Chapter 1

Introducing Accounting in Business

Complied by: JAY M. PARALE Mabini Colleges Daet, Camarines Norte

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Chapter Objectives
C1: History and development of accounting C2: Basic professional values and ethics C3: Forms of business organization, their purpose and activities C4: Definition, purpose, nature, functions, scope and objectives of accounting C5: Paciolis Double-Entry Bookkeeping C6: Accounting concepts and principles C7: Different branches of accounting C8: Users of Accounting Information C9: Accounting Profession Career Opportunities
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History of Accounting PRIMITIVE ACCOUNTING

Around 8500 BC (Middle East)

Use of bullae Code of Hammurabi Salaries and wages Tax collection

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History of Accounting
11th to 17th centuries (Italy)

MIDDLE AGES

Use of Arabic Numerals Quipu Florence, Genoa and Venice Fra Luca Pacioli Nicolas Petri Benjamin Workman

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History of Accounting INDUSTRIAL REVOLUTION

18th to 19th centuries (Britain/US)

Emerging of Cost Accounting Corporate organization Railroads 1800s United States Steel 1903

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History of Accounting INFORMATION AGE

20th century

Use of computers Internet & E-commerce Accounting applications and modules

Information Technology is it, you either breathe it or perish.

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Development of Accounting GLOBALIZATION

21th century

Policy Developments Free-market economic system International trade Technological Developments Computers and digital technologies Information & communication technology
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EthicsA Key Concept

Ethics
Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

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Guidelines for Ethical Decisions

Identify ethical concerns Analyze options Make ethical decision

Use personal Consider all good and bad ethics to recognize ethical consequences. concern.
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Choose best option after weighing all consequences.

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Forms of Business Organization

Sole Proprietorship Partnership Corporation

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FORMS OF BUSINESS ORGANIZATION 1-1

A proprietorship is owned by one individual and
   

Comprises 70% of business organizations in the United States. Requires low cost of organizing. Is limited to financial resources of the owner. Is used by small businesses.

A partnership is two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profit among themselves
 Comprises 10% of business organizations in the United States.  Combines the skills and resources of more than one person.
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1-1

FORMS OF BUSINESS ORGANIZATION

A corporation is an artificial being created by operation of law having the rights of succession, powers, and attributes incident to its existence and
 Generates 90% of the total dollars of business receipts received.  Comprises 20% of the businesses.  Includes ownership divided into shares of stock, sold to shareholders (stockholders).  Is able to obtain large amounts of resources by issuing stock.  Is used by large businesses.
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Characteristics of Businesses

Characteristic Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

* Proprietorships and partnerships that are set up as LLCs provide limited liability.

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Purpose of Businesses
Service Business The Walt Disney Company Atlas Air Marriott International Hotels Bank of America Corporation XM Satellite Radio Service Entertainment Transportation Hospitality and lodging Financial services Satellite radio

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Purpose of Businesses

Merchandising Business Product Wal-Mart General merchandise GameStop Corporation Video games and accessories Best Buy Consumer electronics Gap Inc. Apparel Amazon.com Internet books, music, video

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Purpose of Businesses
Manufacturing Business General Motors Corp. Samsung Dell Inc. Nike Pepsico Sony Corporation Product Cars, trucks, vans Cell phones Personal computers Athletic shoes and apparel Beverages and Snacks Stereos and televisions

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ACTIVITIES OF BUSINESS ORGANIZATION 1-5

The Operating activities reports the use of resources to design, produce, distribute, and market goods and services. The Investing activities involves the use of capital from financing to acquire other resources used in transformation process. The Financing activities requires the use of methods to obtain financial resources from Back investors or creditors.
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Definition of Accounting
is a Accounting system that Identifies

Records information Relevant Reliable Comparable

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that is

Communicates

to help users make better decisions.

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Accounting Activities
Identifying Business Activities Recording Business Activities Communicating Business Activities

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Phases of Accounting

Analyze and record the transaction s

Recognition and valuation (measurement)

Classification reduces transactions into useful groups

Analysis or interpretation of FS
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Summarization by preparing financial statements

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Paciolis Double Entry Bookkeeping

Summa de Arithmetica, Geometria, Proportioni et Proportionalita

3 Essential Things to become Successful Merchant  Sufficient cash or credit  Good accounting system  Good bookkeeper
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Paciolis Double Entry Bookkeeping

Summa de Arithmetica, Geometria, Proportioni et Proportionalita

3 Books Stated in the Summa  Memorandum Chronological, narrative, all currency Chronological, narrative, one currency  Journal Alphabetical listing with running balance  Ledger

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Paciolis Double Entry Bookkeeping

Summa de Arithmetica, Geometria, Proportioni et Proportionalita

3 Basic Questions of Owners (Managers)  What profit has the business made?  How much does the business owe?  How much is owed to it?
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Accounting Concepts & Principles

   

 

ACCOUNTING CONCEPTS Accounting Entity Concept Periodicity Concept Stable Monetary Unit Concept Going Concern Back ACCOUNTING PRINCIPLES Objectivity, Historical Cost, Consistency Revenue/Expense Recognition etc..
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Fundamental Accounting Concepts

ACCOUNTING ENTITY CONCEPT





Organization stands apart from other organization or individuals as a separate economic unit. The entity concept for accounting does not simply follow the legal guidelines
A business can be a separate entity for accounting even if it is not one from a legal perspective

It limits the economic data in the accounting system to data related directly to the activities of the business. i.e. nothing personal unless it has been given/assigned to business.
the business
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Fundamental Accounting Concepts

PERIODITY CONCEPT


Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity. Most commonly, the reporting period is

annual. All companies are required to file annual financial statements with their tax returns.


It allows the users to obtain timely information to serve as basis for making decisions
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Fundamental Accounting Concepts

STABLE MONETARY UNIT CONCEPT


In order for accounting to present information that is useful, it must be able to express things in a common unit of measure.

 

The unit of measure in Philippines is usually the Philippine peso. Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable.
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Fundamental Accounting Concepts

GOING CONCERN


 

It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business. Assumes that the entity will remain in operation for a foreseeable future. This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting.
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Generally Accepted Accounting Principles

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information Reliable Information Affects the decision of its users. Is trusted by users.
Used in comparisons across years & companies.
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Comparable Information
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Setting Accounting Principles

Financial Reporting Standards Council (FRSC) is the private group that sets both broad and specific principles in the Philippines. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. The International Accounting Standards Board (IASB) issues international standards that identify preferred accounting practices in other countries. The IASB does not have authority to impose its standards on companies.

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Principles of Accounting

Objectivity Principle Accounting information is supported by independent, unbiased evidence.

Historical Cost Principle Accounting information is based on actual cost.

Now

Future

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Principles of Accounting

Adequate Disclosure Principle All relevant information must be disclosed in financial statement.

Revenue Recognition Principle Recognize revenue when it is earned rather than receipt of cash. Expense Recognition Principle Recognize expenses when it is incurred rather than payment of cash.

Materiality Principle Reporting only information that is significant to affect decisions. It depends on size or nature.
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Branches of Accounting
AUDITING


Independent examination that ensures fairness and reliability of reports that management submits to users outside the business entity.
1. 2.

External Audit Internal Audit

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Branches of Accounting
BOOKKEEPING


It is a routine mechanical task involving the collection of basic financial data. Accounting data are entered in books of accounts, and then classified & summarized in the form of financial statement normally taking place once a month.
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Branches of Accounting


COST ACCOUNTING Deals with collection, allocation, and control of cost of producing specific goods or services. This accumulation and explanations in a more detailed data is important to control current operations and to plan for the future.
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Branches of Accounting
FINANCIAL ACCOUNTING


Focused on recording business transaction and periodic preparation of highly summarized reports on financial position and results of operations in accordance with accounting standards.
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Branches of Accounting
FINANCIAL MANAGEMENT


Is concerned with the maintenance and creation of economic value or wealth. It focuses on decision-making techniques geared toward creation of wealth to shareholders. Financial managers draws much wider range of discipline and relies extensively on non-financial data.
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Branches of Accounting
MANAGEMENT ACCOUNTING


Incorporates cost accounting data and adapts them for specific decisions which management may be called upon to make. It is a consultancy service combining financial and non-financial information from wide range of sources.
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Branches of Accounting
TAXATION


Includes the preparation of tax returns in compliance with existing tax laws and also attempt to reduce clients tax liabilities in accordance with tax laws.
1. 2.

Tax Avoidance Tax Evasion

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Branches of Accounting
GOVERNMENT ACCOUNTING


Identification of sources and uses of funds (resources) consistent with the provisions of city, municipal, provincial or national laws.

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Users of Accounting Information

External Users Internal Users

Lenders

Consumer Groups

Managers

Sales Staff

Shareholders External Auditors Governments Customers

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Officers/Directors Budget Officers Internal Auditors Controllers

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Users of Accounting Information

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External Users

Internal Users

Financial accounting provides external users with financial statements.

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Managerial accounting provides information needs for internal decision makers.

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Opportunities in Accounting
Financial
Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation

Managerial
General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers

Taxation
Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs
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Accountingrelated
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Accounting Jobs by Area

Public accounting 25%

Private accounting 60%

Government, not-for-profit, & education 15%

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End of Chapter 1
REFERENCES: McGraw-Hill/Invin 2008 Introducing Accounting in Business Markle, Kevin August 2004 Schulich School of Business Introduction to Accounting Prentice-Hall 2007 Hospitality Industry Financial Accounting, Educational Institute 2006 Ballada, Win Lu, Basic Accounting 2010 edition
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Example Exercise 1-4 & 1-5 Example

CHICKADEE TRAVEL SERVICE INCOME STATEMENT
For the Year Ended April 30, 2010

1-5

Fees earned Expenses: Wages expense Office expense Miscellaneous expense Total expenses Net income

$263,200 $131,700 63,000 12,950 207,650 $ 55,550

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