Accounting

FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1
Week 1 Session 1
Learning Competencies:
Define accounting
Describe the nature of accounting
Narrate the history/origin of accounting
Define external users and gives examples
Define internal users and give examples
Introduction to
Accounting
Questions to Ponder:
• Do your parents ask how you spend your allowance every day?
• When deciding between buying a bottle of soft drinks or fruit juice,
what is the basis of your decision? Do you compare the prices of
both and then decide?
• When going home, do you sometimes choose to walk from school
rather than riding a jeepney because you want to save?
• Is accounting important to you?
Accounting
“Accounting is the process of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an organization to interested
users.” (Weygandt, J. et. al)
Accounting
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
Accounting
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.
Accounting
COMMUNICATING – occurs through the preparation and
distribution of financial and other accounting reports.
Nature of Accounting
Based on the definition, we can derive the following basic features of
accounting:
• Accounting is a service activity.
•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 both an art and a discipline.
Nature of Accounting
Based on the definition, we can derive the following basic features of
accounting:
•Accounting deals with financial information and transactions:
Accounting records financial transactions and data, classifies these and
finalizes their results given for a specified period, as needed by their
users.
• Accounting is an information system: Accounting is recognized and
characterized as a storehouse of information.
Functions of Accounting in Business
Why is accounting considered as the language of business?

• Keeping systematic record of business transaction.

• Protecting properties of the business.
• Communicating results to various parties in or connected with the
business.
• Meeting legal requirements
Mr. Juan is a retired government employee who is good at baking. One
day he decides to put up a bakery shop in your barangay. He
renovates a portion of his house to serve as the area for the production
of bread. He purchases baking equipment and raw materials to
produce five different types of bread. Mr. Juan also hires Jose to help
him with the baking and, at the same time, to be in-charge of sales. Mr.
Juan pays Jose on a weekly basis. Every day, Mr. Juan’s wife deposits
the daily cash sales in their bank account at XY Savings Bank. With the
help of accounting, what possible decisions or questions of Mr. Juan
can accounting provide an answer to?
Functions of Accounting in Business
Accounting can provide an answer to:
• Is my business earning? (profitability)
• How much daily or monthly sales do I need in order to recover my
fixed cost? (break-even)
• Do I need to hire additional workers to help me with my
production?
• Can I afford to set up a new store in another place? Where do I get
the funds?
• Can I afford to pay a bank loan?
History of Accounting
The following is the evolution of accounting:
• The Cradle of Civilization. Around 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.
History of Accounting
• 14th Century - Double-Entry Bookkeeping. The 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.
History of Accounting
• 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.
History of Accounting
• The Industrial Revolution (1760-1830). Mass production and the
great importance of fixed assets were given attention during this
period.
History of Accounting
• 19th Century – The Beginnings of Modern Accounting in Europe and America.
The 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).
History of Accounting
• 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
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.
History of Accounting
• 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.
Users of Accounting
Information
Users of Accounting Information
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.
Internal Users
Who are the examples of internal users and what information will that
user need that can be answered by accounting?

1. Management
• income/earnings for the period • available cash
• Sales • production cost
To 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.
Internal Users
Who are the examples of internal users and what information will that
user need that can be answered by accounting?

2. Employees
• profit for the period
• salaries paid to employees
Job security, consider staying in the employ of the company or look
for other employment opportunities
Internal Users
Who are the examples of internal users and what information will that
user need that can be answered by accounting?

3. Owners/Stockholders
• profit or income for the period • liabilities of the business
• resources or assets of the business
Considerations regarding additional investment, expanding the
business, borrowing funds to support any expansion plans.
Internal Users
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.
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.
External Users
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 (LGU).
External Users
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.
External Users
External users (Secondary Users) of accounting information include
the following:
Tax Authorities (BIR): for determining the credibility of the tax returns
filed on behalf of a company.
External Users
External users (Secondary Users) of accounting information include
the following:
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.
External Users
External users (Secondary Users) of accounting information include
the following:
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.
External Users
External users (Secondary Users) of accounting information include
the following:
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.
External Users
Information provided by Accounting:
• Income or profit of the business
• resources or assets of the business
• liabilities or amount owed by the business to its suppliers
• taxes paid by the business
• salaries and other benefits paid to employees
External Users
Decisions of external users that are supported by accounting
information:
• Potential Investors – Is it profitable for me to invest in this
business?
• Banks – If extend a loan to this company, will it be able to pay this
loan? Does this company have sufficient resources to pay its loan?
• Suppliers – Do I extend credit to this company? For how long?
• BIR – Is the owner paying the correct taxes?
• DOLE – Are the employees paid according to what the law states?
Do they get the benefits required?
Internal Vs. External Users
Internal 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.
Activity 1
Activity 2
Activity 3
Activity 4
Activity 5
 End of Week
1 Session 1
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so much!!!!