INTRODUCTION TO ACCOUNTING
Learning Objective • To define accounting and explain its nature and functions
Key Understanding
Understanding of the meaning of accounting and its functions in making business decisions
Key Question
What is accounting?
What Is Accounting? • It is a system that helps businesses track events that affect them. • This process involves identifying the events that affect a business, recording these events, and communicating the summarized results of all events within a particular period to interested parties. • Almost all companies allot a significant amount amount of resources to the accounting process since it aids them in improving their business.
What Is Accounting? • For example, the sale of Toyota cars is identified as an economic event that affects the company. The accountant will record this transaction and consolidate all records by the end of the month. The consolidated records can be used by the top management to identify potential problems encountered by the company. This can also be used to attract potential investors. Clearly, accounting process is very beneficial to a company.
The Accounting Process • The starting point of the accounting process is the identification of economic events relevant to a business. Examples of relevant economic events are the sale of Toyota cars, provision of services by a hospital, payment to suppliers, and purchase of equipment for the manufacturing of Bench shirts. • To be identified as a relevant economic event, there should be a transfer of things with value. Normally, for the purchase of equipment, cash or money is exchanged for the equipment. The cash and equipment both have value making the purchase a relevant economic event.
The Accounting Process • The recording of relevant economic events is the next step in the accounting process. • After a company identifies the relevant relevant economic events, events, it records those events which will serve as the history of its financial activities. • Recording events should be done systematically systematically and chronologically chronologically for easier tracking and interpretation. • Records of events are inputted in the so-called accounting books.
The Accounting Process • Finally, after a lapse of a specific period (usually one year), companies summarize all the recorded economic events into accounting reports. • The most popular accounting reports are the financial statements. statements. All similar events during the period are lumped together to provide meaningful and presentable information. As such, all sales transactions during the period are added and presented as one aggregate amount. This makes the information understandable to other parties.
Group Activity • Think of at least two types of business belonging to different industries (e.g., Petron from the oil industry and Jollibee from the food industry). Give five examples of economic events that each company identifies and records in its respective accounting books. Discuss why these events or transactions are recorded in the accounting books.
Nature of Accounting 1.
Accounting is is a pr process : A process is composed of multiple steps that lead to a common end goal. The enrollment process in your school may involve reservation of slots, filling out documents, attending school orientations, and payment of necessary fees. These steps all lead to you being enrolled in your school. Likewise, accounting is a process because it performs the functions of identifying, recording, and communicating economic events with the end goal of providing information to internal and external parties.
2.
Accounting is is an an ar art: Art refers to a way of performing something. It entails creativity and skills to help attain some objectives. Accounting is the art of recording, classifying, summarizing, and finalizing financial data. Accounting is a combination of techniques and its application requires applied skill and expertise. This is the reason why accounting can be considered as an art.
Nature of Accounting 3. Accounting deals with w ith financial information and transactions : Accounting deals only with quantifiable financial transactions. transactions. These are the only events identified by the accountant, recorded in the books, and communicated to different parties. Nonfinancial transactions are not the focus of the accounting process. However, nonfinancial data may be used to interpret and better estimate some financial data. 4. Accounting is a means and not an end: end : As mentioned earlier, accounting is a tool to achieve specific objectives. It is not the objective itself. Imagine that you dream to go to Paris someday. Accounting can be thought of as the plane that will bring you to your destination. 5. Accounting is an information system: Accounting 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 been evolved out to meet the need of financial information required by different interested groups.
Functions of Accounting • The American Accounting Association defines accounting as “the process of identifying, identifying, measuring, and communicating communicating economic information to permit informed judgments and decisions decisions by the users users of information.” information.” • Meanwhile, the American Institute of Certified Public Accountants (AICPA) (AICPA) defines accounting 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 a financial character and interpreting the results thereof .”
Functions of Accounting From the foregoing definitions, the main functions of accounting can be summarized as follows: 1. Keeping systematic record of business transactions 2. Protecting properties of the business 3. Communicating results to various parties in or connected with the business 4. Meeting legal requirements
Functions of Accounting 1. K eeping ping S ys tematic R ecord of of B us ines ines s Trans Trans action ctionss •
Recording transactions does not only involve entering the transactions in the accounting books. The records should be systematic enough to enable easy understanding of readers. No matter how comprehensive the records are, if they are not produced systematically, then they provide little to no value.
2. Pr P r otecting otecti ng P r operties oper ties of the B us i nes s •
The accounting records serve as the evidence that properties of a business do exist or how much of a particular resource does a company have. If the accounting records show that the amount of cash should be ₱1 000 000, any excess and deficiency will be b e noticed immediately. Moreover, the accounting system helps in preventing employee fraud and misappropriation of company resources.
Functions of Accounting 3. C omm ommunicating unicating R esul es ultts to Va Vari rious ous P arties in or C onnecte onnected d with with
the B us ines ines s •
The accounting reports produced at the end of each period are not only used by external parties (e.g., potential investors, government agencies), but also by the management in their decision-making function. Communication of the results of operations of a company is essential for all concerned parties to enable them to take well-informed decisions.
4. Meet Meeting ing L eg al R equir equir ement ementss •
In the Philippines, the government requires some companies (particularly those with public accountability) to provide financial reports quarterly, semi-annually, or annually. This procedure aims to protect the public by providing them the necessary information to make sound decisions. The government also requires reports from heavily regulated industries such as the energy and oil industries.
History of Accounting • It is believed that the history of accounting is thousands of years old and can even be traced t raced to ancient civilizations. civilizations. A number of history books suggest that the early development of accounting can be dated back to ancient Mesopotamia. During those times, people followed a system of writing and counting money. The development of accounting may be related to the taxation and trading activities of temples.
History of Accounting •
The reign of Emperor Augustus (63 BC –14 –14 AD) provided more evidence about the development of accounting. The Roman government kept detailed financial information of the deeds of Emperor Augustus regarding the stewardship of Roman resources. This is evidenced by the Res Gestae Divi Augusti (The Deeds of the Divine Augustus). The Roman historians Suetonius and Cassius Cas sius Dio recorded that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci ( tax tax officials ), and in the hands of the publicani the publicani (public contractors ); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus’ statement that it was written out by Augustus himself.
History of Accounting •
Many consider the dissemination of the double-entry bookkeeping of Luca Pacioli in the fourteenth century Italy the most important event in accounting history. In fact, Luca Pacioli is acknowledged as the father of modern accounting because of this. The doubledouble- entry bookkeeping system is defined as any bookkeeping system that has a debit and a credit for each transaction. Luca Pacioli’s Summa de Arithmetica, Geometria, Geometria, Proportioni et Proportionalita (Review of Arithmetic, Geometry, Ratio, and Proportion) is the first book printed with a treatise on bookkeeping. The double-entry bookkeeping system is the system being used to this very day.
History of Accounting • The modern profession of the chartered accountant originated in Scotland in the nineteenth century when Queen Victoria granted a royal charter to the Institute of Accountants in Glasgow. Glasgow. At present present times, accounting accounting standards are already available to guide accountants in their practice of the profession. Some of these standards include the PFRS (Philippine Financial Reporting Standard) and the PAS (Philippine (Philippine Accounting Standards).
