WHAT IS ACCOUNTING?

Accounting is known as the "language of business".

Accounting is a means through which information
about a business entity is communicated. Through
the financial statements, the end-product reports in
accounting, it delivers information to different users.
ACCOUNTING DEFINITION
Technical definitions of accounting have been
published by different accounting bodies. The
American Institute of Certified Public Accountants
(AICPA) defines 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 financial character, and interpreting the results
thereof."
1. ACCOUNTING IS CONSIDERED 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 (improved).
2. ACCOUNTING 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

For example, hiring an additional employee is

qualitative information with no financial character.
Hence, it is not recorded. However, the payment of
salaries, acquisition of an office building, sale of
goods, etc. are recorded because they
involve financial value.
4. BUSINESS TRANSACTIONS ARE
EXPRESSED IN TERMS OF MONEY

They are assigned amounts when processed in an

accounting system. Using one of the examples
above, it is not enough to record that the company
paid salaries for April. It must include monetary
figures – say for example, P20,000 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.
THE PURPOSE OF ACCOUNTING
We learned that accounting is the language of business;
a means of communicating information about an
economic entity to different users for decision-making.
An economic entity is a separately identifiable
organization which makes use of resources to achieve
its goals and objectives.
An economic entity may be a business entity operating
primarily to generate profit, or a non-profit entity carrying
out charitable and not-for-profit operations.
According to the American Institute of
Certified Public Accountants (AICPA):

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, in making
reasoned choices among alternative courses of
action.
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.
Both of the above definitions and the very nature of
accounting suggest its basic purpose – to provide
information needed by users in making economic
decisions.
ACCOUNTING INFORMATION
Here's a list of the different types of information provided by
accounting reports.
1. Results of operations. This pertains to the profit generated by
the company for a certain span of time (for a year, for a quarter,
for a month, etc.). This is measured by deducting all expenses
from all income. The resulting amount is called net income.
2. Financial position. How much resources does the entity
currently have? How much does the entity owe third parties?
How much is left for the owners after we pay all obligations using
our resources? The first question refers to the entity's
total assets; the second to liabilities, and the third to capital.
ACCOUNTING INFORMATION
3. Solvency and liquidity. Solvency refers to the entity's ability
to pay obligations when they become due. Liquidity pertains
to its ability to meet short-term obligations.
4. Cash flows. The financial statements also show the inflows
and outflows of cash in the different activities of the business
(operating, investing, and financing activities).
5. Other information. The financial statements
provide qualitative, quantitative, and financial information.
One of the characteristics of the financial statements
is relevance. Any information that could affect the decisions of
users should be included in the financial reports.
USERS OF FINANCIAL STATEMENTS
1. Owners and Investors
2. Management
3. Lenders
4. Trade Creditors or Suppliers
5. Employees
6. Customers
7. Government
8. General public.
1. Owners and investors
Stockholders of corporations need financial information
to help them make decisions on what to do with their
investments (shares of stock), i.e. hold, sell, or buy
more.
2. Management
In small businesses, management may include the
owners. In huge organizations, however, management
is usually made up of hired professionals who are
entrusted with the responsibility of operating the
business or a part of the business. They act as agents
of the owners.
3. Lenders
Lenders of funds such as banks and other financial
institutions are interested in the company’s ability to
pay liabilities upon maturity (solvency).
4. Trade creditors or suppliers
Like lenders, trade creditors or suppliers are interested
in the company’s ability to pay obligations when they
become due. They are nonetheless especially
interested in the company's liquidity – its ability to
pay short-term obligations.
5. Government
Governing bodies of the state, especially the tax
authorities, are interested in an entity's financial
information for taxation and regulatory purposes.
6. Employees
Employees are interested in the company’s profitability
and stability. They are after the ability of the company
to pay salaries and provide employee benefits. They
may also be interested in its financial position and
performance to assess company expansion
possibilities and career development opportunities.
7. Customers
When there is a long-term involvement or contract
between the company and its customers, the
customers become interested in the company’s ability
to continue its existence and maintain stability of
operations. This need is also heightened in cases
where the customers depend upon the entity.
8. General Public
Anyone outside the company such as researchers,
students, analysts and others are interested in the
financial statements of a company for some valid
reason.
INTERNAL AND EXTERNAL USERS
The users may be classified
into internal and external users.

Internal users refer to managers who use accounting

information in making decisions related to the
company's operations.

External users, on the other hand, are not involved in

the operations of the company but hold some financial
interest.
TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING

As a result of economic, industrial, and technological

developments, different specialized fields in
accounting have emerged.
The famous branches or types of accounting include:
financial accounting, managerial accounting, cost
accounting, auditing, taxation, AIS, fiduciary, and
forensic accounting.
TYPES OF ACCOUNTING / BRANCHES OF
ACCOUNTING
1. Financial Accounting
Financial accounting involves recording and classifying business
transactions, and preparing and presenting financial statements to be
used by internal and external users.
In the preparation of financial statements, strict compliance
with generally accepted accounting principles or GAAP and PFRS is
observed. Financial accounting is primarily concerned in
processing historical data.
TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING
2. Managerial Accounting
Managerial or management accounting focuses on providing
information for use by internal users, the management. This
branch deals with the needs of the management rather than
strict compliance with generally accepted accounting
principles.
Managerial accounting involves financial analysis, budgeting and
forecasting, cost analysis, evaluation of business decisions,
and similar areas.
TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING
3. Cost Accounting
Often times considered as a subset of management accounting,
cost accounting refers to the recording, presentation, and
analysis of manufacturing costs. Cost accounting is very
useful in manufacturing businesses since they have the most
complicated costing process.
Cost accountants also analyze actual costs versus budgets or
standards to help determine future courses of action regarding
the company's cost management.
 TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING
4. Auditing
External auditing refers to the examination of financial statements by
an independent party with the purpose of expressing an opinion as to
fairness of presentation and compliance with GAAP. Internal
auditing focuses on evaluating the adequacy of a company's internal
control structure by testing segregation of duties, policies and
procedures, degrees of authorization, and other controls
implemented by management.
 TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING
5. Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It
includes tax planning and preparation of tax returns. It also involves
determination of income tax and other taxes, tax advisory services
such as ways to minimize taxes legally, evaluation of the
consequences of tax decisions, and other tax-related matters.
6. Accounting Information Systems
Accounting information systems (AIS) involves the development,
installation, implementation, and monitoring of accounting
procedures and systems used in the accounting process. It includes
the employment of business forms, accounting personnel direction,
and software management.
 TYPES OF ACCOUNTING / BRANCHES
OF ACCOUNTING
7. Fiduciary Accounting
Fiduciary accounting involves handling of accounts managed by a
person entrusted with the custody and management of property of or
for the benefit of another person. Examples of fiduciary accounting
include trust accounting, receivership, and estate accounting.
8. Forensic Accounting
Forensic accounting involves court and litigation cases, fraud
investigation, claims and dispute resolution, and other areas that
involve legal matters. This is one of the popular trends in accounting
today.
Focusing on a Specialization
If you want to focus on a specialization, you may want to
consider obtaining an accounting certification in your chosen
field. It will give you an edge over those who are uncertified.
Due to the increasing population and demand for competitive
professionals, you need to step it up a little to get recognized.

Some of the most famous certifications include the Certified

Public Accountant (CPA), Certified Management Accountant
(CMA), Certified Internal Auditor (CIA), Certified Financial
Planner (CFP), and Certified Information Systems Auditor
(CISA).
 AREAS OF ACCOUNTING PRACTICE
1. Public Accounting
Accountants in public practice are working in accounting firms or
individually to provide audit and attestation, tax planning and
preparation, and advisory services to their clients.
Accountants in public accounting serve clients on a project or contractual
basis.
In CPA firms, new accountants start as accounting or audit staff and work
their way up to the junior accountant, senior accountant, supervisor,
manager, and partner positions. After gaining enough experience, they
may also start a public accounting firm of their own.
 AREAS OF ACCOUNTING PRACTICE
2. Private Accounting
In private accounting, also known as practice in commerce and industry,
an accountant serves only one company. Accountants in private
accounting provide a staff function which supports the company by
performing accounting-related tasks.

Positions in private practice include entry-level jobs such as bookkeeper,

accounting clerk, financial analyst, internal auditor, and others. From
there, new entrants can work their way up the organizational chart
and get to key management positions such as Chief Internal Auditor,
Controller (Chief Management Accountant or Chief Accounting
Officer), and Chief Financial Officer (CFO).
 AREAS OF ACCOUNTING PRACTICE

3. Government Accounting
Government agencies also need accountants. These
agencies need accounting information to help them plan,
budget, forecast, and allocate government funds. State
auditors are also employed by the government to ensure
the proper use and allocation of the said funds.
 AREAS OF ACCOUNTING PRACTICE
4. Accounting Education
This area is made up of accountants who are into teaching, research, and
training & development.
Accountants can pursue a career as a faculty member in a school, an
author of an accounting book, a researcher, a trainer, or a reviewer.
Note that it is not unusual to work in more than one area. In fact, many
accounting professionals engage in more than one scope of practice.
One may be providing public accounting services while having a part-
time job in teaching. Another may be employed by a multi-national
company or by a government agency while also working as a
bookkeeping consultant to the public.
TYPES AND FORMS OF BUSINESS

A business entity is an organization that uses economic

resources to provide goods or services to customers in
exchange for money or other goods and services.
Business organizations come in different types and in different
forms of ownership
 TYPES AND FORMS OF BUSINESS
There are three major types of businesses:
1. Service Business
A service type of business provides intangible products (products
with no physical form). Service type firms offer professional skills,
expertise, advice, and other similar products.
2. Merchandising Business
This type of business buys products at wholesale price and sells the
same at retail price. They are known as "buy and sell" businesses.
They make profit by selling the products at prices higher than their
purchase costs. A merchandising business sells a product without
changing its form.
 TYPES AND FORMS OF BUSINESS
3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys
products with the intention of using them as materials in making a
new product. Thus, there is a transformation of the products
purchased.
A manufacturing business combines raw materials, labor, and
overhead costs in its production process. The manufactured goods
will then be sold to customers.
Hybrid Business
Hybrid businesses are companies that may be classified in more
than one type of business. A restaurant, for example, combines
ingredients in making a fine meal (manufacturing), sells a cold bottle
of wine (merchandising), and fills customer orders (service).
TYPES AND FORMS OF BUSINESS
These are the basic forms of business ownership:
1. Sole Proprietorship
A sole proprietorship is a business owned by only one person.
It is easy to set-up and is the least costly among all forms of
ownership. The owner faces unlimited liability; meaning, the
creditors of the business may go after the personal assets of
the owner if the business cannot pay them.
The sole proprietorship form is usually adopted by small
business entities.
2. Partnership
A partnership is a business owned by two or more persons who
contribute resources into the entity. The partners divide the profits of
the business among themselves.
In general partnerships, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the
limited partners.
3. Corporation
A corporation is a business organization that has a separate legal
personality from its owners. Ownership in a stock corporation is
represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited
involvement in the company's operations. The board of directors, an
elected group from the stockholders, controls the activities of the
corporation.
In addition to those basic forms of business ownership, these are
some other types of organizations that are common today:

Cooperative
A cooperative is a business organization owned by a group of
individuals and is operated for their mutual benefit. The
persons making up the group are called members.
Cooperatives may be incorporated or unincorporated.
Some examples of cooperatives are: water and electricity
(utility) cooperatives, cooperative banking, credit unions, and
housing cooperatives.