BAGUIO CITY HIGH SCHOOL

SENIOR HIGH SCHOOL

Course Title: Fundamentals of Accountancy, Business and Management 1

LESSON 1: Introduction to Accounting
Content Standards The learners demonstrate an understanding of the definition, nature, function, and history of accounting.
Performance Standards The learners shall be able to cite specific examples in which accounting is used in making business decisions
The learners:
1. define accounting
Learning Competencies 2. describe the nature of accounting
3. explain the functions of accounting in business
4. narrate the history/origin of accounting

Introduction
Accounting is known as the ‘language of business.’ Through the financial statements or reports generated, as the end-
product of the accounting process, information about a business entity is delivered to the different users. Almost all business
entities, even non-profit ones, require accounting in order to have a better understanding of how the entity is performing
financially.
To illustrate, assuming Mr. X started a computer shop business. He invested ₱200,000 of personal money into
establishing the business. At the end of the month, he wants to know how much the business made. He also wants to know if the
money he invested is still there.
Without a way of recording the activities of the business, we will not be able to answer his questions. Surely, we can tell
him that we made a lot this month, but we need proof. He also needs the figures. We can easily answer the question of Mr. X if
we religiously kept track of the transactions of the business. This might be quite simple if we have few transactions. But imagine if
we have hundreds of them occurring daily. Besides, there’s a lot more to accounting than recording. The accounting process
should provide us with reports so we can answer the questions: ‘How much did we make?’, ‘How much do we owe our creditors?’,
‘Is this a good investment?’
You may not notice but the simple things you do and encounter everyday can actually be related to some level of
accounting. You make budgets, count change and check the receipts from the supermarket. You may also have listed things you
spent your money with at one point in your life.
We are surrounded by business. In fact, almost all of our needs are provided in some way or another by a business –
from the food we eat to the clothes we wear and to our personal needs, such as haircut, medical care and transportation. And
where there is business, there is accounting. By studying the definition of accounting below, we can learn some important
concepts in accounting. It also gives us an idea of what accountants do.

Accounting: Definition
There are three different definitions of accounting. These are:
1. According to Accounting Standards Council (ASC):
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.
2. According to the American Accounting Association (AAA):
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
3. According to the American Institute of Certified Public Accountants (AICPA)
Accounting is the art of recording, classifying, and summarizing transactions and events, which are, in part at
least, of a financial character and interpreting the results thereof. It is a service activity in that it serves the need
of decision makers by providing them with the needed financial information regarding a business unit. Inasmuch
as it provides information, it is an information system.
Nature of Accounting
From the definition provided by AICPA, we shall be able to know the nature of accounting.
1. Accounting is an art
Accounting is considered an art because it requires the use of skills and creative judgment. One has to be
trained in this discipline to be able to perform accounting functions well.
Accounting is also considered a science because it is a body of knowledge. However, accounting is not an
exact science since the rules and principles are constantly changing for improvement and updating.
2. Accounting is a process
A process refers to the method of performing any specific job step by step according to objectives or target.
Accounting as a process involves interconnected phases. Recording pertains to writing down or keeping
records of business transactions. Classifying involves grouping similar items that have been recorded. Once
they are classified, information is summarized into reports which we call financial statements.
3. Concerned with transactions and events having financial character
Transactions are activities that involve an exchange of values – the value received and the value given.
The sale of goods and the payment of salaries are examples of transactions. When we sell goods (e.g. a
laptop), we give the laptop, which is something of value. In return, we receive payments in the form of cash.

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 Hiring of an additional employee is qualitative information with no financial character. Hence, it is not
recorded. However, the payment of salaries is quantitative information worthy of being recorded in the
accounting system.
Events, on the other hand, can be classified as either monetary or non-monetary. Only the monetary
events are recorded in the accounting system. Events do not necessarily involve an exchange of value yet they
have an effect on the financial status of the business entity. For instance, an equipment was recorded at
purchase value when they were acquired. Several years later, and due to depreciation, the value of the same
equipment is now lower as compared to its original purchase value.
4. Business transactions are expressed in terms of money
They are assigned amounts when processed in the accounting system. Using one of the examples given
above, it is not enough to record that the company paid salaries for a certain month. It must include monetary
figures – say for example ₱50,000 salaries expense.
5. Interpreting the results
Interpreting results is part of the phases of accounting. Information is useless if they cannot be interpreted
and understood. The amounts, figures, and other data in the financial reports have meanings that are useful to
the users.
6. Accounting is an information system
Accounting is recognized and characterized as a storehouse of information. As a service function, it
collects processes and communicates financial information of an entity. This discipline of knowledge has been
evolved out to meet the need of financial information required by different interested groups.
7. Accounting as the language of business
Accounting is one of the means of reporting and communicating information about a business. As one has
to learn a new language to converse and communicate, so also is to be learned and practiced to communicate
business activities.
A language and accounting have common features as regards rules and symbols. Both are based and
propounded on fundamental rules and symbols. In language, these are known as grammatical rules, in
accounting these are termed as accounting rules. The expression, exhibition and presentation of accounting
data such as numerals and the words debit and credit are accepted as symbols which are unique to the
discipline of accounting

Accounting and Bookkeeping

Accounting and bookkeeping are both essential business functions required for all businesses. Bookkeeping is
responsible for the recording of financial transactions. Accounting includes bookkeeping and expands into classifying, analyzing,
reporting, summarizing and interpreting financial data.
A bookkeeper follows a prescribed set of procedures on a repetitive basis to record common activities. These common
bookkeeping tasks are entirely adequate for the accounting needs of a small business.
The accountant is more likely to work exclusively on a specific area, such as fixed assets or the general ledger, and is
more likely to have formal training in the accounting function.

Functions of Accounting in Business

The function of accounting in business can be classified into two – stewardship and managerial. Accountants are
generally regarded as stewards of all economic activities of a business concern. As a steward he is supposed to be responsible
for all economic activities of a business concern. In discharging his responsibilities, he keeps accurate accounts of all financial
transactions of his business and these are regarded as stewardship functions of accounting.
The management is to take various decisions for smooth running of the business. These decisions are taken on the
basis of evaluation of past activities. Accounting provides reports of past financial activities which are made suitable for decision-
making through analysis. These activities of Accounting are regarded as managerial functions.

Historical or Stewardship Functions

1. Recording of financial transactions
The primary function of accounting is to record the transactions in journal as soon as they occur. If the
transactions are journalized it becomes easier to transfer them in ledger accounts and to keep track of the transactions.
2. Classifying
After journalizing the transactions these are classified and recorded in ledger separately.
3. Summarizing
After recording the transactions in the ledger these are closed by drawing balances. A brief statement is
prepared with the balances of ledger which is called trial balance.
4. Finding net results
The main function of accounting is not only to record the transactions in books of accounts but also to
determine the net results of a business for a particular period at the end of that period. Income statement is prepared
with the help of revenue incomes and expenses mentioned as ledger balances in the trial balance in order to find out
operating results of a business organization for a particular period.
5. Exhibiting financial affairs
Preparation of balance sheet is one of the functions of special importance of accounting. Balance sheet is
prepared to exhibit the financial position of an organization at a particular date.

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 A picture of assets and liabilities is reflected through balance sheet and a clear conception can be achieved
regarding financial stability of an organization through it.
6. Analyzing financial data
The financial data derived from financial statements are interpreted and analyzed for different purposes. From
this information a clear conception is achieved regarding capability of repayment of debts, capability of earning profit,
work efficiency and transparency etc. of an organization. This can be ascertained through ratio- analysis.
7. Communicating financial information
Interested parties related to business organization such as owners, employees, suppliers, investors,
researchers, government etc. remain eager to know various information regarding financial positions of that organization.
One of the main functions of accounting is to provide them with information regularly through various reports.

Managerial Functions
1. Control of financial policy and formation of planning
Various financial information is presented before the management so that the management can control financial
policies and formulates planning regarding future activities and course of action.
2. Preparation of budget
Preparation of estimated statement of income and expenditure on the basis of future activities is also one of the
important managerial functions. Accounting provides necessary financial information required for preparation of this
budget. Later on, executed activities are compared with budgetary elements.
3. Cost control
A standard cost is estimated ahead against each cost. For this purpose, the necessary financial information is
available from accounting records. Actual cost and standard cost are compared for evaluating efficiency of work. In this
way cost control is possible.
4. Evaluation of employees’ performance
Assigned tasks of employees of every, department of an organization are to be evaluated. For this, accounting
provides necessary information.
5. Prevention of errors and frauds
Through accounting system, the activities of employees are checked to prevent errors and frauds.

History of Accounting
Accounting is as old as money itself. However, the act of accounting was not developed as it is today because in the
early stages of civilization, the number of transactions to be recorded was so small that each businessman was able to record and
check for himself all his transactions.

Ancient Accountants
Ancient Egyptian bookkeepers kept meticulous records of the inventory of goods kept in royal storehouses. The
accuracy of these records was assured by the swift and severe penalty that came if mistakes were ever discovered. Archeologists
discovered century-old bone labels inscribed with marks and attached to bags of oil and linens. Describing inventory owners,
amounts, and suppliers, these labels of antiquity are known to be ancient origin of the counting systems that would eventually
develop into the sophisticated accounting methods we’re familiar today.
Other ancient societies also used accounting methods, including scribes in Mesopotamia who kept records of commerce
on clay tablets. In ancient Greece, the account books of bankers show that they changed and loaned money and help people
make cash transfers through affiliate banks in other cities. In ancient Rome, government and banking accounts grew out of
records kept by the head of families.
Accounting was practiced in India twenty-three centuries ago as is clear from the book named “Arthashastra” written by
Kautilya, King Chandragupta’s minister. This book not only relates to politics and economics, but also explains the art of proper
keeping of accounts.

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 in 14th century Italy. Pacioli is considered as the Father of Modern Accounting.
Pacioli described double-entry bookkeeping in his book documenting the system entitled Summa de Arithmetica,
Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry and Proportion).
Written as a digest and guide to existing mathematical knowledge, bookkeeping was only one of the five topics covered.
The Summa’s 36 short chapters on bookkeeping, entitled De Computis et Scripturis (Of Reckonings and Writings) were added in
order that the subjects of the most gracious Duke of Urbino may have complete instructions in the conduct of business and to give
the trader without delay information as to his assets and liabilities.

19th and 20th Century – Modern Accounting

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 chartered accountants.
Today, the double-entry bookkeeping system is still being used. Accounting as a discipline evolved and branched out
into several specialized fields. International standards were developed and adopted by accountants all over the world.

References:

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Books:
Aliling, L.E. (2016) Fundamentals of Basic Accounting. Manila: Rex Bookstore.
Valencia, E. (2015) Basic Accounting, 3rd ed. Baguio City: Mutual Books.
Websites:
Functions of Accounting. (n.d.). Retrieved September 2016, from www.accountingtheory.weebly.com
History of Accounting. (n.d.). Retrieved October 2016, from www.accounting.edu.org.

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