ACCOUNTING The American Accounting Association

(AAA) in its Statement of Basic

Introduction: Accounting Theory defines accounting
as follows:
- Accounting is relevant in all walks of
life, and it is absolutely essential in
Accounting is the process of identifying,
the world of business.
measuring, and communicating economic
- Accounting is the system that
information to permit informed judgment
measures business activities,
and decisions by users of the information.
processes that information into
reports, and communicates the
Accounting is a process of identifying,
results to decision-makers.
recording, and communicating economic
- Accounting quantifies business
information that is useful in making
communication. For this reason,
economic decisions.
accounting is called the language of
business.
Essential elements of the definition of
Lesson 1: Definition of Accounting accounting:

1. Identifying – The accountant

The Accounting Standards Council analyzes each business transaction
(ASC ) defines accounting as follows: and identifies whether the
transaction is an “accountable event”
Accounting is a service activity. Its or “non-accountable event.” This is
function is to provide quantitative because only “accountable events”
information, primarily financial in nature, are recorded in the accounting books.
about economic entities, that is intended to “Non-accountable events” are not
be useful in making economic decisions. recorded in the accounting books.

The Committee on Accounting “Accountable events” (or ‘economic

Terminology of the American Institute events’) are those that affect the
of Certified Public Accountants define assets, liabilities, equity, income, and
accounting (AICPA) as follows: expenses of a business. Sociological
and psychological matters are
Accounting is the art of recording, outside the scope of accounting.
classifying, and summarizing in a significant
manner and in terms of money, transactions, 2. Recording – The accountant
and events which are in part at least of a recognizes (i.e., records) the
financial character and interpreting the “accountable events” he has
results thereof. identified. This process is called
“journalizing.”
 After journalizing, the accountant information is found in the notes to financial
then classifies the effects of the event statements as well as on the face of the other
on the “accounts.” This process is components of financial statements.
called “posting.”
3. Financial information- information
“Account” is the basic storage of expressed in money. Financial
information in accounting, e.g., information is also quantitative
“cash,” “land,” “sales,” etc. information because monetary
amounts are normally expressed in
3. Communicating – At the end of each numbers.
accounting period, the accountant
summarizes the information Accounting as science and art
processed in the accounting system
in order to produce meaningful 1. As a social science, accounting is a
reports. This is important because body of knowledge that has been
information processed in the systematically gathered, classified,
accounting system is useless unless it and organized.
is communicated to interested users.
Accounting information is 2. As a practical art, accounting
communicated to interested users requires the use of creative skills and
through accounting reports, the most judgment.
common form of which is the
financial statements. Accounting as an information system

Lesson 2: Nature of Accounting A system is one that consists of an input, a

process, and an output.
Accounting is a process with the basic
purpose of providing information about For example,
economic activities intended to be useful in
making economic decisions. In your digestive system, the input is
the food you eat, the process is when your
Types of information provided by body produces digestive juices to convert the
accounting: food into an output called? energy! Your
body needs energy so it can function
1. Quantitative information – properly.
information expressed in numbers,
quantities, or units. Similarly, in an accounting system, the
inputs are the accountable events; the
2. Qualitative information – processes are recording, classifying, and
information expressed in words or summarizing; and the output is the
descriptive form. Qualitative accounting report that is communicated to
the users.
Bookkeeping and Accounting Managing a business
Although the bookkeeping function is part of
accounting, bookkeeping and accounting are Good management is the key to a business’s
not the same. success. On the other hand, mismanagement
is, one way or another, the cause of every
➢ Bookkeeping refers to the process of business’ failure. Management, therefore, is
recording the accounts or no laughing matter. It cannot be taken
transactions of an entity. lightly. To be a good manager, one must
Bookkeeping normally ends with the equip himself or herself with the right
preparation of the trial balance. management tools – and one important
Unlike accounting, bookkeeping does management tool is accounting!
not require the interpretation of the
significance of the information Management is a process of establishing
processed. common objectives, coordinating efforts
towards those objectives, and efficiently and
➢ Accounting, on the other hand, effectively utilizing available resources so as
covers the whole process of to achieve certain goals.
identifying, recording, and
communicating information to Managing a business requires more than just
interested users. technical skills. A business manager is
likened to a musical conductor who leads a
Lesson 3: Function of Accounting in group of musicians to perform a musical
Business piece to the best of their abilities.

Accounting is often referred to as a A successful business manager sees the “big

“language of business” because it is picture” and understands each detail. He or
fundamental to the communication of she has the ability to think “inside and
financial information. outside of the box” and to make both
long-term (strategic) and short-term
Accounting has the following two broad (tactical) plans.
functions in a business:
As a future business professional, you need
1. To provide non-owners of a business to understand each of the following major
(i.e., external users) with information facets of a business:
that is useful in making, among
others, investment and credit a. Finance – refers to how a business
decisions; and generates and manages its funds.
Finance is responsible for providing
2. To provide business owners and adequate resources needed for the
managers (i.e., internal users) with other facets to function properly.
information that is useful in
managing the business.
 b. Production – refers to how goods are Accounting as a managerial tool
produced or services are rendered. As mentioned earlier, accounting is an
Production is responsible for the essential managerial tool. This is because
quality of goods and services and the accounting provides information that helps a
efficiency by which they are produced business manager perform his or her
or rendered. management functions.

c. Marketing – refers to how goods or Functions of a manager

services are communicated to
customers. Marketing is responsible Planning – involves the process of mapping
for creating value for customers and out or arranging in detail how a business
building strong customer goal is to be
relationships. achieved.

d. Accounting – provides a measure of Organizing – after a plan is formulated, a

how well the other facets of the manager needs to organize his or her
business are performing. Accounting personnel and other resources according to
is responsible for providing useful the plan. Organizing involves assigning
information that aids in making responsibilities and granting authority to
business decisions. personnel.

A manager makes countless business Staffing – involves the process of selecting,

decisions. A few examples of these decisions training, and developing employees. This
include: function is commonly referred to as human
resource management.
a. How much money needs to be
invested in the business? Directing – after a plan is formulated and
resources are organized and made available,
b. How much inventory is enough? a manager needs to lead his personnel to
ensure that each is performing his or her
c. Is the business spending too much on responsibilities towards the organization’s
its marketing activities? common goal to the best of his or her ability.
Directing involves motivating,
d. Is the business earning profits? communicating, guiding, and encouraging a
person.
e. Shall the business continue or cease
its existence?
Controlling – after the other elements are in
place, a manager needs to continuously
Each of the major facets of business is
monitor results against goals and take
mutually dependent. They work hand in
corrective actions necessary to ensure that
hand. Without the other, the business will
the plan remains on track.
not fully achieve its goals.
Examples in which accounting is used in -The amount of
making management decisions available cash
needed to
employ
Functio Management Accounting additional
n decision Information personnel.
Planning The need to -The current
improve sales and past levels Directing Are the -Records of
and the of the business employees personnel
business’ ability sales. properly training
to do so motivated, and
-Forecast of informed, development
sales. guided costs.
and encouraged
Organizin -Do we need -The current
in meeting -Records of
g additional productive
the business’ daily sales.
production capacity
goal of
facilities and of existing
increasing its
equipment to facilities and
sales?
cater to the equipment.
planned Controlli Have we met -Variance
increase in -The marketing ng our goal of analysis on
sales? costs spent in increasing our differences
the past in sales? between actual
-Do we have the relation to the sales and
ability to sales expected sales.
spend more on generated.
our marketing
activities? - The amount
of available Accounting as a managerial tool is likened to
cash a Global Positioning System (GPS) attached
and the to a car. It shows exactly where you are
business’ (financial position) and where you have been
ability to
generate (financial performance). This information is
additional vital in determining your ability to get to
financing. your next destination (strategic and
short-term goals).

Accounting information is also likened to the

Staffing Do we need to The number of
employ currents statistics gathered after a basketball game –
additional employees the number of rebounds, points in the paint,
personnel? compared to shots taken and shots missed, etc. This
the current information helps the coach and his players
level of plan their strategy for the next game.
productivity.
Examples in which accounting is used in disks, spheres, and pellets. These tokens
investment and credit decisions correspond to commodities like sheep,
clothing, or bread. They were used in the
Middle West in keeping records. After some
External Decision Accounting time, the tokens were replaced by wet clay
users of Information tablets. During such time, experts concluded
information this to be the start of the art of writing.

Investor Shall I invest The financial Other ancient civilizations keeping

in this performance
account records are Babylonia (4500 B.C.),
business? Is of the
this a business. Egypt (2250 B.C.), China and Greece. In the
profitable middle ages (13th and 15th centuries), trade
undertaking? flourished in places such as Florence, Venice,
and Genoa. This has brought advancement
Creditor Shall I lend The ability of in account-keeping methods. In 1211 A.D.,
money to this the business
one of the systems in accounting was kept by
business? to generate
Does this revenue and a Florentine banker. However, the system
Businesses cash flows was primitive as the concept of equality for
have the from its entries was absent. Double-entry records
ability to operations. first came out during 1340 A.D. in
payback my Genoa.
loan?
In 1494, the first systematic record-keeping
dealing with the “double-entry recording
Now that we have understood how system” was formulated by Fra Luca Pacioli,
accounting plays an important role in a Franciscan monk, and mathematician. The
making business decisions, let us have a brief “double-entry recording system” was
overview of how accounting came to be. included in Pacioli’s book titled “Summa di
Arithmetica Geometria Proportioni and
Lesson 4: Brief history of accounting Proportionista,” published on November 10,
1494, in Venice. The concept of “double-entry
Accounting can be traced as far back as recording” is being used to this day. Thus, Fra
prehistoric times. Since the dawn of Luca Pacioli is considered the father of
civilization when mankind began to engage modern accounting.
in trade, perhaps more than 10,000 years
ago, methods of record-keeping and
accounting have been invented.

As early as 8500 B.C., accounting has

already existed. Archaeologists have found
clay tokens as old as 8500 B.C. in
Mesopotamia which was usually cones,