed of multiple steps that lead
to a common end goal. The enrollment process in your school may involve
reservation of slots, filling out documents, attending school orientations, and
payment of necessary fees. These steps all lead to you being enrolled in
your school. Likewise, accounting is a process because it performs the
functions of identifying, recording, and communicating economic events with
the end goal of providing information to internal and external parties.
2. Accounting is an art: Art refers to a way of performing something. It entails
creativity and skills to help attain some objectives. Accounting is the art of
recording, classifying, summarizing, and finalizing financial data. Accounting
is a combination of techniques and its application requires applied skill and
expertise. This is the reason why accounting can be considered as an art.
 Nature of Accounting
3. Accounting deals with financial information and transactions: Accounting deals only
with quantifiable financial transactions. These are the only events identified by the
accountant, recorded in the books, and communicated to different parties. Nonfinancial
transactions are not the focus of the accounting process. However, nonfinancial data may
be used to interpret and better estimate some financial data.
4. Accounting is a means and not an end: As mentioned earlier, accounting is a tool to
achieve specific objectives. It is not the objective itself. Imagine that you dream to go to
Paris someday. Accounting can be thought of as the plane that will bring you to your
destination.
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
• The American Accounting Association defines accounting as
“the process of identifying, measuring, and communicating
economic information to permit informed judgments and
decisions by the users of information.”

• Meanwhile, the American Institute of Certified Public

Accountants (AICPA) defines accounting as “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 a financial character and interpreting the results thereof.”
 Functions of Accounting

From the foregoing definitions, the main functions of

accounting can be summarized as follows:
1. Keeping systematic record of business transactions
2. Protecting properties of the business
3. Communicating results to various parties in or
connected with the business
4. Meeting legal requirements
 Functions of Accounting
1. Keeping Systematic Record of Business Transactions
• Recording transactions does not only involve entering the
transactions in the accounting books. The records should
be systematic enough to enable easy understanding of
readers. No matter how comprehensive the records are, if
they are not produced systematically, then they provide
little to no value.
 Functions of Accounting
2. Protecting Properties of the Business
• The accounting records serve as the evidence that
properties of a business do exist or how much of a
particular resource does a company have. If the accounting
records show that the amount of cash should be ₱1 000
000, any excess and deficiency will be noticed
immediately. Moreover, the accounting system helps in
preventing employee fraud and misappropriation of
company resources.
 Functions of Accounting
3. Communicating Results to Various Parties in or
Connected with the Business
• The accounting reports produced at the end of each period
are not only used by external parties (e.g., potential
investors, government agencies), but also by the
management in their decision-making function.
Communication of the results of operations of a company
is essential for all concerned parties to enable them to take
well-informed decisions.
 Functions of Accounting
4. Meeting Legal Requirements
• In the Philippines, the government requires some
companies (particularly those with public accountability) to
provide financial reports quarterly, semi-annually, or
annually. This procedure aims to protect the public by
providing them the necessary information to make sound
decisions. The government also requires reports from
heavily regulated industries such as the energy and oil
industries.
 History of Accounting
• It is believed that the history of accounting is thousands
of years old and can even be traced to ancient
civilizations. A number of history books suggest that the
early development of accounting can be dated back to
ancient Mesopotamia. During those times, people
followed a system of writing and counting money. The
development of accounting may be related to the
taxation and trading activities of temples.
 History of Accounting
• The reign of Emperor Augustus (63 BC–14 AD) provided more evidence
about the development of accounting. The Roman government kept detailed
financial information of the deeds of Emperor Augustus regarding the
stewardship of Roman resources. This is evidenced by the Res Gestae Divi
Augusti (The Deeds of the Divine Augustus). The Roman historians
Suetonius and Cassius Dio recorded that in 23 BC, Augustus prepared a
rationarium (account) which listed public revenues, the amounts of cash in
the aerarium (treasury), in the provincial fisci (tax officials), and in the hands
of the publicani (public contractors); and that it included the names of the
freedmen and slaves from whom a detailed account could be obtained. The
closeness of this information to the executive authority of the emperor is
attested by Tacitus’ statement that it was written out by Augustus himself.
 History of Accounting
• Many consider the dissemination of the double-entry bookkeeping of
Luca Pacioli in the fourteenth century Italy the most important event
in accounting history. In fact, Luca Pacioli is acknowledged as the
father of modern accounting because of this. The double- entry
bookkeeping system is defined as any bookkeeping system that has
a debit and a credit for each transaction. Luca Pacioli’s Summa de
Arithmetica, Geometria, Proportioni et Proportionalita (Review of
Arithmetic, Geometry, Ratio, and Proportion) is the first book printed
with a treatise on bookkeeping. The double-entry bookkeeping
system is the system being used to this very day.
 History of Accounting
• The modern profession of the chartered accountant
originated in Scotland in the nineteenth century when
Queen Victoria granted a royal charter to the Institute of
Accountants in Glasgow. At present times, accounting
standards are already available to guide accountants in
their practice of the profession. Some of these standards
include the PFRS (Philippine Financial Reporting
Standard) and the PAS (Philippine Accounting
Standards).