INTRODUCTION TO ACCOUNTING 1.

Accounting is a process: A process is composed

of multiple steps that lead to a common end goal.
 WHAT IS ACCOUNTING?
The enrollment process in your school may involve
 It is a system that helps businesses track events reservation of slots, filling out documents,
that affect them. This process involves identifying attending school orientations, and payment of
the events that affect a business, recording these necessary fees. These steps all lead to you being
events, and communicating the summarized results enrolled in your school. Likewise, accounting is a
of all events within a particular period to interested process because it performs the functions of
parties. identifying, recording, and communicating economic
 Almost all companies allot a significant amount of events with the end goal of providing information to
resources to the accounting process since it aids internal and external parties.
them in improving their business. 2. Accounting is an art: Art refers to a way of
 For example, the sale of Toyota cars is identified as performing something. It entails creativity and skills
an economic event that affects the company. The to help attain some objectives. Accounting
accountant will record this transaction and is the art of recording, classifying, summarizing, and
consolidate all records by the end of the month. The finalizing financial data. Accounting is a combination
consolidated records can be used by the top of techniques and its application requires applied
management to identify potential problems skill and expertise. This is the reason why
encountered by the company. This can also be used accounting can be considered as an art.
to attract potential investors. Clearly, accounting 3. Accounting deals with financial information
process is very beneficial to a company. and transactions. Accounting deals only with
 THE ACCOUNTING PROCESS quantifiable financial transactions. These
 The starting point of the accounting process is the are the only events identified by the accountant,
identification of economic events relevant to a recorded in the books, and communicated to
business. Examples of relevant economic events are different parties. Nonfinancial transactions are
the sale of Toyota cars, provision of services by a not the focus of the accounting process. However,
hospital, payment to suppliers, and purchase of nonfinancial data may be used to interpret and
equipment for the manufacturing of Bench shirts. better estimate some financial data.
 To be identified as a relevant economic event, there 4. Accounting is a means and not an end: As
should be a transfer of things with value. Normally, mentioned earlier, accounting is a tool to achieve
for the purchase of equipment, cash or money is specific objectives. It is not the objective
exchanged for the equipment. The cash and itself. Imagine that you dream to go to Paris
equipment both have value making the purchase a someday. Accounting can be thought of as the plane
relevant economic event. that will bring you to your destination.
 The recording of relevant economic events is the 5. Accounting is an information system:
next step in the accounting process. Accounting is recognized and characterized as a
 After a company identifies the relevant economic storehouse of information. As a service function, it
events, it records those events which will serve as collects processes and communicates financial
the history of its financial activities. information of any entity. This discipline of
 Recording events should be done systematically and knowledge has been evolved out to meet the need
chronologically for easier tracking and interpretation. of financial information required by different
 Records of events are inputted in the so-called interested groups.
accounting books.  Functions of Accounting
 Finally, after a lapse of a specific period (usually one  The American Accounting Association defines
year), companies summarize all the recorded accounting as “the process of identifying, measuring,
economic events into accounting reports. and communicating economic information to permit
 The most popular accounting reports are the informed judgments and decisions by the users of
financial statements. All similar events during the information.”
period are lumped together to provide meaningful  Meanwhile, the American Institute of Certified Public
and presentable information. As such, all sales Accountants (AICPA) defines accounting as “the art
transactions during the period are added and of recording, classifying, and summarizing in a
presented as one aggregate amount. This makes the significant manner and in terms of money,
information understandable to other parties. transactions and events which are in part at least of
Nature of Accounting a financial character and interpreting the results
thereof.”
 Functions of Accounting Roman historians Suetonius and Cassius Dio
From the foregoing definitions, the main functions of recorded that in 23 BC, Augustus prepared a
accounting can be summarized as follows: rationarium (account) which listed public revenues,
1. Keeping systematic record of business the amounts of cash in the aerarium (treasury), in
transactions - Recording transactions does not the provincial fisci (tax officials), and in the hands of
only involve entering the transactions in the the publicani (public contractors); and that it
accounting books. The records should be systematic included the names of the freedmen and slaves from
enough to enable easy understanding of readers. No whom a detailed account could be obtained. The
matter how comprehensive the records are, if they closeness of this information to the executive
are not produced systematically, then they provide authority of the emperor is attested by Tacitus’
little to no value. statement that it was written out by Augustus
2. Protecting properties of the business - himself.
The accounting records serve as the evidence that  Many consider the dissemination of the double-entry
properties of a business do exist or how much of a bookkeeping of Luca Pacioli in the fourteenth
particular resource does a company have. If the century Italy the most important event in accounting
accounting records show that the amount of cash history. In fact, Luca Pacioli is acknowledged as the
should be ₱1 000 000, any excess and deficiency will father of modern accounting because of this. The
be noticed immediately. Moreover, the accounting double- entry bookkeeping system is defined as any
system helps in preventing employee fraud and bookkeeping system that has a debit and a credit for
misappropriation of company resources. each transaction. Luca Pacioli’s Summa de
3. Communicating results to various parties in or Arithmetica, Geometria, Proportioni et
connected with the business. The accounting Proportionalita (Review of Arithmetic, Geometry,
reports produced at the end of each period are not Ratio, and Proportion) is the first book printed with a
only used by external parties (e.g., potential treatise on bookkeeping. The double-entry
investors, government agencies), but also by the bookkeeping system is the system being used to this
management in their decision-making function. very day.
Communication of the results of operations of a  The modern profession of the chartered accountant
company is essential for all concerned parties to originated in Scotland in the nineteenth century
enable them to take well-informed decisions. when Queen Victoria granted a royal charter to the
4. Meeting legal requirements. In the Philippines, Institute of Accountants in Glasgow. At present
the government requires some companies times, accounting standards are already available to
(particularly those with public accountability) to guide accountants in their practice of the profession.
provide financial reports quarterly, semi-annually, or Some of these standards include the PFRS
annually. This procedure aims to protect the public (Philippine Financial Reporting Standard) and the
by providing them the necessary information to PAS (Philippine Accounting Standards).
make sound decisions. The government also
requires reports from heavily regulated industries BRANCHES OF ACCOUNTING
such as the energy and oil industries. 1. Financial accounting is a branch of accounting
 History of Accounting primarily handling the recording of financial
 It is believed that the history of accounting is transactions of a business. The financial transactions
thousands of years old and can even be traced to are later summarized into standardized accounting
ancient civilizations. A number of history books reports, more popularly known as the financial
suggest that the early development of accounting statements, for the benefit of internal and external
can be dated back to ancient Mesopotamia. During users.
those times, people followed a system of writing and  Financial statements should provide information
counting money. The development of accounting useful to a wide range of users in their economic
may be related to the taxation and trading activities decisions. This is the main reason why accounting
of temples. standards such as the Philippine Financial Reporting
 The reign of Emperor Augustus (63 BC–14 AD) Standard (PFRS) and the Philippine Accounting
provided more evidence about the development of Standards (PAS) are created. The PFRS and PAS
accounting. The Roman government kept detailed supply guidelines on how companies should prepare
financial information of the deeds of Emperor their financial statements.
Augustus regarding the stewardship of Roman
resources. This is evidenced by the Res Gestae Divi
Augusti (The Deeds of the Divine Augustus). The
 Standardized financial statements allow the users to sales revenue for a particular period, costs incurred,
compare the results of operations of different or even the comparison of actual results
companies regardless of size and nature. with budgeted amounts.
 As stated above, financial accounting caters to the  Financial accounting summarizes financial
need of both internal and external users. However, it information gathered within a specified period. Thus,
is evident that financial accounting’s main goal is to financial accounting provides information that is
provide the information needs of external users that historical. Meanwhile, management accounting
have no capability to request information directly information is forward-looking. It contains
from management.. forecasted information used by managers in
 Are the financial statements prepared to planning.
accommodate the information needs of persons who Role of Management Accountants
have no capability to request or acquire information According to the Chartered Institute of Management
directly from the company? Accountants (CIMA), chartered management
 If the answer is yes, the financial statements are accountants perform the following
called general purpose financial statements. roles:
Otherwise, the financial statements are called  Advise managers about the financial implications of
special purpose financial statements. projects
 Explain the financial consequences of business
Primary Users of Primary Users of decisions
General Purpose Special Purpose
 Formulate business strategy
Financial Financial
 Monitor spending and financial control
Statements Statements
 Conduct internal business audits
Investors Top management (e.g.,
Board of directors of a  Explain the impact of the competitive landscape
Creditors company, CEO, CFO,  Bring a high level of professionalism and integrity to
COO) the business
Shareholders/  Analysis. Management accountants should be able
Stockholders Department managers to analyze information and use it to make business
(e.g., sales manager, decisions.
Government Agencies production manager)  Strategy. Management accountants should be able
to formulate business strategies that will increase
Auditors Other internal parties the company’s wealth and create value for the
company’s shareholders.
Other interested outside
 Risk. Management accountants should be able to
parties
identify risks that can potentially have detrimental
effects to the company. At the same time,
 Predominantly, external parties use general purpose
management accountants should give
financial statements to evaluate the performance of
recommendations on how to manage such risks.
the company.
 Planning. Management accountants should be able
 On the other hand, specific purpose financial
to apply accounting techniques in the planning and
statements are utilized by internal parties to guide
budget creation phase of a business.
them in the decision-making process for the
 Communication. Management accountants should
company.
be able to identify what information the
management needs and also explain the numbers to
2. Management accounting – focuses on the
nonfinancial managers.
preparation of financial reports used by managers in
 ETHICAL CODE - Even though management
their day-to-day decision making. Reports generated
reports do not follow the requirements imposed by
using management accounting are for internal
accounting standards like the PFRS and PAS,
users only. As such, management reports need not
management accountants are still expected to follow
follow accounting standards such as the PFRS and
the CIMA code of ethics.
PAS. Additionally, unlike financial reports that are
3. Government Accounting - According to Section
generated quarterly, semi-annually, or annually,
109 of Presidential Decree 1445, government
management reports can be done daily, weekly, or
accounting is defined as an accounting system which
whenever managers require a specific report.
“encompasses the process of analyzing, recording,
 Management reports typically contain information
classifying, summarizing, and communicating all
regarding the amount of cash on hand, the level of
transactions involving the receipt and disposition of
 government fund and property and interpreting the  Direct cost – costs that can economically be traced
result thereof.” to a cost object (e.g., materials, labor, etc.)
 Section 110 of the same decree lays down the  Fixed cost – costs that do not change within a
objectives of government accounting. relevant range of activity (e.g., rent of a factory
a) To provide information concerning past operations building, insurance costs, etc.)
and present conditions  Variable cost – costs that change as the level of
b) To provide a basis for guidance for future operations activity or production increases (e.g., materials cost,
c) To provide for control of the acts of public bodies labor cost, selling cost, etc.)
and offices in the receipt, disposition, and utilization  Indirect cost – costs that cannot be traced to a
of funds and property cost object (e.g., costs of supplies used in the
d) To report on the financial position and the results of factory, salary of supervisor overseeing factory
operations of government agencies for the operations, etc.)
information and guidance of all persons concerned
4. Auditing - an unbiased examination and evaluation 7. Accounting Education - The Bachelor of Science
of the financial statements of an organization in Accountancy (BSA) in the Philippines is normally a
(Investopedia.com). Auditing is a process that 5-year course composed of subjects in accounting,
includes numerous steps to determine whether or audit, administration, and business laws and
not a company’s financial statements are presented taxation. Although the subjects usually highlight the
truthfully. business environment, the scope of the topics in BSA
 Accountants that perform the auditing procedure are also covers other fields such as banking and finance,
specifically called auditors. Auditors, aside from government, nonprofit organizations, and the
having the competence to perform their roles, academe. Students of the course are also trained to
should also be independent from the company being create and understand computerized accounting
audited. Independent auditors have no connection systems to cope with the rapidly changing
with the company. If an employee of the company is technology.
the one who examines and evaluates the financial  Before a BSA graduate can practice accountancy,
statements, the fear of the users that the results are he/she needs to pass the Certified Public Accountant
manipulated will not be alleviated. Licensure Examination. The CPA Licensure Exam is a
 Audited financial statements are accompanied by the comprehensive test composed of 7 subjects. Each
auditor’s opinion. The auditor’s opinion will be the subject will be taken within 3 hours so the exam will
basis whether or not the financial statements are be for 21 hours all in all. A candidate should achieve
prepared truthfully and without any material errors. a general average of at least 75% with no rating
5. Tax Accounting - Tax accounting records some below 60% in any of the 7 subjects in order to pass
financial transactions in a different manner. It the exam.
adheres to some guidelines in the PFRS and PAS, 8. Accounting research - deals with the creation of
but it is not required to implement everything new knowledge. Combining the models produced by
written in such standards. the hard sciences in research and testing with
 Tax accounting follows the pronouncements of the financial statements, stock prices, surveys, and
National Internal Revenue Code (NIRC). The NIRC is experiments, we can gain a specific perspective and
to tax accounting as the PFRS and PAS are to basis on the following:
financial accounting.  Deciding and implementing new accounting and
6. Cost Accounting - a branch of accounting that auditing standards
provides information for management accounting  Presenting unusual economic transactions in the
and financial accounting (Horngren et al. ). financial statements
Terms Used in Cost Accounting  Learning how new tax laws impact clients and
 Cost – the resource sacrificed to achieve an employers
objective (e.g., money, resources, time, etc.)  Discerning how the accounting profession affects the
 Cost object – anything that you wish to find the capital markets through academic accounting
cost of (e.g., cost of a pair of jeans, cost of a pair of research
Jordan XI shoes) Researchers in the accounting field also apply the
 Cost driver – an activity that is a cause of the scientific method like their counterparts in the
incurrence of costs (e.g., the number of working sciences. With the constantly evolving field of
hours is related to the amount of salaries a company accountancy, it is expected that accounting research
pays) will continue to play a vital role in the future.