ELE02-Special Topics in Accounting

CHAPTER 1 INTRODUCTION TO ACCOUNTING

LEARNING OBJECTIVES
 Define accounting.
 Describe the nature and purpose of accounting.
 Give examples of branches of accounting.
 State the function of accounting in a business.
 Differentiate between external and internal users of accounting
information.
 Narrate the history/origin of accounting.
 State the forms of business organization.
 State the types of business according to their activities.

 Definition of Accounting
Accounting is a process of identifying, recording and communicating
economic information that is useful in making economic decisions.

 Essential elements of the definition of accounting

1. Identifying – The accountant analyzes each business transaction and
identifies whether the transaction is an “accountable event” or
“non-accountable event.” This is because only “accountable events” are
recorded in the books of accounts. “Non-accountable events” are not
recorded in the books of accounts.
2. Recording – The accountant recognizes (i.e., records) the “accountable
events” he has identified. This process is called “journalizing.” After
journalizing, the accountant then classifies the effects of the event on the
“accounts.” This process is called “posting.”
3. Communicating – At the end of each accounting period, the accountant
summarizes the information processed in the accounting system in order to
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produce meaningful reports. Accounting information is communicated to

interested users through accounting reports, the most common form of which
is the financial statements.

 Nature of accounting
Accounting is a process with the basic purpose of providing information
about economic activities intended to be useful in making economic
decisions.

 Types of information provided by accounting

1. Quantitative information
2. Qualitative information
3. Financial information
 Functions of Accounting in Business
1. To provide external users with information that is useful in making
investment and credit decisions; and
2. To provide internal users with information that is useful in managing the
business.

 Brief history of accounting

 Accounting can be traced as far back as the prehistoric times, perhaps
more than 10,000 years ago.
 Archaeologists have found clay tokens as old as 8500 B.C. in
Mesopotamia which were usually cones, disks, spheres and pellets.
These tokens correspond to commodities like sheep, clothing or bread.
They were used in the Middle West in keeping records. After some
time, the tokens were replaced by wet clay tablets. During such time,
experts concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
 Double entry records first came out during 1340 A.D. in Genoa.
 In 1494, the first systematic record keeping dealing with the “double
entry recording system” was formulated by Fra Luca Pacioli, a
Franciscan monk and mathematician. The “double entry recording
system” was included in Pacioli’s book titled “Summa di Arithmetica
Geometria Proportioni and Proportionista,” published on November 10,
1494 in Venice.
 The concept of “double entry recording” is being used to this day. Thus,
Fra Luca Pacioli is considered as the father of modern accounting.

 Common Branches of Accounting

Branch of Accounting Type of Accounting Users of service

service provided

1. Financial  General  All business use

Accounting record-keeping, i,e,. financial
maintenance of accounting in their
Journals and Ledgers. record-keeping.
ELE02-Special Topics in Accounting

These records
provide information
that is also used in
the branches of
 Preparation of general accounting.
purpose Financial  Businesses
Statement (FS) prepare general FS
atleast annually for
the use of lenders,
investors, or
government
regulatory bodies.
2. Management  Preparation of  Required by
Accounting specifically tailored management to aid
management them in performing
reports. their management
function.
3. Government  General  Required by the
Accounting record-keeping and government and its
preparation of financial agencies.
reports for the
government and its
agencies. It also
includes the
preparation of budgets
and accountability
reports.
4. Auditing  Expression of an  Business with
opinion on the gross quarterly
correspondence revenues of
between management P150,000 are
assertion and required to have
established criteria. their financial
statements audited
*The most common form by an independent
of such opinion is the CPA.
Independent Auditors’
Report which is
attached to audited
financial statements.
5. Tax Accounting  Preparation of tax  All businesses are
returns. required to file tax
 Providing tax advice. returns.
 Some tax payers
may require the
professional advice
of a tax practitioner
regarding the
management of
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taxes.
6. Cost Accounting  Analyses of cost of  Businesses used
products or services. cost accounting to
analyze the cost of
their products or
services and the
effects of those
accounting in,
among others,
earnings and
pricing policies.
7. Accounting  Teaching of  Required by
Education accounting and related business students,
subjects. business owners,
accounting
practitioners in
their Continuing
Professional
Development
(CPD) and other
interested parties.
8. Accounting  Accounting research  Required by
Research papers, articles and business owners,
similar publications. professional
organization, and
other interested
parties.

 Users of Accounting Information

1. Internal users – those who are directly involved in managing the business.
Examples:
a. Business owners who are directly involved in managing the business
b. Board of directors
c. Managerial personnel

2. External users – those who are not directly involved in managing the
business. Examples:
a. Existing and potential investors (e.g., stockholders who are not directly
involved in managing the business)
b. Lenders (e.g., banks) and Creditors (e.g., suppliers)
c. Non-managerial employees-
d. Public

 Forms of Business Organizations

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Advantages and Disadvantages

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 Types of Business According to Activities

1. Service business
2. Merchandising (Trading)
3. Manufacturing
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Reference

FINANCIAL ACCOUNTING AND REPORTING (Fundamentals)

Zeus Vernon B. Millan, CPA
Lecture Notes of Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc

For further discussion please refer to the link provided:

Chapter 1- Introduction to Accounting- https://youtu.be/azVuusaDZ-U

Chapter 1- Forms of Business Organizations- https://youtu.be/bC_m2hlKA7I

Chapter 1- Types of Business According to Activities-https://youtu.be/m6pPrT2wO2Y