Fundamentals of Accountancy, Business and Management 1 Introduction to Accounting PDF

Fundamentals of Accountancy, Business and Management 1 Introduction to Accounting Do you know that accounting is one of the oldest professions in the world? It has evolved throughout time addressing the needs of society. In all walks of life, its relevance can be seen. It has a system and pr...

Fundamentals of Accountancy, Business and Management 1 Introduction to Accounting Do you know that accounting is one of the oldest professions in the world? It has evolved throughout time addressing the needs of society. In all walks of life, its relevance can be seen. It has a system and process that help business owners to understand the flow of their transactions. It truly plays a necessary role in the business.  Let us first define accounting, its nature, history, and users of the accounting information. Being an ABM student, you wanted to deepen your knowledge and skill in accounting. Accounting is a process of identifying, recording, and communicating economic events such of an organization to related users (Weygandt, 2005). Economic events include purchase of materials, sale of goods, and acquisition of machinery which are measured in monetary terms and are recorded in the financial statements. 5 ⮚Identifying – involves in the selection of the economic events which are important to a particular business transaction. Examples of transactions in a merchandising store are sales of merchandise, purchases of merchandise, and purchases of delivery truck. ⮚Recording – is the act of keeping a chronological record of events that are measurable in accounting documents like journals and ledgers. ⮚Communicating – refers to the process of communicating financial reports to the users of financial information. The Role of Accounting 1.Recording Financial Transactions: 1.Accounting ensures every financial transaction, such as sales, purchases, expenses, and investments, is documented. 2.This process, called bookkeeping, provides a clear and detailed record of all financial activities. 3.Example: If a business sells a product for ₱5,000, this transaction is recorded in the sales ledger. The Role of Accounting 2. Summarizing Financial Information: 1.Transactions are organized into meaningful summaries, such as: 1.Income Statement: Shows profit or loss over a specific period. 2.Balance Sheet: Highlights what a business owns (assets) and owes (liabilities). 3.Cash Flow Statement: Tracks cash inflows and outflows. The Role of Accounting 3. Decision-Making Tool: 1.Accounting provides crucial information to managers, investors, and other stakeholders. 2.It helps businesses evaluate their financial health, plan budgets, reduce costs, and set future goals. 3.Example: An investor may review a company's financial statements before deciding to invest. Real-World Application of Accounting Small Business Owners: Use accounting to track income and expenses, ensuring profitability and tax compliance. Corporations: Rely on accountants to prepare financial statements for transparency and compliance with regulations. Individuals: Use accounting principles to budget personal finances or file taxes. Why Accounting Matters Without proper accounting, businesses and individuals would struggle to: Understand how money is being spent and earned. Plan for the future. Comply with legal and tax requirements. Make sound financial decisions. Nature of Accounting 1. 2. 5  Nature of Accounting 1. Accounting is a service activity. It helps decision makers by giving them financial reports that will guide them in making sound decisions. 2. Accounting is a process. It refers to the method of performing any specific job step-by-step according to the 1. objectives. It performs the specific task of collecting, 2. processing, and communicating financial information. 5 3. Accounting is both an art and a discipline. It is considered an art because one records, classifies, summarizes, and finalizes financial data. The way something is done is referred to as “art”. It is a behavioral knowledge involving an established creativity and skill to help one achieve distinct objectives. 4. Accounting deals with financial information and transactions. It records financial transactions and data, categorizes these, and finalizes the results given for a specified period. Accounting only deals with financial and not with non- monetary or non-financial aspects of an information. 5. Accounting is known and characterized as a storehouse of information. It collects, processes, and communicates financial information of any entity. History of Accounting In history, accounting is as old as civilization. It was developed in response to various social and economic needs of men. It started as a simple recording of monotonous exchanges. Its history shares the similarity with that of finance and business. Evolution of Accounting  The Cradle of Civilization (3600 B.C.) – In Mesopotamia, record-keeping was done through “Clay Tablet” as evidence of recording transactions. From India and China to Central and South America, the clay tablet records the business transactions like accounts receivable and accounts payable. Double-Entry Bookkeeping (14th Century) - The most relevant event in accounting history is generally considered to be the dissemination of double- entry bookkeeping-by Luca Pacioli (Father of Accounting, in 14th century Italy). Pacioli was much revered in his day, and was a friend and fellow of Leonardo da Vinci. The Italians of the 14th to 16th centuries are recognized as the fathers of modern accounting and were the first to use Arabic numerals than Roman, and for following business accounts. Summa de Arithmetica was written by Luca Pacioli, the first book issued that contained a detailed chapter on double-entry bookkeeping.  French Revolution (1700s) – In this period, the development of accounting theory has begun and was influenced by social upheavals. The Industrial Revolution (1760-1830 – The focus ) on this era are fixed assets and mass production. The Beginnings of Modern Accounting in Europe and America (19th Century) - The modern and formal accounting profession emerged in Scotland in 1854. Most accountants stayed in the U.S., establishing accounting practices and becoming the origins of several U.S. accounting firms. The first national U.S. accounting society was established in 1887.  The American Association of Public Accountants was the initiator of the current American Institute of Certified Public Accountants (AICPA). The Present (20th Century) – In the present time, accounting standards were established and practitioners follow the rules of international organizations or groups like AICPA. Modern accounting standards were given more attention and time.  History of Accounting The Cradle of Civilization (3600 B. C.) Clay tablets was used in keeping accounting records. Double-entry bookkeeping (14th Century) Double-entry bookkeeping was disseminated by Luca Pacioli (The Father ofAccounting) French Revolution (1700) Development of accounting theory began during this period. The Industrial Revolution (1760-1830) Fixed assets and mass production were given importance. The Beginnings of Modern Accounting in Europe and America (19th Century) Modern Accounting in Europe and America began. The Present (20 Century) th Development in the accounting profession was developed. External and Internal Users of Accounting Information  External and Internal Users of Accounting Information External Users –are the individuals or organizations outside the company who are not involved in operating the business. 1. Creditors – users who need accounting information to determine the credit integrity, worthiness of the organization, and credit terms. 2. Tax Authorities (Bureau of Internal Revenue) - a government agency that verifies the accuracy of financial data to ensure the credibility of the tax returns filed by the business. 3. Investors – users who need accounting information to evaluate and examine the feasibility of investing in a company. 4. Customers – users who evaluate the financial information of its supplier to keep stable source of supply in the long term. 5. Regulatory Authorities -government agencies like Securities and Exchange Commission (SEC), Department of Trade and Industry (DTI), Department of Labor and Employment (DOLE) were established to supervise if businesses comply with legal requirements in running a business. Internal Users – individuals inside the organization who plan, organize, and run the business. They are directly involved in managing and operating the business. Internal users are also called as “primary users” of accounting information and some of these users are the marketing managers, supervisors, finance directors, company officers, and owners. The following are the internal users of accounting: 1. Management - to know the income/earnings for the period, sales, available cash, and production cost are the reasons why the management needs the accounting information. They also analyze the organization's performance and position and take appropriate measures to improve the company results, sufficiency of cash to pay dividends to stockholders as well as the pricing decisions. 2. Employees – for job security, they use financial information as factor to consider in staying employment or to look for other employment opportunities. 3. Owners – they use financial information to know the profit or income for the period, resources, or assets of the business. Liabilities of the business are needed by the owners. They also use financial information in considerations regarding additional investment, expanding the business, and borrowing funds to support any expansion plans.