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Lesson 1 Introduction To Accounting

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19 views4 pages

Lesson 1 Introduction To Accounting

Uploaded by

jay yoro
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to Accounting

Accounting is part of our daily life. It is essential in the world of business because
it functions as its language and provides information that is useful in decision
making.
It has its own characteristics, nature and origin. Simply, understanding
accounting will help an aspiring accountant or business manager understand
how the business works.

Accounting is a process of identifying, recording, and communicating economic


events such of an organization to related users (Weygandt, 2005). Economic
events include purchase of materials, sale of goods, and acquisition of machinery
which are measured in monetary terms and are recorded in the financial
statements.

Identifying – involves in the selection of the economic events which are


important to a particular business transaction. Examples of transactions in a
merchandising store are sales of merchandise, purchases of merchandise, and
purchases of delivery truck.

Recording – is the act of keeping a chronological record of events that are


measurable in accounting documents like journals and ledgers.

Communicating – refers to the process of communicating financial reports to


the users of financial information.

Nature of Accounting
1. Accounting is a service activity. It helps decision makers by giving them
financial reports that will guide them in making sound decisions.
2. Accounting is a process. It refers to the method of performing any specific
job step-by-step according to the objectives. It performs the specific task of
collecting, processing, and communicating financial information.
3. Accounting is both an art and a discipline. It is considered an art because
one records, classifies, summarizes, and finalizes financial data. The way
something is done is referred to as “art”. It is a behavioral knowledge involving
an established creativity and skill to help one achieve distinct objectives.
4. Accounting deals with financial information and transactions. It
records financial transactions and data, categorizes these, and finalizes the
results given for a specified period. Accounting only deals with financial and not
with non-monetary or non-financial aspects of an information.
5. Accounting is known and characterized as a storehouse of
information. It collects, processes, and communicates financial information of
any entity.

History of Accounting
In history, accounting is as old as civilization. It was developed in response to
various social and economic needs of men. It started as a simple recording of
monotonous exchanges. Its history shares the similarity with that of finance and
business.

Evolution of Accounting
• The Cradle of Civilization (3600 B.C.) – In Mesopotamia, record-keeping
was done through “Clay Tablet” as evidence of recording transactions. From
India and China to Central and South America, the clay tablet records the
business transactions like accounts receivable and accounts payable.
• Double-Entry Bookkeeping (14th Century) - The most relevant event in
accounting history is generally considered to be the dissemination of double
entry bookkeeping-by Luca Pacioli (Father of Accounting, in 14th century Italy).
Pacioli was much revered in his day, and was a friend and fellow of Leonardo da
Vinci. The Italians of the 14th to 16th centuries are recognized as the fathers of
modern accounting and were the first to use Arabic numerals than Roman, and
for following business accounts. Summa de Arithmetica was written by Luca
Pacioli, the first book issued that contained a detailed chapter on double-entry
bookkeeping.
• French Revolution (1700s) – In this period, the development of accounting
theory has begun and was influenced by social upheavals.
• The Industrial Revolution (1760-1830) – The focus on this era are fixed
assets and mass production.
•The Beginnings of Modern Accounting in Europe and America (19 th
Century) - The modern and formal accounting profession emerged in Scotland
in 1854. Most accountants stayed in the U.S., establishing accounting practices
and becoming the origins of several U.S. accounting firms. The first national U.S.
accounting society was established in 1887. The American Association of Public
Accountants was the initiator of the current American Institute of Certified Public
Accountants (AICPA).
• The Present (20th Century) – In the present time, accounting standards
were established and practitioners follow the rules of international organizations
or groups like AICPA. Modern accounting standards were given more attention
and time.
External and Internal Users of Accounting Information
External Users –are the individuals or organizations outside the company who
are not involved in operating the business.

1. Creditors – users who need accounting information to determine the credit


integrity, worthiness of the organization, and credit terms.
2. Tax Authorities (Bureau of Internal Revenue) - a government agency that
verifies the accuracy of financial data to ensure the credibility of the tax returns
filed by the business.
3. Investors – users who need accounting information to evaluate and examine
the feasibility of investing in a company.
4. Customers – users who evaluate the financial information of its supplier to
keep stable source of supply in the long term.
5. Regulatory Authorities -government agencies like Securities and Exchange
Commission (SEC), Department of Trade and Industry (DTI), Department of
Labor and Employment (DOLE) were established to supervise if businesses
comply with legal requirements in running a business.
Internal Users – individuals inside the organization who plan, organize, and run
the business. They are directly involved in managing and operating the business.
Internal users are also called as “primary users” of accounting information and
some of these users are the marketing managers, supervisors, finance directors,
company officers, and owners.

1. Management - to know the income/earnings for the period, sales, available


cash, and production cost are the reasons why the management needs the
accounting information. They also analyze the organization's performance and
position and take appropriate measures to improve the company results,
sufficiency of cash to pay dividends to stockholders as well as the pricing
decisions.
2. Employees – for job security, they use financial information as factor to
consider in staying employment or to look for other employment opportunities.
3. Owners – they use financial information to know the profit or income for the
period, resources, or assets of the business. Liabilities of the business are
needed by the owners. They also use financial information in considerations
regarding additional investment, expanding the business, and borrowing funds to
support any expansion plans.

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