Accounting as the

language of business
 Objectives
• Explain the nature of accounting
• Discuss why accounting information is considered “a
Means to an End”
• Describe the overall objective of accounting
• Enumerate and explain the types of accounting
information
• Explain how accounting information links economic
activities to decision-making
• Be familiar with the users and uses of accounting
information, both internal and external
• Appreciate the need for an accountant’s ethical
behavior in fulfilling his mandate
• Explain the relationship between bookkeeping and
accounting
 Definition of Accounting
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.

~ American Institute of Certified Public Accountants

(AICPA), 1953
 Definition of Accounting
It is a service activity. Its function is to provide
quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in
making economic decisions.
~ Accounting Standards Council

Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgements and decision by users of the information.
~ American Accounting Association
 Nature of Accounting
1. Accounting is a process – follows definite steps
2. Accounting is an art – involves certain creativity and skill

3. Accounting is means not an end – helps attain objectives

4. Accounting deals with financial information and
transactions – from starting to the end
5. Accounting is an information system – different users of
accounting information
 Functions of Accounting
1. Recording

2. Classifying

3. Summarizing

4. Analysis and interpretation

5. Communication
 Functions of Accounting
1. Recording – all financial transactions are recorded in an
orderly manner (basic function)
2. Classifying - group transactions or entries of one nature at
one place
3. Summarizing – presenting data in an understandable and
useful manner
4. Analysis and interpretation – in a manner that the end-users
can make a meaningful business and financial judgment
5. Communication - communicated in a proper form and
manner to the proper person
Overall Objective of Accounting
• To provide information that can be used in
making economic decisions
Types of Accounting Information
Financial Accounting
• Financial resources, obligations, and activities of an
economic entity
• Assist investors and creditors – place scarce resources
• “general-purpose” accounting information
Management Accounting
• Aid management in running the business
 Set company’s goals
 Evaluate performance of departments and individuals
 Decide whether to introduce new line of products
 All types of managerial decisions
Types of Accounting Information
Tax Accounting
• Adjusted or reorganized to conform with income tax
reporting requirements
• Tax planning – anticipating the tax effects of business
transactions and structuring these transactions in a
manner that will minimize the income tax burden
Not-for-Profit Accounting
• Government agencies, churches, NGOs, charitable
institutions and schools
 Prepare budgets
 Maintain records of revenues and expenses
Branches of
Accounting
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 Branches of Accounting
1. Financial accounting
2. Management accounting
3. Government accounting
4. Auditing
5. Tax accounting
6. Cost accounting
7. Accounting education
8. Accounting research

*Divided according to the areas of activity.

 Financial accounting
• Original form of accounting
• Periodic reporting of a company’s financial position and
the results of operations
• Preparation of the company’s financial statements
• Strict compliance with Generally Accepted Accounting
Principles (GAAP), generally known as accounting
standards or standard accounting practice
• Primarily concerned in processing historical data
 Management accounting
• Managerial Accounting or Management Advisory Services
• Needs of the management
• Regular reports regarding various necessary information
required on a timely basis
• Communicate the relevant information periodically to
the management (suitable decisions)
• Cost Control, Quality Control, Budgetary Control,
Planning are examples of the functions of the
Management Accountant.
 Government accounting
• National government and its different agencies
• Safekeeping of public funds
• Compliance with the intended uses of budgeted
resources
• Recording and reporting of revenues and expenditures
related to the government organizations
• Examine records of government agencies (government
auditing)
 Auditing
• examination and verification of company accounts and
the firm's system of internal control.
• External audit
• Examination of financial statements (express opinion
on the fairness of the presentation of the financial
statements)
• Internal audit
• Adequacy of a company's internal control
 Tax accounting
• Tax planning and preparation of tax returns
• In accordance with the laws and rules set by tax
authorities (Bureau of Internal Revenue or BIR)
• Tax minimization (legal)
• Determination and verification of tax consequences
• Effect of taxes in the business operations
 Cost accounting
• Cost of the product/service and control of cost
• By indicating avoidable losses and wastes
• Set the prices of the product/service
• Subset of management accounting (in manufacturing
businesses)
• Budget – recording, presentation, and analysis of
manufacturing costs
 Accounting education
• Accounting education or academe includes accountants
who pursue careers as instructors/professors, reviewers,
and authors
 Accounting research
• effects of economic events on the process of accounting,
and the effects of reported information on economic
events
• carried out both by academic researchers and practicing
accountants
• broad range of research areas including financial
accounting, management accounting, auditing and
taxation
 Users of
accounting
information
 External Users
• Those who make decisions concerning their relationship
to the enterprise; no direct access to the information
generated by internal operations of the business
1. Investors
• Risk and return provided by their investments
• Buy, hold or sell
• Ability of the company to pay them a return (known as
a dividend)
 External Users
2. Employees (including their representative groups/union)

• Interested in the stability and profitability of their

employers
• Security of employment and satisfactory compensation
• Ability of the entity to continue to provide
remuneration, retirement benefits and
employment opportunities
• How much can be distributed to them in terms of
bonuses and premiums
 External Users
3. Suppliers, Creditors and Lenders
• Suppliers provide business with the items required to
run the actual business
• They include suppliers of raw material or other
services that help business produce goods or
provide services to its customers
• Creditors are suppliers that give the company credit
terms on their purchases
• Lenders are the ones who lend or give loans to the
company
 External Users
3. Suppliers, Creditors and Lenders
• Financial position of the business
• Determine the capability of the company to meet its
debts as and when they fall due, and whether offering
additional credit to the business is wise

• Determine customer requirement

 External Users
4. Customers - may include such customers who require goods
or services of the business in their business or simply
household customers for consumption to satisfy their daily
needs
• Assess the financial position of the business
• Continuance of the business
• Stable source of supply in the long term
 External Users
5. Government and regulatory authorities
• Determine the earnings of the business
• To assess the tax liabilities of the business
• On the basis of financial statements, government
authorities determine the progress of various
industries and the need for financial help. Sometimes
government restricts the trade which is using unfair
trade practices and charging more prices for essential
commodities
 External Users
5. Government and regulatory authorities
• Basis of national income and similar statistics
• For ensuring that the 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
6. Public or Society - may not have a directly vested interest in
the business
• To know the social obligations/responsibilities of the
business ( for the upliftment of the society)
• For example by taking measures to eradicate
pollution caused by business operation or give
employment to people residing in locations where it
operates
• disclosed by the business entity in the financial
statements it publishes
 Internal Users
• Those who make decisions directly affecting the internal
operations of the enterprise

1. Management – may consist of Board of Directors, managers

and other officers of the business enterprise.
• Planning, controlling and decision making process
• Feedback on the results of their previous decisions
(extend successful aspects of the decisions/adapt and
improve unsuccessful aspects)
• Assess the capacity of the business to earn profits in
the future
 Internal Users
2. Owners – persons who contribute capital in the business

• Ultimately responsible to bear all risk associated with

the business
• In small business enterprises, owners control the
affairs of the business directly, but in medium or
large enterprises these control are exercised by
the managers

• Profitability and solvency of the business

 Internal Users
2. Owners

• Maintain, increase, decrease or dispose of completely

their investment and whether they are getting a fair
return on their investment
Professional values and Ethics of accountants
Ethics
• Code or moral system that provides criteria for
evaluating right and wrong
• Code of Ethics

 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality
 Professional Behavior
 Compliance with Technical Standards