ACCOUNTING

What is accounting?
• Accounting is very important in all aspects of life especially in
business. It is said to be the “language of business”.
• This phrase was associated to Warren Buffet who advised a young
man to study the language of accounting because it is the best way to
understand financial statements.
• Like any language, accounting has its own set of terminologies.
Interested persons especially those in the field of business must learn
accounting language to effectively use them on a daily basis.
• Through accounting, businesses are able to speak about its
performance and interested users make better or worst business
prospects or future business plans.
Definitions of Accounting
•The term accounting has been defined technically by different accounting
associations.
•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 Standards Council).
•Accounting is an art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are at least of
financial character, and interpreting the results thereof. (American Institute of
Certified Public Accountant)
•Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgement and decisions by users of
the information. (American Accounting Association)
•Accounting is an information system that measures, processes and
communicates financial information about economic entity. (Financial
Accounting Standards Board)
• Based on the given definitions, accounting therefore is a process of
identifying, measuring, recording financial information to be
communicated to interested users at the right time.
• This shows that there is a need to identify entity’s financial
transaction or events. The financial transactions will be measured.
• Measuring refers to the process of assigning and determining the
monetary value of business transactions or events. Take note that
only business transactions that are quantifiable and have monetary
value will be recorded. This quantifiable financial transactions will be
classified into accounts and financial statements will be prepared.
• Finally, the complete set of financial statements will be interpreted
and communicated to the interested users of accounting information.
Nature of Accounting
Accounting is a systematic recording of financial transactions and presenting the
information to the different users of accounting information. Based from the definitions
given, the nature of accounting are as follows:
1.Accounting is a process.
A process is a systematic series of action directed towards a particular outcome.
Accounting is identified as a process as it follows logical phases in the accounting cycle
such as recording, classifying, summarizing financial transactions and communicating the
results after.
2.Accounting is an art.
The word “art“refers to the way of how something can be performed. It is a behavioral
knowledge which involves creativity and skill. Accounting activity is systematic that
requires a definite techniques and application of accounting expertise and skills. So by
nature, accounting is an art.
3.Accounting is a service activity.
It is concerned with providing service of ensuring that the financial statements are
available to users on a timely basis.
NATURE OF ACCOUNTING
• Accounting is an information system.
An information system is an interrelated components working together to achieve
common goal. Accounting is characterized as a storehouse of information. A business uses a
structure to collect, record, classify, summarize and communicate financial information of any
entity.
• Accounting deals with financial information and transactions.
Accounting records financial transactions and data, classifies and summarize the results
for a given specific period of time, as needed by the users. At all times, accounting deals with
financial information only and does not deal with non-monetary or non-financial aspects of
information.
• Accounting is a means not an end.
Accounting finds out the financial results and position of an entity and the same time, it
communicates this information to its users. The users then take their own decisions on the
basis of such information. Thus, accounting itself is not an objective, it helps attaining a
specific objective. So it is said the accounting is “a means to an end’ and it is not “an end” in
itself. Accounting serves as a tool to achieve specific objective.
Phases of Accounting

•There are four phases of accounting:

•recording,
•classifying,
•summarizing,
•and interpreting.
1. Recording

• Recording is the basic phase of accounting that is also known as

bookkeeping.
• In this phase, financial transactions are recorded systematically and
chronologically in the “journal” which is also known as the book of
original entry.
• Accounting recorders need source documents such as receipts,
invoices, checks to record business transactions. Good and accurate
records allow the owners/managers keep track of the progress of
their business.
Recording
CLASSIFYING
• The classifying phase involves sorting or grouping similar items into
assets, liabilities, equity, income or expenses.
• This is the phase wherein recorded data are grouped systematically in
one place.
• The term “ledger “refers to the book wherein classifications are
recorded.
CLASSIFYING
3. SUMMARIZING
• The summarizing phase involves preparing the financial statements:
statement of financial position (balance sheet),
statement of financial performance (income statement),
statement of changes in owner’s equity,
cash flow statement, and
notes to financial statement.
This is to summarize the effects of all business transactions that
transpired during the accounting period such as monthly, quarterly,
semi-annually, annually.
4. INTERPRETING
• Interpreting phase is concerned with analyzing the results on the
financial statements to evaluate the liquidity, profitability and
solvency of the business entity.
• This final function interprets the recorded data in a manner which
enables the users of financial information make a meaningful
judgement and sound decisions of business personal account.
• This data is used to prepare future plans and policies of the business
entity.
Why is accounting considered as the language of business?
FUNCTIONS OF ACCOUNTING
• 1. Accounting is a means by which financial information are
communicated to business owners and other users of financial
information.
• Accounting provides relevant information for owners and managers to
use in business operation.
• Possible questions answered by accounting information:
•  What is the result of the operation?
•  Is there a profit? Or loss?
•  What is the result of my investment?
FUNCTIONS OF ACCOUNTING
• 2. Accounting information allows business owners or managers assess the
efficiency and effectiveness of business operations.
• Financial reports could be compared with other industry standards to
determine how the business is doing. Also, business owners may use
historical financial statements to create trends for analysing and
forecasting future sales.
• Possible questions answered by accounting information:
•  Is my company profitable?
•  Is my company liquid?
•  Is my company solvent?
FUNCTIONS OF ACCOUNTING
3. Accounting helps the management or owners fulfill its stewardship
function.
With the accounting information, the management must ensure the
assets and other resources of the business are taken care of in behalf of
the oPossible questions answered by accounting information:
 How much is the total assets of the business?
 How much is the total liabilities of the business?
 How much equity do the business have?wners or stakeholders by
keeping proper books of account.
FUNCTIONS OF ACCOUNTING
4. Accounting helps interested users come up with informed decisions.
Users of financial information such as potential investors, banks/creditors,
suppliers and government needs financial information to make decisions.
These are some questions answered by accounting information:
Possible questions answered by accounting information:
 Is it profitable for me to invest in this company? (Potential Investor)
 If I extend loan to this company, will it able to pay for this loan? Does the
company have sufficient resources to pay for this loan? (Banks/Creditors)
 Will I extend credits for this company? For how long? (Suppliers)
 Is the owner paying correct taxes? (Government)
FUNCTIONS OF ACCOUNTING
5. Support the daily operations of the business.
In order for a business to survive, business owners or managers must
be well-informed to see the true picture of the business in financial
terms.
Possible questions answered by accounting information:
o How much daily sales do I need in order to recover my expenses?
o Do I need to hire additional worker?
o Can I afford to buy additional equipment?
o Can I afford to pay bank loans?
History of Accounting
• Accounting is as old as mankind and civilization itself. It started as a simple
recording of repetitive exchanges. According to history, in 4000B.C. the income of
temples was recorded in lower Mesopotamia. In 2500 B.C. historical accounting
records has been found in ancient civilizations of Egypt and China and during that
time accounting records were kept by rulers for taxing and spending on public
works. The Phoenicians in 1000B.C. created an alphabet with accounting so that
they will not be cheated through trades with Ancient Egyptians. In 500 B.C.
history recorded the invention of the first bead and abacus wire by the Egyptians.
• In the 1300s, historical records stated that the oldest double-entry books entitled
“Massari (Treasury Officials) Ledgers of Commune Genoa” were written in 1340.
In today’s accounting system, this is simplified into the T-Account and expanded
into the ledger. And in the 1400s, Lucia Bartolomes Pacioli, who is also known as
the Father of modern accounting, wrote his famous paper “Summa de
Arithmetica, Geometrica, Proportioni et Proportionalita” which was published in
Venice in November 1494.
History of Accounting
• During the Industrial Revolution in the1700s to 1900s, accounting
took off as industrial companies sought out to gain financing and
maintain efficiency through operations. Several of the double-entry
accounting methods was truly developed in this area as there was a
focus on business as never before. Shortly after the first accounting
organization was developed in New York in the year 1887. The title
and professional license of the Certified Public Accountant followed in
the year 1896.
History of Accounting
• In 1920-1940 U.S GAAP was developed shortly after the American
Institute of Certified Public Accountants (AICPA) and the Financial
Accounting Standards Board (FASB) in the year 1939. Accounting
became important to reduce the amount of fraud and scandals that
were performed in businesses around the world.
History of Accounting in the Philippines
• In the Philippines, the first Accounting Law (Republic Act No. 3105) was passed in 1923.
This law created the Board of Accountancy (BOA). In 1967, the Accountancy Law in the
Philippines was revised and passed under Republic Act No. 5166.
• This law standardized accounting education and regulated the practice of accountancy
and spelled out the examination process of CPA registration.
• The Accountancy Law was revised and passed under Presidential Decree No. 692 in 1975.
In 1981, the Philippine Institute of Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to establish and improve accounting standards
generally accepted in the Philippines.
• In 2004, the Professional Regulation Commission (PRC) created the Financial Reporting
Standard Council (FRSC). This replaced the ASC and was created to assist the Board of
Accountancy (BOA) to carry out its powers and functions provided under Republic Act No.
9298, the Philippine Accountancy Act of 2004. Complimenting International Accounting
Standards (IAS) and International Financial Reporting Standards (IFRS) were the Philippine
Accounting Standards (PAS) and the Philippine Financial Reporting Standards (PFRS).
• From 2005 to the present, the Philippines became fully compliant with the IFRS
LUCA BARTOLOMES PACIOLI
• An Italian monk and mathematician, Luca Bartolomeo
Pacioli
is known as the “ Father of Modern Accounting”
for his work in the double entry bookkeeping.
He wrote Summa DeArithmetica, Geometria,
Proportioni et Proportionalita ( Everything about
Arithmetic, Geometry, Proportion, and Proportionality)
Which was published in Venice in November
1494. It included a 24-page treatise on
Bookkeeping, Particularis de Computis et
Scripturiz (Details of Calculation and
Recording), specifically on the subjects of
Recordkeeping and double-entry accounting.
AWESOME ACROSTIC POEM