FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1

“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an

organization to interested users.” (Weygandt, J. et. al)
Explain the three highlighted words in the graphic:
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. Examples of economic events or
transactions - In a bakery business:
• sales of bread and other bakery products
• purchases of flour that will be used for baking • purchases of trucks needed to deliver the products
RECORDING – this involves keeping a chronological diary of events that are measured in pesos. The diary
referred to in the definition are the journals and ledgers which will be discussed in future chapters.
COMMUNICATING – occurs through the preparation and distribution of financial and other accounting reports.

Nature of accounting
According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-scope-of-accounting.html):
“Accounting is a systematic recording of financial transactions and the presentation of the related information to
appropriate persons.” Based on this definition we can derive the following basic features of accounting:
• Accounting is a service activity. Accounting provides assistance to decision makers by providing them financial
reports that will guide them in coming up with sound decisions.
• Accounting is a process: A process refers to the method of performing any specific job step by step according to
the objectives or targets. Accounting is identified as a process, as it performs the specific task of
collecting, processing and communicating financial information. In doing so, it follows some definite steps
like the collection, recording, classification, summarization, finalization, and reporting of financial data.
• Accounting is both an art and a discipline. Accounting is the art of recording, classifying, summarizing and
finalizing financial data. The word ‘art’ refers to the way something is performed. It is behavioral
knowledge involving a certain creativity and skill to help us attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper application requires skill and expertise.
So by nature, accounting is an art. And because it follows certain standards and professional ethics, it is
also a discipline.
Accounting deals with financial information and transactions: Accounting records financial transactions and
data, classifies these and finalizes their results given for a specified period of time, as needed by their
users. At every stage, from start to finish, accounting deals with financial information and financial
information only. It does not deal with non-monetary or non-financial aspects of such information.
• Accounting is an information system: Accounting is recognized and characterized as a storehouse of information.
As a service function, it collects processes and communicates financial information of any entity. This
discipline of knowledge has evolved to meet the need for financial information as required by various
interested groups.
• Accounting is the means by which business information is communicated to business owners and stakeholders. The
role of accounting in business is to provide information for managers and owners to use in operating the
business. In addition, accounting information allows business owners to assess the efficiency and
effectiveness of their business operations.
Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of men.
Accounting started as a simple recording of repetitive exchanges. The history of accounting is often seen as
indistinguishable from the history of finance and business.

• Following is the evolution of accounting:

• The Cradle of CivilizationAround 3600 B.C., 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 which dealt with commercial transactions at the time such as listing of accounts receivable
and accounts payable.
• • 14th Century - Double-Entry BookkeepingThe most important event in accounting history is generally
considered to be the dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of
Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged
as the fathers of modern accounting and were the first to commonly use Arabic numerals, rather than
 Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published
that contained a detailed chapter on double-entry bookkeeping.
• • French Revolution (1700s)The 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 AmericaThe modern, formal
accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the
Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA). In the late
1800s, chartered accountants from Scotland and Britain came to the U.S. to audit British investments. Some
of these accountants stayed in the U.S., setting up accounting practices and becoming the origins of
several U.S. accounting firms. The first national U.S. accounting society was set up in 1887. The American
Association of Public Accountants was the forerunner to the current American Institute of Certified Public
Accountants (AICPA).In this period rapid changes in accounting practice and reports were made.
Accounting standards to be observed by accounting professionals were promulgated. Notable practices
such as mergers, acquisitions and growth of multinational corporations were developed. A merger is when
one company takes over all the operations of another business entity resulting in the dissolution of another
business. Businesses expanded by acquiring other companies. These types of transactions have challenged
accounting professionals to develop new standards that will address accounting issues related to these
business combinations.
• • The Present - The Development of Modern Accounting Standards and CommerceThe 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 the 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, businesses everywhere feel the need to operate globally. The trend now for
accounting professionals is to observe one single set of global accounting standards in order to have
greater transparency and comparability of financial data across borders.

Branches of Accounting
“Accounting is divided into several branches to better serve the needs of different users with varying information
needs. These branches sometimes overlap and they are often closely intertwined.”
Financial Accounting
Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is
primarily concerned with the recognition, measurement and communication of economic activities. This information
is communicated in a complete set of financial statements. It is assumed under this branch that the users have one
common information need. Financial accounting conforms with accounting standards developed by standard-
setting bodies. In the Philippines, there is a Council created to set these standards.
Examples of these financial reports include: • the balance sheet (statement of financial condition)
• income statement (the profit and loss statement, or P&L) • statement of cash flows Financial accounting is
primarily concerned with processing historical data. Although financial accounting generally meets the needs of
external users, internal users of accounting information also use these information for their decision-making needs.
Management (or Managerial) Accounting
Management accounting emphasizes the preparation and analysis of accounting information within the
organization. The objective of managerial accounting is to provide timely and relevant information for those
internal users of accounting information, such as the managers and employees in their decision-making needs.
Oftentimes, these are sensitive information and is not distributed to those outside the business - for example,
prices, plans to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business
decisions, and similar areas.
Government Accounting
Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and
interpreting financial information about the government in aggregate and in detail reflecting transactions and
other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities.
This branch of accounting deals with how the funds of the government are recorded and reported.
Ask the learners the following questions:
• What are the sources of income of the government? Possible Answer: Taxes paid by Filipinos
• Where do these taxes go? Possible Answer: Roads, Hospitals, for education and others
Government accounting deals with these transactions, the recording of inflow and outflow of funds of the
government.
Auditing
There are two types of auditing: external and internal auditing. External auditing refers to the examination of
financial statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an
opinion as to fairness of presentation and compliance with the generally accepted accounting principles (GAAP).
The audit does not cover 100% of the accounting records but the CPA reviews a selected sample of these records
and issues an audit report.
Internal auditing deals with determining the operational efficiency of the company regarding the protection of the
company’s assets, accuracy and reliability of the accounting data, and adherence to certain management policies.
It focuses on evaluating the adequacy of a company's internal control structure by testing segregation of duties,
policies and procedures, degrees of authorization, and other controls implemented by management.
Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax
returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to
minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters.
Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the recording,
presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since
they have the most complicated costing process.
Cost accountants also analyze actual and standard costs to help managers determine future courses of action
regarding the company's operations.
Cost accounting will also help the owner set the selling price of his products. For example, if the cost accounting
records shows that the total cost to produce one can of sardines is PHP50, then the owner can set the selling price
at PHP60.
Accounting Education
This branch of accounting deals with developing future accountants by creating relevant accounting curriculum.
Accounting professionals can become faculty members of educational institutions. Accounting educators contribute
to the development of the profession through their effective teaching, publications of their research and influencing
students to pursue careers in accounting. Accounting teachers share their knowledge on accounting so that students
are informed of the importance of accounting and its use in our daily lives.
Accounting Research
Accounting research focuses on the search for new knowledge on the effects of economic events on the process of
summarizing, analyzing, verifying, and reporting standardized financial information, and on the effects of
reported information on economic events. Researchers typically choose a subject area and a methodology on
which to focus their efforts. The subject matter of accounting research may include information systems, auditing
and assurance, corporate governance, financials, managerial, and tax. Accounting research plays an essential
part in creating new knowledge. Academic accounting research "addresses all aspects of the accounting
profession" using a scientific method. Practicing accountants also conduct accounting research that focuses on
solving problems for a client or group of clients. The Accounting research helps standard-setting bodies around the
world to develop new standards that will address recent issues or trend in global business.

Users of Accounting Information

60 “Who uses accounting data or information?” There are two broad categories of users of financial information:
internal and external users.
INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan, organize, and run the
business. These users are directly involved in managing and operating the business. These include marketing
managers, production supervisors, finance directors, company officers and owners
Engage the learners in a question-and-answer type lecture.
Ask the learners to give examples of internal users and follow up with a question: “what information will that user
need that can be answered by accounting?”
Internal users (Primary Users) of accounting information include the following: Management
Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position and take appropriate measures to
improve the company results. sufficiency of cash to pay dividends to stockholders; pricing decisions
Employees Information need: profit for the period, salaries paid to employees Decisions supported: job
security, consider staying in the employ of the company or look for other employment opportunities
MOwners
Information need: profit or income for the period, resources or assets of the business, liabilities of the business
Decisions supported : considerations regarding additional investment, expanding the business, borrowing funds to
support any expansion plans.
Accounting information is presented to internal users usually in the form of management accounts, budgets,
forecasts and financial statements. This information will support whatever decision of the internal users.
Discuss the external users of accounting information
EXTERNAL USERS
External users are individuals and organizations outside a company who want financial information about the
company. These users are not directly involved in managing and operating the business. The two most common
types of external users are potential investors and creditors. Potential Investors use accounting information to
make decisions to buy shares of a company . Creditors (such as suppliers and bankers) use accounting information
to evaluate the risks of granting credit or lending money. Also included as external users are government
regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR),
Department of Labor and Employment (DOLE), Social Security System (SSS), and Local Government Units (LGUs).
External users (Secondary Users) of accounting information include the following:
Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors according
to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such
as banks.
Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.
Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a
reasonable return on their investment before they commit any financial resources to a company.
Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable
source of supply in the long term.
Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information is in
accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such
information in forming their decisions.
INSInternal users of accounting information are those who are involved in planning, organizing and running the
business. They need more detailed information on a timely basis in order to support their decisions. Examples of
these internal users are managers, employees and owners.
The external users of accounting information are those individuals or organizations outside a company who are
interested in its financial information. Examples of these external users are potential investors, suppliers and
government agencies.

Forms of Business Organizations

• Sole /Single Proprietorship
• A form of business is owned by one person; the simplest, and the most common form of business organization
• It is not separate from the owner. The business and the owner are inseparable
advantages of sole/single proprietorship
• The owner keeps all the profits.
• The owner makes all the decisions.
• It is easy to form and operate.
disadvantages of sole/single proprietorship
• The life of the business is limited to the life of the owner. Once the owner dies, the business will cease to
operate under the name of the proprietor.
• The amount of capital is limited only by the wealth of the proprietor.

• Partnership
• A form of business owned by two or more persons. The details of the arrangement between the partners are
outlined in a written document called articles of partnership.
• Profits are divided among partners based on their agreed sharing.
• The owner is called a partner.
advantages of a partnership
Higher capital because two or more persons will contribute to the common fund.
It is easy to operate like a sole/single proprietorship
disadvantages of a partnership
• The profits are divided among the partners.
• A partner can be held liable for the acts of the other partners.
• In a lawsuit, the personal properties of the partners can be held beyond their contributions and may be used to
answer for any liability of the partnership.
• Corporation
• A corporation is a business organized as a separate legal entity (artificial person) under the corporation law
with ownership divided into transferable shares of stocks
• Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
• The corporation begins its existence from the date the Articles of Incorporation is approved by the Securities
and Exchange Commission (SEC).
• The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private
corporations in the Philippines.
• The owners are called stockholders or shareholders.
• The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
• The voting rights of a shareholder is generally based on the percentage of ownership.
• The management of the business is delegated by the shareholders to the Board of Directors
• The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for
example at PHP10 per share.
• The proof of ownership is evidenced by a stock certificate.
Advantages of a corporation
Can easily raise additional funds by selling shares of stocks to the public.
Shareholders are not personally liable for the debts of the corporation. The extent of their liability is
limited to their equity (ownership) in the corporation.
Disadvantages of a corporation
It is relatively complicated to set up.
Subject to several legal restrictions as listed in the Corporation Code of the Philippines
Cooperatives
• A cooperative is a duly registered association of persons with a common bond of interest, voluntarily joining
together to achieve their social, economic and cultural needs.
• The owners are called members who contribute equitably to the capital of the cooperative.
• The members are expected to patronize their products and services.
• The word ‘cooperative’ appears in the name of the entity.
• This form of business organization is regulated by the Cooperative Development Authority (CDA).
Advantages of a cooperative
Enjoys certain tax exemption privilege
Promotes the concept of sharing resources
Disadvantages of a Cooperative
• Limited distribution of surplus
• Requires continuous education programs for members.
• The members have active and direct participation in the business of the cooperative.