Chapter 1

Introduction to Accounting
Learning Objectives
1. Define accounting.
2. Describe the nature and purpose of accounting.
3. Give examples of branches of accounting.
4. State the function of accounting in a business.
5. Differentiate between external and internal users of
accounting information.
6. Narrate the history/origin of accounting.
7. State the forms of business organization.
8. State the types of business according to their activities.
Chapter 1: Introduction to Accounting
(FAR by: Millan)
 Definition of accounting
• Accounting is a process of identifying,
recording and communicating economic
information that is useful in making
economic decisions.

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Essential elements of the definition of
accounting
1. Identifying – The accountant analyzes each business transaction and
identifies whether the transaction is an “accountable event” or “non-
accountable event.” This is because only “accountable events” are
recorded in the accounting books. “Non-accountable events” are not
recorded in the accounting books.
2. Recording – The accountant recognizes (i.e., records) the “accountable
events” he has identified. This process is called “journalizing.” After
journalizing, the accountant then classifies the effects of the event on
the “accounts.” This process is called “posting.”
3. Communicating – At the end of each accounting period, the accountant
summarizes the information processed in the accounting system in
order to produce meaningful reports. Accounting information is
communicated to interested users through accounting reports, the
most common form of which is the financial statements.

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Nature of accounting
• Accounting is a process with the basic
purpose of providing information about
economic activities intended to be useful in
making economic decisions.

Chapter 1: Introduction to Accounting (FA

R by: Millan)
Types of information provided by accounting

1. Quantitative information
2. Qualitative information
3. Financial information

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Functions of Accounting in Business

1. To provide external users with information

that is useful in making investment and
credit decisions; and
2. To provide internal users with information
that is useful in managing the business.

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Accounting as a managerial tool
Accounting provides information that helps a
business manager perform the following
management functions:
1. Planning
2. Organizing
3. Staffing
4. Directing
5. Controlling

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Brief history of accounting
• Accounting can be traced as far back as the prehistoric times, perhaps more
than 10,000 years ago.
• Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia
which were usually cones, disks, spheres and pellets. These tokens
correspond to 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 start of the art of writing. (Source: http://EzineArticles.com/456988)
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the “double entry
recording system” was formulated by Fra Luca Pacioli, a Franciscan monk
and mathematician. The “double entry recording system” was included in
Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni and
Proportionista,” published on November 10, 1494 in Venice.
• The concept of “double entry recording” is being used to this day. Thus, Fra
Luca Pacioli is considered as the father of modern accounting.
Chapter 1: Introduction to Accounting (FA
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Common Branches of Accounting

Chapter 1: Introduction to Accounting (FA

R by: Millan)
Common Branches of Accounting

Chapter 1: Introduction to Accounting (FA

R by: Millan)
Common Branches of Accounting

Chapter 1: Introduction to Accounting (FA

R by: Millan)
Common Branches of Accounting

Chapter 1: Introduction to Accounting (FA

R by: Millan)
 Users of Accounting Information
1. Internal users – those who are directly involved in managing the
business. Examples:
• Business owners who are directly involved in managing the business
• Board of directors
• Managerial personnel

2. External users – those who are not directly involved in managing the
business. Examples:
• Existing and potential investors (e.g., stockholders who are not
directly involved in managing the business)
• Lenders (e.g., banks) and Creditors (e.g., suppliers)
• Non-managerial employees­
• Public

Chapter 1: Introduction to Accounting (FAR by: Millan)

Forms of Business Organizations

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Types of Business According to Activities

1. Service business
2. Merchandising (Trading)
3. Manufacturing

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

Advantages and Disadvantages

Chapter 1: Introduction to Accounting (FAR by: Millan)

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Chapter 1: Introduction to Accounting (FA

R by: Millan)