INTRODUCTION

TO ACCOUNTING
ACCOUNTING AND ITS ENVIRONMENT
 DEFINITION OF ACCOUNTING
Accounting is a process of identifying, recording and communicating economic
information that is useful in making economic decisions.

Identifying
Recording
The accountant determines if a
transaction is: The accountant records the
accountable event. The process is
An accountable event or known as “journalizing.”
A non-accountable event.

Communicating
The accountant summarizes the
information and communicates it to
interested users.

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NATURE OF ACCOUNTING

Providing information intended to be

useful in making economic decisions.

What kind of information?

Quantitative – expressed in numbers,

quantities or units
Qualitative – expressed in words or
descriptive form
Financial – expressed in money

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IS ACCOUNTING A SCIENCE
OR AN ART?
Both!

As a science – accounting is a body of

knowledge which has been systematically
gathered; classified & organized.

As an art – accounting requires creative

skills and judgment.

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 BOOKKEEPING AND ACCOUNTING

BOOKKEEPING
Refers to the process of recording the accounts
or transactions of an entity. It normally ends
with the preparation of the trial balance. It
does not require the interpretation of the
information processed.
ACCOUNTING
Covers the whole process of identifying,
recording and communicating information to
interested users.

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FUNCTION OF
ACCOUNTING
Accounting is the language of business
because it is fundamental to the
communication of financial information.

2 broad functions:
1. To provide external users with
information that is useful in making,
among others, investment and credit
decisions;
2. To provide internal users with
information that is useful in managing
the business. Usually, this is prepared
through managerial accounting.

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WHAT IS THE DIFFERENCE? Those who are not directly involved in managing
the business.
Examples include:
a. Existing and potential investors (e.g.
INTERNAL USERS stockholders who are not directly involved in
managing the business)
b. Lenders (e.g. banks) and Creditors (e.g.
Those who are directly involved in managing the suppliers)
business.
c. Government agencies (e.g. BIR, SEC)
Examples include:
d. Non-managerial employees
a. Business owners who are directly involved in
managing the business. e. Customers

b. Board of directors f. Public

c. Managing Personnel.

EXTERNAL USERS

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TYPES OF ACCOUNTING INFORMATION
CLASSIFIED AS TO USERS’ NEEDS
GENERAL PURPOSE
ACCOUNTING INFORMATION
• Designed to meet common
needs of most statement
users. It is provided by
financial accounting and is
primarily for external users.
SPECIAL PURPOSE
ACCOUNTING INFORMATION
• Designed to meet specific
needs of particular
statement users. It is
provided by management
accounting or other
branches of accounting and
is primarily for internal
users.
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 USER EXAMPLE OF DECISION TO
MAKE
Investor a. Existing investor – whether to
hold or sell investment in
stocks
b. Potential investor – whether
or not to buy shares of stocks.
EXTERNAL USER
Lender or a. Lender – whether or not to
supplier extend a loan to a business
b. Supplier – whether or not to
extend credit to a business.
Manager Whether or not to increase the
sale price of a product.
Manager How much capital is needed to
manufacture a new product?
NAL USER
EXAMPLE OF
INFORMATION NEEDED
Audited financial statements
GENERAL PURPOSE INFORMATION SPECIAL PURPOSE IN
of the business to aid in
analyzing the value of the
company
Audited financial statements
of the business to aid in
analyzing the company‘s
ability to pay its debt
Analysis of the effects of
sales prices to earnings
Budget report.
 USER EXAMPLE OF DECISION TO EXAMPLE OF
MAKE INFORMATION NEEDED

GENERAL PURPOSE INFORMATION

Investor Shall I invest in this business? Is
this a profitable undertaking?
Creditor Shall I lend money to this
business? Does this business
EXTERNAL USER
The financial performance of
the business.
The ability of the business to
generate revenue and cash

have the ability to pay back my flows from its operations.

loan?
 As early as 8500 B.C., accounting has already existed.
Archaeologists have found clay tokens as old as 8500 B.C.
found in Mesopotamia which were usually cones, disks,
spheres and pellets. These tokens correspond to such
commodities like sheep, clothing or bread. They were used
in the Middle West in keeping records. After some time, the
tokens were replaced by wet clay tablets. During such time,
experts concluded this to be the starts of the art of writing.
BRIEF HISTORY Examples of ancient civilizations keeping account records
are China, Babylonia, Greece and Egypt. Like in Babylonia
during 3600 B.C., payments of salaries were recorded in
clay tablets. In addition, the rulers of these civilizations
keep track of labor and material costs used in building
structures using accounting. A good example is the case of
the Egyptian pharaohs in building their magnificent
pyramids.
 During the thirteenth to the fifteenth centuries, trade
flourished places such as Florence, Venice and Genoa, thus,
there was advancement in account keeping methods,
thanks to the merchants and the bankers of such time.
during the 1211 A.D., one of the systems in accounting was
kept by a Florentine banker. However, the system was
primitive as the concept of equality for entries was absent.
BRIEF HISTORY Double entry records first came out during 1340 A.D. in
Genoa. In 1494, the first systematic record keeping was
formulated by Fra Luca Pacioli, a Franciscan monk and one
of the most celebrated mathematicians to this day. Pacioli
is considered as the father of accounting.

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