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Study Material and Notes (November 2021)
ACCOUNTING AND ITS NATURE
What is Accounting?
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Accounting is a systematic process of identifying, measuring, and
communicating financial information about transactions of a
business.
Accounting is the language of business (Warren Buffet). It is the
language of business because it allows business entities and
financial information users to communicate with each other about
their financial information and create decisions.
Warren Buffet, CEO of Berkshire
Hathaway
Source: Forbes.com
What is Bookkeeping?
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A part or a basic function of accounting. It is specifically for record keeping and maintaining
the books of accounts.
Natures of Accounting
1. Accounting is an art.
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It is an art of recording, classifying, and summarizing in a significant manner and in terms
of money, transaction, and events that are in financial characters at least and interpreting
the results thereof. (American Institute of Certified Public Accountant (AICPA)
It needs honed skills and knowledge from experiences, education, or observation.
2. Accounting is a service activity.
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It is a service activity because it has a particular purpose which is to provide quantitative
information expressed in monetary terms about economic units for decision making.
3. Accounting is a systematic process.
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It is a systematized process because it requires a series of steps to be followed to reach a
result. Specifically, it is the identifying, measuring, and communicating of financial
information to reach the result which is judgement and decision making.
4. Accounting is a profession.
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It is a recognized and established profession because it needs to undergone formal
education, trainings, and the Licensure Exam for Certified Public Accountants (LECPA) to
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Study Material and Notes (November 2021)
master the intellectual skills needed and be able to follow certain codes of values and
accept its duty for the society.
Functions of Accounting
1.
2.
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4.
Systematically record transactions based on books of account
Classify assets, liabilities, and owners’ equity
Summarize and meet needs of users through financial statements
Communicate and interpret result to users through financial reports
Financial Information needed by Users
1. Statement of Financial Position- type, amount and balances of the asset, liabilities, and
owner’s equity in the present (now, as of, a moment in time, for a point in time)
2. Statement of Comprehensive Income- net profit or net loss during a period time (for the
period, from beginning to end)
3. Statement of Cash Flows- the operating, investing, and financing activities that affected
cash inflows and outflows during a period time (for the period, from beginning to end)
4. Statement of Changes in Owner’s Equity- accounts and transactions that changed the
equity during a period time (for the period, from beginning to end)
Users of Financial Information
1. Internal Users- users directly involved in the activities inside the business entity.
a. Owners- the one who formulated the business through investments and ideas. Owners use
financial information to know the financial status of the company and make relative
decisions for it.
b. Management- employed by the business to deliver detailed financial information and use
it to set goals for the company.
c. Employees- not directly involved in decision making but uses financial information for
future employment decisions and to view the status of the company.
2. External Users- users that are not directly involved inside the business entity.
a.
b.
c.
d.
Creditors- uses information to identify the business’ obligation to pay or worthiness.
Government- for tax and economic purposes.
Investors- to find the business’ strength in terms of returns of investment.
Consumers- also known as the end users of financial information. Uses it every time they
use a product.
e. Customers- use financial information for decision making about what product to buy, to
sell, or to use for operations.
f. Research Scholars- students that use information for investigation and references.
g. General Public- everyone uses financial information even the media and other digital
platforms for references and decision making.
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Study Material and Notes (November 2021)
Few Accounting Reminders that any Accountancy Student Should know:
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An accountant should have integrity and competence
Accounting is FAIR not ACCURATE because accountants make estimates
To account means to take responsibility
Stockholder is not the same as shareholders
An accounting system are methods used by business to keep financial records and
summarize it to reports
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