FUNDAMENTALS OF ACCOUNTANCY BUSINESS

AND MANAGEMENT 1
GRADE 11
Content Standards

• the definition, nature, function, and history of accounting.

• the external and internal users of financial information.
Performance Standards
• cite specific examples in which accounting is used in making business decisions.
• solve exercises and problems on the identification of users of information, type of
decisions to be made, and type of information needed by the users.
• cite users of financial information and identify whether they are external or internal
users.
Most Essential Learning Competency:
1. define accounting Week 1 ABM_FABM11-IIIa-1
2. describe the nature of accounting ABM_FABM11- IIIa-2
3. narrate the history/origin of accounting ABM_FABM11- IIIa-4
4. define external users and gives examples ABM_FABM11- IIIa-7
5. define internal users and give examples ABM_FABM11-IIIa-8

DEFINITION OF ACCOUNTING

ACCOUNTING is the process of IDENTIFYING, MEASURING AND COMMUNICATING economic

information to permit informed judgment and decision by the users of the information.
- American Accounting Association

ACCOUNTING is the art of recording, classifying, and summarizing in a significant manner, and
in terms of money, transactions and events which are in the part at least of financial character,
and interpreting the results thereof.
- Committee on Accounting Terminology of the American Institute of CPA

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.
- Accounting Standards Council

ACCOUNTING is an information system that measures, processes, and communicates financial

information about economic entity.
- Financial Accounting Standard Board
 HOW ACCOUNTING WORKS?

Accounting is one of the key functions for almost any business. It may be handled by a
bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of
employees at larger companies. The reports generated by various streams of accounting, such as
cost accounting and managerial accounting, are invaluable in helping management make
informed business decisions.

HISTORY OF ACCOUNTING
The history of accounting has been around almost as long as money itself. Accounting history
dates back to ancient civilizations in Mesopotamia, Egypt and Babylon. For example, during the
Roman Empire the government had detailed records of their finances.7 However, modern
accounting as a profession has only been around since the early 19th century.
Luca Pacioli is considered "The Father of Accounting and Bookkeeping" due to his contributions
to the development of accounting as a profession. An Italian mathematician and friend of
Leonardo da Vinci, Pacioli published a book on the double-entry system of bookkeeping in 1494.8
By 1880, the modern profession of accounting was fully formed and recognized by the Institute
of Chartered Accountants in England and Wales.9
This institute created many of the systems by which accountants practice today. The formation
of the institute occurred in large part due to the Industrial Revolution. Merchants not only
needed to track their records but sought to avoid bankruptcy as well.

USERS OF ACCOUNTING INFORMATION

The accounting process provides financial data for a broad range of individuals whose objectives
in studying the data vary widely. Three primary users of accounting information were previously
identified, Internal users, External users, and Government/ IRS. Each group uses accounting
information differently, and requires the information to be presented differently.

INTERNAL USERS
Accounting supplies managers and owners with significant financial data that is useful for
decision making. This type of accounting in generally referred to as managerial accounting.
Some of the ways internal users employ accounting information include the following:
 • Assessing how management has discharged its responsibility for protecting and managing
the company’s resources.
• Shaping decisions about when to borrow or invest company resources.
• Shaping decisions about expansion or downsizing
EXTERNAL USERS
Typically called financial accounting, the record of a business’ financial history for use by external
entities is used for many purposes. The external users of accounting information fall into six
groups; each has different interests in the company and wants answers to unique questions. The
groups and some of their possible questions are:
Owners and prospective owners. Has the company earned satisfactory income on its total
investment? Should an investment be made in this company? Should the present investment be
increased, decreased, or retained at the same level? Can the company install costly pollution
control equipment and still be profitable?
Creditors and lenders. Should a loan be granted to the company? Will the company be able to
pay its debts as they become due?
Employees and their unions. Does the company have the ability to pay increased wages? Is the
company financially able to provide long-term employment for its workforce?
Customers. Does the company offer useful products at fair prices? Will the company survive long
enough to honor its product warranties?
Governmental units. Is the company, such as a local public utility, charging a fair rate for its
services?
General public. Is the company providing useful products and gainful employment for citizens
without causing serious environmental problems?

Some of the ways external users employ accounting information include the following:

• Stockholders have the right to know how a company is managing its investments.
• Banks or lending institutions may use accounting information to guide decisions such as
whether to lend or how much to lend a business.
• Investors will also use accounting information to guide investment decisions.
General-purpose financial statements provide much of the information needed by external users
of financial accounting. These financial statements are formal reports providing information on
a company’s financial position, cash inflows and outflows, and the results of operations. Many
companies publish these statements in annual reports, also known as a 10-K or a 10-Q (quarterly
report). The annual report contains the independent auditor’s opinion as to the fairness of the
financial statements, as well as information about the company’s activities, products, and plans.
Typically, the best place to find these reports for a public company can be on their website under
the Investor relations section. Financial statements used by external entities are prepared using
generally accepted accounting principles, or GAAP. We will discuss the language of GAAP further
in later sections.
Government
Government agencies that track and use taxes are interested in the financial story of a business.
They want to know whether the business is paying taxes according to current tax laws. The
language in which tax-related financial statements are prepared is called IRC or Internal Revenue
Code. Tax preparation will be outside the scope of this course.
BUSINESS DEFINED
A business (also known as enterprise or firm) is an organization engaged in the trade of goods,
services of both to consumers. Generally, businesses are administered to earn profit to increase
the wealth of the owners.
A business enterprise may be classified according to the nature of their businesses as either a
SERVICE, A MERCHANDISING, OR A MANUFACTURING.

REFERENCES:

Fernando, J. (2021, March 04). Accounting definition. Retrieved March 12, 2021, from
https://www.investopedia.com/terms/a/accounting.asp.

Principles of Accounting I, L. (n.d.). Financial accounting. Retrieved March 12, 2021, from
https://courses.lumenlearning.com/finaccounting/chapter/users-of-accounting-information/

Ballada, Win (2019). Basic Financial Accounting and Reporting.

ACTIVITY 1 TRUE OR FALSE
1. Accounting is often characterized as the “Language of Business”.
2. Double entry bookkeeping was invented by Friar Luca Pacioli.
3. Accounting identifies, measures, and communicates information about economic entities
for the use in making economic decisions.
4. Accounting is a service activity.
5. Creditor is one of the examples of internal users.
ACTIVITY 2- Write IU if the statement is INTERNAL USER and EU if the statement is EXTERNAL
USER of the information.
1. Manager of the Bank
2. CEO of XYZ Company
3. Director of BIR
4. Stockholder of ABC Company
5. Finance officer of DFG Company
6. Bank checker
7. Auditor of ABC Company
8. COO of XYZ Company
9. Department head of the City Permit and Licensing Office
10. Employees unions

ACTIVITY 3
- Memorized the four definitions of Accounting (based from the source).