OFELIA C.

BUENAFE, MAEd
WHAT IS ACCOUNTING?
DEFINITION AND NATURE
 ACCOUNTING AS A SERVICE ACTIVITY
 Service is the occupation or function of serving;
 Its function is to provide QUANTITATIVE
INFORMATION, PRIMARILY FINANCIAL IN
NATURE, about ECONOMIC ENTITIES, that is
intended to be useful in making ECONOMIC
DECISION.
 FROM ASC: ACCOUNTING STANDARDS COUNCIL
WHAT IS ACCOUNTING?
DEFINITION AND NATURE
 ACCOUNTING AS AN ART
 ART is a skill acquired by EXPERIENCE.
 It is an art of RECORDING, CLASSIFYING and
SUMMARIZING in a significant manner in terms of
money, transactions and events which are in part at least
of a financial character and INTERPRETING the results
thereof
 From AICPA: AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS
WHAT IS ACCOUNTING?
DEFINITION AND NATURE
 ACCOUNTING AS A SYSTEMATIC PROCESS
 PROCESS is a series of actions that produce
something or that lead to a particular result.
 It is the process of IDENTIFYING, MEASURING and
COMMUNICATING economic information to permit
informed judgment and decision by users of the
information.
 FROM AAA: AMERICAN ACCOUNTING
ASSOCIATION
HISTORY OF ACCOUNTING
 5000 BC
 ABACUS functioned as a calculator in the ancient times
 Was developed by the SUMERIANS ( FROM
MESOPOTAMIA) ( MODERN DAY IRAQ )
HISTORY OF ACCOUNTING
 14TH CENTRY – THE BIRTH OF DOUBLE ENTRY
BOOK KEEPING
 FOUNDER: LUCA PACIOLI OF ITALY
 “FATHER OF ACCOUNTING”
 Wrote “EVERYTHING ABOUT ARITHMETIC,
GEOMETRY, PROPORTION”
 Similar to modern day accounting cycle
 Explains extensively the use of BALANCE
SHEET, METHOD OF RECORDING
MEMORANDUMS
 JOURNALS AND LEDGERS, THE USE OF
ACCOUNTS SUCH AS ASSETS,
LIABILITIES AND OWNER’S EQUITY,
REVENUE AND EXPENSES YEAR END
CLOSING ENTRIES AND THE USE OF
TRIAL BALANCE TO PROVE A
BALANCED LEDGER
LUCA PACIOLI
HISTORY OF ACCOUNTING
 19TH CENTURY – THE DAWN OF MODERN
ACCOUNTING IN EUROPE AND AMERICA
 Industrial revolution which replaced hand tools with
MACHINE or POWER TOOLS.
 TRANSFORMED ACCOUNTING INTO AN ACTUAL
PROFESSION
HISTORY OF ACCOUNTING
 20TH CENTURY – THE EVOLUTION OF MODERN
ACCOUNTING STANDARDS
 AICPA= AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS, the first national professional
association for CPAs in the United States
 AICPA was tasked to establish FASB to set
ACCOUNTING AND AUDITING standards
 FASB: FINANCIAL ACCOUNTING STANDARDS
BOARD, is the result of the demand for more reliable
and comparable FINANCIAL REPORTING.
 THE FASB AND GASB ( GOVERNMENT
ACCOUNTING STANDARDS BOARD) are currently the
TWO of the significant authorities establishing GAAP (
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES)
BRANCHES OF ACCOUNTING
 FINANCIAL ACCOUNTING
 MANAGEMENT ACCOUNTING
 GOVERNMENT ACCOUNTING
 AUDITING
 TAX ACCOUNTING
 COST ACCOUNTING
 ACCOUNTING EDUCATION
 ACCOUNTING RESEARCH
FINANCIAL ACCOUNTING
 is the reporting of the financial position and
performance of a firm through financial statements
issued to external users.
 Deals with the framework covering accounting
principles and concepts relative to MEASUREMENT
and VALUATION applied to the preparation and
presentation of FINANCIAL STATEMENTS.
MANAGEMENT ACCOUNTING
 process of identifying, measuring, analyzing,
interpreting and communicating information for the
pursuit of an organization's goals.
 aimed at helping managers within the organization
make decisions. (INTERNAL USERS)
GOVERNMENT ACCOUNTING
 refers to the field of that specifically finds application
in the public sector.
AUDITING
 OBJECTIVE, INDEPENDENT examination and
EVALUATION of the FINANCIAL STATEMENTS of an
organization to make sure that the records are a fair
and accurate representation of the transactions
they claim to represent.
TAXATION
 Tax accounting consists of accounting methods that
focus on taxes rather than the appearance of public
financial statements. Tax accounting is governed by
the Internal Revenue Code (BIR) which dictates the
specific rules that companies and individuals must
follow when preparing their tax returns.
COST ACCOUNTING
 aims to capture a company's costs of production by
assessing the input costs of each step of production.
ACCOUNTING EDUCATION
 Involves planned grading and formal teaching in an
educational institution. Imparts knowledge to
students enrolled in an accounting subject matter.
Either basic accounting or higher accounting subjects
P
ACCOUNTING RESEARCH
 Involves a careful and diligent study aimed at
discovering and interpreting facts, REVISING
ACCEPTED THEORIES IN THE LIGHT OF NEW
FACTS, OR REVISED APPLICATION OF SUCH NEW
OR REVISED THEORIES for the generation of new
knowledge.
USERS OF ACCOUNTING
INFORMATION ( according to the
CONCEPTUAL FRAMEWORK )
 PRIMARY USERS
 EXISTING AND POTENTIAL INVESTORS
 SUPPLIERS, LENDERS AND OTHER CREDITORS

SECONDARY USERS
- EMPLOYEES
- CUSTOMERS
- GOVERNMENT AND THEIR AGENCIES
- PUBLIC
PRIMARY USERS OF
ACCOUNTING INFORMATION
 EXISTING AND POTENTIAL INVESTORS,
STOCKHOLDERS OWNERS
 These parties provide the financial resources
to keep the business going.
 They decide whether to invest or not
depending on the estimated amount of
income on the investment.
PRIMARY USERS OF
ACCOUNTING INFORMATION
 SUPPLIERS, LENDERS AND OTHER CREDITORS
INCLUDING FINANCIAL INSTITUTIONS
 Use financial information to determine the
capacity of the business organization to pay
its OBLIGATIONS/DEBTS and their
INTERESTS at the appropriate time.
SECONDARY USERS
 EMPLOYEES
 They are not directly involved in the decision making of
the company.
 They are interested in the financial information of the
FUTURE PROFITABILITY of the company.
SECONDARY USERS
 CUSTOMERS
 Have an interest about the continuance of an entity
when they have a long term involvement with or are
dependent on the entity.
SECONDARY USERS
 GOVERNMENT AND THEIR AGENCIES
 Financial information is important for TAX PURPOSES
and in checking of compliance with SECURITIES AND
EXCHANGE COMMISSION (SEC)
 They are interested in the allocation of resources and
therefore the activities of the entity.
SECONDARY USERS
 PUBLIC
 They are provided with the information about the
LATEST TRENDS and the range of activities.
TYPES OF BUSINESS
ORGANIZATIONS
 SOLE/ SINGLE PROPRIETORSHIP
 Is a business owned and managed by only ONE
PERSON.
 ADVANTAGES:
 Minimal costs and requirements in the formation
 The owner can withdraw the assets and profits of the business
anytime at his or her own discretion
 Decision making is solely in the hands of the owner
 The duration of the life of the business solely depends on its
owner
 Disadvantages
 Resources are limited as the capital is provided only by
the OWNER.
 The liability of the owner is UNLIMITED as he or she is
accountable to all creditors of the business.
 Infusion of knowledge in the management of the
business is limited to one person only, WHICH IS THE
OWNER.
TYPES OF BUSINESS
ORGANIZATIONS
 PARTNERSHIP
 Is a business organization owned and managed by two
or more persons who agree to contribute MONEY,
PROPERTY OR INDUSTRY to the common fund for the
purpose of DIVIDING THE PROFITS AMONG
THEMSELVES.
 ADVANTAGES
 There are minimal costs and requirements in the formation
 There are more funds contributed from the investment of the
partners
 There is infusion of MORE KNOWLEDGE, EXPERIENCE
INDUSTRY from TWO OR MORE PARTNERS.
 Disadvantages
 The partners are liable for the actions of each partner as a
result of MUTUAL AGENCY.
 A general partner as unlimited liability if the other partners
are limited partners or are insolvent
 Disagreement between or among partners can lead to the
withdrawal of one or more partners( thus causing dissolution)
 DEATH, RETIREMENT, WITHDRAWAL OR INCAPACITY of
a partner results in the DISSOLUTION OF THE
PARTNERSHIP.
 Admission of a NEW PARTNER depends upon the approval of
the OTHER PARTNERS.
TYPES OF BUSINESS
ORGANIZATIONS
 CORPORATION
 It is an Artificial being created by an operation of law,
having the rights of succession and the powers attributes
and properties expressly authorized by law or incident
to its existence ( Sec 2. Corp code of the philippines)
 Advantages
 The stockholders only have LIMITED LIABILITY, as
their liability extends only to the amount of their capital
investment
 Has life of 50 years
 Cannot be dissolved even with the death of the
stockholders
 More infusion of funds from stockholders
 Shares of stocks can be transferred without the consent
of other shareholders.
 The power is with the BOARD OF DIRECTORS
 Disadvantages
 Has many requirements than a partnership.
 Government exercises strict control over corporations
and imposes high taxes
 Distribution of net income depends on the declaration
of stock dividends.
TYPES OF BUSINESS
ORGANIZATIONS
 COOPERATIVES
 Is an association of SMALL PRODUCERS and
CONSUMERS who come together voluntarily to form a
business which they own, manage and patronize

 Advantages
 The prices of products offered to consumers are lower due to
direct purchase of cooperative members from producers or
manufacturers.
 Managed by MEMBERS THEMSELVES; thus saving on
management costs which leads to lower prices of products
inuring to the benefit of consumers
 Disadvantages
 There is limited capital due to underprivileged members
 The cooperative is STRICTLY for members only and shares
cannot be transferred to non members
 Lack of efficient management as it is managed only by its
members.
TYPES OF BUSINESS
ACCORDING TO ACTIVITIES
 SERVICE
 MERCHANDISING
 MANUFACTURING
TYPES OF BUSINESS
ACCORDING TO ACTIVITIES
 SERVICE
 Is a type of business operation engaged in the rendering
of SERVICES.
 It earns based on the SKILL or QUALITY it offers.
 Example: DENTAL CLINIC, BARBERSHOP, LAUNDRY,
ACCOUNTING
 TRADING MERCHANDISING
 Is a type of business engaged in the buying and selling
goods.
 It includes the process of MANAGING and
MARKETING the product.
 EXAMPLE: GROCERY, SARI-SARI STORE
 MANUFACTURING
 Is engaged in the production of items to be sold.
 It involbes the PURCHASING and CONVERTING OF
RAW MATERIALS to WORK IN PROCESS to FINISHED
GOODS.
 Example: SHOE FACTORY, FOOD PROCESSING,
PHONE COMPANIES.
ACCOUNTING CONCEPTS AND
PRINCIPLES
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
( GAAP)
 These are broad general statements or rules and
procedures that serves as guides in the practice of
accounting.
 These are standards, assumptions and concepts with
general acceptability
 Philippine Setting
 Philippine Accounting Standards (PAS)

 Philipine Financial Reporting Standards (PFRS)

 ACCOUTNING SYSTEM
 Comprises methods used by a business to keep records
of its financial activities and to summarize these
accounts in the accounting report.
 T R A N S AC T I O N
 Is a completed action which can be
expressed in monetary terms.
FUNDAMENTAL CONCEPTS
 1.) Entity concept – regards the business enterprise as
separate and distinct from its owners and from other
business enterprises.
 2.) Periodicity – is the concept behind providing
financial accounting information about the economic
activities of an enterprise for specified time period.
 ACCOUNTING PERIOD:
 CALENDAR YEAR – 12 month period that starts on
January and ends on December 31
 FISCAL YEAR – 12 month period that starts on ANY
MONTH of the year other than JANUARY and ends 12
months after the starting period.
 3.) GOING CONCERN
 ASSUMES THAT THE BUSINESS will CONTINUE TO
OPERATE INDEFINITELY.
BASIC ACCOUNTING
PRINCIPLES
 1.) Objectivity principle
 States that all business transactions that will be entered
in the accounting records must be duly supported by
verifiable evidence.
 2.) Historical cost
 Means that all properties and services acquired by the
business must be recorded at their ORIGINAL
ACQUISITION COST.
 3.) Accrual principle
 States that income should be recognized at the time it is
earned.
 3.) Accrual principle
 States that income should be recognized at the time it is
earned.
 When goods are delivered or when services HAVE BEEN
RENDERED.
 Expenses should be recognized at the time they are
INCURRED.
 4.) Adequate disclosure
 ALL material facts that will significantly affect the
financial statements must be indicated.
 5.) Materiality
 Financial reporting is only concerned with information
significant enough to make decisions. This refers to the
relative importance of an item or event.
 An item is considered important if knowledge of it
would influence the users of the financial statements
 6.) Consistency –means that the approaches used in
reporting must be UNIFORMLY EMPLOYED from
PERIOD TO PERIOD to allow comparison of results
between time periods. Any changes must be clearly
explained.