Module #1 in Bookkeeping

MODULE 1- INTRODUCTION TO ACCOUNTING
Learning Objectives:
After reading this MODULE, YOU MUST be able to:
1. know the definition/meaning of accounting

2. learn about the nature/basic features of accounting
3. gain information on the functions of accounting
4. have knowledge on the divisions of accounting
5. be familiar with the accounting processes
6. have a deeper understanding on the relationship of Bookkeeping and Accounting
What is accounting?
 Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature
about economic entities that is intended to be useful in making economic decisions- in making reasoned choices
among alternative courses of action.
 Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information.
 Accounting is the art of recording, classifying and summarizing data in a significant manner and in terms of
money, transactions and events which are, in part at least, of a financial character, and interpreting the results
thereof.
 Accounting is an information system that measures, processes and communicates financial information about an
identifiable economic entity.
 In short, Accounting is a systematic process of identifying, recording, measuring, classifying, verifying,
summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period,
and the value and nature of a firm's assets, liabilities and owners' equity.
Based from the definitions stated, it can be said that the main functions of Accounting can be summarized as follows:
1. Keeping systematic record of business transactions
Recording transactions does not only involve entering the transactions in the accounting books. The records should be
systematic enough to enable easy understanding to readers or the ones going to use the accounting books. No matter how
comprehensive the records are, if they are not produced systematically, then they provide little to no value.
2. Protecting properties of the business
The accounting records serve as the evidence that properties of a business do exist or how much of a particular resource
does a company have. If the accounting records show that the amount of cash should be P1,000,000.00, any excess and
deficiency will be noticed immediately. Moreover, the accounting system helps in preventing fraud and misappropriation
of company resources.
3. Communicating results to various parties in or connected with the business
The accounting reports produced at the end of each period are not only used by external parties (e.g., potential investors,
government agencies), but also by the management in their decision-making function. Communication of the results of
operation of a company is essential for all concerned parties to enable them to take well-informed decisions.
4. Meeting legal requirements
In the Philippines, the government requires some companies (particularly those with public accountability) to provide
financial reports quarterly, semi-annually, or annually). This procedure aims to protect the public by providing them
necessary information to make sound decisions. The government also requires reports from heavily regulated industries
such as energy and oil industries.
Characteristics of Accounting Information
Accounting information is composed principally of financial data about business transactions, expressed in terms
of money. The mere records of transactions are of little use in making “informed judgments and decisions”. The recorded
data must be sorted and summarized before significant report analyses can be performed. The “basic raw materials” of
accounting are composed of business transaction data. Its “primary end products” are composed of various summaries,
analyses and reports.
Accounting provides information about:

1. The resources available to the firm
2. The means employed to finance those resources
3. The results achieved through the use of these resources
BOOKKEEPING NCIII
Nature of accounting
The basic features of Accounting are as follows:

1. Accounting is a process
A process is composed of multiple steps that lead to a common end goal. Accounting is a process because it performs the
functions of identifying, recording, and communicating economic events with the end goal of providing information to
internal and external parties.
2. Accounting is an art
Accounting has never been described as a science but frequently as an art which refers to a way of performing something.
Probably due to creativity and skills it entails to attain some objectives. Accounting is the art of recording, classifying,
summarizing, and finalizing financial data. Accounting is the combination of techniques and its application requires
applied skill and expertise.
3. Accounting deals with financial information and transactions
Accounting deals only with quantifiable financial transactions. These are the only events identified by the accountant,
recorded in the books, and communicated to different parties. Non-financial transactions are not the focus of the
accounting process. However, non-financial data may be used to interpret and better estimate some financial data.
4. Accounting is a means and not an end
As mentioned earlier, accounting is a tool to achieve specific objectives. It is not the objective itself. Imagine that you
dream to go to Paris someday. Accounting can be thought of as the plane that will bring you to your dream destination.
5. Accounting is an information system
Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and
communicates financial information of any entity. This discipline of knowledge has evolved to meet the need of financial
information required by different interested groups.
6. Accounting is the language of business
Accounting, which has been called the "language of business", measures the results of an organization's economic activities
and conveys this information to a variety of users including investors, creditors, management, and regulators.
Accounting can be divided into several fields including financial accounting, management accounting, auditing,

taxation and accounting information systems.
 Financial accounting focuses on the reporting of an organization's financial information including the
preparation of financial statements, to external users of the information, such
as investors, regulators and suppliers. It measures and records business transactions and prepares financial
statements for the external users in accordance with generally accepted accounting principles (GAAP). GAAP,
in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the
needs of decision-makers.
Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006
reports on performance in 2005—on an annual or quarterly basis, generally about the organization as a whole.
 Management accounting focuses on the measurement, analysis and reporting of information that can help
managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures
and reports are based on cost-benefit analysis, and are not required to follow GAAP.
Management accounting produces future-oriented reports—for example the budget for 2006 is prepared in
2005—and the time span of reports varies widely. Such reports may include both financial and nonfinancial
information, and may, for example, focus on specific products and departments.
 Auditing is the verification of assertions made by others regarding a payoff, and in the context of accounting it is
the "unbiased examination and evaluation of the financial statements of an organization".
An audit of financial statements aims to express or disclaim an opinion on the financial statements. The auditor
expresses an opinion on the fairness with which the financial statements presents the financial position, results of
operations, and cash flows of an entity, in accordance with GAAP and "in all material respects". An auditor is also
required to identify circumstances in which GAAP has not been consistently observed.
 Accounting information system is a part of an organization’s information system that focuses almost
exclusively on processing quantitative data.
 Tax accounting/taxation concentrates on the preparation, analysis and presentation of tax payments and tax
returns. Tax system requires the use of specialized accounting principles for tax purposes which can differ from
the generally accepted accounting principles (GAAP) for financial reporting. Tax law covers four basic forms of
BOOKKEEPING NCIII
business ownership: sole proprietorship, partnership, corporation and cooperative.
Corporate and personal incomes are taxed at different rates, both varying according to income levels and
including varying marginal rates (taxed on each additional amount of income) and average rates (set as a
percentage of overall income).
The Accounting Process
The accounting processes are as follows:
1. The identification of economic events relevant to the business.
The starting point of the accounting process is the identification of economic events. Examples of economic events are
sales of cars in a car manufacturing company, provision of services by a hospital, payment to suppliers or a purchase of
equipment. To be identified as a relevant economic event, there should be a transfer of things with value. Normally, for the
purchase of equipment, cash or money is exchanged for the equipment. The cash and equipment both have value making
the purchase a relevant economic event. This analysis is also applicable to the other examples mentioned above.
2. The recording of relevant economic events.
The recording of relevant economic events is the next step in the accounting process. After a company identifies the
relevant economic events, it records those events which will serve as the history of its financial activities. Recording events
should be done systematically and chronologically for easier tracking and interpretation. Records of events are inputted in
the so-called accounting books (journals and ledgers).
3. Summarizing all the recorded economic events into accounting reports / communicating financial data into
financial statements.
After a lapse of a specific period which is usually a year, companies summarize all the recorded economic events into
accounting reports. The most popular accounting reports are the financial statements (i.e. Balance Sheet, Income
Statement and Statement of Cash Flow). All similar events during the period are lumped together to provide meaningful
and presentable information. As such, all sales transactions during the period are added and presented as one aggregate
amount. This makes the information understandable to other parties.
Relationship of Accounting with Bookkeeping
BOOKKEEPING is the recording of business data in a prescribed manner. A bookkeeper may be responsible for
keeping all the records of a business or only a minor segment, such as portion of customer accounts in department store.
Much of the work of the bookkeeper is critical in nature and increasingly being accomplished through the use of
mechanical and electronic equipment. ACCOUNTING is primarily concerned with the design of the system of records, the
preparation of reports based on the recorded data and the interpretation of the reports. Accountants often direct and review
the work of bookkeeper. In event, the accountant must possess a higher level of knowledge, conceptual understanding and
analytical skill than is required for that of the bookkeeper.
BOOKKEEPING NCIII

Module #1 in Bookkeeping

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What are the main functions of accounting?

What are the characteristics of accounting information?

MODULE 1- INTRODUCTION TO ACCOUNTING

After reading this MODULE, YOU MUST be able to:

1. know the definition/meaning of accounting

Characteristics of Accounting Information

Accounting provides information about:

The basic features of Accounting are as follows:

Accounting can be divided into several fields including financial accounting, management accounting, auditing,

The Accounting Process

The accounting processes are as follows:

1. The identification of economic events relevant to the business.

2. The recording of relevant economic events.

Relationship of Accounting with Bookkeeping

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