Introduction to

Accounting
Historical Development of (Origin) of
Accounting
In Ancient Sumerian cities of the land that is now known as
Iraq, bookkeepers documented wealth by pressing the ends of
the sticks into damp clay tablets that hardened into permanent
records.
Formal accounting was invented in 1494 by a Franciscan friar
named Fra. Luca Pacioli, in his paper “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita” (Everything About
Arithmetic, Geometry, and Proportion).
The treatise described double-entry bookkeeping; that for
every credit entered into a ledger, there must be a debit, a
concept created by Florentine merchants and hailed by Goethe
as “one of the most beautiful discoveries of the human spirit”.
Luca Pacioli was born in 1445 and died on June 19, 1517 in
Sansepolcro, Tuscany, Italy.
While Pacioli is often called the “Father of Accounting”, he
did not invent the system. Instead, he simply described a
method used by merchants in Venice during the Italian
Renaissance period.
His system included most of the accounting cycle as we
know it today. He described the the use of journals and
ledgers, and he warned that a person should not go to sleep
at night until the debits equaled the credits.
His ledger included assets (including receivables and
inventories), liabilities, capital, income, and expense
accounts.
He demonstrated year-end closing entries and proposed that
a trial balance be used to prove a balanced ledger.
Definition of Accounting
The American Institute of Certified Public
Accountants (AICPA) defined accounting as an art of
recording, classifying, 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.
Another definition from the American Accounting
Association (AAA) which is the proces of identifying,
measuring, and communication economic
information to permit informed judgements and
decisions by users of information.
In the Philippines, the Accounting Standards Council
(ASC) defined accounting as 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.
Key features of Accounting
1. It provides a vital service in today’s business
environment.
2. It is primarily concerned with quantitative, financial
information used in conjunction with qualitative
evaluations in making informed judgment.
3. It is used in making decisions about allocation of
scarce resources.
4. It is considered as language of business.
Purpose of accounting
The main purpose of accounting is to provide
quantitative, financial information about economic
entities that is intended to be useful in making
economic decisions. It provides the basis for the two
main assumptions as a foundation for the accounting
process. (Monetary Unit Assumption and the
Economic Entity Assumption)
Since accounting is a language of business, its
profession has developed standards that are generally
accepted which are referred to as “Generally
Accepted Accounting Principles” (GAAP).
Users of Financial Statements
Internal users
-Owners
-Managers
-Vice Presidents
-President
-Employees
External users
-Potential investors
-Creditors
-Suppliers
-Government Agencies
Branches of Accounting
1. Business Accounting
-Financial Accounting- is concerned w/ general purpose
financial statements including consolidated financial statements. It
applies to the financial statements of all commercial, industrial, and
business reporting entities, whether in public or in private sectors.
-Managerial Accounting- refers to the processing or
preparation of special purpose financial reports for management needs
such as, prospectus, management reports on cost analysis, cost and
benefit analysis, investment analysis, and such other internal
management reports.
-Tax Accounting- it includes the preparation of tax returns
and the consideration of the tax consequences (withholding taxes,
value added tax, percentage taxes, and other taxes) of business
transactions.
2. Not-for-Profit Accounting
-Government Accounting- is the process of
analyzing, recording, classifying, summarizing, and
communicating all transactions involving state funds and
properties.
-Institutional Accounting- is the accounting for
non-profit entities including non-government
organizations (NGOs).
3. Auditing
-External Auditing- is the independent
examination intended to support the expression of an
impartial expert opinion on the fairness of the financial
statements.
-Internal Auditing- is an objective independent
objective assurance and consulting activity designed to
add value and improve an organization’s operations. It
helps an organization accomplish its objectives by
bringing a systematic, disciplined approach toi evaluate
and improve the effectiveness of risk management,
control, and governance processes (ISPPIA)
4. Fiduciary Accounting
-Estate Accounting- is the handling of accounts
for fiduciaries who wind up the affairs of a dead person.
-Trust Accounting- is the handling of accounts
for fiduciaries who determine that customer’s money are
held for the purpose contracted by the customer and its
management.
-Receivership Accounting- is the handling of
accounts for a fiduciary appointed to take charge of a
financially unstable business pending its disposition or
the attainment of an imposed objective.
The Accounting Standard Setting Bodies
Financial Reporting Standards Council (FRSC)
-Established by the Board of Accountancy (BOA) in 2006
under the Implementing Rules and Regulations of the Philippine
Accountancy Act of 2004.
-Assumed the function of the Accounting Standards Council
(ASC) created by the Philippine Institute of Certified Public
Accountants (PICPA) in 1981.
-Consists of a Chairman and members who are appointed by
BOA.
-Members include representatives from BOA, Securities and
Exchange Commission (SEC), Bangko Sentral ng Pilipinas
(BSP), Financial Executives Institute of the Philippines (FINEX), and
PICPA.
Accounting vs Bookkeeping
Accounting includes bookkeeping, which is part of the
accounting process of recording, classifying, and
summarizing.
Bookkeeping is the technical term for the recording
phase of accounting as it is involved with recording of
transactions in accounting journals or books of accounts.
The bookkeeping tasks include routine, mechanical, and
clerical work while accounting extends beyond
bookkeeping to include judgment on the estimates
applied, presentation, and analysis of financial
statements.
Forms of Business Organization
1. Sole Proprietorship- is owned and operated by one person known as
the proprietor. It is common among small service-type businesses and
retail establishments.
2. Partnership- is a business owned and operated by two or more
persons (called partners) who bind themeselves to contribute money,
property, or industry to a common fund, with the intention of dividing
the profits among themselves.
3. Corporation- is an artificial being created by operation of law, having
the rights of succession and its powers, attributes, and properties
expressly authorized by law or incident to its existence. The owner is
called a stockholder or shareholder.
4. Cooperative- is a duly registered association of persons, with a
common bond of interest, who have voluntarily joined together to
achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the
risks and benefits of the undertaking in accordance with universally
accepted cooperative principles.
Objective of Financial Statements
To provide information about the financial position,
performance, and changes in financial position of an
entity that is useful to a wide range of users in making
economic decisions.
The management of an entity has the primary
responsibility for the preparation and presentation of
its financial statements.
Financial Position- affected by the economic resources
it controls, its financial structure, its liquidity and
solvency, and its capacity to adapt to changes in the
environment in which it operates. (Statement of
Financial Position)
Performance of an entity- is required in order to assess
potential changes in the economic resources that is
likely to control in the future. (Statement of Financial
Performance)
Changes in Financial Position- useful in order to asses
its investing, financing, and operating activities during
the reporting period.
Qualitative Characteristics of
Information
Understandability- It is an essential quality of the
information that makes the financial statements
readily understandable by users.
Relevance- Information has the quality of relevance
when it influences the economic decision of users by
helping them evaluate past, present, or future events
or confirming, or correcting their past evaluations.
-Predictive Value
-Feedback Value
-Timeliness
Reliability- Information has the quality of reliability
when it is free from material error and bias and can be
depended upon by users to represent faithfully that
which it either purports to represent or could
reasonably be expected to represent.
-Faithful representation
-Substance over form
-Neutrality
-Prudence
-Completeness
Comparability- is the ability to bring together for the
purpose of identifying its similarities and differences.
-Intra-comparability or horizontal
comparability
-Inter-comparability or dimensional
comparability
Elements of the Financial Statements
Elements directly related to the measurement of
financial position are:
ASSETS – are the resources controlled by the
entity as a result of past events and from which
future economic benefits are expected to flow to the
entity.
Examples: Cash, Accounts Receivable, Notes Receivable,
Merchandise Inventory, Furniture and Fixtures, Lans, Unused Supplies,
and other Prepayments.
LIABILITIES - are the financial obligations of an
entity arising from past events, the settlement of
which is expected to result in an outflow from the
entity of resources embodying economic benefits.
Examples: Accounts Payable, Notes Payable, and Accrued
Expenses

EQUITY or CAPITAL – is the residual interest in the

assets of the entity after deducting all its liabilities.
Examples: Owner’s Equity
Elements Directly related to the
measurement of performance:

INCOME – in increases in economic benefits during

the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating
to contributions from equity participants.
Examples: Service Revenue, Sales Revenue
EXPENSES – are decreases in economic benefits
during the accounting period in the form of outflows
or depletion of assets or incurrence of liabilities that
result in decreases in equity, other than those relating
to distributions to equity participants.
Examples: All expenditures and disbursements
(Utilities expense, Travel expense, Depreciation
expense)
Recognition
Recognition is the process of incorporating in the
balance sheet or income statement an item that meets
the definition of an element and satisfies the criteria
for recognition. An item that meets the definition of
an element should be recognized if:
1. it is probable that any future economic benefit
associated with the item will flow to or from the
entity; and
2. the item has a cost or value that can be
measured with reliability.
Recognition of Assets
An asset is recognized in the statement of financial
position (balance sheet) when it is probable that the
future economic benefits will flow to the entity and the
asset has a cost or value that can be measured reliably.
Recognition of Liabilities
A liability is recognized in the balance sheet when it is
probable that an outflow of resources embodying
economic benefits will result from the settlement of a
present obligation and the amount at which the
settlement will take place can be measured reliably.
Recognition of Income
Income is recognized in the income statement when
the increase in the future economic benefits related to
an increase in an asset or a decrease of a liability has
arisen that can be measured reliably.
Exceptions to the general rule:
-installment method
-cost recovery method
-cash method
-percentage of completion method
-production method
Recognition of expenses
Expenses are recognized in the income statement
when the decrease in future economic benefits related
to a decrease in an asset or an increase of liability has
arisen that can be measured reliably.
Expense recognition priniciple
Matching principle – expenses are recognized in the
income statement on the basis of a direct association
between the costs incurred and the earning of specific
items of income.
Systematic and rational allocation – expenses are
recognized in the income statement when economic
benefits are expected to rise over several accounting
periods and the association with income can only be
broadly or indirectly determined.
Immediate recognition – an expense is recognized
immediately in the income statement when
expenditure produces no future economic benefits or
when, and to the extent that, future economic benefits
do not qualify or cease to qualify for recognition in the
balance sheet as an asset.
Measurement of Elements of Financial
Statements
Measurement is the process of determining the
monetary amounts at which the elements of the
financial statements are to be recognized and carried
in the balance sheet and income statement.