FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: Lesson 1

Accounting Amounts used in measuring financial transactions

- referred to as the “language of business”. are the following:
- It is because Accounting is used as a means a. Historical cost or past purchase exchange price
through which information about a business entity b. Current replacement cost
is communicated to interested users. c. Realizable value or current selling price
d. Present value, the discounted value of the
Accounting is defined by the American Accounting future net cash inflows or future exchange price
Association (AAA)
its Statement of Basic Accounting Theory as the 3. Communicating
process identifying, measuring and communicating  involves the preparation and distribution of
economic information to permit informed accounting reports to potential users of
judgment and decision by users of the information. accounting information.
 This is the formal component of accounting.
Three important activities in the accounting
process Accounting (defined by the Committee on
Accounting Technology of the American Institute
1. Identifying of Certified Public Accountants –AICPA)
 Involves the recognition or non-recognition of an art of recording, classifying, and summarizing,
business activities to be accounted for. in a significant manner and in terms of money,
 When an item is recognized, it is recorded in transactions and events which are in part, at least,
the books of accounts and presented in the of a financial character, and interpreting the results
financial statements. thereof.
 Transactions and events are recognized only if
they have effects on assets, liabilities and 4 Mechanical phases in the accounting process
owners’ equity. 1. Recording
 Identifying involves the analysis of transactions – known as journalizing, involves the routine and
before they can be recorded in the books of mechanical process of committing to writing
accounts. business transactions and events on the books of
 Thus identifying is considered as the analytical accounts in a chronological sequence in
component of accounting. accordance with established accounting rules and
procedures.
2. Measuring
 Involves the assigning of monetary amounts to 2. Classifying
the accountable economic transactions and - involves the sorting or grouping of similar items
events. into their respective classes.
 The unit of measure is usually the currency of - This is done through the process of posting the
a country where the business was organized information from the journal to the ledger.
and where the financial statements are
submitted to the regulatory agency. 3. Summarizing
 Measuring is the technical component of – involves the determination of the balances of
accounting. each account in the ledger and the preparation of
financial statements.

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: Lesson 1

4. Interpreting 5. Accounting is an information system.

– the analytical phase of accounting involves giving Accounting is recognized and characterized as
meaning to the amounts, ratios, trends, and other a storehouse of information. It provides data to
information derived from the financial statements. users intended to be utilized for reporting and
- The information may be used to predict future analysis.
outcome or confirm previous expectations. As a service function, it collects processes and
communicates financial information of any entity.
Accounting is defined by the Philippine This discipline of knowledge has evolved to
Accounting Standards Council (ASC) meet the need for financial information as required
a service activity. by various interested groups.
Its function is to provide quantitative information,
primary financial in nature, about economic
entities, that is intended to be useful in making Functions of Accounting
economic decisions – in making reasoned choices 1. Keeping systematic record of business
among alternative courses of action. transaction.
Records should be systematic enough to enable
Nature of Accounting easy understanding of readers.
1. Accounting is a process.
It is a process because it performs the 2. Protecting properties of the business.
functions of identifying, recording, and The accounting records serve as the evidence that
communicating economic events with the end goal properties of a business do exist or how much of a
of providing information to internal and external particular resource does a company have.
parties.
3. Communicating results to various parties.
2. Accounting is an art. Communication of the results of operations of a
Accounting is an art since it requires company is essential for all concerned parties to
specialized skills in recording, classifying, enable them take well-informed decisions.
summarizing and finalizing accounting information.
4. Meeting legal requirements.
3. Accounting deals with financial information Businesses are generally required to submit
and transactions. periodic reports to regulatory agencies to monitor
Accounting records financial transactions and data, compliance with laws and regulations to protect
classifies these and finalizes their results given for a the public interest.
specified period of time, as needed by their users.
All non-financial data are not given accounting History of Accounting
recognition. I. Ancient Accounting
Around 7 500 BC - Mesopotamians followed a
4. Accounting is a means not an end. system of writing and counting money.
Accounting is a tool to achieve specific - The development of accounting may be
objectives. related to the taxation and trading activities of
Accounting aims at providing financial temples.
statements of an entity in order for users to make
informed decisions.

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: Lesson 1

63 BC – 14 AD - The reign of Emperor  They need the information to help them

Augustus provided more evidence about the determine whether they should buy, hold or
development of accounting. sell their investments.
- The Roman government kept detailed  Shareholders are also interested in information
financial information of the deeds of Emperor which enables them to assess the ability of the
Augustus regarding the stewardship of Roman entity to pay dividends.
resources evidenced by The Deeds of the Divine
Augustus. b. Lenders and other creditors
- Roma historians recorded that Augustus  Lenders, potential lenders, and other trade
prepared a rationarium (account) which listed creditors are interested in the information that
public revenues. enables them to determine whether their
loans as well as the related interest can be
II. Development of Double-entry Accounting collected by them when due.
1494 - A Franciscan Monk and mathematician
names Luca Pacioli, published in Venice his famous c. Suppliers and Trade creditors
book “Summa de Arethmetica, Geometria,  Suppliers and other creditors provide goods,
Proportioni et Proportionalita (Review of whether raw materials or finished products,
Arithmetic, Geometry, Ratio and Proportions ) that business use for their operations.
which is the first book printed with a treatise on  They are interested in information that
bookkeeping. Luca Pacioli is acknowledged as the enables them to determine whether amounts
father of accounting. owed to them will be paid when due.
III. Other Developments  While trade creditors are likely to be
Industrial Revolution - accounting techniques interested in an enterprise over a shorter
to handle mechanization, factory-manufacturing period, lenders on the other hand are
operations, and the mass production of goods and dependent upon a continuation of the
services were developed. enterprise as a major customer.
Mid-19th century - the establishment of large
publicly-held business corporations had helped d. Government and their agencies
accountants gain important status in the business  They need the information so that they can
world and transformed accounting into a regulate the activities of the enterprise and
profession. determine appropriate policies, like taxation
1896 – The New York State passed the first policies.
Accountancy Law which required testing the
qualifications of those who wanted to practice as e. Customers
public accountant. The first examination was  They are interested about the continuance of
administered the same year. the enterprise, especially when they have a
long-term involvement with, or are dependent
Users of Financial Information on, the enterprise.
External Users of Accounting Information
a. Existing and potential investors f. Public
 The investors or the providers of risk capital  Financial statements may assist the public by
are concerned with the risk inherent in and providing information about the trends and
return provided by their investments. range of activities of organizations.

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: Lesson 1

Internal Users of Accounting Information ABC Merchandising should record the equipment
a. Management at P 10,000 rather than P 9,800.
Management uses the financial information to
analyze the organization's performance and 2. Liability recognition principle
position and take appropriate measures to improve  A liability is recognized it is a result of a
operations of the company. past transaction or event and it is probable that an
outflow of resources embodying economic benefits
b. Employees will be required for the settlement of a present
Employees and their respective groups are obligation and the amount of the obligation can be
interested in information about the stability and measured reliably.
profitability of their employers so they can assess  The settlement of the obligation requires
the ability of the enterprise to provide payment of cash, other assets, or services.
renumeration, retirement benefits and
employment opportunities. 3. Income recognition principle
 Income should be recognized when
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES earned rather than when cash is received.
(GAAP) Example: XYZ merchandising sold canned
 represent the rules, procedures, practice and goods to Maria for P 500 on February 14, 2015.
standard followed in the preparation and Maria made a promissory note that she will
presentation of financial statements. pay on April 1,2015. In this regard, income
 These principles have gained worldwide shall be recorded on February 14 when the
acceptance among practitioners and have goods were transferred to Maria rather than
substantial support of professional on April 1 when cash will be received.
organizations and government authorities
such as Securities and Exchange Commission 4. Matching principle
(SEC), Financial Executives of the Philippines  All costs and expenses incurred in the earning
(FINEX), Bangko Sentral ng Pilipinas (BSP), revenue should be reported in the same
Board of Accountancy (BOA) and other period.
respectable members of the financial
community. 5. Accrual accounting
 are conventional in the sense that these  Income is recognized when earned regardless
principles have been developed on the basis of of when received and expense is recognized
experience, reason and practical necessity. when incurred regardless of when paid.
 They have become accepted by mere  The timing of receipts and payments of cash is
agreement among accountants and parties not the basis for the recording of income and
affected by the principles. expenses.
 The timing of the earning process of income
and the incurrence of expenses are
Accounting Principles considered.
1. Cost Principle
 Cost principle requires that assets should
be recorded initially at original acquisition cost.
Example: ABC Merchandising purchased
an equipment at a price of P 10,000. The same
equipment is being sold in Manila at P 9,800.

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1: Lesson 1

Accounting Assumptions or Postulates  This requires that the indefinite life of an

 Accounting assumptions are the basic notions entity should be divided into time periods or
or fundamental premises on which the accounting periods for the preparation of the
accounting process is based. periodic financial reports.
 It serves as the bedrock of accounting in order  The basic accounting period is 12 months a
to enhance understanding and usefulness of year.
the financial statements.
Accounting period could be:
1. Going concern or continuity a. Calendar year – a twelve-month period that
 In the absence of evidence to the contrary, the starts January 1 to December 31
accounting entity is viewed as continuing in b. Fiscal year – a twelve-month period that starts
operation indefinitely. at any month of the year other than January and
 It is assumed that the business is going to ends twelve months after.
operate for an indefinite period of time. Thus,
assets are normally recorded at cost. 5. Use of Judgment and Estimates
 Accounting estimates are approximations
2. Economic entity or Accounting entity made by accountants or the management in
 The business is treated as a separate entity the preparation of financial statements.
from that of its owners, managers and  The use of reasonable estimates is an essential
employees who constitute the firm. part of the preparation of financial statements
 Accounting entity is the specific business and does not undermine their reliability.
organization. An accounting entity is an
organizational unit for which financial and 6. Prudence
economic data are gathered and processed.  In accounting sense is also called conservatism.
 A business is considered as an accounting Some financial transactions are sometimes
entity and is therefore considered as a unit uncertain when they will occur. According to
separate and distinct from that of its owner(s). Valix et.al (2013), “Conservatism means in case
of doubt, record any loss and do not record
3. Monetary unit any gain.”
 Two aspects of monetary unit assumptions are
quantifiability and stability of peso. 7. Substance over form
 Quantifiability means that the entities should  Information presented in the financial
record assets, liabilities, equity, income and statements of a company should truthfully and
expenses in terms of a unit of measure which faithfully represent the financial condition and
is in terms of money like peso, dollar, etc. financial performance of the company.
 Stability of the peso assumption means that
the purchasing power of the peso is stable or 8. Materiality Principle
constant and any instability is insignificant.  In case of assets that are immaterial to make a
difference in the financial statement, the
4. Time period or periodicity company should instead record it as an
 Financial statements are prepared for a expense.
specified time period. Example: A school purchased an eraser
with an estimated useful life of three years.
Since the eraser is immaterial relative to assets,
it should be recorded as an expense.

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