Fundamentals of

Accountancy, Business, and

Management 1
 INTRODUCTION

Accounting is defined as an information system that measures,

processes, and communicates information, which are primarily
financial in nature, about an identifiable entity for the purpose of
making economic decisions. Accounting has been referred to as the
language of business because it is the communication link between
the entity and the users of financial information.
 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.
 HISTORY OF ACCOUNTING
continuation…
The reign of Emperor Augustus (63 BC-14AD) provided more evidence about the
development of accounting. The Roman government kept detailed financial
information of the deeds of Emperor Augustus regarding the stewardship of Roman
resources. This is evidenced by the Res Gestae Divi Augusti (The Deeds of the Divine
Augustus). The Roman historians Suetonius and Cassius Dio recorded that in 23BC,
Augustus prepared a 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. The closeness of this
information to the executive authority of the emperor is attested by Tacitus’
statement that it was written out by Augustus himself. (Oldroyd 1995)
 HISTORY OF ACCOUNTING
continuation…

Many consider the dissemination of the double-entry bookkeeping

of Luca Pacioli in the fourteen is acknowledged as the father of
modern accounting because of this. The Double-entry bookkeeping
is defined as any bookkeeping system that has a debit and a credit
for each transaction. Luca Pacioli’s Summa de Arithmetica,
Geometria, Proportioni et Proportionalita (Review of Arithmetic,
Geometry, Ratio, and Proportion) is the first book printed with a
treaties on bookkeeping. The double-entry bookkeeping system is
the system being used to this very day. (Sangster et al. 2007)
 HISTORY OF ACCOUNTING
continuation…

To modern profession of the chartered accountant originated in

Scotland in the nineteenth century when Queen Victoria granted a
royal charter to the Institute of Accountants in Glasgow. At present
times, accounting standards are already available to guide
accountants in their practice of the profession. Some of these
standards include the PFRS (Philippine Financial Reporting
Standard) and the PAS (Philippine Accounting Standards).
 THE ACCOUNTING PROCESS

Accounting is the art of analyzing financial transactions and economic events,

recording them, classifying them into accounts, summarizing them, reporting,
and interpreting the results. The diagram of the accounting process is as
follows:

1. 2. 4. 5. 6.
Recording 3. Classifying
Analyzing Summarizing Reporting Interpreting
 Analyzing is the first phase of the accounting process. The accountant must
look at the transactions entered into, economic events that have taken place,
and determine their effects on the business. These transactions and events are
generally supported by documentary evidences or proofs. For example, a sale of
service or sale of product is evidenced by a sales invoice. This sales invoice is
further supported by a delivery receipt. In most cases, before delivery of service
or product is made, a purchase order is received from the customer.
Recording involves writing the effects of the transactions and events that
have been analyzed. This recording may be done manually, or it may be
encoded with the use of computers or data-processing machines. The
recording, whether done manually or with data-processing machines, includes
the inputting of information in the accounting books called journals. These
journals are general and special. The special journals are the (1) cash receipts
book, (2) cash disbursement book, (3) sales book, and purchases book. As the
names of these books indicate, the transactions and events recorded therein
already involved grouping together transactions and events of the same kind.
Some transactions and events may not be conveniently grouped in the special
journals. In this case, the general journal is the books to be used.
 Classifying is the sorting or grouping of similar transactions
and events into specific account titles. This process is almost like
putting similar information in boxes. For example, all cash
information are put in the cash box or cash account title; all those
about sales are put in the sales box or sales account title. The
journalized transactions and events are classified in ledgers. The
ledgers are general ledgers and subsidiary ledgers. The subsidiary
ledgers show the details of those transactions and events
classified in the general ledger.
Summarizing is the process that involves grouping the various
accounts referred to in the classifying process. This is where the
accounts are grouped into assets, liabilities, owner’s equity,
revenue, and cost and expenses. The summaries are taken from
the accounts in the general ledger.
 Reporting involves the preparation of financial summaries
called financial statements. These are written or documentary
media where the (1) results of the operation (income statement),
(2) financial position (balance sheet), and (3) cash flows (cash flow
statement) are communicated to the users of information. The
three reports may be further supported by schedules.
Interpreting is the last step in the accounting process. It is the
step that directs attention to the significance of various matters
and relationships. This step involves the computation of
relationships of figures from the financial reports and schedules.
Interpreting is a combination of figures and narration based on
the figures presented. The relationships may be in percent or in
ratios, may be within the financial report, or may be one report in
relation to another report.
 DIAGRAM OF THE ACCOUNTING
INFORMATION SYSTEM

Analyzing
Documents Decisions by
Recording Reporting
Business or Supporting Users of
with Financial
Activities Accounting Classifying Financial
Statements
Papers Statements
Summarizing
 NATURE OF ACCOUNTING

The basic features of accounting are as follows:

1. Accounting is a process. A process is composed of multiple steps that lead
to a common end goal. The enrollment process in your school may involve
reservation of slots, filling out documents, attending school orientations, and
payment of necessary fees. These steps all lead to you being enrolled in your
school. Likewise, accounting is a process because it performs the functions of
identifying, recording, and communicating economic events with the end goal
of providing information to internal and external parties.
2. Accounting is an art. Art refers to a way of performing
something. It entails creativity and skills to help us attain some
objectives. Accounting is the art of recording, classifying,
summarizing, and finalizing financial data. Accounting is a
combination of techniques and its application requires applied skill
and expertise. This is the reason why accounting can be considered
as an art. (Accountingtheory.com)

3. Accounting deals with financial information and transactions.

Accounting deals only with quantifiable financial transactions.
These are the only events identified by the accountant, recorded in
the books, and communicated to different parties. Non-financial
transactions are not the focus of the accounting process. However,
non-financial data may be used to interpret and better estimate
some financial data.
4. Accounting is a means and not an end. As mentioned earlier,
accounting is a tool to achieve specific objectives. It is not the
objective itself. Imagine that you dream to go to Paris someday.
Accounting can be thought of as the plane that will bring you to
your destination.

5. 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. This discipline of knowledge has been
evolved out to meet the need of financial information required by
different interested groups. (Accountingtheory.com)
 FUNCTIONS OF ACCOUNTING

The American Accounting Association (AAA) defines

accounting as “the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by the users of information.”
Meanwhile, the American Institute of Certified Public
Accountants (AICPA) defines accounting as “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.”
From the foregoing definitions, the main functions
of accounting can be summarized as follows:
1.Keep systematic record of business
transactions.
2.Protecting properties of the business.
3.Communicating results to various parties in or
connected with the business.
4.Meeting legal requirements.
 Keeping Systematic Record of Business
Transactions

Recording transactions does not only involve entering the

transactions in the accounting books. The records should
be systematic enough to enable easy understanding of
readers. No matter how comprehensive the records are, if
they are not produced systematically, then they provide
little to no value.
 Protecting Properties of the Business

The accounting records serve as the evidence that properties of a

business do exist or how much of a particular resource does a
company have. If the accounting records show that the amount of
cash should be ₱1, 000, 000, any excess and deficiency will be
noticed immediately. Moreover, the accounting system helps in
preventing employee fraud and misappropriation of company
resources.
Communicating Results to Various Parties in
or Connected with the Business

The accounting reports produced at the end of each period are not
only used by external parties (e.g., potential investors, government
agencies), but also by the management in their decision-making
function. Communication of the results of operations of a company
is essential for all concerned parties to enable them to take well-
informed decisions.
 Meeting Legal Requirements

In the Philippines, the government requires some companies

(particularly those with public accountability) to provide financial
reports quarterly, semi-annually, or annually. This procedure aims
to protect the public by providing them the necessary information
to make sound decisions. The government also requires reports
from heavily regulated industries such as the energy and oil
industries.
 Business Entity Concept

There is a need to clearly identify the entity or business entity, for which
the accounting is to be done. The entity may be (1) a sole proprietorship, (2)
a partnership, or (3) a corporation. It may be engaged in (1) service, (2)
merchandising or buying and selling, or (3) manufacturing. We have to
make sure that there is a clear identification or separation of those
transactions and events that are for the entity and those that are personal
to the owners of the entity. For example, (1) it is not proper to record, as a
business expense, the restaurant bill of the birthday of the daughter of the
sole proprietor; (2) it is not proper to record, as a business expense the
rental of the house used by the family of the partner in partnership; and (3)
it is not proper to show, as an income of X Corporation, the salaries from
ABC College received by its stockholder Marian Chua, who also happens to
be a teacher of the school.
 Double Entry System

The first description of the double entry system appeared more than 500 years
ago in a mathematics book written by Fra Luca Pacioli. Double entry means
value received and value parted with. It means that for every transaction or
economic event, there are at least two effects in the accounting equation.
An increase or decrease in any asset, liability, owner’s equity, revenue, or
expense is always accompanied by an offsetting change within the basic
accounting elements. Double entry accounting is a processing system that
involves entering the two effects of every transaction. The method is orderly,
simple, and flexible. When records are not balanced, something must be
wrong. This gives a warning to the accountant to review the records, find the
error, make the necessary correction. However “in balance” does not
necessarily mean “free from error.”