Introduction to Accounting

1st Session

AC1 - Introduction to Accounting

1st Session
 Introduction to Accounting
1st Session
Learning Objectives

► Describe the nature of a business and the role and purpose of accounting in business
► Describe the accounting concepts and principles and constraints
► State the accounting equation and define each element of the equation
► Introduction to debits and credits

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 Introduction to Accounting
1st Session
Trivia on accounting

 Fr. Luca Pacioli (1447 – 1517), an Italian friar is the father of accounting. He published a book for the
double entry system of accounting. He was a friend of Leonardo da Vinci
 Vicente Fabella (founder of Jose Rizal University) is the first registered CPA in the Philippines. He
obtained the first CPA certificate (#001).
 Accounting is the “language of business”

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 Introduction to Accounting
1st Session
What is a business?

► A business is an organization in which basic resources (inputs), such as materials and labor, are
assembled and processed to provide goods or services (outputs) to customers. The objective of most
businesses is to earn a profit.
► Profit is the difference between the amounts received from customers for goods and services and the
amounts paid for the inputs used to provide goods or services

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 Introduction to Accounting
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The role of Accounting in business

Accounting can be defined as an information system that provides reports to users about economic
activities and conditions of a business. Economic activities are those transactions that can be quantified
in terms of money.

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 Introduction to Accounting
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Checkpoint

Exercise 1.1 – Determine if the following events can be considered “economic activities”
a. You are the business owner of a hair salon. You have serviced a customer for a haircut.
b. There were some people who came into your salon and asked for solicitation. Out of empathy, you gave
cash out of your earnings for the day.
c. You were informed that your customer the other day died of an unknown illness.
d. You went to a mall to do window shopping

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What is accounting?

► As defined by American Institute of Certified Public Accountants (AICPA), 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, in making
reasoned choices among alternative courses of action.
► American Accounting Association meanwhile defines accounting as the process of identifying,
measuring and communicating economic information to permit informed judgment and
decisions by the users of information
► Accounting is a science because it is based on concepts and rules that are directed in performing the
activity. Accounting follows a process in order to produce the output i.e. a systematic process
► Accounting is an art because it requires the use of skills and creative judgement

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What is accounting?

► The four (4) functions of accounting are the following:

a. Recording - the process of journalizing the transactions that is relevant to a business entity.
b. Classifying – the process of grouping the transactions according to elements, such as the assets,
liabilities, equity, revenue and expenses
c. Summarizing – the process of preparing the financial statements
d. Interpreting – the process of assessing and evaluating financial statements to be able to make a sound
decision

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1st Session
What is the purpose of accounting?

► It gives you an excellent gauge of how well your business is doing

► Accounting provides financial information throughout a period so you can measure the success of
your business strategies
► This is a tool for sound financial judgment i.e., decision making

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Who are the users of financial information?

► There are several stakeholders that are interested in the financial information of entities. They are
classified into two (2) groups, namely: Internal users and External users.

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Checkpoint

Exercise 1.2 – Identify if the stakeholder is an internal user or an external user:

a. Business owner/Investor
b. Government agencies
c. Management of the company
d. Company’s employees
e. Lenders and suppliers

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Who are the users of financial information?

► Internal users are the following:

a. Business owners and stockholders – to evaluate the financial performance of the company in
consideration of their investment.
b. Employees – to determine if their employer is still profitable. They are checking if their employer can
still pay their renumerations and benefits
c. Management – to check if their strategy in planning, controlling and directing are still effective to earn
profit

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 Introduction to Accounting
1st Session
Who are the users of financial information?

► External users are the following:

a. Lenders and suppliers– to evaluate the company’s credit worthiness.

b. Government agencies– to check whether the company is still paying the right amount of what is due i.e.,
income and other taxes and to check if still compliant with existing rules and regulations
c. Potential investors – to decide whether to invest in the company

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Fields in Accounting

1. Public accounting – This encompasses auditing, tax services and management advisory services.
2. Private accounting – This includes accountants working in a private company with roles such as
bookkeepers, cost accounting, financial planning and budgeting and internal audit
3. Government accounting – Those accountants working in the government e.g. national/local units,
commission on audit, department of finance, etc.
4. Education – Teachers of accounting

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Accounting concepts and principles

► Accounting concepts and principles are divided into two (2) types:

a. Fundamental Qualitative
1. Relevance – composed of predictive value, confirmatory value and materiality. This means that
the financial information is capable to in making difference.
1.1 Predictive value - helps the user determine forecasts or projections of a certain event
1.2 Confirmatory value – helps the user check if an expectation has been fulfilled or met
1.3 Materiality – a threshold that determines if an omission or misstatement of an information will lead to
influence users in their decision-making process

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Accounting concepts and principles

2. Faithful representation – a financial information must be neutral, free from material error and complete
to convey the information that should be cascaded to users.
a. Neutrality – free from bias. The financial information has been prepared objectively and in
accordance with the accounting standards.
b. Free from material error - the financial information is prepared in a meticulous way and generated
from the best data available
c. Completeness – all information that should have been included is included. Information that can help
users for decision making

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Accounting concepts and principles

b. Enhancing Qualitative
1. Understandability – the presentation of financial information must be clear and, in most cases, concise.
This requires that the users have ample knowledge to interpret the financial information.
2. Comparability – the financial information presented can be compared with other entities or with the
same period of another timeframe.
3. Verifiability – the financial information should always represent the best data available.
4. Timeliness – the financial information must be readily available whenever the users will make a
decision

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Accounting concepts and principles

Basic accounting assumptions

1. Economic entity concept – The business is assumed to be of different entity from the owners. This
means that the transactions of the business and the owners are recorded separately.
2. Going concern assumption – The business is assumed to continue in a foreseeable future
3. Time period – It is presumed that the reporting period is one (1) year. Calendar year means that the
reporting period of an entity is from January 1 to December 31. While fiscal year means that the
reporting period of an entity is not December e.g. April 1 to March 31.
4. Monetary unit – Financial information is expressed in monetary terms. The purchasing power of the
currency must be stable.

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Accounting concepts and principles

Basic accounting principles

1. Historical cost – a transaction must be recorded on the basis of the total cost at the point of acquisition.
This is the initial economic value of an asset, measured in currency e.g. peso.
2. Full disclosure – All information that can affect the decision of the user of a financial information must
be made available. This commonly pertains to the notes to the financial statements.
3. Revenue recognition principle – Revenue must be recognized WHEN the goods are transferred to the
buyer or when the services have already been rendered.
4. Expense recognition principle – Expenses incurred must be recorded on the related revenues
recognized in the same period. This is commonly known as the “matching concept”.

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Checkpoint

Seatwork 1.1
Identification: Determine which accounting assumption/concept is being identified in the following
statements.
1. This assumption conveys that personal and business record-keeping should be separately
maintained
2. This principle ensures that all relevant financial information is reported
3. This principle requires recognition of expenses in the same period as related revenues
4. This assumption indicates that a business is assumed to have indefinite life

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Accounting constraints

 These constraints are the limitations or boundaries in application of the accounting principles.

1. Cost-Benefit principle – The benefit derived from the information should exceed the cost of obtaining
the information.
2. Materiality concept – An item is considered as “material” if the knowledge of it would affect or influence
the decisions of the users of the financial information. The concept of materiality is relative, meaning
every entity has different considerations on what they deem as material.
3. Conservatism/Prudence - This is a concept wherein if an entity is in doubt of two or more acceptable
actions on the matter, the entity must choose the action that will less likely beneficial to them.
4. Industry practice – Simply following what is being done by the industry you belong

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Types of business - ownership

1. Sole proprietorship – owned by an individual. This is usually common for low-tier businesses such as
grocery store, dental clinics, salons, etc.
2. Partnership – Business is owned by two or more individuals
3. Corporation – Duly registered in the Securities and Exchange Commission as a corporation. Usually
composed of more than 5 individuals and having shares of stock as evidence of ownership.

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The Accounting Equation

 The accounting equation is Asset is equal to liabilities plus owner’s equity (A = L + E)

1. Assets - Economic resources owned by the business which benefit current and future operations.
2. Liabilities - Obligations of the business which are to be paid in cash or non-cash assets, or settled by
rendering some form of services
3. Owner’s equity / Net assets - The residual claim of the owner in the assets of the business after
satisfying the claims of the creditors.
4. Income - This represents inflow of economic resources that increase owner’s equity other than the
investment of the owner
5. Expense - This represents outflow of economic resources that decrease owner’s equity other than the
withdrawal of the owner.

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The Financial Statements

 The financial statements are the product of accounting. This is the summary of the financial information
and the way the business conveys its financial results.
1. Statement of financial position – commonly known as the “balance sheet”. This identifies the financial
position of the company. This shows the assets, liabilities and owner’s equity at a certain point in time.
2. Statement of financial performance - this details a company's revenues, expenses and net income.
3. Statement of Changes in Equity – this statement summarizes the movement of the owner’s equity. This
can be expressed as: beginning equity + additional investments – withdrawals + income – expenses =
ending equity
4. Statement of cash flows - provides aggregate data regarding all cash inflows a company receives from its
ongoing operations and external investment sources

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 Introduction to Accounting
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The Financial Statements

 The financial statements are the product of accounting. This is the summary of the financial information
and the way the business conveys its financial results.
1. Statement of financial position – commonly known as the “balance sheet”. This identifies the financial
position of the company. This shows the assets, liabilities and owner’s equity at a certain point in time.
2. Statement of financial performance - this details a company's revenues, expenses and net income.
3. Statement of Changes in Equity – this statement summarizes the movement of the owner’s equity. This
can be expressed as: beginning equity + additional investments – withdrawals + income – expenses =
ending equity
4. Statement of cash flows - provides aggregate data regarding all cash inflows a company receives from its
ongoing operations and external investment sources
5. Notes to financial statements – provides additional information that are essential to understanding
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 Introduction to Accounting
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Checkpoint

Seatwork 1.1 – Introduction to Accounting

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The Debit and Credit Concept

 Debit – left side of a “T- account”. This is the NORMAL BALANCE of an ASSET and EXPENSE.
 Credit – right side of a “T-account”. This is the NORMAL BALANCE of LIABILITIES, OWNER’S
EQUITY and INCOME.

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Summary of the Rules of Debit and Credit

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