ccounting Definition and Purpose

Accounting is famously known as the

language of business. It is a channel
through which information about a
business entity is communicated to
different users.
Accounting is a means through which
information about a business entity
Technical definitions of accounting
The American Institute of Certified Public Accountants (AICPA)
defines accounting as:

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 financial character, and interpreting
the results thereof.
Components of
Accounting
1. Accounting is considered
an art
Accounting is considered an art
because it requires the use of
skills and creative judgment.
One has to be trained in this
discipline to be able to perform
accounting functions well.
Accounting is also considered
a science because it is a body of
knowledge. However, accounting is not
an exact science since the rules and
principles are constantly changing
(improved).
 2. Accounting involves
interconnected "phases"

RECORDING CLASSIFYING

INTERPRETING SUMMARIZING
Phase What is this? How is this done? Where do we do it?

RECORDING The first phase of Through journal The JOURNAL.

Accounting. This entries. A journal Also referred to
is when we entry, we will as the book of
record learn later on, original entry.
transactions for has debit and
the first time in credit
accounting books components.
and records.
CLASSIFYING The second Through ledger The LEDGER. Also
phase of entries. Journal referred to as the
Accounting. This entries are book of final
is when transferred from entry.
transactions that the journal to
are already ledger.
recorded are
classified into
groups of similar
accounts.
Phase What is this? How is this done? Where do we do it?

SUMMARIZING The preparation Through the The FINANCIAL

of financial preparation of a STATEMENTS
statements and worksheet which which are
reports. facilitates the quantitative
preparation of presentations of
financial the results of
statements. operations,
financial position,
cash flows and
changes in equity
of the business.
INTERPRETING The analysis of Through different Through
financial financial analysis MANAGEMENT
information to aid tools as vertical REPORTS
users in analysis, accompanying
decision-making. horizontal financial
analysis, and ratio statements.
analysis.
3. Concerned with transactions and
events having financial character
For example, hiring an additional
employee is qualitative information
with no financial character. Hence, it is
not recorded. However, the payment
of salaries, acquisition of an office
building, sale of goods, etc. are
recorded because they
involve financial value.
 4. Business transactions are
expressed in terms of money
• They are assigned amounts when
processed in an accounting system.
Using one of the examples above, it is
not enough to record that the
company paid salaries for April. It
must include monetary figures – say
for example, P20,000 salaries expense.
Purpose of Accounting
 Economic entity
•An economic entity is a separately
identifiable organization which makes
use of resources to achieve its goals
and objectives.
•An economic entity may be a business
entity operating primarily to generate
profit, or anon-profit entity carrying
out charitable and not-for-profit
operations.
Purpose of Accounting
According to the American Institute of
Certified Public Accountants (AICPA):
•Accounting is 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,
in making reasoned choices among
alternative courses of action.
 By the American Accounting
Association (AAA).
Accounting is the process of
identifying, measuring and
communicating economic
information to permit informed
judgment and decision by users
of the information.
Accounting Information
Here’s a list of the different types of
information provided by accounting
reports
 Results of
operations.
REVENUES-EXPENSES=NI/NL
.
NET INCOME
Revenue≥ Expenses
NET LOSS
Expenses ≤ Revenue
BREAK EVEN
Revenue = Expenses
 Financial
position.
How much resources does the entity
currently have? How much does the
entity owe third parties? How much is
left for the owners after we pay all
obligations using our resources? The
first question refers to the entity's
total assets; the second
to liabilities, and the third to capital.
ASSETS LIABILITIES OWNER’S EQUITY

Current Assets – assets Current Liabilities – A. Original/Income

readily convertible to cash Obligations payable within B. Additional
- changes value with in one year or the normal
given time operating cycle whichever is
Example: Cash on hand, Cash shorter.
in bank, Accounts receivable,
supplies Inventory, Notes Example: Accounts Payable
receivable and Notes Payable

Non- Current Assets – Assets Non-Current Liabilities –

not readily convertible to Obligations payable normally
cash beyond one year.
-remains the same after
operation Example: Loans Payable,
Example: Land, Building, Mortgage Payable
Equipment, Furniture and
fixtures and Machineries
Assets = Liabilities + Owner’s Equity ACCOUNTING EQUATION

Liabilities = Assets – Owner’s Equity

Owner’s Equity = Assets - Liabilities
ASSETS
Liabilities +
Assets Owner’s Equity
Debit Credit

Liabilities

Owner’s Equity
 Solvency and
liquidity
Solvency refers to the entity's
ability to pay obligations when
they become due.
Liquidity pertains to its ability
to meet short-term obligations.
 Cash flows.
The financial statements also show the
inflows and outflows of cash in the
different activities of the business
(operating, investing, and financing
activities).
• Inflows – Outflows=NET CASH FLOW
 Other
information.
The financial statements
provide qualitative, quantitative, and
financial information. One of the
characteristics of the financial
statements is relevance. Any
information that could affect the
decisions of users should be included in
the financial reports.