CHAPTER I INTRODUCTION OF ACCOUNTING

1.definition of accounting

Learning Essentials

Accounting is a systematic and comprehensive way of recording the business’ financial

transactions. It is a process of summarizing, analyzing, and reporting business transactions
to oversight agencies and tax collection entities. It is applicable and useful to all kinds of
business such as multinational, small-scale and medium-scale. Since all of these kinds of
businesses involve transactions that must undergo the accounting process to monitor its
financial performance in the market; accounting is very important.

Bookkeeping is the recording part of accounting that uses systematic procedures in listing
transactions. It has a narrower scope compared to accounting. A bookkeeper is the one who
handles the basic accounting functions of a business that may include recording of the
various transactions. He is also tasked to do the summarizing, reporting, and analyzing.
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GAAP or Generally Accepted Accounting Principles is a set of standards related to balance

sheet identification, outstanding share measurements, and other accounting issues. Its
standards are
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based on a double-entry accounting.

Double-entry accounting is a method which enters each expense or incoming revenue in two
places on a company’s balance sheet. It does not also use one place in a company’s
balance sheet.

Components of accounting:

(1) Recording refers to the process of making records of all the transactions that the
business made in a certain period of time.

(2) Summarizing pertains to the creation of a summary of the accumulated recorded

transactions

(3) Reporting is the process wherein the management presents reports to the company
investors as to where the invested money is going
(4) Analyzing is the process of drawing out both the positive and negative points so that the
financial performance of the company will be improved and where profits, sales, and cash
are being compared to be able to draw the needed conclusions within the given period of
time.

Objectives of Accounting:

(1) Creditworthiness for investors will need an assurance from the firm that all investments
will be put to good use. It is targeted through providing past accounting records of the firm.

(2) Efficient use of resources is targeted through providing the records that summarizes the
return obtained from the activities where the resources were placed into.

(3) Projections are targeted through providing the substantial accounting data that will be
used to project costs and revenue growth of the firm in a given period of time.

(4) Measurement of the outcome is done through providing periodic financial statements
which help the firm adjust their operations accordingly.

Limitations of Accounting:

(1) Subjective measurement is shown when accountants provide estimates that may result
to manipulation of monetary value

(2) Unstable unit of account is seen through the different value of currencies that are very
dynamic because of inflation, deflation, and other economic forces

(3) No information about opportunity cost as the management do not have any information
about what might happen if they will use their resources in an optimum manner
(4) Qualitative factor is one of the limitations of accounting which pertains to the incapability
of accounting to attach monetary value to everything with goodwill as an example.

Types of accounts:

(1) Personal account pertains to all the transactions that have been undertaken by a
particular person.

(2) Real account refers to the transactions concerning tangible things such as land and
buildings among others.

(3) Nominal account is a special category account that is automatically reset to zero as soon
as the time period is over.

Accounting data is one of the vital components for successful ventures. There are various
stakeholders that benefit from accounting data. Capital markets make use of these data as
basis for the appraisal of the stock price in the market. Lenders use accounting data to judge
the creditworthiness of the firm. The government uses accounting data as it has to tax
business based on the profit that the business can generate.

The different designations of an accountant are the following:

Certified Public Accountant

Certified General Accountant
Certified Management Accountant
They prepare the financial statements that will be used in the analysis of the financial
performance of the firm. They act as business strategists when it comes to the amount of
capital that will be spent in producing the demand of the market. They also act as advisers
and consultants regarding financial moves of the company.

Cash accounting is a process that entails recording transactions only upon the exchange of
cash. Here, revenues are only recorded upon the receipt of payment and expenses are only
recorded upon the payment of the obligation.
Cost accounting helps businesses make decisions about costing for it considers all the
costs, both fixed and variable costs to producing a product. This information determines the
cost of the respective products.

Financial Accounting is a branch of Accounting that pertains to the process an accountant

uses in generating the annual accounting statements of the firm. Financial statement is a
summary of the company’s operations over a period of time. It shows the financial position of
the company in its field and relative to its market. It is also a summary of the company’s cash
flows that shows the excess of cash revenues over cash outlays in a given period of time.

The financial statements that are prepared in Financial Accounting:

(1) Balance Sheet is a record of financial situation of an institution on a particular date by

listing its assets and claims against those assets

(2) Income Statement is a record of the operating results of a firm for a specific period

(3) Cash Flow Statement shows the excess of cash revenues over cash outlays in a given
period of time.

Management accounting which is the process accountants use in generating the monthly or
quarterly accounting statements of the firm.

2.DESCRIBE THE NATURE OF ACCOUNTING

Accounting is the process of recording, classifying, summarizing, reporting, and interpreting

information about the economic activities of an organization.
The financial information captured by the accounting system is usually communicated
through reports called financial statements including (1) income statements, (2) balance
sheets, and (3) cash flow statements.

Financial Statements

Income Statement captures revenue, expenses, and net income over a period of time.

Important elements of an income statement:

Revenue is the monetary compensation given to the organization in exchange for good and
services provided.

Expenses are the cost incurred by the organization in providing the goods and services to its
customers.

Net Income (Losses) is the difference between income and expenses, depending on which
is greater.

Balance Sheet shows the assets, liabilities, and owner’s equity at a point in time.

Important elements of a balance sheet:

Assets are the resources owned by the organization. These assets can be classified as fixed
or current, and as tangible or intangible.

Liabilities are the obligations of the organization to other organizations. The obligations can
be classified as long-term or current.
Equity is the residual amount left after liabilities are subtracted from the assets of an
organization. This represents the actual value of ownership the shareholders have in the
organization after all the obligations are met.

The Accounting Equation

The relationship of the three types of accounts listed above is represented by the
accounting equation:

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A cash flow statement, also known as statement of cash flows, shows how changes in
balance sheet counts, shows how income affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities.
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3.EXPLAIN THE FUNCTIONS OF ACCOUNTING IN BUSINESS