The Definition, Nature and

History of Accounting
Business
• It is the exchange of good or services that results in mutual benefit for
both parties involved. It’s primary objective is to make PROFITS.
Kinds of Business
1. Trading or Merchandising-this involves the buying of goods or
merchandise.
2. Manufacturing- this involves the conversion of raw material into
finished product.
3. Servicing-this involves the rendering of services for a certain fee
which is higher than the cost of the services rendered.
Exercise
Identify the ff. businesses whether trading/merchandising,
manufacturing or servicing:
1. Repair shops
2. Supermarkets
3. Coca-Cola Company
4. Parlors
5. Bookstores
Forms of Business (As to Ownership
Structure)
1. Sole Proprietorship -this is a business owned and operated by only
one person
2. Partnership -this is a business owned by two or more persons.
3. Corporation -this is a business whose capital is divided into shares
of stock owned by several people called shareholders or
stockholders.
4. Cooperative -this is a business whose capital is owned by several
people called members.
Exercise
Identify the following characteristics whether sole proprietorship,
partnership, corporation or cooperative:
1. Two or more owners called partners-Partnership
2. Limited Liability-Corporation/Cooperative
3. Can sell services-All Kinds of Business
4. Owner manages the business-Sole Proprietorship
5. Unlimited owners called members-Cooperative
Accounting
• It is a service activity whose function is to provide quantitative
information, primarily financial in nature, about economic entities
that is intended to be useful in making economic decision. (Financial
Reporting Standards Council (FRSC))

• It is an art of recording , classifying and summarizing in a significant

manner and in terms of money ,transaction and events which are in
part at least of financial character, and interpreting the result thereof.
(Committee on Terminology of the American Institute of Certified
Public Accountants (AICPA))
Application of Accounting
• Ms. Sweet started a business. She invested 100,000.00 (personal
money), 50,000.00 is used to buy printers and 30,000.00 to pay the
bills. The company collected and earned 50, 000.00 from a customer
in one month.
1. After one month, how much is the overall balance of cash?-
Ans.70,000.00 (100,000.00-50,000.00-30,000.00+50,000.00)
2. How much the business made?(Profit/Loss)
Ans. 20,000.00 (50,000.00-30,000.00) , considering printer as not
expense
Functions of Accounting
1. Recording/Bookkeeping –putting into writing all the business
transactions including significant events which might occur and
which will affect the business.
2. Classifying- involves grouping together similar items or accounts for
purposes of systematic recording and preparation of reports.
3. Summarizing- involves the preparation of formal accounting reports
or financial statements at the end of an accounting period.
4. Interpreting- involves the analysis of the financial statements by
developing financial ratios and explaining their significance to make
the statements more meaningful.
Role of Accounting in Business
• It helps the owner/s or managers make plans and decisions.
• It reports and analyzes business transactions thru financial
statements.
• It communicate financial information to all interested parties.
Brief History of Accounting
• The Cradle of Civilization –the oldest evidence of record-keeping happened around 3600 B.C. was the “clay tablet”
of Mesopotamia which dealt with commercial transactions such as listing of accounts receivable and accounts
payable
• 14th Century- Double-entry bookkeeping- this is the dissemination of double entry of bookkeeping by Luca Pacioli
(The Father of Accounting)
• French Revolution (1700s)- The thorough study of accounting and development of accounting theory began during
this period.
• Industrial Revolution (1760-1830)- mass production and the great importance of fixed assets were given attention
during this period.
• 9th Century- The Beginnings of Modern Accounting in Europe and America- In this period (late 1800s), rapid changes
in accounting practice and reports were made. Accounting standards to be observed by accounting professionals
were promulgated.
• The present-The Development of Modern Accounting Standards and Commerce- The accounting profession in the
20th century developed around state requirements for financial statement audits. Beyond the industry’s self
regulation, the government also sets accounting standards, through laws and agencies such as Securities and
Exchange Commission (SEC).
Users of Financial Information
1. Internal Users- refers to the management.
2. External Users-those who have financial claim or interest in the
business.
Internal Users
• Management- they want to know the income/earnings for the
period, sales, available cash, production cost
• Employees- they are interested to know the stability and profitability
of the business so that they can look for another company when
necessary
• Owners/investors/stockholders- they are interested about the profit
or income for the period, resources or assets of the business,
liabilities of the business
External Users
• Creditors or suppliers or Lending Institutions- they want to know the risk they are
taking when they give credit terms to the business.
• Tax Authorities (BIR)- for determining the credibility of the tax returns filed on behalf
of a company.
• Prospective Investors- they want to know whether it is worthwhile investing in the
business.
• Customers- they are interested in the stability of the business, which is the supplier of
their needs.
• Regulatory Authorities/Government- for ensuring that a company’s disclosure of
accounting information is in accordance with the rules and regulations.
• General public- The public may be interested in the affairs of the business for their
own personal and varied reasons.
 Guidelines on Basic
Accounting Principles and
Concepts
Generally Accepted Accounting Principles
(GAAP)
• It is the framework and guidelines of accounting profession.
• The accounting procedures, the profit determination , preparation
and presentation of the financial statements must be in conformity
with this framework.
• Knowledge of these principles serves as guides to the accountants in
the practice of accountancy.
Basic Accounting Principles and concepts
1. Business Entity principle- Under this concept, the business is
treated, as having a separate personality from the owner’s.
2. Going Concern principle- under this concept, it is assumed that the
business will continue operations indefinitely unless there is
evidence to the contrary.
3. Time Period Principle – Financial Statements are to be divided into
specific time intervals.
4. Monetary Unit Principle- are amounts stated into a single monetary
unit.
5. Historical Cost/ Cost principle – This simply means that the
properties or assets acquired must be recorded at the actual
acquisition cost and not at estimated cost.
6. Matching Principle/ Matching Cost Against Revenue- This simply
means that all cost and expenses incurred during the period in
generating the revenue must be matched (subtracted) against the
revenue for the same period.
7. Accounting Period- This principle entails a business to complete the
whole accounting process over specific operating time period.
8. Conservatism principle/ prudence- In case of doubt, assets and
income should not be overstated while liabilities and expenses should
not be understated.
9. Consistency Principle- For the financial statements to be
comparative , the application of the accounting methods, procedure or
principles must be consistent with the previous period.
10. Materiality Principle- In case of assets that are immaterial to make
a difference in the financial statements, the company should record it
as an expense.
11. Objectivity Principle- This simply means that the transactions
reported can be verified thru the supporting documents.
12. Revenue Recognition Principle- The revenue recognition principle
states that the revenue should be recognized and recorded when it is
realized or realizable and when it is earned.
13. Cost Principle- An accounts should be recorded initially at cost.
14. Accrual Accounting Principle- This simply means that expenses of
the business are recognized or recorded when incurred whether paid or
not and revenue is recognized when earned whether collected or not.
15. Disclosure principle- All relevant and material information should
be reported.
Qualitative Characteristics of Financial
Information
1. Relevance- This means the financial statements are accurate and can
be used to predict future company performance.
a. Predictive Value- refers to the fact that quality financial information
can be used base predictions, forecast, and projections on.
b. Feedback Value-Quality information has a feedback value when it
can confirm or correct previous expectations.
c. Timeless- Out of date information does not do investors or creditors
any good when they are trying to make current and future decisions.
2. Reliability- financial information can be verified by many source with
evidence and that all financial information is presented.
a. Verifiability- Financial information is verifiable when multiple,
independent measures are used to come up with the same result.
b. Representational Faithfulness- Representational faithfulness simply
means that the financial statements represent reality or what actually
happened during the year.
c. Neutrality- No biased.
3. Comparability- Information that is prepared using the same
measurement techniques and reported in a similar and can be judged
side by side other similar financial information.
Accounting Equation

Assets = Liabilities + Equity

Assets-Liabilities=Equity
Liabilities=Assets-Equity