FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT
CHAPTER 1- INTRODUCTION TO ACCOUNTING
Objectives:
1. Define Accounting
2. Describe the Nature of Accounting
3. Explain the Functions of Accounting
4. Cite specific examples in which accounting is used in making business decisions.
Some businesses are successful locally and internationally. The common factor that contributes to and serves as
the secret formula of their companies’ success is accounting.
The Accounting Process:
Accounting broadly speaking, is a system that helps businesses track events that affect them.
Involves the processes of :
a. Identifying the events that affect a business. The identification of economic events relevant to a business like the sale of
cars, provision of services by a hospital, payment to suppliers, and purchase of equipment for manufacturing. To be
identified as relevant economic events, there should be a transfer of things with value. Normally, the purchase of
equipment, cash, or money is exchanged for the equipment. The cash and equipment both have value making the
purchase a relevant economic event.
b. Recording of relevant economic events is the next step in the accounting process. After the companies identify
the economic events, they record those events which will serve as the history of their financial activities. Recording
of events should be done systematically and chronologically for easier tracking and interpretation. Recording of
events is inputted to the so-called accounting books.
c. Communicating. The summarized results of all events after a lapse of a specific period (usually one year)
companies summarize all the recorded economic events into accounting reports. The most popular accounting
reports are the financial statements. All similar events are lumped together to provide meaningful and presentable
financial information to internal and external users alike. It helps quantify data for easier interpretation of the
performance of the company and is used as a guide for future decision-making. If not for accounting, managers will
still be making decisions not based on a solid foundation.
a. Fiscal year/Financial year - accounting year that does not end on December 31. As long as it is composed of 12
months/52 weeks. Ex: February 1 - January 31. October 1 - September 30, June 1 -May 31
b. Calendar year - The accounting year from January 1 through December 31.
Questions:
1. How will the manager know if the company is doing well?
2. How can the manager know if additional investment is needed in a particular segment of the company?
REVIEW QUESTIONS
1. Explain briefly the subject of accounting. What are its purposes?
2. Explain the three-step processes of accounting. What is the role of an accountant in each step?
3. What is a relevant economic event? Give at least three examples of relevant economic events.
Group Activity
Think of at least two types of business belonging to different industries (e.g.; Petron from the
oil industry and Jollibee from the food industry. Give examples of five economic events that each
company identifies and records in its respective accounting books. Discuss why these events or
transactions are recorded in the accounting books.
NATURE OF ACCOUNTING
1. Accounting is a process. A process is composed of multiple steps that lead to a common end goal (for example: the
enrollment process). Accounting is a process because it performs the functions of identifying, recording, and
communicating economic events with the end goal of providing information to internal and external parties.
2. Accounting is an art. Art refers to a way of performing something. It entails creativity and skills to help us attain some
objectives. Accounting is the art of recording, classifying, summarizing, and finalizing financial data. Accounting is a
combination of techniques and its application requires applied skill and expertise.
3. Accounting deals with financial information and transactions. Accounting deals only with quantifiable financial
transactions.
4. Accounting is a means and not an end. As mentioned before, accounting is a tool to achieve specific objectives. It is not
the objective itself Accounting gives information needed for decision making and that is the end of accounting. The users
who are going to decide on what, where, and how are they going to use the information given wisely then accounting can
be taught as the plane that will bring the business to success.
5. Accounting is an information system. Accounting is recognized and characterized as a storehouse of information. As a
service function, it collects, processes, and communicates financial information of any entity. This discipline of knowledge
has evolved to meet the need for financial information required by different interested groups.
FUNCTIONS OF ACCOUNTING
The American Accounting Association (AAA) defines accounting as the “process of identifying, measuring, and
communicating economic information to permit informed judgments and decisions by the users of the information
The American Institute of Certified Public Accountants (AICPA) defines accounting as “the 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.”
From the foregoing definitions, the main functions of accounting can be summarized as follows:
1. Keeping a Systematic Record of Business transactions. Recording transactions does not only involve entering the
transactions in the accounting books. The records should be systematic enough to enable easy understanding of
readers. No matter how comprehensive the records are, If they are not produced systematically then they provide
little to no value.
2. Protecting Properties of the Business. The accounting records serve as the evidence that properties of a business
do exist or how much of a particular resource a company has. If the accounting records show that the amount of
cash should be P 1,000,000, any excess and deficiency will be noticed immediately. Moreover, the accounting system
helps in preventing employee fraud and misappropriation of company resources.
3. Communicating Results to Various Parties in or Connected with the Business. The accounting reports produced at
the end of each period are not only used by the external parties (e.g., potential investors, and government agencies)
but also by the management in their decision-making function. Communication of the results of the operations of a
company is essential for all concerned parties to enable them to make well-informed decisions.
4. Meeting Legal Requirements. In the Philippines, the government requires some companies particularly those with
public accountability to provide financial reports quarterly, semi-annually, or annually. This procedure aims to protect
the public by providing them with the necessary information to make sound decisions. The government also requires
reports from heavily regulated industries such as the energy and oil industries.
Review Questions:
1. What is the nature of accounting? Describe each feature of accounting and give specific examples of how each
feature of accounting is applied in the daily operations of a business.
2. What are the main functions of accounting? Explain each function in detail.
History of Accounting:
The development of accounting may be related to the taxation and trading activities of the temples. It is believed
that the history of accounting is thousands of years old and can be traced to ancient civilizations dating back to ancient
Mesopotamia. During those times people followed a system of writing and counting of money. The reign of Emperor
Augustus(63BC - 14AD) provided more evidence for the development of accounting.
In the 14th century in Italy, many considered the dissemination of the double-entry bookkeeping of Luca Pacioli,
the most important event in the history of accounting. Double-entry bookkeeping is defined as any bookkeeping system
that has a debit and a credit for each transaction. Because of this Luca Pacioli was acknowledged as the father of modern
accounting. The system of double-entry bookkeeping is the system being used to this very day. (Sangster et al. 2007)
The modern profession of the chartered accountant originated in Scotland in the 19th century when
Queen Victoria granted a royal charter to the Institute of Accountants in Glasgow. At present times, accounting standards
are already available to guide accountants in their practice of the profession. Some of these standards include the PFRS
(Phillippine Financial Reporting Standard) and the PAS (Philippines Accounting Standards).