Introduction to Accounting Fundamentals

Introduction to
Accounting
By: Lucy Marcos Blanco, LPT

Definition of Accounting
Fundamentals of Accounting, Business and Management 1

Accounting
It is a service activity to
provide quantitative
information, primarily
financial in nature, about
economic entities that is
intended to be useful in
making economic
decisions.
(Statement of Financial Accounting Standard No.1,”Basic
Concepts and Accounting Principles Underlying Financial
Stataments of Business Enterprises” (Manila: Accounting
Standard Council, 1983), par.1)
 By: Lucy Marcos Blanco, LPT

Accounting
Is an information system that
measures, processes and
communicate financial
information about economic
entity.
(Statement of Financial Accounting Standard No.1,”Basic
Concepts and Accounting Principles Underlying Financial
Stataments of Business Enterprises” (Norwalk, Conn.:
Financial Standards Board, 1978), par.9)

Accounting
Is the process of identifying, measuring and
communicating economic information to permit
informed judgements and decisions by users of the
information.
(American Accounting Association, ”A statement of Basic Accounting Theory” (Evanston, III.: American
Accounting Association, 1966), par 1)

Accounting
It is an 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
(American Institute of Certified Public Accountants (AICPA) ,”Review and Resume”,
Accounting Terminology Bulletin No. 1 (New York AICPA,1953), Par 9)

Nature of Accounting
Accounting is a Process
Accounting is an Art
Accounting deals with Financial
information
Accounting is a means and not end
Accounting is an Information System

Accounting is a Process
A process is composed of multiple steps
that lead to a common end goal.

Accounting is an Art
It entails creativity and skills to help us
attain some objectives. Accounting is
the art of recording, classifying,
summarizing, and finalizing financial
data.

Accounting deals with Financial
Information
These are the only events identified by
the accountant, recorded in the books
and communicated to different parties.

Accounting is a means and not
an end
Accounting is a tool to achieve specific
objectives. It is not the objective itself.

Accounting is an information
system.
Accounting is recognized and
characterized as a storehouse of
information. As a service function, it
collects processes and communicates
financial information of any entity.

History/Origin of
Accounting

History of Accounting
It is believed that the history of accounting is
thousands of years old and can even be
traced to ancient civilizations. A number of
history books suggest that the early
development of accounting can be dated
back to ancient Mesopotamia.

During those times, people followed a
system of writing and counting money. The
development of accounting may be related
to the taxation and trading activities of
temples.

Accounting and Its Environment
Brief History
I. Early development in Mesopotamia
• People followed a system of writing and counting
money. The development of accounting may be
related to the taxation and trading activities of temples.
Bulla (plural Bullae) found in Mesopotamia. Experts
consider this stage of record keeping the beginning of the
art of writing.
The original bulla was a lump of clay molded around a cord and
stamped with a seal. Once the clay has dried, the container
(such as a vase or money bag) cannot be violated without
visible damage to the bulla, thereby ensuring the contents
remain tamper-proof until they reach their destination

Brief History
II. Development in the Roman Empire
• The reign of Emperor Augustus (63BC-14AD) provided more evidence
about the development of accounting.
• The Roman government kept detailed financial information of the deed of
Emperor Augustus regarding the stewardship of Roman resources.
• Roman historian Suetonius and Cassius Dio recorded that in 23BC,
Augustus prepared rationarium (account) which listed public revenues, the
amounts of cash in the aerarium (treasury), in the provincial fisci (tax
officials), and in the hands of the publican (public contractors); and that it
included the names of the freedmen and slaves from whom a detailed
account could be obtained.

Brief History
III. Dissemination of double-entry bookkeeping the 14th
century Italy
• Most important event in accounting history
• Luca Pacioli is acknowledged as the father
of modern accounting because of this. His
“Summa de Arithmetica,
Geometria,Proportioni et Proportionalita”
(Everything about Arithmetic, Geometry
and Proportion) is the first book printed
with a treatise on bookkeeping.

Brief History
IV. Signing of charter by Queen Victoria
V. Formation of accounting standards
such PAS and PFRS
• The modern profession of the chartered accountant
originated in Scotland in the 19th century when Queen
Victoria granted a royal charter to the Institute of
Accountants in Glasgow.

FUNCTIONS OF
ACCOUNTING IN
BUSINESS

TYPES OF BUSINESS
ACCORDING TO
ACTIVITIES

INTRODUCTION
A business is an organization that converts inputs
or resources such as material, labor, and overhead
into outputs which are usually either goods or
services. In this chapter, we will discuss the different
types of business according to activities, their
business requirements, and their advantages and
disadvantages.

Three major types of business:
1. Service companies
2. Merchandising companies
3. Manufacturing companies

SERVICE COMPANIES
Service companies are firms that
generally use their employees to
provide intangible products or
services to customers. These services
include professional skills, advice,
expertise, and other related products.
(e.g. accounting firms, law firms, and dry
cleaning establishments, etc. )

Operating Cycle of Service Companies
Cash on
hand
Performs
Services
Pays
employe
es and
other
expenses
Receives
payment
from
customers

MERCHANDISING COMPANIES
• Merchandising companies sell tangible
products. This type of business buys
finished or almost finished goods from their
suppliers and resell the same to customers.
• Primarily earn revenues from the sale of the
goods of merchandise, also known as sales
revenue or sales.

THERE ARE TWO TYPES OF MERCHANDISING COMPANIES:
• Retailer is a merchandising
company that sells goods
directly to customers.
• Wholesaler is a
merchandising company
that sells goods to retailers.

Operating Cycle of Merchandising Companies
Cash on
hand
Sells
inventory
Buy
goods
Receives
payment
from
customers
Stores
goods as
inventory

MANUFACTURING COMPANIES
• Manufacturing companies or simply
manufacturers, buy materials, convert
them into products, and then sell the
products to other companies or to the
final consumers.

Operating Cycle of Manufacturing Companies
Cash on
hand
Stores
finished
goods as
inventory
Pays for
inputs
(materials,
labor,
overhead)
Receives
payment
From
customers
Converts
inputs
into
finished
goods
Sell
inventory

Type of Business According
to Activities
Advantages Disadvantages
Service
Absence of inventory
 No production facilities
Inability to standardize
services
Maintaining human capital
Merchandising
Visible products
Less conversion, time,
and effort
Managing inventory
Manufacturing
Quality control
Visible products
Generally needs
production facilities
High conversion costs
Cost of quality control
Managing inventory

FUNDAMENTAL OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1
By: Nick L. Aduana

Introduction to Accounting Fundamentals

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