Fundamentals of Accountancy PDF

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1 ABM113 HANDOUT 1 ARLENE A MIGUEL- INSTRUCTOR 1|Page  LESSON 1. INTRODUCTION TO ACCOUNTING: DEFINITION, NATURE, HISTORY AND PURPOSE Accounting Defini...

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1 ABM113 HANDOUT 1 ARLENE A MIGUEL- INSTRUCTOR 1|Page  LESSON 1. INTRODUCTION TO ACCOUNTING: DEFINITION, NATURE, HISTORY AND PURPOSE Accounting Definition Generally Accepted Accounting Principles (GAAP) Accounting - Language of business  Standards that are generally accepted and universally practiced The American Institute of Certified Public  Indicate how to report economic Accountants (AICPA) defines accounting events as “the art of recording, classifying, and  Financial Reporting Standards summarizing in a significant manner and in Council (FRSC) of the Philippines- terms of money, transactions and events regulatory body task with the which are, in part at least of financial establishment of GAAP in the character, and interpreting the results Philippines thereof”.  Accounting Standards Council (ASC)- created in November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish GAAP in the Philippines  The FRSC carries on the decision made by the ASC to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB) Ethics in Accounting Business  It is important in preparing financial reports because users of these reports must depend on the good faith of the people involved in their preparation  Fraudulent financial reporting- intentional preparation of misleading financial statements, can result to: o Distortion of records (e.g., manipulation of inventory records) o Falsified transactions (e.g., fictitious sales) o Misapplication of various accounting principles  Motives for fraudulent reporting o Covering the financial weakness to obtain a higher price when a company is sold o Meeting the expectations of their investors, owners, and financial analysts, or obtaining loan 2|Page  Nature of Accounting As an art- requires the use of skills and creative judgement As a science- it is a body of knowledge, however, not an exact science, it involves interconnected “phases”  Recording- writing down or keeping records of business transactions  Classifying- grouping similar items that have been recorded  Summarizing- financial statements  Concerned with transactions and events having financial character- qualitative information (not recorded)  Business transactions are expressed in terms of money- monetary figures  Interpreting results- part of phrases of accounting The History/Origin of Accounting Ancient Beginnings: The Dawn of Record-Keeping (c. 4000 - 3000 BCE)  Mesopotamia, around 4000 BCE, early civilizations recording transactions related to trade and agriculture  The Sumerians used clay tablets to keep records of crops, livestock, and trade exchanges.  Records were essential for managing resources and ensuring the fairness of transactions.  The Babylonians, Egyptians, and Chinese also developed systems of record-keeping, primarily for taxation and inventory purposes. The Roman Empire: Early Accounting Practices (c. 700 BCE – 476 CE)  Accounting practices became more sophisticated  Romans used detailed records to manage their vast empire, including military expenditures, tax collection, and public works  The "codex accepti et expensi" (book of income and expenses) was one of the earliest forms of financial documentation, laying the groundwork for modern accounting systems The Middle Ages: The Birth of Double-Entry Bookkeeping (c. 1200 - 1500 CE)  The most significant development in the history of accounting occurred during the late Middle Ages in Europe.  The rise of trade and commerce, particularly in Italian city-states like Venice, Florence, and Genoa, created a need for more organized financial records.  Invention of double-entry bookkeeping, a system where every transaction is recorded in two accounts: a debit and a credit  The earliest known documentation of double-entry bookkeeping is found in a book written by Benedetto Cotrugli in 1458 2|Page   Luca Pacioli, an Italian mathematician and Franciscan friar, popularized the double-entry method.  In 1494, Pacioli published "Summa de Arithmetica, Geometria, Proportioni et Proportionalità," which included a section on double-entry bookkeeping, considered the foundation of modern accounting.  Pacioli’s system introduced the fundamental principles of accounting, such as the accounting equation (Assets = Liabilities + Equity), which are still in use today. The Industrial Revolution: Accounting as a Profession (18th - 19th Century)  Transformed economies from agrarian to industrial, leading to the rise of large-scale businesses and corporations  Created a greater need for accurate financial records and the systematic management of resources  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  Followed by the establishment of similar bodies in England, the United States, and other countries. These organizations set professional standards and guidelines, leading to the development of Generally Accepted Accounting Principles (GAAP). 20th Century to Present: The Globalization and Standardization of Accounting  The globalization of trade and the emergence of multinational corporations,  further emphasizing the need for standardized accounting practices  Various countries developed their own accounting standards, which eventually led to the creation of the 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.  Computers and software in the latter half of the 20th century revolutionized accounting  Automated systems replaced manual bookkeeping, improving accuracy, efficiency, and the ability to handle complex financial data  Digital transformation continues today with advancements in artificial intelligence, blockchain, and data analytics, shaping the future of accounting Branches of Accounting 1. Financial Accounting- theoretical framework of accounting principles and concepts, governed by the generally accepted accounting principles 2. Management Accounting- management decision makings provided by the financial experts in internal reporting and control of the business organization 3. Government Accounting- receipt and disposition of the government fund under Section 109 of Presidential Decree (PD) No. 1445 3|Page 4. Auditing- examination and review of accounting reports to ascertain fairness, propriety, and reliability 5. Tax Accounting- tax services and avoidance of tax problems with the Bureau of Internal Revenue (BIR) through proper compliance in minimizing taxes 6. Cost Accounting- about all the cost of production in manufacturing concerns 7. Accounting Education- formal teaching in an educational institutions 8. Accounting Research- careful and diligent study of discovering and interpreting facts in accounting to revisit theories and standards Forms of Business Entity 1. Sole Proprietorship- consists of one individual doing business called proprietor  Advantages o Ease of entry and exit o Full ownership and control o Tax savings o Few government regulations  Disadvantages o Unlimited liability o Limitations in raising capital o Lack of continuity 2. Partnership- consists of two or more individuals doing business together called partners  Advantages o Ease of information o Additional sources of capital o Management base o Tax implementation  Disadvantages o Unlimited liability o Lack of continuity o Difficulty transferring ownership o Limitations in raising capital 3. Corporation- has legal personality separate and distinct from the owners, can conduct business on its own name, owned by stockholders.  Advantages o Limited liability o Unlimited life o Ease in transforming ownership o Ability to raise capital  Disadvantages o Time and cost of formation 4|Page Types of Business According To Activities 1. Manufacturing  produce goods for sale  Manufacturer buys materials and produces a product, which it then sells, either to other businesses or to consumers.  Need to account for the cost of goods sold (materials purchased, labor costs, freight) and inventory (materials to be used, product waiting to be sold). 2. Merchandising or Wholesale/Retail  Buy products to resell  Buys products and sells them to retailers for what’s called a markup  Wholesaler adds a certain percentage to the price to cover its costs and make a profit.  Will have a cost of goods sold (product purchased) and will have to account for the inventory of those products. 3. Service  Provide services for sale (e.g., landscaping or insurance, computer repair or wedding planning—to other businesses or to consumers.  Won’t have any inventory, but instead will have cost of sales (presentation costs, travel costs, equipment). Users of Accounting Information 1. Internal Users- directly involved in managing the business  Management- analyzes the organization’s performance and position and takes appropriate measures to improve the company’s results  Employees- assesses company’s profitability and its consequence on their future remuneration and job security  Owners- analyzes the viability and profitability of their investments and determines any future course of action 5|Page  2. External Users- do not have authority to demand financial reports tailored to their specific needs  Creditors- determines the creditworthiness of the organization  Investors- analyzes the feasibility of investing in the company  Customers- assesses the financial position of its suppliers, to maintain a stable source of supply in the long-term  Government- tax authorities (determining the credibility of the tax returns) and regulatory authorities (ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations References Aduana, N. (2016). Fundamentals of Accountancy, Business and Management 1. Anthony, R. N., Hawkins, D. F., & Merchant, K. A. (2011). Accounting: Text and cases (13th ed.). McGraw-Hill Education. Ballada, W. (2017). Fundamentals of Accountancy, Business and Management 1 (2017 ed.). Ong, F. L. (2019). Fundamentals of Accountancy, Business, and Management 1. C&E Publishing, Inc. 6|Page