MODULE I

INTRODUCTION TO ACCOUNTING

A. OVERVIEW

Module I contains the vision and mission of the university and the goals of the college
for you to read, understand, and recite by heart. The module also contains the accounting
concepts and basic principles which serve as guide as the lessons progress. It also contains
the definition of accounting and its importance to different stakeholders. Accounting
information system and its fundamental principles are introduced. The lesson also includes
the classification of business organization. Finally, in this module are the changes taking
place in business environment, and how businesses addressed these changes.

B. LEARNING OUTCOMES

At the end of this module, you should be able to:

1. Familiarize with the vision and mission of the university and the goals of the college.
2. Learn the history of accounting.
3. Develop clear understanding of the accounting concepts and principles.
4. Define accounting.
5. Understand the importance of accounting to different stakeholders.
6. Define accounting information system.
7. Discuss the fundamental system principle.
8. Identify the different business organizations as to nature and ownership.
9. Describe the changes taking place in the business environment and how business
organizations addressed these changes.

C. REQUIREMENTS

After reading and studying the module, please answer the questions/exercises given
at the end of the lecture.

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II. CONTENT

A. LESSONS

1. VISION-MISSION-GOALS

VISION. A leading technology-driven university responsive to the development needs of

changing societies.

MISSION. To develop globally competitive and socially responsible professionals

through technology-driven instructions, innovative researches, sustainable extension
programs that will enhance the lives of people in the communities.

COLLEGE GOALS

1.1. To produce business professionals and entrepreneurs with skills,

knowledge, abilities, and work attitude ready to the challenges of
competitive business world.
1.2. To prepare young men and women in the field of business and industry,
making them aware of their worthwhile contributions to the economy and
society, as well as their ethical and social responsibilities.

2. HISTORY OF ACCOUNTING

Ancient Egyptians kept records of all the goods kept in the royal storehouses.
Scribes of Mesopotamia also kept business records on clay tablets. Ancient Greek
bankers’ account books show that they changed and loaned money. Ancient Romans’
bank accounts were kept by the heads of families.

The term bookkeeping first appeared in the 1500s and meant the work of
keeping account books. Luco Pacioli is the Father of Accounting released in the 14th
century Italy. He described double-entry bookkeeping and other business-related
concepts in his book, “De Computis et Scriptures” (Of Reckoning and Writings).

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 In 1854 Scotland, Queen Victoria granted a royal charter to the Institute of
Accountants in Glasgow, creating the profession of chartered accountant (CA), this
was the start of the modern accounting profession.

The chartered accountants from Scotland and Britain came to the US to audit
British investments. Some of these accountants stayed in the US and practiced their
profession; this was the origins of US accounting firms.

3. ACCOUNTING CONCEPTS, ASSUMPTIONS AND PRINCIPLES

The following accounting concepts will serve as guide as you go along with the
lesson:

3.1. Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are accounting rules,

procedures, practices, and standards which served as guide in the preparation
and presentation of financial statements. They were developed based on reason,
usage, experience, and necessity.

3.2. Accounting Assumptions

Accounting assumptions are the foundation of all accounting practices

and principles:

Accounting Entity /Going Concern

Time Period

Monetary Unit

3.3. Business as an Accounting Entity (Entity Principle)

In accounting, the business is always considered separate from its owner

or owners. Which means that the personal properties of the owner are different
from the assets of the business; the liabilities of the business are different from

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 his personal obligations; and the expenses incurred by the business are also
different from his personal expenses. Therefore, the transactions entered into by
the owner in behalf of the business should be recorded in the books of the firm.

For example, Mr. V. Santos, who owns a store and manages his own
business receives a monthly salary of Php 20000. Since this salary is given to
Mr. Santos at the end of each month, it is an expense of the business and should
be recorded in the accounting books of the firm. This principle holds true to all
types of business, whether sole proprietorship, partnership, or corporation.

3.4. Going Concern or Continuity Assumption

The business is assumed to have a continuous operation from the date it

is established.

3.5. Time Period

The final result of any business operation may not be obtained unless the
business is terminated and liquidated. Users of financial reports, however, need
periodic reports of the business. This is the reason for dividing the life of the
business into accounting periods. One accounting period is usually one year. It
could be a calendar year, January 1 to December 31, or natural business year
which consists of 12 months that ends on the lowest or slack period of the
business.

3.6. Monetary Unit

The Peso is the Philippine monetary unit. Thus, assets, liabilities, equity,
income, and expenses should be presented in this unit of measure.

4. DEFINITION OF ACCOUNTING

Different accounting bodies have defined accounting as 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.” –AICPA Committee on Terminology

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 “The process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information.”
–American Association of Accountants

Explanation of the Definitions

Art of Communication - Accounting is a service activity which purpose is to

communicate to different stakeholders the relevant information of the business

Identifying- Events of business organizations are analyzed and only those

business transactions which are identified as quantifiable or measurable in terms
of money are recognized and recorded in accounting books.

Recording, Classifying, Summarizing, Interpreting

These are the four (4) phases of accounting:

Recording- or the technical term is bookkeeping. It is the process of recording
business transactions in the accounting books; the journal and the ledger. There
are two kinds of bookkeeping, the single-entry bookkeeping and the double-entry
bookkeeping. The single-entry bookkeeping does not show the two-fold effects of
business transactions, while the double-entry bookkeeping.

Classifying- accounts recorded are grouped and classified as to assets, liabilities,

capital, income, and expenses.

Assets are the properties of the business.

Liabilities are debts or financial obligations of the business.
Capital is the amount of assets invested by the owner in the business.
Income is the amount of revenue or earnings from business operations.
Expense is the amount spent or paid for items used to operate the
business.

Summarizing- the data recorded or journalized and classified or posted to their

respective accounts are then summarized in the form of financial statements.

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 The basic financial statements are: income statement, statement of financial
position, statement of changes in owner’s equity and the statement of cash flows.

Interpreting- based on the information provided by the financial statements, the

status of the business is analyzed and interpreted as to solvency, liquidated,
profitability and other necessary interpretations. From these interpretations,
proper decisions could be done by the users of business information.

5. IMPORTANCE OF ACCOUNTING TO STAKEHOLDERS

The main role of accounting is to communicate to stakeholders or users of

financial information all about the business, its organization and condition by means
of its financial statements.

The following, among others, are the users of financial information of the
business. Users of accounting information are the direct and indirect users.

Direct users are the following:

5.1. Owner. Questions like “Has the business improved?” “Is it wise to make
additional investments?” may be asked by the owner of a firm. He is
interested to know whether the business should be maintained,
increased, decreased, or disposed of completely. Furthermore, he needs
to know if he is getting a fair return on his investment.

5.2. Management. The management may ask questions like, “What are the
sources of business? How much are its debts? What expenses can be
minimized? Did the business earn? What is the proportion of the
expenses to sales? Is there a need for expansion?”

To the management, financial information serves as a measure for

making future financial decisions and a measure of management
effectiveness.

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5.3. Prospective Investors. “Will my money grow in the business?” an investor
may ask.

An investor is interested in the financial statement to determine whether

to acquire ownership in the firm.

5.4. Creditors. A creditor may ask the following questions before granting
loans. “Can the business meet its obligations?” Creditors use financial
statements as a basis to answer such question.

5.5. Employees. “Are we receiving fair remuneration?” or “Can we ask for

more financial assistance/benefits?” are some questions an employee
may ask.

Employees are interested in financial information so they can assess the

ability of the firm to provide remuneration and other benefits. Likewise, to
labor unions such information is useful for negotiating increases in wages
and improving working conditions.

5.6. Government. “Is this firm reporting the correct amount of income?” may
be one of the questions asked by the government’s Bureau off Internal
Revenue.

The government needs accounting information to regulate the firm’s

activities for tax collection purposes and to determine the basis for
taxation policies.

All of these questions can be answered and wise decisions can be made
only after a thorough study of the accounting reports of the business.

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 Indirect users are those who use accounting information as basis for their
advice/assistance to direct users. They are the regulatory agencies, the
public, financial and legal consultants.

ACCOUNTING INFORMATION SYSTEM (AIS)

Accounting information system is a process which consists of:

Input or the data gathered from measurable business transactions

Process or processor which are recording, classifying, and summarizing
Output which are the financial statements, which purpose is to
communicate to the users the results of business operation and financial
condition

5. ACCOUNTING INFORMATION SYSTEM (AIS) PRINCIPLES

To have efficient and effective AIS, the following principles have to be followed:

5.1. Control Principle- the firm must have a good internal control. A good
internal control protects the assets of the business organization; produces
reliable and accurate accounting records; compliant with the company
policies; and proper evaluation of unit/department performance.

5.2. Cost-benefit Principle- the advantage derived from an asset bought is

more than the cost spent for its acquisition.

5.3. Relevance Principle- the information must be useful and must be reported
promptly to users to reach a conclusion and make a timely decision.

5.4. Compatibility Principle- the system design should fit the size and usage of
the firm.

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 5.5. Flexibility Principle- there are times that the needs of the firm become
more complex, in that case, the system design should allow for changes.

NOTE: Accounting Information System and the above-mentioned principles will

be taken up in detail, among others, in higher accounting courses.

6. BUSINESS ORGANIZATIONS

Business organizations can be classified according to (1) ownership and (2)

the nature of the business.

6.1. Ownership- from the point of view of ownership, the following are the
types of business:

i Single or sole proprietorship- this type of business is owned by one

person. Usually the owner is also the manager of the business. He
usually supplies the capital or borrows funds from banks or other
lending institutions.
ii Partnership- this is a business organization with two or more owners.
The owners, called partners, agree on the capital contributions,
management of the firm, distribution of profits and losses, and other
matters pertaining to the operation of the firm. iii Corporation-
this is a business organization of no less than five persons. It is
organized by operation of law

iv Cooperative- this kind of business is governed by the “one member, one

vote” principle.

Common types of cooperative are:

8.1.4a. Worker Cooperative- owned and operated by

people working there.
8.1.4b. Consumer Cooperative- owned and operated by
people who buy the goods or services from that coop.

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 8.1.4c. Producer Cooperative- owned and operated by the
people who collaborate to process and market their
product.

6.2. Nature of Business- according to the nature of business, the following are
the different types of organizations:
i Service Concern- this deals with the rendering of services to the
customers such as tailoring shops, beauty shops, firms of CPA’s, lawyers,
doctors, and others.
ii Trading or Merchandising Concern- this type of business deals with
the buying of goods and selling of the same for profit. Examples are
sari-sari stores, department stores, grocery stores, etc.
iii Manufacturing Concern- this involves the purchase of raw materials
and converting these into finished products. Examples are textile
manufacturing firms, candy manufacturing firms, etc.

7. BUSINESS ENVIRONMENT AND THE CHANGES TAKING PLACE

With the advent of technology, commerce has evolved.

7.1. E-commerce makes business transactions possible even without physical

presence in the site of the business
7.2. Business transactions are done online
7.3. Goods/Products are ordered and paid on-line
7.4. Meetings and conferences are done on-line via different platforms such
as Skype, Zoom, etc
7.5. On-line banking is also a trend; and many other business transactions are
done using technology.

The 2020 pandemic caused by Covid-19 virus compelled the government to

quarantine and lockdown some areas to avoid transmission of the disease.
People were ordered to stay home and businesses were temporarily closed. With
this condition, people and business devoted to on-line transactions: people go

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 shopping using their gadgets and internet; even schools are holding classes
using different modalities with the aid of the internet.

B. ADDITIONAL READINGS
1. Fundamentals of Accounting by Amelia M. Arganda
2. Conceptual Framework and Accounting Standards by Zeus Millan
3. Financial Accounting and Reporting For Services and Merchandisers by
Zenaida Manuel
4. Fundamentals of Accountancy, Business and Management by Rodiel C.
Ferrer

III. SUMMARY

Accounting is a service activity which main function is to communicate to the

stakeholders of the business its financial information pertaining to operation and
condition. It has four phases: recording, classifying, summarizing, and interpreting.
There are accounting concepts and principles which serve as guide from the
analysis of business transactions to preparation of financial statements. Business
organizations can be classified into two: according to nature and according to
ownership. According to nature are service concern, merchandising concern, and
manufacturing concern. While according to ownership are sole-proprietorship,
partnership, and corporation. Years back, transactions of these business
organizations were done manually and physical presence on the site of business.
However, with the advent of technology, business organizations have evolved and
Ecommerce is now commonly used by most of them.

Prepared by:
PROF. AMELIA M. ARGANDA

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