HISTORICAL BACKGROUND:
 accounting came about because of man’s need to keep records
 present day recording system for business activities can be
traced from the book of Luca Pacioli in November 1494, it
contained primarily principles of mathematics and incidentally a
set of accounting procedures
WHAT IS ACCOUNTING:
 it is considered to be the language of business
 an art of recording, classifying, summarizing in a significant
manner and in terms of money, transactions and events, which
are in part, at least, of financial character and interpreting the
results thereof - according to the Committee on Terminology of
the American Institute of Accountants
PURPOSE OF ACCOUNTING:
 accounting provides a record of business transactions in financial
terms, these transactions and other important events should be
recorded to serve as reference for future recall
 provides the management with information necessary for
efficient operation of the business
DIRECT USERS OF ACCOUNTING:
a. OWNER
 interested to know whether the business should be
maintained, increased, decreased, disposed of completely
and whether he is getting a fair return of his investment
b. MANAGEMENT
 financial information serves as a measure for making future
financial decisions and a measure of its effectiveness
c. PROSPECTIVE INVESTORS
 interested in the financial statement to determine whether
to acquire ownership in the firm
d. CREDITORS
 they use financial statements as a basis in granting loans
e. EMPLOYEES
 interested in information enable them to assess the ability of
the firm to provide compensation and other benefits
f. GOVERNMENT
 it needs accounting information to regulate the firm’s
activities and determine the basis for taxation policies
Fields of Accounting:

a professional accountant may pursue a career in any of
the following four major fields:
a. Public Accounting: the accountant in public accounting is one
who offers accounting services to the public for a fee.

these services may include:
Auditing, Management
Advisory Services, Tax services
b. Private Accounting: enterprises of private ownership employ as
many accountants as they may find necessary

work may be divided into the following fields of
specialization:
General Accounting, Cost Accounting,
Budgeting, Internal Auditing
c. Government Accounting: government officials, like private
business firms, rely on accumulated
accounting data

the accountant in government prepares budgets, gathers
and records transactions, audit governmental units, and
examines/audit the income, payroll and tax returns
submitted to the government
d. Accounting Education and Research:
the accountant in
education seeks to bridge the gap between
practice and theory; as for research, it helps to
make the profession alive, relevant and
interesting
BUSINESS ORGANIZATION:
business organizations can be
classified into two:
 According to ownership and nature of the business
Types of Ownership:
Single or Sole Proprietorship:
 the business organization is owned by one person, who is also
the manager of the business
Partnership:
 the business organization is owned by two or more persons
(called partners)
 the owners agree on the capital contributions (money,
property or industry), management or the firm, distribution of
profits and losses
Corporation:
 a corporation is formed when five or more investors agree to
engage in business, whose capital is divided into shares of
stock
 this is organized by operation of law
Types of Nature of Business:
Service Concern:
 this deals with the rendering of services to the customers such
as tailoring, barber shops, firms of CPAs, lawyers, doctors, etc.
Trading or Merchandising:
 this deals with the buying of goods and selling the same goods
in the same form for profit
 examples: sari-sari stores, department stores, grocery stores
Manufacturing Concern:
 this involves purchase of raw materials and converting these
materials into finished products
 ex: textile manufacturing firms, paper manufacturing firms
Elements of Financial Statements:
Balance Sheet
• it is a statement of the total assets and liabilities of an
organization at a particular date - usually the last date of an
accounting period.
• measurement of financial position
• elements of a balance sheet: assets, lliabilities, capital
Income Statement
• is a historical record of the trading of a business over a
specific period (normally one year)
• measurement of performance (shows the profit or loss)
• elements of an income statement: income, expenses
Cash Flow Statement
• measurement of changes in financial position
• shows the amount of cash generated and used by a company
in a given period
Business as an Accounting Entity:
• in accounting, the business is treated as an entity or person
distinct and separate from the owner or owners
• the personal assets and liabilities of the owner/s are different
from the assets and liabilities of the business
Accounting Elements or Values:
Assets:
• these are economic resources owned by the business
• they include properties and other things of the value the
ownership title of which is in the name of the business
Current Assets:
•
assets which can be reasonably converted to cash within
a short period of time
a. Cash/Cash on Hand and In Banks
b. Receivables (amounts due from customers arising from credit
sales or credit services)
c. Inventories (work-in-process goods and completely finished
goods that are considered to be the portion of a
business's assets that are ready or will be ready for sale)
d. Prepayments (expenses paid in advance)
Noncurrent Assets:
• assets which are not classified as current
• they include property, plant and equipment
• these are tangible assets used in the operation of the
business, have useful life that exceeds beyond one year and
are not intended for sale
Liabilities:
• these are debts or obligations of the business to a party other
than its owner
Current or short-term Liabilities:
• these are debts which are due for payment within a short
period of time or within one year from the balance sheet date
• payable in current asset
a. Accounts Payable (amounts due to third parties for purchases
on credit)
b. Notes Payable (amounts due to third parties supported by
promissory notes)
c. Accrued Expenses (recognized in the books before it is paid for)
Fixed or Long-term Liabilities:
• these are debts which mature beyond one year from the
balance sheet date
• examples: mortgages payable, bonds payable, notes payable
due beyond a year
Capital:
• value of cash and other assets contributed to the business by
the owner of the business.
• it represents the owners’ equity or investment in the business
• other terms of capital are Owner’s Equity and Proprietorship
TRANSACTIONS:
• transactions are the data we record in the accounting books,
they are also the economic activities of the firm
• external transactions are activities involving the enterprise
and another enterprise
• internal transaction is an activity within the enterprise
• in every transaction, there is always a value received and a
value parted with, which may either be money, property or
services
Recording
• technically called bookkeeping
• it is in this phase where business transactions are recorded
systematically & chronologically in the proper accounting
books
Types of Bookkeeping:
a. Single Entry Bookkeeping (it shows only the debit or the credit
of each transaction)
b. Double Entry Bookkeeping (reflects the two-fold effects of
business transactions, it has a debit and a credit)
Classifying
• items are sorted and grouped wherein similar transactions and
events are classified under the same name.
Summarizing
• involves grouping together the various accounts referred to in
the classifying process
• they may be classified as asset accounts, liability accounts,
capital accounts, revenue accounts, cost and expense
accounts
• the classification is useful to the needs of the management
Reporting
• involves the preparation of financial summaries called financial
statements : Balance sheet, Income statement and Cash flow
statement
• these are written reports submitted to users of information
Interpreting
• involves the computation of relationships of figures from the
financial reports and schedules
• it is a combination of figures and narrations based on the
figures presented. The relationships may be in percent or in
ratios; and may be within the financial report or one report in
relation to another report.
Importance of the Accounting Equation:
• Business transactions affect the assets, liabilities and
proprietorship of the business.
These effects can be
expressed in the accounting equation: ASSETS = EQUITIES
Steps in Accounting Process:
Analyzing
• involves looking over transactions entered into, economic
events that have taken place, and determining their effects on
the business.
• these are generally supported by documentary evidences or
proofs such as a purchase order, delivery receipt, invoice or
official receipt.
Equity: it is the right, claim or interest of a person over the assets
of the business, sources are liabilities and capital
• liability represents such claim in the assets of the business
• proprietorship is the owner’s interest in the business
• Since there are two sources of equities, from the creditors and
from the owner, then we can express the accounting equation
as:
ASSETS = LIABILITIES + CAPITAL
Possible effects of a transaction to the Accounting
Elements:
Decrease in assets = Decrease in Liabilities
Decrease in assets = Decrease in Owner’s Equity
Increase in assets = Increase in Liabilities
Increase in assets = Increase in Owner’s Equity
Increase in one form of asset = Decrease in another form of asset
Increase in one form of liability = Decrease in another form of
liability