Fundamentals of Accounting

• Accounting is the language of business
• Accounting involves recording, classifying, summarizing financial transactions, and interpreting the results

Generally Accepted Accounting Principles (GAAP)

• GAAP is a set of standards that are generally accepted and universally practiced to indicate how to report economic events
• The Financial Reporting Standards Council (FRSC) in the Philippines is tasked with establishing GAAP
• The Accounting Standards Council (ASC) was created in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish GAAP in the Philippines
• The FRSC decided to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB)

Ethics in Accounting

• Ethical financial reports are important because users depend on the good faith of those preparing them
• Fraudulent financial reporting is the intentional preparation of misleading financial statements
• Motives for this can include covering financial weakness to obtain a higher sale price or meeting investor/analyst expectations

Nature of Accounting

• Accounting is an art that requires skills and judgement
• Accounting is a science that involves interconnected phases
• Recording involves writing down/keeping records of business transactions
• Classifying involves grouping similar items that have been recorded
• Summarizing involves the production of financial statements
• Accounting involves transactions and events that have a financial character
• Business transactions are expressed in terms of money like monetary figures
• Interpreting results is a part of overall accounting

History and Origin of Accounting

• In ancient Mesopotamia (around 4000 BCE), civilizations recorded transactions related to trade and agriculture
• Sumerians used clay tablets to keep records of crops, livestock, and trade exchanges to manage resources
• Babylonians, Egyptians, and Chinese developed record-keeping systems for taxation and inventory
• During the Roman Empire (around 700 BCE – 476 CE), accounting practices became more sophisticated
• Romans kept detailed records to manage their empire, including military expenditures, tax collection, and public works
• The "codex accepti et expensi" (book of income and expenses) was an early form of financial documentation
• The most significant development in accounting history (double-entry bookkeeping) occurred during the late Middle Ages in Europe (1200 - 1500 CE)
• Italian city-states like Venice, Florence, and Genoa needed more organized financial records due to the rise of trade/commerce
• Double-entry bookkeeping involves recording transactions in two accounts: debit and credit
• The earliest documentation of double-entry bookkeeping is found in a book written by Benedetto Cotrugli in 1458
• Luca Pacioli, an Italian mathematician and Franciscan friar, popularized the double-entry method
• In 1494, Pacioli's book included a section on double-entry bookkeeping, and is considered the foundation of modern accounting
• Pacioli's system introduced the accounting equation (Assets = Liabilities + Equity)
• The Industrial Revolution (18th - 19th Century) transformed economies leading to the rise of large-scale businesses/corporations
• This created a need for accurate financial records and systematic resource management
• Accounting became more formalized and recognized as a profession
• In 1854, the Institute of Accountants in Glasgow, Scotland, became the world's first professional accounting body
• Similar bodies were then established in England, leading to the development of Generally Accepted Accounting Principles (GAAP)
• The globalization of trade and the emergence of multinational corporations emphasized the need for standardized accounting practices
• Various countries developed their own accounting standards, which led to the creation of International Financial Reporting Standards (IFRS) in the late 20th century
• IFRS aimed to harmonize accounting practices across different countries, making it easier for businesses to operate globally
• The late 20th century saw computers/software revolutionizing accounting, with automated systems replacing manual bookkeeping

Branches of Accounting

• Financial Accounting: theoretical framework of accounting principles and concepts
• Management Accounting: management decision makings provided by the financial experts in business organization
• Government Accounting: managing receipt and disposition of the government fund
• Auditing: reviewing accounting reports to observe fairness and reliability
• Tax Accounting: tax services and avoidance of tax problems
• Cost Accounting: about all the cost of production in manufacturing concerns
• Accounting Education: formal teaching in an educational institutions
• Accounting Research: study of discovering and interpreting facts in accounting

Forms of Business Entity

• A sole proprietorship consists of one individual doing business called proprietor
• Advantages of sole proprietorship: ease of entry/exit, full ownership/control, tax savings, few government regulations
• Disadvantages of sole proprietorship: unlimited liability, limitations raising capital, lack of continuity
• A partnership consists of two or more individuals doing business together called partners
• Advantages of partnership: easier information collection, additional capital sources, management base, tax implementation
• Disadvantages of partnership: unlimited liability, lack of continuity, difficulty transferring ownership, limitations raising capital
• A corporation has legal personality separate from the owners, can conduct business on its own name, and is owned by stockholders
• Advantages of corporations: limited liability, unlimited life, ease in transforming ownership, ability increasing capital
• Disadvantages of corporations: time and cost of formation

Types of Business

• Manufacturing businesses produce goods for sale and need to account for the cost of goods sold and inventory.
• Merchandising or Wholesale/Retail businesses buy products to resell and add a markup
• Service businesses provide services for sale and do not have any inventory, instead they will have costs of sales

Users of Accounting Information

• Internal users of accounting information are directly involved in managing the business
• Management analyzes the organization's performance
• Employees assesses company's profitability and its consequence on their future remuneration and job security
• Owners analyzes the viability and profitability of their investments
• External users do not have authority to demand financial reports
• Creditors determines the creditworthiness of the organization
• Investors analyzes the feasibility of investing in the company
• Customers assesses the financial position of its suppliers
• Government assesses tax returns

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