Introduction to Accounting
Name of Student
Grade & Section
Ms. Lynleen A. Alagasi, CPA
Mr. Jon Christian M. Miranda, CPA
Subject Teachers
I.
Content Standard:
The learners demonstrate understanding of:
1. Definition of accounting;
2. Nature of accounting;
3. Function of accounting;
4. History of accounting; and
5. Users of financial information.
II.
Performance Standard:
The learners should be able to:
1. Cite specific examples in which accounting is used in making business decisions;
2. Solve exercises and problems on the identification of users of information, type of
decisions to be made, and type of information needed by the users; and
3. Cite users of financial information and identify whether they are external or
internal users.
III.
Most Essential Learning Competencies:
1. Define accounting.
2. Describe the nature of accounting.
3. Narrate the history/origin of accounting.
4. Define external users and give examples.
5. Define internal users and give examples.
IV.
Learning Objectives:
After going through this lesson, the learner will be able to:
1. Define accounting;
2. Describe the nature of accounting;
3. Explain the functions of accounting in business;
4. Narrate the history/origin of accounting;
5. Differentiate the branches of accounting;
6. Explain the kind/type of services rendered in each of these branches;
7. Define external users and give examples;
8. Define internal users and give examples;
9. Identify the type of decisions made by each group of users; and
10. Describe the type of information needed by each group of users.
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Let us Pray
“Heavenly Father, You hold each of us in your loving hands. Come fill our hearts, minds and
bodies afresh with hope. Help us to cast our worries upon you, so that we can embrace our
learning today.
Bless us as we study and grow together. Come and anoint those who teach and tutor us to be
bringers of insight and knowledge. Lord, watch over us all, keep us safe within your Almighty
hand.
Amen.”
DISCUSSION
Definition of accounting
Accounting is a process of identifying, recording and communicating economic information that
is useful in making economic decisions.
Essential elements of the definition of accounting
1. Identifying – The accountant analyses each business transaction and identifies whether
the transaction is an “accountable event” or “non-accountable event.” This is because
only “accountable event” are recorded in the accounting books. “Non-accountable
events” are not recorded in the accounting books.
“Accountable events” (or ‘economic events’) are those that affect the assets,
liabilities, equity, income and expenses of a business. Sociological and psychological
matters are outside the scope of accounting.
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”.
“Account” is the basic storage of information in accounting, e.g., “cash”, “land”,
“sales”, etc.
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.
This is important because information processed in the accounting system is useless
unless it is communicated to interested users. Accounting information is communicated
to interested users through accounting reports, the most common form of which is the
financial statements.
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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.
Types of information provided by accounting
1. Quantitative information – information expressed in numbers, quantities, or units.
2. Qualitative information – information expressed in words or descriptive form,
Qualitative information is found in the notes to financial statements as well as on the face
of the other components of financial statements.
3. Financial information – information expressed in money. Financial information is also
quantitative information because monetary amounts are normally expressed in numbers.
Accounting as science and art
1. As a social science, accounting is a body of knowledge which has been systematically
gathered, classified and organized.
2. As a practical art, accounting requires the use creative skills and judgement.
Accounting as an information system
A system is one that consists of an input, a process, and an output. For example, in your
digestive system, the input is the food you eat, the process is when your body produces digestive
juices to convert the food into an output called? ………………..energy! (The output my friend is
energy. The one you are thinking of is called waste. ☺ ) Your body needs energy so it can
function properly.
Similarly, in an accounting system, the inputs are the accountable events; the processes are
recording, classifying and summarizing; and the output is the accounting report that is
communicated to the users.
Bookkeeping and Accounting
Although bookkeeping function is part of accounting, bookkeeping and accounting are not the
same.
➢ Bookkeeping refers to the process of recording the accounts or transactions of an entity.
Bookkeeping normally ends with the preparation of the trial balance. Unlike accounting,
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bookkeeping does not require the interpretation of the significance of the information
processed.
➢ Accounting, on the other hand, covers the whole process of identifying, recording, and
communicating information to the interested users.
Function of Accounting in Business
Accounting is often referred as “language of business” because it is fundamental to the
communication of financial information.
Accounting has the following two broad functions in business:
1. To provide non-owners of business (i.e., external users) with information that is useful in
making, among others, investment and credit decisions; and
2. To provide business owners and managers (i.e., internal users with information that is
useful in managing the business
Managing a business
Good management is the key to a business’ success. On the other hand, mismanagement is, one
way or another, the cause of every business’ failure. Management, therefore, is no laughing
matter. It cannot be taken lightly. To be a good manager, one must equip himself or herself with
the right management tools – and one important management tool is accounting!
Management is a process of establishing common objectives, coordinating efforts towards those
objectives, and efficiently and effectively utilizing available resources so as to achieve certain
goals.
Managing a business requires more than just technical skills. A business manager is likened to a
musical conductor who leads a group of musicians to perform a musical piece to the best of their
abilities.
A successful business manager sees the “big picture” and understands each detail. He or she has
the ability to think “inside and outside the box” and to make both long-term (strategic) and shortterm (tactical) plans.
As a future business professional, you need to understand each of the following major facets of a
business:
A. Finance – refers to how a business generates and manages its funds. Finance is
responsible in providing adequate resources needed for the other facets to function
properly.
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B. Production- refers to how goods are produced or services are rendered. Production is
responsible for the quality of goods and services and the efficiency by which they are
produced or rendered.
C. Marketing – refers to how goods or services are communicated to customers. Marketing
is responsible in creating value for customers and building strong customer relationships.
D. Accounting – provides a measure of how well the other facets of the business are
performing. Accounting is responsible in providing useful information that aids in
making business decisions.
A manager makes countless business decisions. Few examples of these decisions include:
a.
b.
c.
d.
e.
How much money needs to be invested in the business?
How much inventory is enough
Is the business spending too much on its marketing activities?
Is the business earning profits?
Shall the business continue or cease existence?
Each of the major facets of business is mutually dependent. The work hand in hand. Without the
other, the business will not fully achieve its goals.
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Story
Once upon a time, there lived a turtle, a monkey, and a snake.
Mr., Turtle is diligent and has excellent cooking skills but is very shy and timid. No wonder
Mr. Turtle is still single at age 40.
Mr. Monkey is charismatic, has an outgoing personality and has many friends but
sometimes Mr. Monkey can be very trusting. No wonder many girls have taken advantage of Mr.
Monkey in the past.
Mr. Snake is very intelligent and cunning. But unlike Mr. Turtle and Mr. Monkey, Mr. Snake
is cold as ice and lazy. No wonder Mrs. Snake left him.
One day, Mr. Turtle and Mr. Monkey decided to put up a fast food restaurant. Mr. Turtle
was in-charge of the cooking while Mr. Monkey did the marketing.
When Mr. Snake heard about this, he offered himself to be the business’ cashier and
bookkeeper. With his slyness, he was able to make Mr. Turtle and Mr. Monkey accept him as coowner of the business for a very minimal amount of investment.
As skillful and diligent as he is, Mr. Turtle was able to formulate recipes that never failed to
make customers smile. With Mr. Monkey’s marketing skills, the business’ customers and market
share continued to grow.
After years of operation, the business gained considerable growth. The business even
received recognition from various organizations for its excellence. However, Mr. Turtle and Mr.
Monkey, the founders of the business, have never tasted yet the fruits of their labor in monetary
terms. They got frustrated, which eventually led them to cease their operations and call it quits.
The End
It seems there is no happy ending to the story. Why? ……. Honestly. I don’t know. ☺✌ No one
knows for sure, but here are possible reasons:
1. Maybe the business earned no profits because of excessive expenses despite of increased
sales;
2. Maybe they had the wrong pricing decision, e.g., excessively low pricing;
3. Maybe the business was assessed with excessive taxes; or
4. Maybe Mr. Snake embezzled the business’ money …….and so on.
There are so many “maybes” but all of these can only be corroborated by accounting information!
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Accounting as managerial tool
As mentioned earlier, accounting is an essential managerial tool. This is because accounting
provides information that helps a business manager perform his or her management functions.
Functions of a manager
1. Planning – involves the process of mapping out or arranging in detail how a business
goal is to be achieved.
2. Organizing – after a plan is formulated, a manager needs to organize his or her
personnel and other resources according to the plan. Organizing involves assigning
responsibilities and granting authority to personnel.
3. Staffing – involves the process of selecting, training and developing employees. This
function is commonly referred to as human resource management.
4. Directing – after a plan is formulated and resources are organized and made
available, a manager needs to lead his personnel to ensure that each is performing his
or her responsibilities towards the organization’s common goal to the best of his or
her ability.
Directing involves motivating, communicating, guiding and encouraging personnel.
5. Controlling – after the other elements are in place, a manager needs to continuously
monitor results against goals and take corrective actions necessary to ensure that the
plan remains on track.
Examples in which accounting is used in making management decisions
Function
1. Planning
2. Organizing
Management decision
• The need to improve
sales and the
business’ ability of
doing so.
• Do we need
additional production
facilities and
equipment to cater
the planned increase
in sales?
•
Do we have the
ability to spend more
on our marketing
activities?
Accounting information
• The current and past
levels of the business’
sales.
• Forecast of sales
• The current
productive capacity of
existing facilities and
equipment.
•
•
The marketing costs
spent in the past in
relation to the sales
generated.
The amount of
available cash and the
business’ ability to
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3. Staffing
•
Do we need to
employ additional
personnel?
•
•
4. Directing
5. Controlling
•
•
Are the employees
properly motivated,
informed, guided and
encouraged in
meeting the business’
goal of increasing its
sales?
Have we met our
goal of increasing
our sales?
•
•
•
generate additional
financing.
The number of current
employees compared
to the current level of
productivity.
The amount of
available cash needed
to employ additional
personnel.
Records of personnel
training and
development costs.
Records of daily
sales.
Variance analysis on
differences between
actual sales and
expected sales.
Accounting as a managerial tool is likened to a global Positioning System (GPS) attached to a
car. It shows exactly where you are (financial position) and how far you have been (financial
performance) this information is vital in determining your ability to get to your desired
destination (strategic and short-term goals).
Accounting information is also likened to the statistics gathered after a basketball game – the
number of rebounds, points, shots taken and shots missed, etc. This information helps the coach
and his players plan their strategy for the next game.
Now that we have understood how accounting plays an important role in making business
decisions, let us have a brief overview on how accounting came to be.
Brief history of accounting
What does a Venetian friar have to do with your accounting system? It turns out, a lot.
Luca Pacioli, a Franciscan friar in Medieval Venice, wrote the Summa de arithmetica,
geometria, proportioni et proportionalità in 1494. In it, he detailed a system of financial
recordkeeping in which every debit (Latin for “he owes”) was matched to a credit (“he
trusts”). He warned that a person should not go to sleep at night until his debits matched his
credits. In his system, Pacioli included asset, liability, capital, income, and expense accounts:
exactly those categories you would find on your own balance sheet and income statement.
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Although he is not credited with having invented the system (that designation goes to the
Venetian merchants who used it), he is nonetheless known as the “Father of Accounting” for
having put it to paper.
Although modern accounting revolves around double-entry bookkeeping, accounting as a
technical craft existed long before Pacioli. Financial records of goods sold and money
exchanged stretch back to ancient Mesopotamia, Assyria, Babylon, and Sumeria, where it likely
functioned as an expedient to taxation and the operation of temples. There is even record of a
state official in Egypt holding the title of “comptroller.”
On the more modern side of Pacioli, accounting came into its maturity in Scotland in the
nineteenth century, where the first professional accounting organizations emerged under Royal
Charter. In the bustle of exploding global trade, the Institute of Chartered Accountants in
England and Wales came to life in 1880, and quickly thereafter, the American Institute of
Certified Professional Accountants in 1887. The Industrial Revolution turned accounting into a
critical component of the global economy.
So the next time you sit down to reconcile your bank statement, take pride. It may seem like
mere housekeeping, but really you’re participating in a time-honored tradition that goes back to a
15th-century Italian friar and beyond.
And remember: Don’t go to sleep until your debits match your credits.
(An interesting note: Pacioli was evidently good friends with Leonardo da Vinci. Da Vinci may
have contributed to a volume Pacioli published on the subject of chess by providing the text with
illustrations and diagrams.)
Common branches of accounting
1. Financial accounting – is the branch of accounting that focuses on general purpose
financial statements. General purpose financial statements are those that cater to the
common needs of a wide range of external users.
2. Management accounting – involves the accumulation and communication of
information for use by internal users. An offshoot of management accounting is
management advisory services which includes services to clients on matters of
accounting, finance, business policies, organization procedures, product costs,
distribution, and many other phases of business conduct and operations.
3. Government accounting – refers to the accounting for the government and its
instrumentalities, focusing attention on custody of public funds, the purpose or purposes
to which such funds are committed, and the responsibility and accountability of the
individuals entrusted with such funds.
4. Auditing – is a process of objectively evaluating evidence and expressing an opinion
regarding correspondence between management’s assertions and established criteria.
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5. Tax accounting – is the preparation of tax returns and rendering of tax advice such as
determination of tax consequences of certain proposed business endeavors.
6. Cost accounting – is the systematic recording and analysis of the costs of materials,
labor, and overhead incident to the production of goods or rendering of services.
7. Accounting education – refers to teaching accounting and accounting-related subjects in
an organized learning environment. It is a process of facilitating the acquisition of
knowledge and skills regarding one or more of the other branches of accounting.
8. Accounting research – pertains to the careful analysis of economic events and other
variables to understand their impact on decisions. Accounting research includes a broad
range of topics, which may be related to one or more of the other branches of accounting.
Accounting research topic
Impact of fair value measurement
on the financial statements.
Inventory management and its
effect on earnings.
Internal controls and modern
technology.
Becoming a certified public
accountant.
Related branch of accounting
Financial accounting.
Management accounting.
Auditing.
Accounting education.
Users of Accounting Information
Users of accounting information are broadly classified into two namely:
1. Internal users – those who are directly involved in managing the business. Examples of
internal users include:
a. Business owners who are directly involved in managing the business.
b. Board of directors
c. Managerial personnel
2. External users – those that do not have the authority to demand financial reports tailored
to their specific needs. These are those who are not directly involved in managing the
business. Examples of external users include:
a. Existing and potential investors (e.g., stockholders who are not directly involved
in managing the business)
b. Lenders (e.g., banks) and creditors (e.g., suppliers)
c. Government agencies (e.g., Bureau of Internal Revenue, Securities and Exchange
Commission)
d. Non-managerial employees
e. Customers
f. Public
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Types of accounting information classified as to users, needs
1. General purpose accounting information – is the information designed to meet the
common needs of most statement users. It is provided by financial accounting and is
prepared primarily for external users.
2. Special purpose accounting information – is the information designed to meet the
specific needs of particular statement users. It is provided by management accounting or
other branches of accounting and is prepared primarily for internal users.
Examples of decisions and types of information needed to make those decisions
User
1. Investor
(External
user)
Example of decision to make
•
•
2. Lender or
supplier
(External
user)
•
3. Manager
(Internal
user)
•
•
•
Existing investor –
whether to hold or to sell
investment in stocks.
Potential investor –
whether or not to buy
shares of stocks.
Lender – whether or not
to extend a loan to a
business.
Supplier – whether or
not to extend credit to a
business.
Whether or not to
increase the sales price
of the product
Example of information
needed
• Audited
financial
statements of the business
to aid in analyzing the
value of the company.
(General
purpose
information)
• Audited
financial
statements of the business
to aid in analyzing the
company’s ability to pay
its
debts.
(General
purpose information)
• Analysis of the effects of
sales volume and sales
prices
to
earnings.
(Special
purpose
information)
How much capital is
needed to manufacture a
new product?
•
Budget report. (Special
purpose information)
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References
a. Online Resources
•
https://www.bsbllc.com/brief-history-accounting/
b. Printed Resources
•
Fundamentals of Accountancy, Business & Management Part 1 (2017); Rodiel C.
Ferrer and Zeus Vernon B. Millan; Bandolin Enterprises
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Prepared by:
LYNLEEN A. ALAGASI
Subject Teacher
JON CHRISTI AN M. MIRANDA
Subject Teacher
Reviewed by:
LADY JANE CALDERON
Subject Coordinator
Checked by
Recommended for approval by:
JENNY LIZ J. ANYAYAHAN
Academic Coordinator, Basic Education
DR. FEDELIZA A. NAMBATAC
Principal, Basic Education
Approved by:
BRO. HUBERTUS GURU, SVD
Director, Basic Education
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