Republic of the Philippines

Department of Education
REGION VIII – EASTERN VISAYAS

Division of Northern Samar

CATARMAN NATIONAL HIGH SCHOOL
Senior High School Department

FUNDAMENTALS OF ABM I

ROLE OF ACCOUNTING IN BUSINESS

ACCOUNTING
 A service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to
be useful in making economic decisions (Statement of Financial Accounting Standards No.
1, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprise”
(Manila: Accounting Standards Council, 1983),par.1).
 An information system that measures, processes and communicates financial
information about an economic entity (Statement of Financial Accounting Concepts No.1,
“Objectives of Financial Reporting by Business Enterprises” (Norwalk, Conn.: Financial Accounting
Standards Board, 1978),par.9)
 It is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the
information. (American Accounting Association, “A Statement of Basic Accounting
Theory”(Evanston,III.: American Accounting Association,1966),par.1; Accounting Principles Board,
Statement No.4,”Basic Concepts and Accounting Principles Underlying Financial Statements of Business
Enterprises”(New York:AICPA,1970,)par.40)
 It is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least of a financial character, and interpreting the results thereof. (American
Institute Of Certified Public Accountants, ”Review and Resume”, Accounting Terminology Bulletin No. 1
(New York: AICPA, 1953), par.9)
 It is the process of gathering financial information about a business and
reporting this information to users.
IDENTIFYING
 Involves in the selection of the economic events which are important to a
particular business transaction. Example of transactions in a merchandising
store are sales of merchandise, and purchases of delivery trucks.
RECORDING

 The act of keeping a chronological record of events that are measurable in

accounting documents like journals and ledgers.
COMMUNICATING

 Refers to the process of communicating financial reports to the users of

financial information.

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NATURE OF ACCOUNTING
1. Accounting is a service activity. It helps decision-makers by giving them
financial reports that will guide them in making sound decisions.
2. Accounting is a process. It refers to the method of performing any specific
job step-by-step according to objectives. It performs the specific task of
collecting, processing, and communicating financial information.
3. Accounting is both an art and a discipline. It is considered an art because
one records, classifies, summarizes, and finalizes financial data. The way
something is done is referred to as “art”. It is behavioral knowledge
involving an established creativity and skill to help one achieve distinct
objectives.
4. Accounting deals with financial information and transaction. It records
financial transactions and data, categorizes these, and finalizes the results
given for a specified period. Accounting only deals with financial and not
with non-monetary or non-financial aspects of information.
5. Accounting is known and characterized as a storehouse of information. It
collects, processes, and communicates the financial information of any
entity.
HISTORY OF ACCOUNTING
In history, accounting is as old as civilization. It was developed in response
to various social and economic needs of men. It started as a simple recording of
monotonous exchanges. Its history shares the similarity with that of finance and
business.
Evolution of Accounting

 The Cradle of Civilization (3600 B.C.) – In Mesopotamia, record-keeping was

done through “Clay Table” as evidence of recording transactions. From India
and China to Central and South America, the clay tablet records the business
transactions like accounts receivable and accounts payable
 Double-entry Bookkeeping (14th Century) – The most relevant event in
accounting history is generally considered to be the dissemination of double-
entry bookkeeping -by Luca Pacioli (Father of Accounting), in 14th century
Italy). Pacioli was much reversed in his day, and was a friend and fellow
of Leonardo da Vinci. The Italians of the 14th to 16th centuries are recognized
as fathers of modern accounting and were the first to use Arabic numerals
than Roman, and for following business accounts. Summa de Arithmetica was
written by Luca Pacioli, the first book issued that contained a detailed
chapter on double-entry bookkeeping.
 French Revolution (1700s) - In this period, the development of accounting
theory has begun and was influenced by social upheavals.
 The Beginnings of Modern Accounting in Europe and America (19th Century) –
The modern and formal accounting profession emerged in Scotland in 1854.
Most accountants stayed in U.S., establishing accounting practices and
becoming the origins of several U.S accounting firms. The first national U.S
accounting society was established in 1887.
The American Association of Public Accountants was the initiator of the
current American Institute of Certified Public Accountants (AICPA).

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  The Present (20th Century) – In the present time, accounting standards were
established and practitioners follow the rules of international
organizations or groups like AICPA. Modern accounting standards were given
more attention and time.
History of Accounting

The Cradle of Civilization (3600 B.C.)

Clay tablets was used in keeping Accounting records

Double-entry bookkeeping (14th Century)

Double-entry bookkeeping was disseminated by Luca

Pacioli (The Father of Accounting)

French Revolution (1760-1830)

 Theory began during this

Development of Accounting
period.

The Industrial Revolution (1760-1830)

Fixed Assets and mass production were given importance.

The Beginnings of Modern Accounting in Europe and

America 
(19th Century)
Modern Accounting in Europe and America began

The Present (20th Century)


Development in the accounting profession was developed.

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EXTERNAL AND INTERNAL USERS OF ACCOUNTING INFORMATION
EXTERNAL USERS

 The individuals or organizations outside the company who are not

involved in operating the business. They include present and potential
owners, investors, creditors, suppliers, customers, legislators,
trade associations and others, who lack direct access to the
information generated by the internal operations and must rely on
general-purpose financial statements to make their investment, credit
and public policy decisions.
 Creditors-users who need accounting information to determine the
credit integrity, worthiness of the organization, and credit terms.
 Tax Authorities (Bureau of Internal Revenue) – a government agency
that verifies the accuracy of financial data to ensure the credibility
of the tax returns filed by the business.
 Investors – users who need accounting information to evaluate and
examine the feasibility of investing in a company. The providers of
risk capital and their advisers are concerned with the risk inherent
in, and return provided by, their investments. They need information
to help them determine whether they should buy, hold or sell.
Shareholders are interested in information which enables them to
assess the ability of the enterprise to pay dividends.
 Customers – users who evaluate the financial information of its
supplier to keep stable source of supply in the long term. They have
an interest in information about the continuance of an enterprise,
especially when they have a long-term involvement with, or are
dependent on, the enterprise.
 Regulatory Authorities – government agencies like Securities and
Exchange Commission (SEC), Department of Trade and Industry (DTI),
Department of Labor and Employment (DOLE) were established to
supervise if businesses comply with legal requirements in running a
business.
 Lenders – are interested in information that enables them to determine
whether their loans, and the interest attaching to them will be paid
when due.
 Suppliers and other trade creditors – are interested in information
that enables them to determine whether amounts owing to them will be
paid when due. Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders unless they are
dependent upon the
 Governments and their agencies – they are interested in the allocation
of resources and, therefore, the activities of enterprises. They also
require information in order to regulate the activities of
enterprises, determine taxation policies and as the basis for national
income and similar statistics.
 Employees – are interested in information about the stability and
profitability of their employers. They are also interested in
information which enables them to assess the ability of the enterprise
to provide remuneration retirement benefits and employment
opportunities.
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  Public – enterprises affect members of the public in a variety of
ways. For example, enterprise may make a substantial contribution to
the local economy in many ways, including the number of people they
employ and their patronage of local suppliers. Financial statements
may assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range
of its activities.
INTERNAL USERS

 Individuals inside the organization who plan, organize, and run the
business. They are directly involved in managing and operating the
business. Internal users are also called as “primary users” of
accounting information and some of these users are the marketing
managers, supervisors, finance directors, company officers, and
owners.
 They are the managers of a business entity, responsible for managing
efficiently and effectively, and who have the power and authority to
obtain whatever economic information they need. The process of
providing accounting information to internal decision makers is called
management accounting.
The following are the internal users of accounting:
 Management – to know the income/earnings for the period, sales,
available cash, and production cost are the reasons why the management
needs the accounting information. They also analyze the organization’s
performance and position and take appropriate measures to improve the
company results, sufficiency of cash to pay dividends to stockholders
as well as the pricing decisions.
 Owners – they use financial information to know the profit or income
for the period, resources, or assets of the business. Liabilities of
the business are needed by the owners. They also use financial
information in considerations regarding additional investment,
expanding the business, and borrowing funds to support any extension
plans.
TYPES OF ACCOUNTING INFORMATION
 Financial Accounting – used by business managers to record
transactions of the business, prepare reports based on those
transactions, and thus communicate to owners’ and creditors the
current condition of the company and its success or lack of success.
These reports are the all-purpose of financial statements such as (1)
The Statement of Financial Position or the Balance Sheet Statement,
(2) the Statement of Profit or Loss and Other Comprehensive Income,
(3) Statement of Changes of Owner’s Equity, (4) the Statement of Cash
Flows, and (5) the Notes to the Financial Statements.
 Managerial Accounting – used to aid business managers in planning and
controlling business operations and in decision making.
 Tax Accounting – used to prepare tax returns and to examine tax
consequences of proposed business transactions.

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  Not-for-profit Accounting – is used by nonprofit organizations (such
as NGO’s, civic and charitable institutions) to measure the success
of their activities and to ensure strict compliance with all
requirements imposed by law, by donors, or by the entity’s purposes.
 Governmental Accounting – is used by all branches of government and
by those who receive government funds to oversee the complicated
business of providing government services or to report to the
government on the use of government funding in compliance with the
imposed regulations.
 Cost Accounting – analyzes a business’s costs to help managers control
expense. Good cost accounting records guide managers in pricing their
products and services to achieve greater profits. Also, cost
accounting information shows management when a product is not
profitable and should be dropped.
CAREERS IN ACCOUNTING
Accounting offers many career opportunities. The positions listed in
the following section require varying amounts of education and experience.

INITIAL EMPLOYMENT
 Accounting Clerk – record, sorts, and file accounting information. An
accounting clerk may specialize in cash, payroll, accounts receivable,
accounts payable, inventory, or purchases. As a result, they are
involved with only a small portion of the total accounting
responsibilities for the firm. Accounting clerks must usually have at
least one year of accounting education.
 Bookkeeper – generally supervise the work of accounting clerks, help
with daily accounting work, and summarize accounting information. In
small to medium-sized business, the bookkeeper may also help managers
and owners interpret the accounting information. Bookkeepers must
usually have one to two years of accounting education and experience
as an accounting clerk.
 Accountant – the difference between accountants and bookkeepers is
not always clear, particularly in smaller firms where bookkeepers also
help analyze the accounting information. In large firms, the
distinction is clearer. Bookkeepers focus on the processing of
accounting data. Accountants design the accounting information system
and focus on analyzing and interpreting information. They also look
for important trends in the data and study the impact of alternative
decisions. Most accountants enter the field with a college degree in
accounting. Accountants are employed in public accounting, private
(managerial) accounting and governmental accounting.
PROFESSIONAL LEVEL
PUBLIC ACCOUNTING – offer services in much the same way as doctors and
lawyers. The public accountant can achieve professional recognition as
Certified Public Accountant (CPA) by meeting education and experience
requirements, and passing an examination prepared by the Professional
Regulatory Board of Accountancy. Public accountants perform many services
which are listed in the following sections:

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 o Auditing –involves reviewing and testing to be certain that proper
accounting policies and practices have been followed. The purpose of
the audit is to provide an independent opinion that the financial
information about business is fairly presented.
o Taxation – tax specialist advice on tax planning, prepare tax return
and present clients before governmental agencies such as the Internal
Revenue Service.
o Management Consulting - given the financial training and business
experience of public accountants, many businesses seek their advice on
a wide variety of managerial issues.
PRIVATE ACCOUNTING – many accountants are employees of private business
firms. The controller oversees the entire accounting process and is
considered the principal accounting officer of the company. Private or
managerial accountants perform a wide variety of services for the business.
o Accounting Information System – Accountants in this area design and
implemented manual and computerized accounting systems.
o General Accounting – Based on the accounting data period prepared by the
bookkeepers and accounting clerks, the accountant prepares various
reports and financial statements.
o Cost Accounting – the cost of producing specific products or providing
services must be determined. Further analysis is also done to determine
whether the products and services are produced in the most effective
manner.
o Budgeting - in the budgeting process, accountants help managers develop
a financial plan for the future.
o Tax Accounting – instead of hiring a public accountant, a firm may have
its own accountants to focus on tax planning, preparing tax returns, and
dealing with the Internal Revenue Service and other governmental
agencies.
o Internal Auditing – the main functions of an internal auditor are to
review the operating and accounting control procedures adopted by
management and to see that accurate and timely information is provided.

A managerial accountant can achieve professional status as a Certified

Management Accountant (CMA) by passing a uniform examination offered by the
Institute of Management Accountants. An internal auditor can achieve
recognition as a Certified Internal Auditor (CIA) by passing the uniform
examination offered by the Institute of Internal Auditors.
GOVERNMENT AND NON-PROFIT ACCOUNTING
o Thousands of government and nonprofit organizations such as states,
municipalities, educational institutions, churches, and hospitals
accumulate and report information. These organizations employ a large
number of accountants. While the rules are somewhat different for
governmental and nonprofit organizations, many accounting procedures are
similar to those found in profit-seeking organizations.

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PRACTICE IN EDUCATION/ACADEME
o A CPA may be employed in an educational institution to teach
accounting, auditing, management advisory service, finance, business
law, taxation or other technically related subjects.

References:

 Ma. Elenita Balatbat Cabrera.,et. Al, Fundamentals of Accountancy, Business

& Management I, Philippines: GIC Enterprise & Co., Inc.

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