Introduction to

Accounting
Subtitle
 CONTENT STANDARDS PERFORMANCE STANDARDS

The learners The learners shall be

demonstrate an able to cite specific
understanding of the examples in which
definition, nature, accounting is used in
function, and history of making business
accounting decisions
LEARNING COMPETENCIES
The Learners:
1. Define accounting(ABM_FABM11-IIIa-1)
2. Describe the nature of accounting(ABM_FABM11-IIIa-2)
3. Explain the functions of accounting in business(ABM_FABM11-IIIa-3)
4. Narrate the history/origin of accounting(ABM_FABM11-IIIa-4)
DEFINITION
AND NATURE OF
ACCOUNTING
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 a process
of identifying, measuring
and communicating
economic information to
permit informed
judgements and
decisions by users of the
information.
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.
THE ACCOUNTING
FUNCTION AND
PHASES
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.
Business transactions are the economic activities of a
business. Recording these historical events is a
significant function of accounting. Accounts are produced
to aid management in planning, control and decision-
making and to comply with regulations.
Before the effects 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.
Money serves as both a
medium of exchange and a
measure of value.
To measure a business transaction, the
accountant must decide when the
transaction occurred (recognition issue),
what value to place on the transaction
(valuation issue) and how the components
of the transaction should be classified
(classification issue).
By simply measuring and recording transactions,
the resulting information will be of limited use.
To be useful in making decisions, the recorded
data must be classified and Summarized.
Classification reduces the effects of numerous
transactions into useful Groups or categories.
Summarization of financial data is achieved
through the preparation of financial statements.
These summarize the effects of all business
transactions that occurred during some
period after going through the preceding
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.
Accounting provides the decision-
makers with information to make
reasoned choices among alternative
uses of scarce resources in the
conduct of business and economic
activities.
OUTPUT OF THE
ACCOUNTING CYCLE
An accounting information system is used
by a business to analyze transactions,
handle routine bookkeeping tasks and
structure information so it can be used to
evaluate the performance and health of the
business.
This system generates output in the form of
financial reports which can further be
categorized into internal and external
reports internal reports are used by those
directly involved in the managing and
operating the business or collectively called
the “management.”
External reports, like the financial
statements, are used by individuals and
organizations that have an economic
interest in the business but are not part of
its management, or the external users.
 Process step Explanation of the steps

Identify The transaction "identified" was the purchase of a printer.

Measure The cost of the printer was "measured" as 5000.

Record The transaction was "recorded" in books systematically as 5000.

Classify The transaction was then moved to the ledger and "classified" with similar
transactions.
Here the ledger balance was "summarized" and converted into trial balance
Summarize and financial statements accordingly.

Analyze Purchase manager "analyzed" the financial statements at year-end.

The analysis leads to the "interpretation" that the printer was costly and
Interpret cheaper alternatives were available.

Communicate This was "communicated" to the owners as a recommendation for future

purchases of this kind.
EVOLUTION OF ACCOUNTING
People have counted and kept records throughout
history.
Primitive Accounting
The origin of keeping accounts has
been traced as far back as 8500 B.C.,
the date archaeologists have
established for certain clay tokens --
cones, disks, spheres and pellets-
found in Mesopotamia (modern
lraq). These tokens represented
such commodities as sheep, jugs of
oil, bread or clothing and were used
in the Middle East to keep records.
The tokens were often sealed in clay
balls, called bullae, which were
broken on delivery so the shipment
could be checked against the
invoice; bullae, in effect, were the
first bills of lading.
Later, symbols impressed on
wet clay tablets replaced the
tokens. Some experts
consider this stage of record
keeping the beginning of the
art of writing, which spread
rapidly along the trade
routes and took hold
throughout the known
civilized world.
Account records date back to the ancient
civilizations of China, Babylonia, Greece and
Egypt. People in these civilizations
maintained various types of records of
business activities.
During the 1st dynasty of
Babylonia (2286-2242 B.C.),
its law which was based on
the Code of Hammurabi,
requires merchants trading
goods to give buyers a sealed
memorandum containing
the agreed price before it
can be considered
enforceable.
The agreed-upon transaction
was recorded by the Scribe (the
predecessor of the modern
accountant) on a small mound
of clay with the parties affixing
"their signatures" on it. This
clay was allowed to dry and
served as the record of the
transaction. For the more
important ones, the record can
be kiln-dried.
At around 3600 B.C. in Babylonia, clay tablets also recorded
payments of wages. The rulers of these civilizations used
accounting to keep track of the costs of labor and materials
used in building structures as in the case of the pharaohs of
Egypt in building their great pyramids.
Accounting is one of our oldest
skills. The earliest collections of
understandable writing track
how many bushels of grain
came into the king's
warehouse. Tablets recorded
who brought in the grain and
how much the king took as his
share. Even in the early days,
tax collecting is an activity
closely linked to accounting.
The presence of bookkeeping in the ancient
world has been attributed to various factors
including (i) the invention of writing; (ii) the
introduction of Arabic numerals, (ii) the decimal
system; (iv) the diffusion of knowledge of
algebra; (v) the presence of inexpensive writing
materials; (vi) the rise of literacy; and (vii) the
existence of a standard medium of exchange
A. C. Littleton in Accounting Evolution to 1900 lists seven
preconditions for the emergence of systematic bookkeeping:

• The Art of Writing, since bookkeeping is first of all a record;

• Arithmetic, since the Mechanical aspect of bookkeeping consists of a sequence of
simple computations;
• Private Property, since bookkeeping is concerned only with recording the facts about
property and Property rights;
• Money (i.e., among economy), since bookkeeping is unnecessary except as it reduces
all transactions in properties or property rights to this common. Denominator;
• Credit (i.e. uncompleted transactions), since there would be little impulse to make any
Record whatever if all exchanges were completed on spot;
• Commerce, since a merely local trade would never have created enough pressure
(volume of business) to stimulate men to coordinate diverse ideas into a system;
• Capital, since without capital commerce would be trivial and credit would be
inconceivable
Middle Ages

Because of the Crusades from the 11th to the 13th

centuries, Northern Italy’s literacy 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 use of credit
was prevalent, and a semblance of an international
banking system was also functioning.
The Inca Empire, which
spanned the west coast of
South America throughout
the 11th to 14th centuries,
used knotted cords of
different lengths and
colors called quipu to
keep accounting records.
Development of more formal account-keeping methods is attributed to the
merchant and bankers of Florence, Venice and Genoa during the 13th to
15th centuries.
Double-entry bookkeeping is not a discovery of science; it is the outcome of
continued efforts to meet the changing necessities of trade. German
philosopher Oswald Spengler wrote in The Decline of the West (1928)
that the invention of double-entry Bookkeeping was the decisive event in
European economic history.
The Florentine
Approach
The earliest evidence of business bookkeeping
in Florence, France was evidenced by the bank
ledger fragments of 1211 (transcribed in 1887
by Pietro Santini) and with the development
of accounting in Tuscany, Italy during the 13th
century, as evidenced in the account-books or
extracts. But these were within the framework
of the “narrative” or “paragraph” type of
accounting record (a sezioni sovrapposte),
perhaps derived from the “charge and
discharge” format used in public accounts.
The system was primitive; accounts were not
related in any special way (in terms of equality for
entries) and balancing of the accounts was lacking.
The emergence of double entry itself, was first
witnessed in the “ledgers” of Renieri (or Rinieri) Fini
& Brothers (1296-1305) and Giovanni Farolfi &
Company (1299-1300).
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 Method of Venice
Luca Paciolìi, a Franciscan friar and a
celebrated mathematician, is generally
associated with the introduction of
double-entry bookkeeping. In 1494 he
published his book, Summa de
Arithmetica, Geometria, Proportioni et
Proportionalita or “Everything About
Arithmetic, Geometry, Proportions
and Proportionality,” which includes
Particularis de Computis et Scripturis or
“Details of Calculation and Recording,
describing double-entry bookkeeping.
His treatise reflected the practices of Venice
at the time, which became known as the
Method of Venice or the Italian method.
Therefore, he did not invent double-entry
bookkeeping, but rather described what
were prevalent accounting practices of the
day.
Although Pacioli made no claim to
developing the art of Bookkeeping, he has
been regarded as the father of double-
entry accounting. He stated that the
purpose of bookkeeping was “to give the
trader without delay information as to his
assets and liabilities.
Pacioli also advised the computation of
a periodic profit and the closing of the
books he said, “It is always good to close
the books each year, especially if you are
in a partnership with others, frequent
accounting makes for long friendship.