Principles of Accounting

Introduction to
Accounting
Source: Kevin Troy M. Chua, CPA
 Accounting

- 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
choices among alternative course of action.
- Accounting Standards Council

Accounting is the process of Identifying, Recording and

Communicating economic events of an organization for
interested users. Accounting is also the language of business.
(Weygandt, J. et. al)
Accounting is service activity.

that provides
information to help
internal and external
users make decisions.

https://discoveraccounting.org/rewards-and-benefits-of-becoming-an-accoun
tant-or-cpa/
• – quantitative measures means The function of accounting is
that you use an actual number
disclose an amount or to show
to provide quantitative
change. For example, “net income information, primarily
for the year was Php 1,000,000” is
a quantitative measure, while financial in nature.
qualitative measures mean not Income Statement (numbers in thousand)
Revenue ₱ 5,000.00
showing an actual number, but
Cost of Goods Sold (COGS) ₱ 2,000.00
rather providing information in Gross Income ₱ 3,000.00
other ways such as using relative Expenses
terms or such. Marketing & Promotions ₱ 300.00
General & Administrative ₱ 400.00
• Financial in nature - For purposes
Depreciation ₱ 100.00
of this subsection, the following Interest ₱ 200.00
activities shall be financial in Total Expenses ₱ 1,000.00
nature: (A) Lending, exchanging, Earnings Before Tax ₱ 2,000.00
transferring, investing for others, or Taxes ₱ 500.00
safeguarding money or securities. Net Income ₱ 1,500.00
  About economic entities
• is one of the
assumptions made in
generally accepted
accounting principles.
Almost any type of
organization or unit in
society can be an economic
entity. Examples of
economic entities are
hospitals, companies,
municipalities, and federal
agencies.
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 Intended to be useful in making
economic decisions.
• must provide
information to decision
makers that can be used to
predict the future and
timing of cash flows and
provide decision makers
with information that
allows them to assess the
progress of an investment.

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Making reasoned choices among
alternatives courses of action.

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Identifying – this involves selecting economic events that are relevant to a
business transaction. The economic events of an organization are referred to as
transactions.
 Examples of economic events or transactions - In a bakery business:

sales of bread and other bakery products

purchases of flour that will be used for baking
purchases of trucks needed to deliver the products
•Recording The diary referred to in the definition are the journals and ledgers
which will be discussed in future chapters.
•Communicating – occurs through the preparation and distribution of financial
and other accounting reports.
 Nature of Accounting
• According to Accounting Theory
(http://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html): “Accounting is a systematic recording of financial
transactions and the presentation of the related information to appropriate
persons.” Based on this definition we can derive the following basic features
of accounting:
• Art
• Financial
• Process
• Information
•Art - Accounting is the art of recording, classifying, summarizing, and finalizing
financial data. The word ‘art’ refers to the way something is performed. It is
behavioral knowledge involving a certain creativity and skill to help us attain
some specific objectives. Accounting is a systematic method consisting of definite
techniques and its proper application requires skill and expertise. So, by nature,
accounting is an art. And because it follows certain standards and professional
ethics, it is also a discipline.

•Financial - Accounting deals with financial information and transactions:

Accounting records financial transactions and data, classifies these and
finalizes their results given for a specified period, as needed by their users.
At every stage, from start to finish, accounting deals with financial
information and financial information only. It does not deal with non-
monetary or non-financial aspects of such information.
• Process - Accounting is a process: A process refers to the method
of performing any specific job step by step according to the
objectives or targets. 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 the collection, recording, classification,
summarization, finalization, and reporting of financial data.

• 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 evolved to meet the need for
financial information as required by various interested groups.
 Functions of Accounting

• Maintenance of systematic
records
• Financial results of an entity
can be communicated
• Meeting legal requirements
• Protecting assets of business
• Assistance to management

Mabel Cordelia Wilkins

 Function of Accounting
• Accounting is how business information is communicated to business
owners and stakeholders. The role of accounting in business is to provide
information for managers and owners to use in operating the business. In
addition, accounting information allows business owners to assess the
efficiency and effectiveness of their business operations. Prepared
accounting reports can be compared with industry standards or to a leading
competitor to determine how the business is doing. Business owners may
also use historical financial accounting statements to create trends for
analyzing and forecasting future sales. Accounting helps the users of these
financial reports to see the true picture of the business in financial terms. In
order, for a business to survive, it is important that a business owner or
manager be well-informed.
History of Accounting
Accounting can be traced
to ancient civilizations.

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pt-to-blockchain-dag-and-beyond-47924175cb97
Accounting records dating back more than
7,000 years have been found in
Mesopotamia.

Other early accounting records were also

found in the ruins of ancient Babylon,
Assyria and Sumeria.
• The Roman Empire had access to detailed financial
information as seen in “The Deeds of the Devine Augustus”
• Records of cash, commodities, and transactions were kept by
military personnel of the Roman army.

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• The merchants during the Goryeo Dynasty
of Korea kept track of their businesses and
trades through record-keeping
methodologies.

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Luca Bartolomeo de Pacioli 

Father of Accounting
 Fra Luca Bartolomeo de Pacioli 
Father of Accounting

An Italian mathematician
and Franciscan friar

Summa de arithmetica,
geometria, proportioni
et proportionalita
Summary of arithmetic, geometry,
proportions and proportionality

Published in 1494
 Fra Luca Bartolomeo de Pacioli 
Father of Accounting

Summa de arithmetica, geometria,

proportioni et proportionalita
Details of calculation and recording
Describes the accounting methods then in use
among northern-Italian merchants, including double-
entry bookkeeping, trial balances, balance sheets
and various other tools still employed by
professional accountants.
https://www.thoughtco.com/history-of-accounting-1991228
Activity: Answer the following questions.

a) Do your parents ask how you spend your allowance every day? If none how
you spend your allowance?
b) When deciding between buying a bottle of soft drinks or fruit juice, what is
the basis of your decision? Do you compare the prices of both and then
decide? Explain.
c) Is accounting important to you? and why?
d) Why accounting is considered as the language of business?
e) What do you think is the first tool used in accounting?
f) Give me five (5) reasons, why you should study accounting?
Let us now discuss the function of accounting in business.
Mr. Juan is a retired government employee who is good at baking. One day he
decides to put up a bakery shop in your barangay. He renovates a portion of his
house to serve as the area to produce bread. He purchases baking equipment and
raw materials to produce five different types of bread. Mr. Juan also hires Jose to
help him with the baking and, at the same time, to be in-charge of sales. Mr. Juan
pays Jose on a weekly basis. Every day, Mr. Juan’s wife deposits the daily cash
sales in their bank account at XY Savings Bank. With the help of accounting, what
possible decisions or questions of Mr. Juan can accounting provide an answer to?
Activity: Help Mr. Juan to decide.

a) Is my business earning? (Profitability or non-profitable) explain.

b) How much daily or monthly sales do I need in order to recover my
fixed cost? (break-even, net sales or net loss) explain your answer.
c) Do I need to hire additional workers to help me with my
production? If yes or no explain.
d) Can I afford to set up a new store in another place? If yes or no
explain and Where do I get the funds?
e) Can I afford to pay a bank loan? If yes or no explain.