The Relevance and History of Accounting
Accounting is part of your daily life.

Individual Needs Accounting
o Day to day activities
o Budget of finances
o Doing a better job (employee
and/or entrepreneur)
o Comply
with
government
regulations
For as long as civilizations have been
engaging in trade or organized systems of
government, methods of record keeping,
accounting, and accounting tools have been in
use.

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
Benedetto Cotrugli
o In 1458, he invented the doubleentry accounting system, which
revolutionized accounting.
Double-entry accounting
o It is defined as any bookkeeping
system that involves a debit
and/or
credit
entry
for
transactions.
Luca Bartolomes Pacioli
o He is an Italian mathematician
and Franciscan monk.
o He invented a system of record
keeping
that
used
a
memorandum, journal, and
ledger, wrote many books on
accounting.
o Born in 1445 in Tuscany.
o He is known today as the father
of accounting and bookkeeping.
o In 1494, he wrote “Summa de
Arithmetica,
Geometria,
Proportioni et Proportionalita”.
Summa de Arithmetica, Geometria,
Proportioni et Proportionalita
o It is translated as "The Collected
Knowledge
of
Arithmetic,


Geometry, Proportion, and
Proportionality".
o It included a 27-page treatise on
bookkeeping and was the first
known published work on the
topic
of
double-entry
bookkeeping.
o It was one of the first published
using the historical Gutenberg
press.
o One chapter of it is "Particularis
de Computis et Scripturis".
Particularis de Computis et Scripturis
o It became the reference text and
teaching tool on those subjects
for the next several hundred
years on the topic of record
keeping
and
double-entry
accounting.
o It educated readers about the
use of journals and ledgers;
accounting
for
assets,
receivables,
inventories,
liabilities, capital, income and
expenses; and keeping a balance
sheet and an income statement.
History of Accounting
1. Simple accounting is mentioned
in the Christian Bible in the book
of Mathew in the parable of the
Talents.
2. The Quran also mentions simple
accounting for trade and credit
arrangements.
3. Kautilya’s famous Arthashastra
not only relates to Economics
and Politics, but also explains
the art of account keeping.
4. Luca Pacioli, wrote a book,
“Summa
de
Arithmetica,
Geometria,
Proportioni
et
Proportionalita” in 1494.
o
The Importance of Accounting in Business

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Business
o It is an entity that produce or sell
goods and services for a profit.
o Its major concern is to earn
profit.
Non-for-profit Organization
o It is a business established for
other reasons.
o It operates to fulfill a charitable
mission or further a social cause.
o Common examples of it are Red
Cross which is known for its
blood donation activities and
provides immediate relief and
assistance during disasters, and
Gawad Kalinga with its mission
of ending the poverty of Filipino
families.
Roles that business plays in our society:
o Service provider
o Product provider
o Job provider
o Revenue source for the
economy
The taxes that these businesses pay to
the government are being used to construct
public schools, hospitals, roads and bridges
which improves the lives of its citizen while
creating more job opportunities. If the business
system will stop, it will greatly harm the economy
like what we are experiencing right now due to
the effect of COVID 19 where most of
nonessential operations suffered severe losses
and others were forced to close.

Accounting
o It refers to the systematic and
detailed recording of financial
transactions of a business.
o It is called the “language of
business”.

It is a means of communicating
financial information about the
business.
Roles of accounting in a business
o To enable the business maintain
an organized financial records
and reports.
o Financial reports will provide
information on: position of the
business in terms of its assets,
liabilities
and
capital;
performance of the business if
earning or losing (revenue and
expenses); changes in equity if
increasing or decreasing; and it
provides the balance of your
cash, its sources and uses.
o It ensures statutory compliance.
o It
provides
investors,
management, and government
with quantitative
financial
information.
o It can alert the management if
there is something wrong with
the business.
It is critical to keep the financial records
organized and up to date to provide reliable
financial information about the business.
Forms of Business Organization

Sole Proprietorship
o It is a business owned by only
one person.
o It is easy to set-up and is the
least costly among all forms of
ownership.
o The owner faces unlimited
liability; meaning, the creditors
of the business may go after the
personal assets of the owner if
the business cannot pay them.
o It is usually adopted by small
business entities.
o Capital: From owner
o
o
o
o
o
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
o
Management: By owner
Decision: Quick – Only by owner
Life of Business: Limited
Extent of Liability: Owner’s
liability is unlimited
Registration: Department of
Trade and Industry (DTI)
Partnership
o It is a business owned by two or
more persons who contribute
resources into the entity.
o The partners divide the profits of
the business among themselves.
o In general partnerships, all
partners have unlimited liability.
o In limited partnerships, creditors
cannot go after the personal
assets of the limited partners.
o Capital: From partners
o Management: By managing
partners
o Decision: By all partners
o Life of Business: Limited
o Extent of Liability: General
Partners – Unlimited
o Registration: Securities and
Exchange Commission (SEC)
Corporation
o It is a business organization that
has a separate legal personality
from its owners.
o Ownership
in
a
stock
corporation is represented by
shares of stock.
o The owners (stockholders) enjoy
limited liability but have limited
involvement in the company's
operations.
o The board of directors, an
elected group from the
stockholders,
controls
the
activities of the corporation.
o Capital: From public


Management:
Board
of
Directors, President/CEO
o Decision: Board of Directors,
President/CEO
o Life of Business: Unlimited
o Extent of Liability: Limited – Only
up to amount of investment
o Registration: Securities and
Exchange Commission (SEC)
Limited Liability Company (LLCs)
o It is a hybrid form of business
that have characteristics of both
a corporation and a partnership.
o It is not incorporated; hence, it is
not considered a corporation.
But the owners enjoy limited
liability like in a corporation.
o It may elect to be taxed as a sole
proprietorship, a partnership, or
a corporation.
Cooperative
o It is a business organization
owned by a group of individuals
and is operated for their mutual
benefit.
o The persons making up the
group are called members.
o It may be incorporated or
unincorporated.
o Some examples of it are: water
and
electricity
(utility)
cooperatives,
cooperative
banking, credit unions, and
housing cooperatives.
Types of Business Operations
A business earns profit depending on its
type of operation.

Service Business
o It provides intangible products
(products with no physical
form).
o


It offers professional skills,
expertise, advice, and other
similar products.
o Examples of it are: salons, repair
shops,
schools,
banks,
accounting firms, and law firms.
Merchandising Business
o It buys products at wholesale
price and sells the same at retail
price.
o It is known as "buy and sell"
business.
o It makes profit by selling the
products at prices higher than
their purchase costs.
o It sells a product without
changing its form.
o Examples are: grocery stores,
convenience stores, distributors,
and other resellers.
Manufacturing Business
o It buys products with the
intention of using them as
materials in making a new
product. Thus, there is a
transformation of the products
purchased.
o It combines raw materials, labor,
and overhead costs in its
production
process.
The
manufactured goods will then
be sold to customers.
But how are you going to classify a fast
food chain such as Jollibee or Mc Donald’s? Since
they transform a dressed chicken legs into
delicious chicken joy and potatoes to french fries,
they are into manufacturing type or processing
type of operation.
There are several businesses that are
engaged in different type of operations. Example
is a hotel business that has a restaurant inside
the hotel. The hotel's primary business is service
for the rooms income, but for the hotel's
restaurant it is a merchandising and
manufacturing (processing) type of operations.
This type of business that is engaged in more
than one type of operations is called "hybrid"
type of business.
The Definition of Accounting, Types and Users
of Financial Statements Immersive Reader

Accounting
o Make possible the periodic
matching of cost (efforts) and
revenue.
o Art of recording, classifying and
summarizing in a significant
manner and in terms of money,
transactions and events, which
are in part at least of a financial
character and interpreting the
results thereof.
o The purpose of accounting is to
provide information which is
potentially useful for making
economic decisions and which if
provided will enhance social
welfare.
o As the provision of information
about the financial position,
performance and financial
adaptability of an enterprise
that is useful to wide range of
potential users in making
economic decisions.
o It comes from the word
“account” which is synonymous
to a record, narration, or journal.
o The Merriam Webster dictionary
define the word account as a
description of facts, conditions,
or events; and to furnish a
justifying
analysis
or
explanation. You could relate it
to a typical job of an accountant
who records the transactions of
an entity and prepares its


financial reports. But of course,
the responsibilities of an
accountant are beyond the
recordkeeping task, there are
enormous value-added function
an accountant could offer.
o “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, in making
reasoned
choices
among
alternative courses of action.” –
The American Institute of
Certified Public Accountants
(AICPA)
o It is referred to as “the language
of business” as financial
information is a means to
communicate the financial
condition and performance of
an entity to its users in making
sound decisions.
“Accounting is a service activity…”
o Similar to other professions,
accountants use its technical
expertise to serve its clients.
o The accountant could act as a
bookkeeper who records all the
transactions of the company.
o He may also serve as an auditor
who examines the company’s
financial records.
o He could also act as a consultant
who assist the owners in coming
up with important management
decisions.
“Its function is to provide quantitative
information, primarily financial in
nature about economic entities…”
o The financial reports contain
information about economic


entities or business in terms of
money.
o It shows the net worth of the
company by detailing out the
amount of its resources (e.g.
cash, inventories, building,
equipment, etc.) and obligations
(e.g. salaries payable, utilities
payable, loans payable, etc.) at
any given point of time and how
much did the company earned
by summarizing the income and
expenditures for a specified
period.
“that is useful in making economic
decisions, in making reasoned choices
among alternative courses of action.”
o Business
owners
and/or
managers from time to time
would need to make a decision
about their business.
o Should they open up another
branch? Is it the right time to
increase the selling price?
Should
they
add
more
employees? These questions
shouldn’t be answered through
a wild guess. A decision must be
based on a complete and
relevant data. That is when
financial reports will be very
useful.
Financial Statement
o It shows you where a company’s
money came from, where it
went and where it is now.
o It is a report that summarizes
important financial information
about the business.
o It is the end product of the
accounting process prepared the
company’s management to
present
the
financial
performance and position in a
o
given period (monthly, semiannually or yearly) depending
on the company’s practices and
reporting period.
Usually, companies observe the
yearly reporting period.
Users of Financial Information

Basic Set of Financial Statement

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


Statement of Financial Position
(Balance Sheet)
o It is a progress report showing a
list of assets, liabilities and
owner’s net worth.
Statement of Comprehensive Income
(Income Statement)
o It is a performance report of
revenues against costs and
expenses.
o It shows the net income or profit
that the owner has generated
during a period.
Statement of Cash Flows
o It is a cash report showing where
we got and where we used the
money.
o Was it used in operation,
investing or financing activities?
Statement of Changes in Owner’s Equity
(Net Worth)
o This is a progress report that
shows how the capital/ owner’s
investment had increased or
decreased for a given period as a
result of additional investments,
profit and any withdrawals the
owner have made.
Notes to the Financial Statements
o They are explanatory notes
supplemental to the four basic
statements
that
provides
additional information so that
the users can understand what
information it is trying to convey.

Primary or Internal Users
o Owner/s – the owners provide
capital for the business. Owners
are interested in knowing
whether their capital is earning
or losing.
o Management
–
the
management is interested in
knowing the position and
performance of the business.
The financial statements serve
as the initial source of
information in planning the
course of actions by the
management.
o Employees – the demand for
salary increase, benefits, bonus
and better working conditions of
employees depend upon the
profitability of the firm and to its
financial position. For this
reason,
employees
are
interested
in
financial
statements of the business.
Secondary or External Users
o Creditors
and
Financial
Institutions – the Creditors are
the persons who supply goods
on credit, or bankers or lenders
of money. The creditors are
interested to know the financial
soundness of the company
before granting credit.
o Investors – the prospective
investors are interested to see
the progress and prosperity of
the firm by reviewing the
financial statements. This is to
safeguard the investment.
o Government – the government
is interested in the financial
statements to know the earnings
for the purpose of taxation.
o
o
o
o
o
Customers – in situations
wherein
customers
are
dependent on the product of the
firm, they become interested in
the financial statements. This is
to ensure that the customer’s
production will not be affected
in the event that the firm closed
its operations.
Vendors and Suppliers - are
users of accounting information
as they need to decide whether
to trade with the business, and
in particular whether or not to
provide credit terms. They are
concerned with the ability of a
business to make payment of
invoices on the due dates.
Employees - are stakeholders in
the business and want to know
their employer or potential
employer is financially stable,
and is able to continue to
provide
remuneration,
employment opportunities, and
retirement benefits.
Competitors - Competitors will
make use of publicly available
accounting information in order
to assess the level of
competition they face.
Public - The public use corporate
financial
information,
particularly the annual financial
statements,
to
gather
information about a business
and its activities during the year.
Governing Authorities and Regulators
Authorities and Standards that Govern the
Practice of Accountancy Profession

International Standard-Setting Boards
o Setting
high-quality
international standards that
o



inspire
confidence
in
economies.
o The work of the international,
independent standard-setting
boards supports the global
economy and financial markets
by producing high-quality, global
standards for audit and
assurance, professional ethics,
public sector financial reporting,
and professional skills and
competencies.
The International Auditing and
Assurance Standards Board (IAASB)
o It sets high-quality international
standards
for
auditing,
assurance,
and
quality
management that strengthen
public confidence in the global
profession.
o Audit and Assurance.
International Accounting Education
Standards Board (IAESB)
o It established standards for
professional
accountancy
education
that
prescribe
technical competence and
professional skills, values, ethics,
and attitudes.
o It was the independent
standard-setting body that
established the International
Education Standards (IES).
o Professional
skills
and
competencies.
International Education Standards (IES)
o These standards detail the
principles
professional
accountancy
organizations
should follow to build a national
accountancy profession that is
fully capable of fulfilling the
complex demands economies
and societies place on it.
o



They are authoritative and are
used by IFAC member bodies
when
setting
education
requirements
for
aspiring
professional accountants
International Ethics Standards Board for
Accountants (IESBA)
o It
sets
high-quality,
internationally
appropriate
ethics standards for professional
accountants, including auditor
independence requirements.
o Professional Ethics.
International Public Sector Accounting
Standards Board (IPSASB)
o It develops standards, guidance,
and resources, for use by public
sector entities around the world
for preparation of general
purpose financial statement.
o Public
Sector
Financial
Reporting.
International Accounting Standards
Board (IASB)
o It is established by International
Financial Reporting Standards
(IFRS) Foundation.
o It is IFRS Foundation’s standard
setting body, that develops a
single set of high quality,
understandable,
enforceable
and
globally-accepted
accounting standards – IFRS
Standards – and promotes and
facilitates adoption of the
standards.
o As of April 25, 2018, a total of
166
jurisdictions
(nations)
worldwide have made a public
commitment to support a single
set of high quality global
accounting standards.
o Private
Sector
Financial
Reporting

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
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
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

International
Financial
Reporting
Standards (IFRS) Foundation
o It
is
established
and
headquartered in London.
Financial Accounting Standards Board
(FASB)
o It is established by Financial
Accounting Foundation.
o It
establishes
financial
accounting
and
reporting
standards for public and private
companies and non-for-profit
organizations
that
follow
Generally Accepted Accounting
Principles (GAAP).
o Private
Sector
Financial
Reporting
IES 1
o Entry
Requirements
to
Professional
Accounting
Education Programs
IES 2 (Initial Professional Development)
o Technical Competence
IES 3 (Initial Professional Development)
o Professional Skills
IES 4 (Initial Professional Development)
o Professional Values, Ethics and
Attitudes
IES 5 (Initial Professional Development)
o Practical Experience
IES 6 (Initial Professional Development)
o Assessment of Professional
Competence
IES 7
o Continuing
Professional
Development
IES 8
o Professional Competence for
Engagement
Partners
Responsible for Audits of
Financial Statements
Commission on Higher Education
(CHED)
o





It is a government regulatory
unit that sets the minimum
requirements for professional
accounting education program
in the Philippines.
o IES 1, 2, 3, 4, 5 (through the
Technical
Committee
on
Accounting Education)
Professional Regulatory Board of
Accountancy (PRBOA)
o It is government regulatory unit
that supervises the registration,
licensure, and practice of
accountancy in the Philippines.
o IES 1, 6, 7, 8
Philippine Institute of Certified Public
Accountants (PICPA)
o It is the Accredited Professional
Organization (APO) of CPAs in
the Philippines.
o It is the IFAC Member Body for
the Filipino CPAs.
o IES 7, 8
Generally
Accepted
Accounting
Principles (GAAP)
o They are rules, conventions,
procedures and standards that
are accepted in a community,
thus,
generally
accepted
accounting standards could vary
in different locations.
o Practically, the rest of the world
that had not yet adopted IFRS
are still using GAAP, two of which
are major economies of the
world – U.S.A. and China.
Financial Accounting Foundation (FAF)
o It
is
established
and
headquartered in Norwalk,
Connecticut, USA.
International Federation of Accountants
(IFAC)
o It is the global organization for
the accountancy profession,



comprising more than 180
member
and
associate
organizations in 135 countries
and jurisdictions, representing
more than 3 million professional
accountants.
o It is committed to a global
standard-setting system that is
credible, inclusive, legitimate,
and produces international
standards that are relevant,
innovative, and responsive to
meet the challenges of the
future.
o It facilitates the structures and
processes that support the
following
independent
standard-setting
boards’
operations: IAASB, IAESB, IESBA,
and IPSASB.
o It also supports IASB with
respect to setting international
accounting standards.
Philippine Institute of Certified Public
Accountants (PICPA)
o It is one of the more than 175
member organizations of IFAC,
and officially represents the
Filipino CPAs to this global
organization.
Other government regulatory units that
affect the work of professional
accountants, depending on the financial
reporting industry:
o Securities
and
Exchange
Commission (SEC)
o Bangko Sentral ng Pilipinas (BSP)
o Bureau of Internal Revenue (BIR)
Minimum Requirements
o Curriculum Requirements
o Retention policies
o Licensure or Certification Exams
o Continuing
Professional
Development requirements
Fields of Professional Practice
Section 4 of the Philippine Accountancy
Act of 2004 enumerate the Scope of Practice of
Accountancy, though not really limited to the
following:


Practice of Public Accountancy
o A person, be it his/her
individual capacity, is a partner
or a staff member in an
accounting or auditing firm.
o A qualified person to render
professional services as a
certified public accountant, or
offering or rendering, or both, to
more than one client on a fee
basis or otherwise, services such
as: (1) the audit or verification of
financial
transactions
and
accounting
records;
(2)
preparation of financial reports
to be used by stockholders for
publication or credit purposes,
or to be filed with a court or
government agency, or used for
any other purpose; (3) the
design, installation, review and
revision of accounting systems
and controls; (4) preparation
and/or review of income tax
return
when
related
to
accounting
and
auditing
procedures; representing clients
before government agencies on
tax and other matters related to
accounting; (5) and professional
assistance in matters relating to
accounting procedures and the
presentation
of
financial
information.
Practice in Commerce and Industry
o Persons involved in decision
making requiring professional
knowledge in the science of


accounting, as well as the
aspects of finance and taxation.
o When he/she represents his/her
employer before government
agencies on tax and other
matters related to accounting.
o When such employment or
position requires that the holder
thereof must be a certified
public accountant.
Practice in the Government
o A person who holds, or is
appointed to, a position in an
accounting professional group in
government or in a governmentowned
and/or
controlled
corporation, including those
performing
proprietary
functions,
where
decision
making required professional
knowledge in the science of
accounting, or where a civil
service eligibility as a certified
public
accountant
is
a
prerequisite.
Practice in Education/Academe
o Persons in an educational
institution
which
involve
teaching of accounting, auditing,
management advisory services,
accounting aspect of finance,
business law, taxation and other
technically related subjects;
provided, that the position of
either the dean or the
department chairman or its
equivalent that supervises the
Bachelor
of
Science
in
Accountancy program of an
educational
institution
is
deemed to be in practice of
accountancy
in
the
academe/education
and
therefore must be occupied only
by a duly registered CPA.
Code of Ethics for Professional Accountants
“A distinguishing mark of the
accountancy profession is its acceptance of the
responsibility to act in the public interest.”

International Code of Ethics for
Professional Accountants (“Code”)
o It sets out fundamental
principles of ethics, reflecting
the profession’s recognition of
its public interest responsibility.
Fundamental Principles





Integrity
o To be straightforward and
honest in all professional and
business relationships.
Objectivity
o Not to compromise professional
or business judgments because
of bias, conflict of interest or
undue influence of others.
Professional Competence and Due Care
o Attain and maintain professional
knowledge and skill at the level
required to ensure that a client
or employing organization
receives competent professional
service, based on current
technical and professional
standards
and
relevant
legislation.
o Act diligently and in accordance
with applicable technical and
professional standards.
Confidentiality
o To respect the confidentiality of
information acquired as a result
of professional and business
relationships.
Professional Behavior
o
To comply with relevant laws
and regulations and avoid any
conduct that the professional
accountant knows or should
know might discredit the
profession.
A professional accountant shall comply
with the Code. There might be circumstances
where laws or regulations preclude an
accountant from complying with certain parts of
the Code. In such circumstances, those laws and
regulations prevail, and the accountant shall
comply with all other parts of the Code.
A professional accountant might face a
situation in which complying with one
fundamental principle conflicts with complying
with one or more other fundamental principles.
In such a situation, the accountant might
consider consulting, on an anonymous basis if
necessary, with: (1) others within the firm or
employing organization; (2) those charged with
governance; (3) a professional body; (4) a
regulatory body; (5) legal counsel.
However, such consultation does not
relieve the accountant from the responsibility to
exercise professional judgment to resolve the
conflict or, if necessary, and unless prohibited by
law or regulation, disassociate from the matter
creating the conflict.