INTRODUCTION

TO ACCOUNTING
LESSON 1
FABM1
 MOST ESSENTIAL LEARNING
COMPETENCIES
Define accounting
Describe the nature of accounting
Narrate the history/origin of accounting
Define external and internal users and give examples
Explain the varied accounting concepts and principles
Solve exercises on accounting principles as applied in various cases

FABM1
ACCOUNTING:
The art of analyzing financial
transactions and economic events,
recording them, classifying them into
accounts, summarizing them,
reporting, and interpreting the
results.
 ANALYZING

• The first phase of the accounting process.

• The accountant must look at the transactions entered into, economic
events that have taken place, and determine their effects on the business.
• These transactions and events are generally supported by documentary
evidences by a sales invoice.
• The sales invoice is further supported by a delivery receipt.
• In most cases, before delivery of service or product is made, a purchase
order is received from the customer.
 RECORDING

• Involves writing the effects of the transactions and events that have
been analyzed.
• May be done manually, or it may be encoded with the use of computers
or data-processing machines.
• It includes inputting of information in the accounting books called
journals.
• There are two kinds of journal – 1. General 2. Special
• The special journals are – 1. Cash receipts book 2. Cash disbursements
book, 3. Sales book, and 4. Purchases book.
• The transactions and events recorded in special journals already
involved grouping together transactions and events of the same kind.
• Some transactions and events that may not be conveniently grouped in
the special journals are recorded in the general journal.
 CLASSIFYING

• The sorting or grouping of similar transactions and events into specific

account titles.
• It is like putting similar information in boxes. For example: All cash
information are put in the cash box or cash account title.
• The journalized transactions and events are classified in ledgers.
• The ledgers are general ledgers and subsidiary ledgers.
• The subsidiary ledgers show the details of those transactions and events
classified in the general ledger.

SUMMARIZING
• The process that involves grouping the various accounts referred to in
the classifying process.
• This is where the accounts are grouped into assets, liabilities, owner’s
equity, revenue and cost and expenses.
• The summaries are taken from the accounts in the general ledger.
 History of Accounting

• Evolved in response to various social and economic needs of men.

• Started as a simple recording of repetitive exchanges
 THE CRADLE OF CIVILIZATION

• Around 3600 B.C., record keeping was already common from

Mesopotamia, China and India to Central and South America.
• Oldest evidence – 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

• Father of Accounting – Luca Pacioli

• Luca Pacioli wrote ‘Summa de Arithmetica’, the first book published that
contained a detailed chapter on double-entry bookkeeping.
 FRENCH REVOLUTION (1700s)

• 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
• Formal accounting profession emerged in Scotland in 1854 – creating
the profession of the Chartered Accountant.
• Chartered Accountants from Scotland and Britain came to the U.S. To
audit British Investments.
• Rapid changes in accounting practice and reports were made.

THE PRESENT – THE DEVELOPMENT OF MODERN

ACCOUNTING STANDARDS AND COMMERCE
• State requirements for financial statement audits.
• Sets accounting standards, through laws and agencies such as the
Securities and Exchange
 Users of Financial Statements

• Financial statements are prepared by entities whether for profit or

nonprofit. These entities may be the sole proprietorships, partnerships,
or corporations.
• Financial statements are also prepared for some individuals. Common
among these financial statements for individuals are statements of assets
and liabilities required from government officials.
• Management is the one primary responsible for the preparation and
presentation of financial statements.
• The users of financial statements are:
• 1. present and potential investors,
• 2. employees,
• 3. lenders,
• 4. suppliers,
• 5. customers,
• 6. government agencies,
• 7. the public and
• 8. management.
 INVESTORS

• To determine whether to buy, hold, or sell their investments in equity

ownership in the business, and to assess the ability of the investee to
pay dividends or to pay returns to investors.

EMPLOYEES

• To determine stability and profitability of employers and the ability of

the employer to pay salaries and fringe benefits

LENDERS

• To determine the ability of the borrowers to be on time in paying the

loans granted to them by the creditors.

SUPPLIERS

• To determine the ability of the customer to pay debts as they fall due,
and the ability of the customer to remain as a continuing buyer.
 CUSTOMERS

• To determine the ability of the enterprise to be a continuing source of

supply, and the ability of the company to exist over a long period of time.

GOVERNMENT AGENCIES

• To determine the capacity of the enterprise to pay taxes and its tax
compliance; to provide the bases for monitoring and regulating the
activities of enterprises and individuals.

PUBLIC

• To determine the activities of the enterprise and contribution to the

economy in the form of a. number of employees, b. ownership of assets,
c. prices of their products, d. patronage of local suppliers, and e.
patronage by customers.
MANAGEMENT

• To determine the activities of the enterprise for planning, organizing,

leading and controlling.
 INTERNAL USERS

• Those individuals inside a company who plan, organize, and run the
business. These employees have different specific goals that are designed
to help the entity attain its overall strategies and mission.
• Managers, supervisors, directors, officers, owners.

EXTERNAL USERS

• Individuals and organizations outside a company who want financial

information about the company. The information needs of these users
are diverse so that only the primary or general-purpose financial
statements are provided.
• Potential investors, creditors, suppliers, customers, government agencies,
public.
 FUNDAMENTAL CONCEPTS

• Several fundamental concepts underlie the accounting process. In recording

business transactions, accountants should consider the following:
• Entity Concept. The most basic concept in accounting is the entity concept.
An accounting entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a separate economic
unit. Simply put, the transactions of different entities should not be accounted
for together. Each entity should be evaluated separately
• Periodicity Concept. An entity's life can be meaningfully subdivided into
equal time periods for reporting purposes. It will be aimless to wait for the
actual last day of operations to perfectly measure the entity's profit. This
concept allows the users to obtain timely information to serve as a basis on
making decisions about future activities. For the purpose of reporting to
outsiders, one year is the usual accounting period.
• Stable Monetary Unit Concept. The Philippine peso is a reasonable unit
of measure and that its purchasing power is relatively stable. It allows
accountants to add and subtract peso amounts as though each peso has the
same purchasing power as any other peso at any time. This is the basis for
ignoring the effects of inflation in the accounting records.
 ACCOUNTING PRINCIPLES

• In order to generate information that is useful to the users of financial

statements, accountants rely upon the following principles:
• Objectivity Principle. Accounting records and statements are based on the
most reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by
independent observers. Ideally, accounting records are based on information
that flows from activities documented by objective evidence. Without this
principle, accounting records would be based on whims and opinions and is
therefore subject to disputes.
• Historical Cost. This principle states that acquired assets should be
recorded at their actual cost and not at what management thinks they are
worth as at reporting date.
• Revenue Recognition Principle. Revenue is to be recognized in the
accounting period when goods are delivered or services are rendered or
performed.
• Expense Recognition Principle. Expenses should be recognized in the
accounting period in which goods and services are used up to produce
revenue and not when the entity pays for those goods and services.
 ACCOUNTING PRINCIPLES

• Adequate Disclosure. Requires that all relevant information that would

affect the user's understanding and assessment of the accounting entity be
disclosed in the financial statements.
• Materiality. Financial reporting is only concerned with information that is
significant enough to affect evaluations and decisions. Materiality depends on
the size and nature of the item judged in the particular circumstances of its
omission. In deciding whether an item or an aggregate of items is material, the
nature and size of the item are evaluated together. Depending on the
circumstances, either the nature or the size of the item could be the
determining factor.
• Consistency Principle. The firms should use the same accounting method
from period to period to achieve comparability over time within a single
enterprise. However, changes are permitted if justifiable and disclosed in the
financial statements.