CHAPTER I

INTRODUCTION TO BASIC ACCOUNTING

JUVELLE U. UJANO, MBA

INSTRUCTOR
Learning Objectives:
1. Define accounting and explain its role in business.
2. Have a fair knowledge of the evolution of accounting and fins how it affected accounting
pedagogy, policy and practice.
3. Ascertain the need to adapt Fra Luca Pacioli’s system for the modern times.
4. Discuss the basis of ASEAN 2015 and recognize how it will affect the professionals in the
region.
5. Explain the need for hospitality managers to study accounting.
6. Narrate briefly the development of accountancy in the Philippine and describe the
attributes that makes it a profession including the scope of its practice
7. Summarize the salient features of the Code of Ethics for Professional Accountants.
8. Explain the role of ethics in business.
9. Recount the accounting standard-setting bodies.
10.Identify and discuss the career opportunities open to accounts.
The word account in everyday language is often used as a substitute for an
explanation or a report of certain actions or events. If you are an employee, for
example, you may have to explain to your employer just how you have been
spending your time, or if you are a manager, you may have to report to the
owner on how the business is doing. In order to explain or to report, you, of
course, have to remember what you were doing or what happened. As it is not
always easy to remember, you many need to keep some written record. In
effect, such records can be said to form the basis of a rudimentary
accounting (or reporting) system.
ACCOUNTING—THE LANGUAGE OF BUSINESS
The main purpose of accounting is to provide the information necessary to the organization's
management to enable it to plan and control its business activities. Implicit in this objective is
the idea that accounting is a very important management tool. Accordingly, accounting has
been referred to as "the language of business" because it is the primary means of
communicating business information.

Learning accounting is like learning a new language. If hospitality managers are to effectively
use accounting information, they must acquire an adequate understanding of the accounting
system, including its nature and limitations. Because good decisions require proper analysis of
accounting data, the hospitality manager who lacks training in accounting is unable to identify
all the pertinent elements of the decision-making process, and thus, it is highly doubtful that
he can function as an effective manager.
Definition of Accounting
Accounting is 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.

Accounting 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 is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.

Accounting is an information system that measures, process and communicates financial

information about an identifiable economic entity.
Evolution of Accounting
Accounting history is important to accounting pedagogy policy and
practice. It makes it possible to better understand our present and to
forecast our future. Accounting history is the “study of the evolution
in accounting thought, practice and institutions in response to changes
in the environment and societal needs. It also considers that effect
that this evolution has worked on the environment.
v Primitive Accounting
The earliest methods used tokens with simple shapes to represent
the trade product, such as herd animals. More complex tokens with
visual designs on them displaced tokens with basic shapes. Record
keeping posed certain logistical problems, as tokens were physical and
required storage. One approach involved storing the tokens in a clay
envelope and impressing the tokens into the envelope's soft clay
exterior before sealing it. Another approach called for stringing the
tokens and affixing them to a small piece of clay. These methods
eventually gave way to drawing symbols onto clay tablets and, later,
paper.
v Middle Ages
During the Middle Ages, bartering was the primary form of money-
changing, but when Europe changed to a monetary economy is the
13th Century, merchants began relying on bookkeeping to keep a
record of multiple transactions. This is when double-entry
bookkeeping got its start, which is when a debit and credit value is
entered for each transaction by the accountant. Merchants at the time
used accounting as an ad-hoc ordering system. It provided them with
constant information about their businesses that they could use in
decision-making to grow their business as they saw fit. This laid the
foundation of how we use and understand accounting today.
v The Florentine Approach
ü The Florentine Approach is the introduction of double-entry bookkeeping
system.
ü It was in the 14th century when Amanito Manucci, a partner of merchant
partnership, created a recording system where there's at least one account
debited and one account credited and where the total of debits equals the
total of credits. Notice that this system of recording is the system of double-
entry bookkeeping. Thus, Manucci was tagged as the inventor of double-entry
bookkeeping. It was said that Amanito Manucci called Giovanni Farolfe &
Company in Florence, introduced the Florentine Approach.
ü The records kept by Mannuci for the firm are the oldest evidence that
demonstrated or reflected the use of double-entry bookkeeping system.
v Giovanno Farolfi & Company
As appears from the "ledger", was a firm of Florentine merchants whose head
office was at Nimes in Languedoc, in the kingdom of France. The ledger, however,
relates exclusively to the branch at Salon, a town in the independent county of
Provence. Amatino Manucci was a partner in Giovanni Farolfi & Company, a
merchant partnership based in Florence.

Financial records that he kept for the firm's branch in Salon, Provence, survive
from 1299-1300. Although these records are incomplete, they show enough
detail to be identified as double-entry bookkeeping. These details include the use
of debits and credits and duality of entries. They are the oldest known existing
examples of the double-entry system.
v Amatino Manucci
ü Was the inventor of double-entry bookkeeping. He managed to construct a
comprehensive and fully-articulated set of double-entry records, with a regular
balancing procedure on closure of the General Ledger.
ü He used five books—general ledger, two merchandise ledgers, expenses ledger, and
cash book (with the white ledger as a sixth)—constituted what looks very like a
true double-entry system. In addition, there were at least two subsidiary books.
ü He gave importance to the aspect of financial control. The books were logically
subdivided, with segregation of cash and goods accounts from the main ledger, a
perpetual inventory of each line of agricultural produce and each grade of cloth or
yarn dealt in, and full records of debtors and creditors, expenses, profits, interest
and partners' drawings, as well as the state of account with the head office at
Nimes, and an estimate (15% per annum) of the expected rate of return on capital
employed.
v The Method of Venice
ü Luca Pacioli who was known as the father of accounting born in 1446 in
Sansepolcro where he also received his earlier education known as abbaco
education.
ü The contribution of Luca pacioli in accounting was honored by accountants
around the world who gathered in San Sepulcro an Italian village to pay their
huge tribute to his book published on double-entry accounting. The first
accounting book which was published in 1494 was based on five sections in
his mathematical book title in which he showed ‘Everything about Arithmetic,
Geometry and Proportions’. Until the 16th century, this book written on
accounting served as the only textbook on accounting around the world and
due to this significant contribution, Luca Pacioli, was no doubt the father of
accounting.
v The Method of Venice
ü He did not invent the system but he described the method which was used by
merchants in Venice during the period of Italian Renaissance. The system he
introduced in his book of accounting was mostly the accounting cycle which
is well-known in the modern world of accounting. Luca Pacioli introduced the
use of journals and ledgers in accounting systems and warned that the
accountant must not sleep until the debits are equaled to credits. The ledgers
he introduced were based on assets receivables and inventories, liabilities,
capital, expenditure and income accounts.
ü He presented 36 short written chapters on bookkeeping in which he gave the
necessary instructions in the conduct of business and given the traders
precious information on accounting without any delay as to his assets and
liabilities.
v Industrial Revolution, Corporate Oragnization, Railroads,
United States Steel
v Schmalenbach and the Model Chart of Accounts
ü Eugen schmalenbach (1873-1955) was a german academic and economist. He was born
in Halver, and attended the Leipzig College of Commerce starting in 1898. Schmalenbach
was a professor at theUniversity of Cologne and as a contributor to German language
journals in the subjects of economics, business management and financial accounting.
ü In the early 1920s, professor schmalenbach was frustrated repeatedly with his failure to
compare meaningfully the financial data made available by different companies. This led to a
research on the problem and the publication of his book, The Model Chart of Accounts.
With this book, he laid the foundation for all subsequent developments in uniform
European countries.
ü Schmalenbach claimed that important information could be gained from a firm’s accounts.
The results of one’s firm should show through- flows more usefully than balances. What he
termed “Dynamic Balances” were to be promptly and regularly prepared and presented, so
that external changes and internal efficiencies could be gauged. Inter-firm comparisons
were also to be facilitated.
Imposition of Income Tax and Conflicts with Financial Accounting
ü In the year 10 CE, Xin Dynasty's Emperor Wang Mang instituted an unprecedented tax—the
income tax—at the "rate of 10% of profits, for professionals and skilled labor."
ü To pay for weapons and equipment in preparation for the Napoleonic wars, William Pitt the
Younger of Britain levied an income tax in his budget of December 1798. The 1862 Union
Government established the Bureau of Internal Revenue to assess personal and corporate
income taxes to help finance the Civil War. In 1943, the US Congress passed income tax
withholding as the only way to collect on high tax rates to fund World War II. The
Philippines' Bureau of Internal Revenue (BIR) was created through the passage of
Reorganization Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally
organized and made operational under the Secretary of Finance.
ü Financial accounting is conservative and it's about matching efforts and resultS. Tax
accounting, in turn, is about improving the amount and timing of collections. Note that
"taxes are the lifeblood of the government and their prompt and certain availability are an
imperious need (Commissioner vs. Pineda, 21 SCRA 105)." This difference in perspective
produces conflicts.
DEFINITION

• Financial Accounting- which is concerned with the supply of

information to the owners of an entity; and

• Management Accounting- which is concerned with the

supply of information to the managers of an entity.
 ASEAN 2015

Establishment and Member States

The Association of Southeast Asian Nations, or ASEAN, was established on Aug. 8,
1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok
Declaration) by the Founding Fathers of ASEAN, namely: Indonesia, Malaysia,
Philippines, Singapore and Thailand. Brunei Darussalam then joined on Jan. 7, 1984,
Viet Nam on July 28, 1995, Lao PDR and Myanmar on July 23, 1997 and Cambodia
on April 30, 1999, making up what is today the ten Member States of ASEAN.
VISION
ü What is ASEAN 2015? In a nutshell, the Vision: "a stable, prosperous and highly competitive
ASEAN Economic Region in which there is a free flow of goods, services, investment and a
freer flow of capital, equitable economic development and reduced poverty and socio-
economic disparities."

Opportunities
ü What are the opportunities? Ten member states with an 2013 population of 625
million. ASEAN is characterized by rising incomes, young population, with combined
gross domestic product (GDP) at current prices of US$2,399 billion or a GDP per
capita at current prices of US$3,839 and GDP growth rate of 5.1.
Four Pillars of ASEAN Economic Community
ü The ASEAN Community is comprised of three pillars, namely: the ASEAN Political-Security
Community, ASEAN Economic Community and ASEAN Socio-Cultural Community.
ü In turn, the ASEAN Economic Community (AEC is the blueprint) has four pillars. They are
as follows: Single market and production base (measures to ensure the free flow of
goods, services, investment, capital, skilled labor, priority integration sectors), competitive
economic region (actions on competition policy, consumer protection, intellectual
property rights, infrastructure development, taxation, e-commerce), equitable economic
development (SME development, initiative for ASEAN integration) and integration into
the global economy (coherent approach towards external economic relations, enhanced
participation in global supply networks).
ü What are the priority integration sectors? Goods (agro-based goods, automotive
products, electronics/electrical, fisheries, rubber-based goods, textiles/clothing and
wood-based products). Services (air transport, e-ASEAN, health care services, logistic,
tourism)
ASEAN Framework Agreement on Services

ü ASEAN is a government-to-government cooperation. To realize its dreams,

ASEAN has progressively entered into more legally binding and
institutionalized agreements through the adoption of the ASEAN Trade in
Goods Agreement (ATIGA), the ASEAN
ü Comprehensive Investment Agreement (ACIA) and the ASEAN Framework
Agreement Services (AFAS).
ü AFAS aims to provide greater mobility of ASEAN professionals to provide
their services in the region. This will require rounds of negotiations to
liberalize trade in services.
Mutual Recognition Arrangements and ASEAN Chartered
Professional Accountant
ü MRAs (mutual recognition arrangements) are contracts between a National
Accountancy Body (NAB) and/or Professional Regulatory Authority (PRA)
from countries that have signed the General Agreement on Trade in Services
in 1995 allowing professional service providers registered in signatory
countries to be equally recognized in another signatory country. The existing
MRAs: for engineering (MRA 2005), nursing (MRA 2006), architectural (MRA
2007), medical (MRA 2009), dental (MRA 2009), accountancy (MRA 2014) and
surveying (MRA Framework 2009) services.
Mutual Recognition Arrangements and ASEAN Chartered
Professional Accountant
ü A Professional Accountant is eligible to apply through the Monitoring Committee of
his Country of Origin, to be registered as an ASEAN Chartered Professional
Accountant (ACPA) on the ASEAN Chartered Professional Accountant Register
(ACPAR) subject to certain qualifications enumerated in Article 4 of the ASEAN
MRA on Accountancy Services signed last Nov. 13, 2014.
ü The Monitoring Committee shall assess the Professional Accountant according to
the Guidelines on Criteria and Procedures in Appendix II of the MRA; and guided by
Appendix III in preparing an Assessment Statement for the purpose of the
application. It will then submit the application to the ASEAN Chartered Professional
Accountant Coordinating Committee (ACPACC). ACPACC shall have the authority
to confer and withdraw the title of ACPA or ASEAN Chartered Professional
Accountant.
Mutual Recognition Arrangements and ASEAN Chartered
Professional Accountant
ü To practice in a host country, an ACPA need to apply to become a Registered
Foreign Professional Accountant (RFPA). Upon approval, the successful ACPA
applicant shall be subject to the domestic regulations, be permitted to work
as a RFPA, not in independent practice, but in collaboration with designated
Professional Accountants in the host country, within such area of his own
competency as may be approved by the NAB (in our case, the Philippine
Institute of CPAs) and/or PRA (the Professional Regulation Commission and
the Board of Accountancy) of the host country.
ASEAN Qualifications Reference Framework (AQRF)

ü AQRF, a common reference framework, functions as a device to enable

comparisons of qualifications of skilled labor across ASEAN Member States.
The framework, among others, supports recognition of qualification,
promote quality of education and learning, and facilitate labor mobility. It
addresses all education and training, including formal, non-formal and
informal learning. Noting that ASEAN Member States are at different stages
of development, each country is expected to voluntarily comply with the
AQRF at their own capacity and start the referencing process by 2016 and
at the latest by 2018.
The Hospitality Manager’s Need for Accounting Information

The primary aim of accounting is to provide useful and relevant

Information to management as an aid to decision-making. On this basis,
hospitality managers are not interested in accounting as an end in itself
but as a necessary step toward using financial statements and other
accounting information for decision-making purposes. Regardless of the
degree of assistance provided by professional accountants, obtaining the
knowledge that is so indispensable to successfully operating the
hospitality firm requires that each manager possess an adequate
accounting background.
ACCOUNTANCY IN THE PHILIPPINES
ü Although accounting has been practiced in the Philippines since
the Spanish period and possibly even before, the seeds of
Philippines accountancy as a recognized profession were planted
on March 17, 1923, when Act No. 3105 was approved by the Sixth
Legislature. Entitled "An Act Regulating the Practice of Public
Accounting; Creating the Board of Accountancy (BOA); Providing
for Examination, for the Granting of Certificates, and the
Registration of Certified Public Accountants (CPAs); for the
Suspension or Revocation of Certificates; and for Other
Purposes," the law paved the way for local accountants to do the
work which, up to that time was performed by foreign
accountants in the country.