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**MODULE 1 INTRODUCTION TO ACCOUNTING** ***[OBJECTIVES]*** At the end of the chapter, students are expected to: - Narrate the history and origin of accounting. - Define the meaning of accounting. - Describe the nature of accounting. - Explain the functions of accounting in business. -...

**MODULE 1 INTRODUCTION TO ACCOUNTING** ***[OBJECTIVES]*** At the end of the chapter, students are expected to: - Narrate the history and origin of accounting. - Define the meaning of accounting. - Describe the nature of accounting. - Explain the functions of accounting in business. - Identify activities and events where accounting is used in making business decisions. **[COURSE MATERIALS]** **HISTORY OF ACCOUNTING** The accounting practice dated back to the history of mankind. It started when the human beings lived in caves, in trees, and in other safe dwellings; wherein their main occupation was to collect root crops, vegetables and fruits and to prey birds and animals for their living. In doing these activities in a day to day basis, they would likely keep records of their harvests and preys to keep tract of inventories while scheduling some of their time doing other things. They did this by drawing lines and figures on the stones, on walls and ceilings inside the caves; on the bark of the trees, on skins of animals or making knots out of the vines or creeping grasses. **The Practice of Accounting in the Early Civilization** Record keeping was already common during the "Cradle of Civilization" as countries like China, India or Mesopotamia traded goods in exchange for something valuable. The development which led to early accounting included writing, counting and money exchanges. Accounting records dating back more than 7,000 years have been found in Mesopotamia and documents from ancient Mesopotamia show lists of expenditures, and goods received and traded. The development of accounting, along with that of money and numbers, may be related to the taxation and trading activities of temples. Other early accounting records were also found in the ruins of ancient Babylon, Assyria and Sumeria (source: https:/en.wikipedia.org/wiki/History of accounting) **The Founder of Double -- Entry Accounting System and The Father of Accounting** The double-entry accounting system, which revolutionized accounting, was invented by Benedetto Cotrugli in 1458. The double-entry accounting system is defined as a bookkeeping system that involves two accounts in recording transactions: one is a debit and the other is a credit. Subsequently, the Italian mathematician and Franciscan monk Luca Pacioli invented a system of record keeping that used a memorandum entry, a journal, and a ledger. Pacioli is known today as the father of accounting and bookkeeping. He wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita (The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality) in 1494, which included a page on the topic of double-entry bookkeeping. The topics he wrote on record keeping and double-entry accounting became a reference and a tool in teaching accounting for the next hundred years. (reference : https://www.thoughtco.com/history-of-accounting) **The Beginning of Modern Accounting** Professional organizations for accountants were first established in Scotland in 1854 These were the Edinburgh Society of Accountants and the Glasgow Institute of Accountants and Actuaries. The organizations were granted a royal charter by Queen Victoria and the members of such organizations could call themselves as chartered accountants. Businesses in various industries proliferated that resulted to the demand for reliable accounting system wherein the accounting profession became an integral part of the business and financial system. These chartered accountants of Scotland came to the U.S. for audit and practice of their profession that led to the establishment of the American Institute of Certified Public Accountants in 1887. **The Present Times** The accounting profession in the 20th century branched into different professional expertise in the field of accounting. As this developed, requirement for financial statement preparations, financial audits and financial reporting became so stringent. In the Philippines, self-regulation is being encouraged and beyond this act, the government also sets accounting standards through laws and agencies such as the Securities and Exchange Commission (SEC). Globalization led accounting regulatory bodies require accounting practitioners to observe International Accounting Standards for the purpose of assuring investors of transparency and reliability on financial reports. **WHAT IS ACCOUNTING?** In the early years, accounting was regarded as both an art and a science. It had been defined as ***"the art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results there of. "*** Let's discuss the content of the above meaning to fully appreciate why it was such defined that way: a. *"Art"* is a part of our knowledge that helps us attain our objectives, design processes and policies, design appropriate forms and improved controls. Our goal in the business is to know the financial results. This is accomplished by way of recording, classifying and summarizing the business transactions in the best way. b. *"Recording"* of transactions in various ways, according to the accounting standards and as required according to the size of the organization. c. *"The art of classifying"* which is the grouping of transactions or entries of the same nature at one account. d. *"The art of summarizing"* business transactions, because an organization has to prepare the financial statements. e. *"Summarizing in a significant manner"* means that summarizing must be done a way wherein there is sense of importance and must suit the purpose for which it is done. It should also be user friendly. f. *"In terms of money"* -- because money is the measure and basis in recording the transactions. g. *"Transactions and events which are, in part at least, of financial character"*. Accounting deals with financial transactions and events only that will change the financial position of that organization. The financial character is being measured in terms of money. h. *"Interpreting the results"*. Accounting is not only on the aspect of recording, classifying, summarizing of transactions and events, and the preparation of financial statements. The financial results are interpreted in such a way that the results can be understood and appreciated by at least non-accounting users. The users who are the management, investors and other parties interested in the business will use these interpretations in the decision-making and may also interpret the accounting information for their own purpose. At present, accounting has become a ***discipline***, no longer regarded as an art. If we say *discipline,* the practice is bound with sets of accounting standards and rules associated with the Code of Ethical Conduct of accountants. These accounting standards are contained in the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS). The accounting practice of an organization has its own processes and uses special accounts unique to their company and industry. But when reporting the results to agencies that require the reports, the financial statements should conform with the accounting standards' format; to make it generally acceptable. Accounting has passed a long historical process that it already affects our business and social lives. It became a profession that involves acquiring a degree and formal education to specialize in its fields. It is seen now as a ***"service activity."*** It is a link between business activities and decision-makers, thus regarded as the ***language of the business***. Business enterprises can only communicate themselves to users and decision makers through accounting. The new definition of accounting, in line with the practice of accountancy is: ***\"Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to useful in making economic decisions, in making reasoned choices among alternative courses of action."*** The above new definition has not lost the content and essence of the old definition. The emphasis is more on its "service activity", a more appropriate reference to accounting rather than as an "art". **NATURE OF ACCOUNTING** The nature of accounting has been defined in so many ways. Basically, it is a service to account for economic activities and events that has value. It is expressed in monetary terms. Let see how accounting has evolved from the scriptures in caves to what it is now using new technologies. - It started as a ***science.*** In the history of men where mankind had relied on their special skills and natural-born intelligence, accounting was simply invented by them in a way that they could understand it. They had formulated means on how to record their activities. I believed that when we began to exist, each of us possesses unique skills and intelligence different from one another. One has the skill of a scientist, a skill of an entrepreneur, a skill of a manager, a mathematician and etc. These skills would normally come out naturally and these were used in the olden times as a science. - It was defined as an ***art.*** The art is on the recording aspect, classifying, summarizing and interpreting. Man is a natural born artist; in this way art has been applied to accounting more effectively. When art is applied, processes and policies are made uniquely for the business including management reports which are customized as needed by the users. Though in the end, standard financial reports are prepared to conform with certain accounting standards. - It became a ***discipline.*** This is because accountancy became a profession and the practice of it is governed by sets of rules and accounting standards. The accountant is also bound by the Code of Ethical Standards. - In this era of millennium, accounting has become an ***information system.*** Whether it is a manual system or a computerized system, accounting is a whole information system. This information system accepts not only financial data or transactions but also non-financial transactions. In this way, information generated would only not pertain to the monetary activities but also on activities surrounding the financial transactions which are also essential in the decision making; like the quantities of goods being sold or purchased, the suppliers' and customers' information details, the details of attendance and lates on payroll transactions, the employees' details, etc. These details in the information system are also needed to draw and prepare in-house management reports like sales reports, HR report, purchasing reports, etc. **The functions of accounting include**: 1. *Identifying and analyzing source documents which enter into the information system.* These are activities that are relevant to the business operations. The business activities are normally transactions and events in source documents that transpired in its day-to-day activities. These transactions are called inputs which are processed into the information system and are generated as financial and management reports. 2. *Recording the source documents which are economic activities into the books of accounts of the organization.* The function of recording is called ***bookkeeping***. It is described as the recording of financial transactions that are appropriately classified, in the accounting books of an organization, by either manual means or computerized means. In the accounting information system, this is called transaction processing. 3. *Preparing the financial and management reports.* The financial reports include: (1) Statement of Financial Position, also commonly called the Balance Sheet, (2) Statement of Income, (3) Statement of Cash Flows, (4) Statement of Changes in Equity. The management reports are normally in-house reports needed by the organization's various departments like Sales Reports, HR Reports, Ageing of Accounts Receivables or Payables and other in-house reports that are essential in the review of the business financial performance and operations. 4. *Analyzing and interpreting the financial reports for different users who have interest in the business and who will use these in their decision making.* The interpretations are either in the form of vertical or horizontal analysis and financial ratios, using the classified financial statements. The interpretation will further be discussed in part 2 of this book. In an organization, rendering a timely and correct decision is very important to correct past mistakes and formulate new goals and targets. This decision-making process is being aided by accounting itself. Without accounting, users in the organization will not be able to provide improvements in the organization and achieve their visions and goals. Some of accounting's results that are helpful in making business decisions are as follows: 1. The use of Ageing Report of Accounts Receivable. This report is important in determining the paying habits of the customers and whether the credit policies are properly enforced or not. 2. The use of Ageing Report of Accounts Payable. This report provides information on how effective cash payments to suppliers or vendors are managed. 3. The use of trend reports and analysis of sales performance. This data will assist the sales group in the organization determine whether sales targets are achieved or not. 4. The use of expense reports and analysis. This report is important in determining whether expenditures conform with budget. 5. The use of accounting in monitoring inventories. Inventories are important assets in the company as cash. There should be proper monitoring of inventories to avoid obsolescence and losses, and to make sure that these are moved quickly to accelerate the quick inflows of cash. **MODULE 2 THE BRANCHES OF ACCOUNTING** ***[OBJECTIVES]*** At the end of the chapter, students are expected to: - Differentiate the branches of accounting. - Explain the kind or type of services rendered in each of these branches. - Identify business organizations that require accounting services. - Identify the type of accounting services that matches with the branches of accounting. **[COURSE MATERIALS]** **BRANCHES OF ACCOUNTING** The accounting practice specializes on several areas. It does not concentrate itself on the keeping of records and providing financial reports. It deals on other areas where businesses have required it. The accountants, after getting a profession, also specialize on these fields making it their areas of expertise. At present, accounting has not confined itself to record keeping but has eventually spread its branches to all corners of business and commercial activities. The following are the Branches of Accounting: 1. *Financial Accounting* - this is a branch of accounting wherein it focuses primarily on the preparation of the financial statements. These financial statements, which serve as the result of the operations, are used by business organizations to communicate with the internal and external users. This particular area of accounting is mostly practiced by a Certified Public Accountant (CPA), who is licensed by the Professional Regulations Commission (PRC). The reports are normally required by the owners or shareholders of the organization, government entities, financial institutions, creditors and suppliers, because these are the official reports that represent the business organization's financial performance. 2. *Management Accounting* - in a business organization, management is very much dependent on the accountant in all level of activities such as, cost and quality control, budget preparation, planning, sales and financial forecast, etc. which are relevant to making strategies and rendering decisions. The in-house information generated by the accountant for specific purposes will serve as benchmarks to company's performance. The reports in this area are commonly required by various departments of the organization. These are normally customized reports according to the needs of the internal users to evaluate the organization's operations performance. 3. *Government Accounting -* this branch of accounting is practiced by all government agencies and its employees using their sets of policies, accounts and processes normally different from private business enterprises. The practice of these accounting is reviewed by the Commission of Audit (COA). Government is an independent body with sets of rules, laws and regulations that are enacted by Congress in conformity with the Philippine Constitutions. The regulatory agency that has the police powers in the practice of government accounting is the Commission on Audit (COA); while private businesses are policed by the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenues (BIR). 4. *Auditing -* auditing is defined as a "systematic, independent and documented process for obtaining audit evidence (records, statements of fact or other information which are relevant and verifiable) and evaluating it objectively to determine the extent to which the audit criteria (set of policies, procedures or requirements) are fulfilled. There are two types: (1) *[External audit]*, which requires outside auditors from the business organization purposely to seek independent opinion; (2) *[Internal audit]*, a function of which is done by an employee of the business organization whose function is to examine internal records and help improve internal processes. The area of external auditing is carried out by Certified Public Accountants in the public practice. These accountants are accredited by the Board of Accountancy (BOA). They are the only accountants who can affix their signatures in the audited financial statements that are required by the regulating agencies. They are normally auditing firms like Sycip, Gorres & Velayo (SGV) or accountants who has the profession in public practice. This profession requires independence which means that the CPA is not associated with the organization being subjected to the audit. While the external auditing is a BOA accredited, the internal auditing can be carried out by an employee of the organization. He can be a CPA or a graduate of accountancy as long as the person is equipped with auditing skills and experiences. The internal auditor normally reports directly to the President or Chairman of the Board. 5. *Tax Accounting -* this is the branch of accounting that focuses on the preparation of tax returns as required by the Bureau of Internal Revenue (BIR). Accountants can also employ themselves as tax practitioners and consultants who specialize on taxation. Accountants in a business organization can also learn tax accounting because this is a requirement by the BIR, which gives trainings, seminars and guidelines to businesses on the matters of tax compliance. Other businesses hire consultants or accountants specializing on this field. This is called outsourcing. 6. *Cost Accounting* - this branch deals on collating cost information that is useful to set prices of goods and services for sale. The costs gathered are also essential in the analysis of improving the quality and efficiency of the business organization's operations and in setting price targets to compete with existing markets. The accountant practicing this area of accounting is employed in a manufacturing set-up. The job requires accumulation of costs from various departments to become the factory costs of a particular product. 7. *Accounting Education* - the persons involved in the primary role of molding future accountants are educators in the accounting practice. These educators teach the basic theories and practices which will become the basic foundation and learnings to future accounting professionals. Certified Public Accountants (CPA) can also be in the academe to teach and mold future accountants. This profession requires also accreditation from the Board of Accountancy (BOA) for academic practice. 8. *Accounting Research -* is research on the effects of economic events on the process of accounting, and the effects of reported information on economic events. It involves a broad range of research areas like financial and management accounting, auditing and taxation. Accounting research is carried out both by academic researchers and by practicing accountants. There are practicing accountants who specializes on research and development and offer this service to business organizations which are into new business, expansion, merger and consolidation, buy-out or as a requirement by an external party. Below are some examples of businesses that require the above type of accounting services: [Name/Type of Business] [Accounting Services Required] - A Sari-Sari Store Financial Accounting Management Accounting Auditing Tax Accounting - A Drug Store Financial Accounting Management Accounting Auditing Tax Accounting - Schools & Universities Financial Accounting Management Accounting Auditing Tax Accounting Accounting Education Accounting Research - Paper Manufacturer Financial Accounting Management Accounting Cost Accounting Auditing Tax Accounting - Grocery Store Financial Accounting Management Accounting Auditing Tax Accounting - Barbershop and Salon Financial Accounting Management Accounting Auditing Tax Accounting - Hardware Store Financial Accounting Management Accounting Auditing Tax Accounting - Bakery/Bake Shop Financial Accounting Management Accounting Cost Accounting Auditing Tax Accounting - Vulcanizing Shop Financial Accounting Management Accounting Auditing Tax Accounting - Restaurants/Carenderias Financial Accounting Management Accounting Cost Accounting Auditing Tax Accounting - Gasoline Station Financial Accounting Management Accounting Auditing Tax Accounting - Convenient Store Financial Accounting Management Accounting Auditing Tax Accounting The above examples of businesses in a particular community require not only one area or branch of accounting, but two or more; depending on the management's needs and the requirements of regulating agencies. Hence, several accountants in specialized fields can be hired by one big company alone. But common to Small and Medium Enterprise businesses (SME), one accountant practices multi-tasking responsibilities on several areas of accounting. **MODULE 3. THE USERS OF ACCOUNTING INFORMATION** ***[OBJECTIVES]*** At the end of the chapter, students are expected to: - Define and explain the internal users of accounting. - Define and explain the external users of accounting. - Identify the type or decisions made by each group of users. - Describe the type of information needed by each group of users. **[COURSE MATERIALS]** **USERS OF ACCOUNTING INFORMATION** The accounting information is prepared to satisfy various users of the business organization. These users have different interests and purposes in the business; be it for decision making or a requirement. This chapter discusses the different types of user of financial information which is the result of a business operation. This financial information is presented in such a way that it can communicate to different users. Accounting as the language of the business takes this role. The users of the accounting information are generally classified into: (1) Internal users, (2) External users. ***Internal Users,*** as the word itself suggests, are persons working within the organization. They make actions and decisions pertaining to the internal activities of the business. Internal users are the persons who are responsible in making a business fail or grow. They are the decision makers, the support group, the revenue generators or the front-liners. Each person or group has specific role to play in the organization, which is driven by rewards or promotion when the business succeeds. The financial information needed by the internal users takes in the form of *financial reports* and *management reports*. The financial report which is in the field of financial accounting is prepared by a financial accountant. The reports, which will be discussed thoroughly in part 2 of this book, are; a. Statement of Financial Position or also known as Balance Sheet b. Statement of Income or Statement of Comprehensive Income c. Statement of Changes in Equity d. Statement of Cash Flows e. Notes to the Financial Statements The above financial reports are used by the stakeholders, financial institutions and regulating agencies. Internal users who used these reports are the decision makers. The management report which is in the field of management accounting is prepared by the management accountant. This may take in the form of a financial or non-financial data which are customized according to the needs of the users. Examples of the reports are: a. *Revenue or Sales Reports* which are used by the sales group to monitor whether sales are achieved or not. b. *Human Resources Reports* which are used by the HR group to analyze trends on remunerations and benefits, to monitor tardiness and absences and to study ways of recruitments and reasons/causes of resignations. c. *Ageing of Accounts Receivable Reports* which are used by the Credit/Collection and Treasury groups to monitor the accounts receivables and to determine availability of funds. d. *Ageing of Accounts Payable Reports* which are used by the Purchasing/Payables and Treasury groups to manage the funds available. e. *Cost Reports* which are used by various cost centers to manage the cost and expenses of the organization. f. *Inventory Reports* which are used by Production and Warehouse groups to monitor the level of inventories. The internal users of the financial information are: [Management]: for analyzing the organization\'s performance and position and taking appropriate measures to improve the company results. They are the decision makers. Management uses trends, benchmarking and horizontal, vertical and financial ratio analysis to monitor the company's performance. The management team is usually called the captain of the ship. They are normally the highest paid individuals in the organization whose employment is at the discretion of the owners. They are highly paid because of the risk in the tenure of their employment which depends on trust and confidence of the owners. [Employees:] for assessing business organization\'s profitability and its consequence on their future remuneration and job security. Employees play important roles in the organization. In some businesses where their source of income is service, the employees are considered as one of the business resources. Although there are reports that are confidential in nature, some reports like the management reports are readily available for the consumption of the employees' interest which is essential for the growth of the business. One of the employees' goals in the organization is to contribute profitability by generating revenues and to incur minimal costs. This is in line with the organization's mission and goals. Another employees' goal is to seek rewards and promotions by doing better in their respective responsibilities. They also show loyalty and good service to ensure their job security. [Owners]: for analyzing the viability and profitability of their invested capital and determining any future course of action. The owners have short-term and long-term goals for their business. One of the short-term goals is to achieve beyond the profit targets. This goal is in line with management and employees goal. Profit is used by the owners to reward management and employees for good performance. But the long-term goals are what that matter most to the owners. This is to maximize their wealth- which means investing their income into short or long term investments to generate more returns for themselves and for their business. ***External Users*** are business enterprises or individuals who have interests in the business but do not directly involved themselves in the daily activities of the organization. The external users use financial information to assess the status and viability of the organization in respect to their needs. They don't participate in the decision making but they influence the decisions of management. The reports they need from the organization are the financial reports which are submitted to and recognized the governing bodies. The external users are: [Creditors:] for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers\' financial health and performance. Creditors include suppliers as well as lenders of funds such as banks and other financial institutions. [Tax Authorities]: for determining the correct tax payments and tax returns which will be filed by the business organization. Example of these tax authorities are the Bureau of Internal Revenues (BIR), Bureau of Customs (BoC), the local and municipal agencies, etc [Investors:] for analyzing the feasibility of investing in the business organization. Investors want to make sure that they can earn a reasonable return on their investment before they will commit any financial infusion of resources to the organization. Business organizations, which are lacking of funds and need expansions or improvements in their operations, seek investors to infuse funds to their business. The investors use financial reports to determine the soundness and financial health of the organization. [Customers:] for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of long term supply. Customers are the life blood of the business because they are the main source of revenues. They require financial reports to determine whether the organization's goods or products or services are worthy to patronize or has excellent qualities to pass on to consumers. [Regulatory Authorities]: for ensuring that the business organization\'s disclosure of accounting information is in accordance with the rules and regulations to be complied with. These regulatory agencies include the Securities and Exchange Commissions (SEC), Bureau of Internal Revenues (BIR), Bangko Sentral ng Pilipinas, etc. Below are list of some users of financial information that are categorized as internal or external. INTERNAL USERS EXTERNAL USERS - Accounting Assistant - Banks - Chief Accountant - Insurance Agencies - Treasury Manager - Vendors - Admin Assistant - Consumers - Human Resources Manager - Stock Players or Investors - Sales Representative - Local municipalities - Warehouseman - Contractors - Production Manager - Franchisors - Chief Finance Officer - Holdings Companies - Vice Presidents - Auditing Firms - President - Board of Directors - Internal Auditors