Fundamentals of

Accountancy,
Business and
Management 1
Module 1
OBJECTIVES

1. Define accounting. (ABM_FABM11-IIIa-1)

2. Describe the nature of accounting. (ABM_FABM11-IIIa-2)
3. Narrate the history/origin of accounting. (ABM_FABM11-IIIa-4)
4. Define external users and gives examples. (ABM_FABM11-IIIa-7)
5. Define internal users and gives examples. (ABM_FABM11-IIIa-8)
“Accounting is the process of IDENTIFYING,
RECORDING AND COMMUNICATING economic
events of an organization to interested users.”
(Weygandt, J. et.al)

Identifying – this involves selecting economic

events that are relevant to a particular business
transaction. The economic events of an
organization are referred to as transactions – In a
bakery business:
1. Sales of bread and other bakery products;
Recording – this involves keeping a
chronological diary of events that are measured
in pesos. The diary referred to in the definition
are the journal and ledgers will be discussed in
future learning materials.

Communicating – occurs through the

preparation and distribution of financial and
other accounting reports.
The purpose of accounting is to help end-users see
the true picture of the business in financial terms. To
achieve this purpose, the financial reports prepared
by accountants must be understandable, relevant,
and for general-purpose. It must contain information
that is complete, neutral and free from error. It is
achieved when financial statements are made in
conformity with prevailing accounting standards
called the “generally accepted accounting
principles” (GAAP).
The overall objective of financial reporting is to
provide general-purpose financial statements about
the reporting entity that is useful to present potential
user groups, especially stockholders and creditors to
assist them in making sound economic decisions as
capital providers.

To achieve this accounting objective, a business entity

must prepare general purpose financial statements.
General-purpose financial reporting help users
who lack the ability to demand all the financial
information they need from an entity and therefore,
must rely, at least partly, on the information provided
I.THE DEFINITIONS OF ACCOUNTING
The most commonly accepted definitions of Accounting are
expressed by the
following authoritative bodies:
1. American Institute of Certified Public Accountants (AICPA):
“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.”
2. Accounting Standards Council (ASC): “A service activity.
Its function is
provide quantitative information, primarily financial in
nature, about
economic entities, that is intended to be useful in
II. NATURE OF ACCOUNTING
The most common descriptions when accountants portray the
nature of accounting
are as follows:
1. A Discipline. Accounting is a discipline that observes
professional standards
and professional ethics as other fields of professions like
medicine, law, engineering, and others.
2. A Service activity. Accounting profession is not involved
in the selling of goods.
3. An art and Science. As an art, accounting is
designed to perform its service activity with utmost
efficiency and in best possible manner without any
wastage of time and money.
4. The Language of Business.
Accounting serves as a means of
communication. It communicates the
results of business operations to various
parties (owners, lenders, investors,
government, employees, and other
agencies) who are directly or indirectly
interested on the economic affairs of the
business. It informs them the economic
status of a business organization. It gives
them insights regarding the true financial
Accounting thus plays an essential role to businessmen. It helps
them easily find out needed information anytime to answer the
following business operations:
a. How much is the increase in capital as a results of business
operation?
(Profitability)
b. Are these available funds to finance the business operations?
(Liquidity)
c. Can the business pay its long-term obligations to others?
(Solvency)
d. Can the business sustain its long-term profitability and cash
flow? (Stability)
e. How much borrowed capital and owner’s capital are invested
in the business?
(Capital Structure)
III. FUNCTIONS OF ACCOUNTING
The primary function of accounting is “to
provide financial reports to various endusers
for economic decision-making.” (PAS No. 1)
This is achieved through the use of the
accounting functions as follows:
1. Recording. This accounting function is
employed to ensure that all business transactions
are recorded in a systematic manner in property
books of accounts.
The recording is done in the “Journal Book” and
subsidiary books such as cash journal, purchase
journal, and sales journal. Only transactions that
are financial in nature are recorded in the books
of accounts.
2. Classifying. It is concerned with systematic
analysis of recorded business transactions and
events, with a view to group those that are similar
3. Summarizing. This involves presenting the classified data in manner
which is
understandable and useful to the end-users of accounting information. This
process leads to preparation of a (a) Trial Balance, (b) Statement of
Comprehensive Income and (c) Statement of Financial Position.

4. Analyzing and Interpreting. This is the final function of accounting.

The
recorded financial data are analyzed and interpreted in a manner that the
endusers can make a meaningful judgment about the financial condition
and profitability of the business operations. The data is also used for
preparing the future plan and framing of business policies.

5. Communication. After being meaningfully analysed and interpreted, the

accounting information has to be communicated to the intended end-user.
This is
done thorough the distribution of accounting reports such as Statement of
Comprehensive Income and Statement of Financial Position including
The basic function of accounting is
described as the process of identifying,
measuring, and communicating economic
information to permit informed judgment
for an economic decision. – (American
Accounting Association)
The advanced or critical function of
accounting is its audit function – to test the
reliability of the financial reports, trace
fraudulent transactions, and locate and
IV. HISTORY OF ACCOUNTING
Accounting, as a language of business, is an old as
civilization. It has evolved in
response to economic and social needs of men. It
started with a simple recording of repetitive
exchanges.

The Cradle of Civilization. Around 3600 BC, record-

keeping was already
common from Mesopotamia, China and India to Central
and South America. The oldest evidence of this
practice was the “clay tablet” of Mesopotamia, 90% of
which dealt with commercial transactions, accounts
Evolution of Double-Entry System. The early history of
double-entry bookkeeping cannot be traced with much
accuracy. The earliest known examples of this technique are
the mercantile books of Ferris Bonis of Montauban, dated
1339.
However the evolution of double-entry accounting system has an
Italian influence
in the 13th to 15th century.
 In Genoa, the oldest double-entry books entitled “Massari
(Treasury Officials)
Ledgers of Commerce of Genoa” were written in 1340. These were
books
were known as a perfect double-entry form because separate
pages were used
for debit and credit. Under the present system, this is simplified in
to the Taccount
and expanded into the Ledger.
Example of T-Account
In Florence, there were double-entry records wherein debits
were written
over credits. It is also in Florence that manuscripts of
“Partnership and
Association Contracts” reflecting how partners’ capital,
division of profit and losses, and dissolution of partnership
were computed.
In present system, the Florentine Method is observed in the
Journal Entries
with doubl-entry bookeeping.
Double-entry Bookkeeping. The double-entry bookkeeping
system is based on the dual aspect concept which says that in
every business transaction, two effects of recording are to be
made – the value received (debit) and the value parted with
credit).
The basic principle of bookkeeping is the principle of
balance. It is a principle that distinguishes double-entry
bokkeepimg form mere record keeping. An example of
double-entry bookkeeping is as follows
The transaction regarding the initial investment of the owner is
recorded twice in the general journal – one is Cash (debit side)
which represents the value received by the business, and the
other is Capital (credit side), the corresponding reciprocal
value parted with or the obligation of the business to hold in
trust the investment of the owner.
 Venice of Northern Italy had key influence in the use of the
double-entry
bookkeeping system in 1400s.
In 1494, Luca Pacioli(1447-1517), an Italian monk and
mathematician,
wrote Summa de Arithmetica, the first book that was published
containing a
detailed chapter of double-entry bookkeeping which enable
others to study
and use it.
In this book, Pacioli introduced three important books of records,
namely:
a. Memorandum Book – for all information on a transaction;
b. Journal Book – for the original entry; and
c. Ledger Book – for the final entry (posting, the center of
accounting system)
For this reason, Luca Pacioli is known as the “Father of Modern
Accounting” even if he was neither an accountant nor a merchant.
The Present – The Development of Modern Accounting Standards
and
Commerce. The accounting profession in the 20th century developed
around state requirements for financial statement audits. Beyond the
industry’s self-regulation, the government also sets accounting standards,
through laws and agencies such as Securities and Exchange Commission
(SEC).
As economies worldwide continued to globalize, accounting regulatory
bodies required accounting practitioners to observe International
Accounting Standards.
This is to assure transparency and reliability, and to obtain greater
confidence on accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To
remain competitive, business everywhere feel the need to operate
globally. The trend now for accounting professionals is to observe one
V. Users of Accounting Information
The users of accounting information may be classified based on the
extent of
their participation in the affairs of the business – that is, internal users
comprising
the management group, and external users comprising the financing
and public
groups.

The Management Group. Internal users are those who own and/or
manage and
control the business entity.
To help them make relevant economic decisions in achieving the goal of
the firm,
the management group needs more detailed accounting information.
Internal financial reports are usually prepared exclusively for the use of
the internal
The Financing Group and Public Group. External users (the financing
and public
groups) do not own and/or manage and control business entity.
They have no direct access to the management of the business, but they
use
financial reports to satisfy some of their needs for financial information.
The external users and their respective needs as catered by the financial
reports
include the following:
1. Investors. To assess the risk of investments portfolio, investors need
information to help them determine whether they should buy, hold, or sell
their
investments. They need accounting information to assess their return on
investment.
2. Employees. Workers are interested in the financial statements to
determine the
employer’s stability and profitability. Moreover, enterprise’s capability to
provide
4. Suppliers and other trade creditors. Suppliers use the financial
statements of
their customers and to determine the continuity of the latter’s business.
They are
interested in the information that enables them to determine whether debts
owed 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
continuation of the enterprise as a major customer.
5. Customers. Customers’ use the financial statements of their suppliers to
assess
the latter’s continuity in business because some customers are dependent
on the
existence of the suppliers to insure the availability of the supplies that will
sustain
their business operation.
6. Government and its agencies. In allocation the
national resources, the government is interested in
financial reports of an enterprise for statistics, income
taxes and other regulatory policies.
7. Public. Financial reports may assist the people by
providing information about the trends and recent
developments in the prosperity of the enterprise and the
range of its activities.
External financial reports are usually prepared for those
who have no direct access to the management of the
business. The preparation of these reports is governed
bythe generally accepted accounting principles. The area
of accounting that is concerned with the preparation and