FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR

AND MANAGEMENT 1 HIGH SCHOOL

BULACAO CAMPUS

SLG 1 : The Definition, Nature and History of Accounting / Internal and External users of Financial Information

I – Introduction

Explain the three underlined words in the infographic below.

A. These are the competencies included in this lesson:

1. Define accounting (ABM_FABM11-IIIa- 1)
2. Describe the nature of accounting (ABM_FABM11-IIIa-2)
3. Narrate the history/origin of accounting (ABM_FAB M11- IIIa-4)
4. Define external users and gives examples (ABM_FAB M11- IIIa-7)
5. Define internal users and give examples (ABM_FA BM11- IIIa-8)

B. Learning Outcomes

1. Students will be able to understand accounting and how it works in a real-life situation.
2. Students will be able to identify and explain the origin of accounting.
3. Cite specific examples in which accounting is used in making business decisions

II – Learning Content

Definition of Accounting

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing,

interpreting and communicating financial information. It reveals profit or loss for a given period, and the
value and nature of a firm's assets, liabilities and owners' equity.

In a practical sense, the main objective of financial accounting is to accurately prepare an organization's
financial accounts for a specific period, otherwise known as financial statements.

Example, if the company's transactions are being tracked then Ms. Ken (investor), will know if the money
she invested is still there.

P100,000 (initial investment)

P70,000 (used to buy printers and pay the bills)
P30,000 (balance cash left)
P50,000 (collection from costumers (1month)
P30,000+ P50,000= 80,000 overall balance cash

Accounting is commonly called the “Language of Business” wherein it delivers financial information to
different users through financial statements.

Example:

Ms. Sweet started a business. She invested P100,000 (personal money). After one month Ms. Sweet
wanted to know how much the business made, and if the money she invested is still there.

The American Institute of Certified Public Accountants (AICPA) defines accounting as:
FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR
AND MANAGEMENT 1 HIGH SCHOOL
BULACAO CAMPUS

“An art of recording, classifying and summarizing in a significant manner and in terms of money
transaction and events which are in part at least of financial character, and interpreting the result thereof.”

This definition will provide a better understanding of accounting in terms of the following:

>Accounting is considered an art and a science;

>Accounting involves interconnected phases;
>Accounting is concerned with transactions and events having financial character;
>In accounting, business transactions are expressed in terms of money; and
>Accounting interprets the result of financial statement.

Accounting provides answers to the following questions:

-How much income does the company make?
-How much does the company owe to the creditors?
-Is this a good investment?

Accounting information gives business owners the chance to analyze the overall efficiency and
effectiveness of their business operations.

Nature of Accounting

According to Accounting Theory: http://accountingtheory.weebly.com/nature-and-scope-of-

accounting.html): "Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons."

Based on this definition we can derive the following basic features of accounting:

Accounting is a service activity.

Accounting provides assistance to decision makers by providing them financial reports that will
guide them in coming up with sound decisions.

Accounting is a process.
A process refers to the method of performing any specific job step by step according to the
objectives or targets. Accounting is identified as a process, as it performs the specific task of
collecting, processing and communicating financial information. In doing so, it follows some
definite steps like the collection, recording, classification, summarization, finalization, and
reporting of financial data.

Accounting is both an art and a discipline.

Accounting is the art of recording, classifying, summarizing and finalizing financial data. The word
‘art’ refers to the way something is performed. It is behavioral knowledge involving a certain
creativity and skill to help us attain some specific objectives. Accounting is a systematic method
consisting of definite techniques and its proper application requires skill and expertise. So by
nature, accounting is an art. And because it follows certain standards and professional ethics, it is
also a discipline.

Accounting deals with financial information and transactions.

Accounting records financial transactions and data, classify these and finalize their results given
for a specified period of time, as needed by their users. At every stage, from start to finish,
accounting deals with financial information and financial information only. It does not deal with
non-monetary or non-financial aspects of such information.

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 as required by various
interested groups.
FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR
AND MANAGEMENT 1 HIGH SCHOOL
BULACAO CAMPUS

History of Accounting

Accounting is as old as civilization itself. It has evolved in response to various

social and economic needs of men. Accounting started as a simple recording of
repetitive exchanges. The history of accounting is often seen as indistinguishable from
the history of finance and business. Following is the evolution of accounting:

The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia,
China and India to Central and South America. The oldest evidence of this practice
was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the
time such as listing of accounts receivable and accounts payable.

14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally
considered to be the dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of
Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo da Vinci. The Italians of the 14th to 16 th centuries are widely acknowledged as
the fathers of modern accounting and were the first to commonly use Arabic numerals, rather than
Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book
published that contained a detailed chapter on double-entry bookkeeping.

French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during this
period. Social upheavals affecting government, finances, laws, customs and business had greatly
influenced the development of accounting.

The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during this period.

19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria
granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the
Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain
came to the U.S. to audit British investments. Some of these accountants stayed in the U.S.,
setting up accounting practices and becoming the origins of several U.S. accounting firms. The
first national U.S. accounting society was set up in 1887. The American Association of Public
Accountants was the forerunner to the current American Institute of Certified Public Accountants
(AICPA).

In this period rapid changes in accounting practice and reports were made. Accounting standards
to be observed by accounting professionals were promulgated. Notable practices such as
mergers, acquisitions and growth of multinational corporations were developed. A merger is when
one company takes over all the operations of another business entity resulting in the dissolution
of another business.

Businesses expanded by acquiring other companies. These types of transactions have

challenged accounting professionals to develop new standards that will address accounting
issues related to these business combinations.

The Present - The Development of Modern

Accounting Standards and Commerce
The accounting profession in the 20th century
developed around state requirements for
financial statement audits. Beyond the
industry's self-regulation, the government
also sets accounting standards,
through laws and agencies such as the
Securities and Exchange Commission
(SEC). As economies worldwide
continued to globalize, accounting
regulatory bodies required accounting
practitioners to observe International Accounting Standards. This is to assure transparency and
reliability, and to obtain greater confidence on accounting information used by global investors.
FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR
AND MANAGEMENT 1 HIGH SCHOOL
BULACAO CAMPUS

Nowadays, investors seek investment opportunities all over the world. To remain competitive,
businesses everywhere feel the need to operate globally. The trend now for accounting
professionals is to observe one single set of global accounting standards in order to have greater
transparency and comparability of financial data across borders.

What Is It

Accounting
- is the language employed to communicate financial information of a concern to such parties.

Slavin and Reynolds

Accounting is the discipline that provides information on which external and internal users of the
information may base decisions that result in the allocation of economic resources in society.

Who uses accounting data or information?

There are two broad categories of users of financial information: internal and external users.

INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan,
organize, and run the business. These users are directly involved in managing and
operating the business. These include marketing managers, production supervisors, finance
directors, company officers and owners.

What information will user need that can be answered by accounting?

Internal users (Primary Users) of accounting information include the following:

Management
Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position, and take appropriate
measures to improve the company results, sufficiency of cash to pay dividends to stockholders;
pricing decisions

Employees
Information need: profit for the period, salaries paid to employees
Decisions supported: job security, consider staying in the employ of the company or
look for other employment opportunities

Owners/Investors/Stockholders
Information need: profit or income for the period, resources or assets of the
business, liabilities of the business
Decisions supported: considerations regarding additional investment, expanding the
business, borrowing funds to support any expansion
plans.

Accounting information is presented to internal users usually in the form of management accounts, budgets,
forecasts and financial statements. This information will support whatever decision of the internal users.

EXTERNAL USERS
External users are individuals and organizations outside a company who want
financial information about the company. These users are not directly involved in
managing and operating the business. The two most common types of external
users are potential investors and creditors.
Potential Investors use accounting information to make decisions to buy
shares of a company. Creditors (such as suppliers and bankers) use accounting
information to evaluate the risks of granting credit or lending money. Also included
as external users are government regulatory agencies such as Securities and
Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Department of
Labor and Employment (DOLE), Social Security System (SSS), and Local
Government Units (LGUs).
FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR
External users (Secondary Users) of accounting information include the following:
AND MANAGEMENT 1 HIGH SCHOOL
BULACAO CAMPUS

Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors according
to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance
such as banks.

Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.

Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a
reasonable return on their investment before they commit any financial resources to a company.

Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable
source of supply in the long term.

Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information is in
accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such
information in forming their decisions.

Types of Information needed by each Group of Users

Accounting information includes both financial (quantitative) and non-financial (qualitative) information
used by the decision maker.
*Qualitative analysis-means looking at the intangibles
*Quantitative analysis- means looking at the actual numbers.
*Comprehensive analysis- should include looking at both qualitative and quantitative
factors that would impact decision maker.

SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL

USERS

Internal users of accounting information are those who are involved in planning,
organizing and running the business. They need more detailed information on a
timely basis in order to support their decisions. Examples of these internal users are
managers, employees and owners.

The external users of accounting information are those individuals

or organizations outside a company who are interested in its financial information. Examples of these
external users are potential investors, suppliers and government agencies.

III – Self- Learning Activities

A. Write your answer on a clean sheet of paper.

1. Is accounting important to you? Does it affect daily activities? How?

2. Give examples of decisions or questions that can be supported by accounting information.

B. What business would you want to enter into?

Sample businesses:

Instructions: Choose one of any business. Write your answer on the lines provided.

Question 1- If you would like to own a business, what kind of business would you endeavor, and what do
you want to know about the business?

Question 2- What possible decisions can accounting support?

FUNDAMENTALS OF ACCOUNTANCY BUSINESS SENIOR
AND MANAGEMENT 1 HIGH SCHOOL
BULACAO CAMPUS

IV – Evaluation

Assessment

Let us check how much you have learned from this module's coverage.

Fill in the blank: Write your answer in the blank provided before the number.
_____________1) Refers as the economic events of an organization.
_____________2) The art of recording, classifying, summarizing and finalizing financial data.
_____________3) Refers to the method of performing any specific job step by step according to the
objectives or targets.
_____________4) This involves keeping a chronological diary of events that are measured in pesos.
_____________5) Refers to the way something is performed.
_____________6) The oldest evidence practices of Mesopotamia which dealt with commercial
transactions.
_____________7) He was the father of accounting.
_____________8) The first book published that contained a detailed chapter on double-entry
bookkeeping.
_____________9) Mass production and the great importance of fixed assets were given attention during
this period.
_____________10) In this period, rapid changes in accounting practice and reports were made.

Instructions: Using the graphic below. Write at least four frequently asked questions by Internal Users.
Write your answer on the lines provided.

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_________________________________

V – Extension of Learning

What I Can Do

Activity 4

Instructions:

1. You will create an infomercial on the nature and evolution/history of accounting.

2. Be Creative.
3. Submit your video presentation only in one file through cellphone or any of your convenience.

Guidelines:
Use any media platform at your convenience
 Maximum of 2 minutes
FUNDAMENTALSYou
OFcan
ACCOUNTANCY
use Mother Tongue, BUSINESS
Tagalog or English as language SENIOR
AND MANAGEMENT 1
Wear casual attire HIGH SCHOOL
BULACAO CAMPUS

VI – References

BOOK
Anastacio, Ma. Flordeliza. Fundamentals of Financial Management (with Industry Based Perspective).( Manila: Rex Book
Store, 2011).
Gilbertson, Claudia. Fundamentals of Accounting. 8th ed. (Australia: Cengage Learning, 2010).
Padillo, Nicanor, Jr. Financial Statements Preparation, Analysis and Interpretation. (Manila: GIC Enterprises, 2011).
Pefianco, Erlinda C. The Accounting Process: Principles and Problems. (Makati: Goodwill Trading, 1996).
Young, Felina C. Principles of Marketing. (Manila: Rex Book Store, 2008).

WEBSITE

Bytt Sprak.”Inspisere bøker”. Publicdomainvectors.org. Accessed July 30, 2020.

https://publicdomainvectors.org/no/gratis-vektorbilder/Inspisere-b%C3%B8ker/69444.html.

“Clipart house diagram”.WebStockReview. Accessed date July 30, 2020.

https://webstockreview.net/pict/getfirst.

Corsair’s Publishing. “An Uncollected History of Feedback”. Medium Circa Navigate. February 10, 2016.
https://circa-navigate.corsairs.network/an-uncollected-history-of-feedback-648dff27d94a.