MODULE (FABM 22) FUNDAMENTAL OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Accounting or accountancy is the measurement, processing,

and communication of financial and non financial information about economic entitiessuch
as businesses and corporations. Accounting, which has been called the "language of
business", measures the results of an organization's economic activities and conveys this
information to a variety of users, including investors, creditors, management,
and regulators. Practitioners of accounting are known as accountants. The terms
"accounting" and "financial reporting" are often used as synonyms.

Accounting can be divided into several fields including financial accounting, management
accounting, external auditing, tax accounting and cost accounting.Accounting information
systems are designed to support accounting functions and related activities. Financial
accounting focuses on the reporting of an organization's financial information, including
the preparation of financial statements, to the external users of the information, such
as investors, regulators and suppliers; and management accounting focuses on the
measurement, analysis and reporting of information for internal use by management.The
recording of financial transactions, so that summaries of the financials may be presented
in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the
most common system.
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Introduction to the Course

Course Description:
This is an introductory course in accounting, business, and management data
analysis that will develop students' appreciation of accounting as a language
of business and an understanding of basic accounting concepts and principles that will
help them analyze business transactions.
Learning Outcomes:

 Describe, explain, and integrate fundamental concepts underlying accounting,

finance, management, marketing, and economics
 Use information to support business processes and practices, such as problem
analysis and decision making
 Apply quantitative skills to help analyze and solve business problems and to take
advantage of business opportunities
 Apply oral and written communication skills
 Describe and explain the ethical and social responsibilities of accountants in
ensuring the integrity of financial information
 Develop an understanding of internal control issues and the effects of the
regulatory environment on financial reporting
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CHAPTER 1- ACCOUNTING AND ITS ENVIRONMENT

Objectives:

1. Define accounting and explain its role in business

2. Explain the function and phases of accounting
3. Define relationships among the financial statements

INTRODUCTION
Accounting has evolved, as in the medicine and law, in response to the social and
economic needs of society. As business and society become more complex, accounting
develops new concepts and techniques to meet the ever-increasing needs for financial
information. Without such information, many complex economic development and social
programs may never have been undertaken.
No business could operate very long without knowing how much it was earning and how
much it was spending. Accounting provides the business with these information and
more.
DEFINITION AND NATURE OF ACCOUTING
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 an information system that measures, processes and communicates
financial information about an economic entity.
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.
Accounting in 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.
FUNCTIONS AND PHASES OF ACCOUNTING
The accounting function is part of the broader business system, and does not
operate in isolation. It handles the financial operations of the business but also provides
information and advice to other departments.
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Before the effect of transactions can be recorded, they must be measured. In order that
accounting information will be useful, it must be expressed in terms of a common financial
denominator-money.
To measure a business transaction, the accountant must decide when the
transaction occurred, what value to place on the transaction and how the components of
the transaction should be classified. To be useful in making decisions, the recorded data
must be classified and summarized.
After going through the proceeding phases, it is imperative that the result of the
summarization phase be interpreted or analyzed to evaluate the liquidity, profitability and
solvency of the business organization.
OUTPUT OF THE ACCOUNTING CYCLE
The output, outcome or “big picture” is being presented to pique your interest and
heighten your enthusiasm. Then, the trace back or reverse mapping are made to the
individual major accounts with the use of the T-accounts to show how the typical
transaction affect each account.
Financial Statement
Pro-forma general-purpose financial statements are shown for ASEAN Traders, a
merchandising entity. These statements answer the following questions:
1. What were the operating results for the period?
2. How did equity change over the reporting period?
3. What is the entity’s financial status?
4. What are the cash flows from operating investing and financing activities during
the period?
The income statement presents a summary of the revenues and expenses of an entity
for a specific period. The statement of changes in equity presents a summary of the
changes in capital such as investments, profit or loss, and withdrawals during a specific
period. The balance sheet provides a snapshot by listing all the assets, liabilities and
equity.
The balance sheet presents information based on the basic accounting model, the
accounting equation:
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The name of the statement, balance sheet, suggest that a proper balance sheet
must always balance- total assets must always equal liabilities and owner’s equity. Note
that the assets are on the left side of the equation opposite the liabilities and owner’s
equity. This explains why increases and decreases in assets are recorded in the opposite
manner (“mirror image”).
Relationships Among the Financial Statements
The financial statements are based on the same underlying data and fundamentals
related. The following timelines shows the basic interrelationships among the financial
statements:

1. The income statement reports all income and expenses during the period. The
profit or loss is the final figure in this statement.
2. The statement of changes in equity considers the profit or loss figure from the
income statement as one of the determining factors that explains the change in
owner’s equity.
3. The statement of financial position reports the ending owner’s equity, taken directly
from the statement of changes in equity.
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4. The statement of cash flows reports the net increase or decrease in cash during
the period and ends with the cash balance reported in the balance sheet.
Income Statement and Balance Sheet Connections
After learning the interrelationship of the financial statements, it is time to pinpoint the
connections between the major accounts from the income statement and the balance
sheet.

In its simplest, the following are the connections between the income statement and
balance sheet accounts for a merchandising concern:
 Sales in cash basis can provide the entity with ready cash.
 Sales on credit/account generate accounts receivable.
 To be able to sell merchandise, the entity needs inventory on hand.
 Inventory purchases can be made on credit which will give rise to accounts
payable.
 Operating expenses is a broad category of costs encompassing selling,
administrative and other expenses: some are prepaid expenses, some costs may
give rise to accounts payable or accrued expenses payable.
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 A periodic charge for the use of property and equipment is interested as

depreciation expense.
 Borrowing money by issuing promissory notes will entail cost of capital in the form
of interest expense.
 Profit increases owner’s equity.
●From the preceding discussion, we will reverse map to the T-Accounts. For Example,
the Sales figure on the income statement resulted from cash sales and sales on account
transactions. Both types of accounting events increase the Sales account. In the Sales
account, note that they are credited to increases the account.

Sales
Debit (- Credit (+)
)
● +Cash Sales Cash sales
Sales ● + Sales on Account Sales on Acct.

Balance

Cash
● +Cash Sales Debit (+) Credit (-)
Cash ● + Collections, Other Receipt
Balance, Beg.
Cash Sales Disbursements
● -Disbursements Collections
Other Receipts

Balance, End

Accounts Receivable
Debit (+) Credit (-)
Balance, Beg.
Accounts ● + Sales on Account
Sales on Act. Collections
Receivable ● - Collections
Balance, End.

Inventory
● + Purchases
Inventory Debit (+) Credit (-)
● - Sales Balance, Beg.
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Purchases Sales

Balance, End.

Accounts Payable
● + Purchases of Debit (- Credit (+)
Accounts )
Goods and Services
Payable ● - Payments
Balance, Beg.
Payments Purchases

Balance, End.

Cost of
● + Sales Cost of Goods Sold
goods Sold Debit (+) Credit (-)
Sales

Balance

Property & Equipment

Debit (+) Credit (-)
Balance, Beg.
Property & ● + Acquisitions Acquisitions Disposals
Equipment ● - Disposals
Balance, End

Accumulated Depreciation
Debit (- Credit (+)
)
Accumulated ● + Depreciation Balance, Beg.
Depreciation ● - Disposals Disposal Depreciation

Balance, End

Accumulated Depreciation
Debit (+) Credit (-)
Depreciation
Depreciation ● +Depreciation
Expense Balance
MODULE (FABM 22) FUNDAMENTAL OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Expense ● + Expenses
Accounts Expenses
Debit (+) Credit (-)
Expenses

Balance

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.

Middle Ages
Because of the Crusades from the 11th to the 13th centuries, Northern Italy’s literature has
become widespread. Arabic numerals were also being used as a result of trade with the
Near East allowing columns of numbers to be added and subtracted.
The Florentine Approach
Renaissance Florentine markets were a fascinating combination of formalization, in the
form of account books and double-entry bookkeeping, and of informal social networks,
constructed out of the surroundings rules of Florentine sociality. Account books were not
inconsistent with social exchange; rather, they formalized and made social exchange
easier.
Amatino Manucci 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.
The Method of Venice
Luca PAcioli, a Francuscan friar and a celebrated mathematician, is generally
associated with the introduction of double-entry bookkeeping. In 1949 he published his
book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita or “Everything
about Arithmetic, Geometry, Proportions and Proportionality,” which includes, Particularis
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de Compulis et Scripturis or “Details of Calculation and Recording,” describing double –

entry bookkeeping.
Savary and Napoleonic Commercial Code
The Napoleonic Code or Code napoleon is the French civil code, established under
Napoleon Bonaparte on Mar. 21, 1804. The Commercial Code was adopted in 1807.
Jacques Savary, the elder (1622-1690) in an early accounting text stated, “If this
merchandise is starting to deteriorate or go out of style, or is that which one judges he
could find at the factory or wholesalers at 5% less, it must be reduced to this price.” As
Savary was the principal author, the French Commercial Code of 1673 was also called
the Code Savary.
In the 17th century, Nicolas Petri was the first person to group similar transactions in a
separate record and enter the monthly totals in the journal, rather than recording all
transactions seriatim, that is, in a series.
In 1769, Benjamin Workman published The Art Accountant, the earliest-known
American accounting textbook.
Schmalenbach and the Model Chart of Accounts
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 the University of Cologne and as a contributor to
German language journals on the subject of economics, business management and
financial accounting.
In early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to
compare meaningfully the financial data made available by different companies. The
Model chart of Accounts, with this book, he laid the foundation for all subsequent
developments in uniform accounting in Germany. It also became the basis for
corresponding efforts in other European countries.
Information Age
Dan Brinklin and Bob Frankston wrote VisiCalc for the Apple II, the first electronic
spreadsheet, the most important business application for the personal computer.
Tremendous advances in information technology have further revolutionized accounting
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in recent years. Tasks those are time-consuming when done manually can now be done
with speed, consistency, precision and reliability by computers.
Characteristics of the Profession
 All members of the accountancy profession are Certified Public Accountants
(CPA’s), which means that they have passed the CPA Licensure Examination
given by the Professional Regulatory Board of Accountancy (BOA). Any person
applying for examination shall establish the following requisites to the satisfaction
of the BOA, that he: is a Filipino citizen; is of good moral character; is a holder of
the degree of Bachelor of Science in Accountancy (BSA) conferred by the
school, college, academy or institute duly recognized and/or accredited by the
Commission on Higher Education (CHED) or other authorized government offices;
and has not been convicted of any criminal offence involving moral turpitude.
 CPAs have their own body of language, they use terminology peculiar to the
profession (e.g. debits and credits).
 CPAs adhere to a Code of Ethics. This code upholds the CPA’s responsibility to
serve the public with competence and integrity.
 Like other professions, CPAs are member of a national organization whose role is
to ensure the continued improvement of the accountancy profession to meet the
demands of the times.
For further discussion please refer to the link provided: nature of accounting
https://www.youtube.com/watch?v=cWtrpdU-vOA
For further discussion please refer to the link provided:History of accounting
https://www.youtube.com/watch?v=HAL0sBd9oyg

Reference:
Fundamentals Of Accountancy Business Management 1
Win Ballada,CPA,CBE,MBA Top 2,CPA Board, Author, Basic
accounting 20th Edition