Chapter 1

Introduction to Accounting
Learning Competencies
The learners should be able to.
1. Define accounting
2. Describe the nature of accounting.
3. Explain the functions of accounting in business.
4. Narrate the history/origin of accounting.
Definition of accounting
Accounting is a process of identifying, recording and communicating
economic information that is useful in making economic decisions.
Essential elements of the definition of accounting
1. Identifying The accountant analyzes each business transaction and
identifies whether the transaction is an "accountable event" or "non-
accountable event." This is because only "accountable events" are
recorded in the books of accounts. "Non-accountable events" are not
recorded in the books of accounts.
"Accountable events" (or 'economic events') are those that affect
the assets, liabilities, equity, income or expenses of a business.
Sociological and psychological matters are outside the scope of
accounting.
2. Recording - The accountant recognizes (i.e., records) the identified
"accountable events." This process is called "journalizing."
After journalizing, the accountant then classifies the effects of
the event on the "accounts." This process is called "posting.""Account"
is the basic storage of information in accounting, e.g., "cash," "land,"
"sales," etc.
3. Communicating - At the end of each accounting period, the accountant
summarizes the information processed in the accounting system in
order to produce meaningful reports. This is important because
information processed in the accounting system is useless unless it is
 communicated to interested users. Accounting information is
communicated to interested users through accounting reports, the most
common form of which is the financial statements.
Nature of accounting
Accounting is a process with the basic purpose of providing information
about economic activities that is intended to be useful in making economic
decisions.
Types of information provided by accounting
1. Quantitative information - information expressed in numbers, quantities,
or units.
2. Qualitative information - information expressed in words or descriptive
form. Qualitative information is found in the notes to financial statements as
well as on the face of the other components of financial statements.
3. Financial information - information expressed in money. Financial
information is also quantitative information because monetary amounts are
normally expressed in numbers.
Accounting as science and art
1. As a social science, accounting is a body of knowledge which has been
systematically gathered, classified and organized.
2. As a practical art, accounting requires the use of creative skills and
judgment.
Accounting as an information system A system is one that consists of an
input, a process, and an output. For example, in your digestive system, the
input is the food you eat, the process is when your body produces digestive
juices to convert the food into an output called? .energy! (The output my
friend is energy. The one you are thinking of is called waste.) Your body
needs energy so it can function properly.
Similarly, in an accounting system, the inputs are the identified
accountable events; the processes are recording, classifying and
summarizing; and the output is the accounting report that is communicated to
the users.
Bookkeeping and Accounting
 Although bookkeeping function is part of accounting, bookkeeping and
accounting are not the same. Bookkeeping refers to the process of
recording the accounts or transactions of an entity. Bookkeeping
normally ends with the preparation of the trial balance. Unlike
accounting, bookkeeping does not require the interpretation of the
significance of the information processed.
 Accounting, on the other hand, covers the whole process of
identifying, recording, and communicating information to interested
users.
Functions of Accounting in Business
Accounting is often referred to as the "language of business" because it is
fundamental to the communication of financial information.
Accounting has the following two broad functions in a business:
1. To provide non-owners of a business (i.e., external users) with information
that is useful in making, among others, investment and credit decisions; and
2. To provide business owners and managers (i.e., internal users) with
information that is useful in managing the business.
Managing a business
Good management is the key to a business' success. On the other hand,
mismanagement is, one way or another, the cause of every business' failure.
Management, therefore, is no laughing matter. It cannot be taken lightly. To
be a good manager, one must equip himself or herself with the right
management tools and one important management tool is accounting!
Management is a process of establishing common objectives,
coordinating efforts towards those objectives, and efficiently and effectively
utilizing available resources so as to achieve certain goals.
 Managing a business requires more than just technical skills. A
business manager is likened to a musical conductor who leads a group of
musicians to perform a musical piece to the best of their abilities.
A successful business manager sees the "big picture" and understands
each detail. He or she has the ability to think "inside and outside of the box"
and to make both long-term (strategic) and short-term (tactical) plans.
As a future business professional, you need to understand each of the
following major facets of a business:
A. Finance - refers to how a business generates and manages its funds.
Finance is responsible in providing adequate resources needed for the
other facets to function properly.
B. Production - refers to how goods are produced or services are rendered.
Production is responsible for the quality of goods and services and the
efficiency by which they are produced or rendered.
C. Marketing refers to how goods or services are communicated to
customers. Marketing is responsible in creating value for customers and
building strong customer relationships.
D. Accounting - provides a measure of how well the other facets of the
business are performing. Accounting is responsible in providing useful
information that aids in making business decisions.
A manager makes countless business decisions. Few examples of these
decisions include:
a. How much money needs to be invested in the business?
b. How much inventory is enough? c.
Is the business spending too much on its marketing activities?
d. Is the business earning profits?
e. Shall the business continue or cease its existence?
The major facets work hand in hand. Each is mutually dependent on the
others. Without any one of them, the business will not fully achieve its goals.
 Story
Once upon a time, there lived a turtle, a monkey, and a snake.
Mr. Turtle is diligent and has excellent cooking skills but is very shy
and timid. No wonder Mr. Turtle is still single at age 40.
Mr. Monkey is charismatic, has an outgoing personality and has many
friends, but sometimes Mr. Monkey can be very trusting. No wonder many
girls have taken advantage of him in the past.
Mr. Snake is very intelligent and cunning. But unlike Mr. Turtle and
Mr. Monkey, Mr. Snake is cold as ice and lazy. No wonder Mrs. Snake left
him.
One day, Mr. Turtle and Mr. Monkey decided to put up a fast food
restaurant. Mr. Turtle was in charge of the cooking, while Mr. Monkey did
the marketing.
When Mr. Snake heard about this, he offered hirnself to be the
business cashier and bookkeeper. With his slyness, he was able to make Mr.
Turtle and Mr. Monkey accept him as co-owner of the business for a very
minimal amount of investment.
As skillful and diligent as he is, Mr. Turtle was able to formulate
recipes that never failed to make customers smile. With Mr. Monkey's
marketing skills, the business' customers and market share continued to grow.
After years of operation, the business has gained considerable growth.
The business even received recognition from various organizations for its
excellence. However, Mr. Turtle and Mr. Monkey, the founders of the
business, have never tasted yet the fruits of their labor in monetary terms.
They got frustrated, which eventually led them to cease their operations and
call it quits.
The End
It seems there is no happy ending to the story. Why? ..... Honestly. I don't
know. No one knows for sure, but here are possible reasons:
1. Maybe the business earned no profits because of excessive expenses
despite of increased sales:
2. Maybe they had wrong pricing decisions, e.g., excessively low pricing:
3. Maybe the business was assessed with excessive taxes; or
4. Maybe Mr. Snake embezzled the business money.....and so on.
There are so many "maybes" but all of these can only be corroborated
by accounting information!

Accounting as a managerial tool

As mentioned earlier, accounting is an essential managerial tool. This is
because accounting provides information that helps a business manager
perform his or her management functions.
Functions of a manager
1. Planning - involves the process of mapping out or arranging in detail how
a business goal is to be achieved.
2. Organizing - after a plan is formulated, a manager needs to organize his or
her personnel and other resources according to the plan. Organizing
involves assigning responsibilities and granting authority to personnel.
3. Staffing - involves the process of selecting, training and developing
employees. This function is commonly referred to as human resource
management.
4. Directing - after a plan is formulated and resources are organized and
made available, a manager needs to lead his personnel to ensure that
each is performing his or her responsibilities towards the organization's
common goal to the best of his or her ability.
Directing involves motivating, communicating, guiding and
encouraging personnel.
5. Controlling - after the other elements are in place, a manager needs to
continuously monitor results against goals and take corrective actions
necessary to ensure that the plan remains on track.

Examples in which accounting is used in making management decisions

Function Management Accounting
infromation
1. Planning  The need to  The current and
improve sales past levels of the
and the business' business' sales.
ability of doing  Forecast of
so. sales.
2. Organizing  Do we need  The current
additional productive
production capacity of
facilities and existing facilities
equipment to and equipment.
cater the planned  The marketing
increase in costs spent in the
sales? Do we past in relation
have the ability to the sales
to spend more generated.
on our  The amount of
marketing available cash
activities?. and thw business
ability to
generate
additional
financing.

3. Staffing  Do we need to  The number of

 employ current
additional employees
personnel? compared to the
current level of
productivity.

 The amount of
available cash
needed to
employ
additional
personnel.
4. Directing  Are the  Records of
employees personnel
properly training and
motivated, development
informed, costs.
guided and  Records of
encouraged in daily sales.
meeting the
business' goal of
increasing its
sales?
5. Controlling  Have we met  Variance
our goal of analysis on
increasing our differences
sales? between actual
sales and
expected sales.

Accounting as a managerial tool is likened to a Global Positioning System

(GPS) attached to a car. It shows where you are (financial position) and
where you have been (financial performance). This information helps in
determining your ability to get to your destination within your budgeted
travel time (strategic and short-term goals).
 Accounting information is also likened to the statistics gathered after a
basketball game - the number of rebounds, points in the paint, shots taken and
shots missed, etc. This information helps the coach and his players plan their
strategy for the next game.

External user of Decision Accounting

informtion information
1. Investors  Shall I invest in  The financial
the business? Is performance of
this business a the business
profitable
undertaking?
2. Creditor  Shall I lend  The ability of
money to this the business to
business? Does generate revenue
this business and cash flows
have the ability from its
to pay back my operations.
loan?
Examples in which accounting is used in investment and credit decisions

Now that we have understood how accounting plays an important role

in making business decisions, let us have a brief overview on how accounting
came to be

Brief history of accounting

Accounting can be traced as far back as the prehistoric times. Since the dawn
of civilization when mankind began to engage in trade, perhaps more than
10,000 years ago, methods of record keeping and accounting have been
invented.
As early as 8500 B.C., accounting has already existed. Archaeologists
have found clay tokens as old as 8500 B.C. in Mesopotamia which were
usually cones, disks, spheres and pellets. These tokens correspond to
commodities like sheep, clothing or bread. They were used in the Middle
West in keeping records. After some time, the tokens were replaced by wet
clay tablets. During such time, experts concluded this to be the start of the art
of writing. (Source: http://EzineArticles.com/456988)
Other ancient civilizations keeping account records are Babylonia
(4500 B.C.), Egypt (2250 B.C.), China and Greece.
In the middle ages (13th and 15th centuries), trade flourished in places
such as Florence, Venice and Genoa. This has brought advancement in
account keeping methods. In 1211 A.D., one of the systems in accounting
was kept by a Florentine banker. However, the system was primitive as the
concept of equality for entries was absent. Double entry records first came
out during 1340 A.D. in Genoa.
In 1494, the first systematic record keeping dealing with the "double
entry recording system" was formulated by Fra Luca Pacioli, a Franciscan
monk and mathematician. The "double entry recording system" was included
in Pacioli's book titled "Summa di Arithmetica Geometria Proportioni and
Proportionista," published on November 10, 1494 in Venice.
+ The concept of "double entry recording" is being used to this day.
Thus, Fra Luca Pacioli is considered as the father of modern accounting.