Information Sheet No.

CHAPTER 1: Introduction to Accounting

HISTORY OF ACCOUNTING
The earliest record keeping and accounting system were found in 2000 BC in the cities of
Babylonia, Greece, and Egypt. Primitive accounting then consisted of records of taxes collected
from the people by the governors and the tax collectors.
As early as the fifteenth century, the Italian merchants kept track of their daily activities,
listing down what they owned (assets) and what they owed (liabilities). From their records came
the term debtor (one who owes) and creditor (one who owed). And from these two terms came the
accounting “debit” and “credit”.
It was also in the fifteenth century, that Cotrugli wrote the first accounting book in Naples
and the modern bookkeeping system could be traced from the book prepared by Luca Pacioli
entitled Summa de Aritmetica.
ACCOUNTING – is defined as a service activity which provides quantitative information,
primarily financial in nature, about business organizations which information is
needed for making decisions.
- it is also defined as the process of recording, classifying and summarizing
financial data as a basis for making decisions after a through analysis and
interpretation.
5 EXAMPLES OF FINANCIAL DATA
1. GATHERED or DOCUMENTED, which means that transactions are evidenced by business
papers, such as official receipt for cash received, voucher for cash paid, invoice or
statement of account for property or service bought or sold.
2. RECORDED or written down in books called the JOURNAL. Modern technology
accomplishes this by using mechanical and electronic devices.
3. CLASSIFIED or sorted out in an orderly and systematic manner in a book called the
LEDGER for better standing and use of financial data.
4. SUMMARIZED or placed in a financial reports which may be prepared daily like the cash
collection reports or weekly like the sales summary or monthly depending on the
need of the statement user aside from the yearly financial reports prepared which
are the balance sheet and the income statement.
5. INTERPRETED or analyzed to bring out answers to such questions as: Is the business
solvent? Stable? Liquid? Profitable? To answer these, analytical tools, and
techniques must be used such as ratios, trends and percentages.
ACCOUNTING AS A PROFESSION
Accounting as a profession is commonly classified into 3 main categories – Public
Accounting, Private Business Accounting, and Government Accounting. Students are guided
toward the accountancy profession by CPA’s who denote their time in education.
CPA – Certified Public Accountant
1600 – The first college education of Accountants starts in Venice where students are required to
undergo an apprenticeship / training for 6 years. The students further had to pass an
examination before graduating.
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CHAPTER 1: Introduction to Accounting

PALE – Public Accountant Licensure Examination

PRC – Professional Regulations Commission
❖ PUBLIC ACCOUNTING
- offer their professional services to the public for a fee, in the same manner as
doctors, lawyers, architects, or engineers do.
PUBLIC ACCOUNTING SERVICES
1. AUDITING – public accountants conduct an examination of business records in order to
verify their accuracy and to detect any fraud and error. They certify the prepared
financial statements as fairly correct.
2. MANAGEMENT ADVISORY SERVICE – public accountants provide counsel and
technical assistance in analyzing and controlling operations with the purpose of
helping improve the use of resources of the client company.
3. TAX ACCOUNTING – public accountants do the recognition, computation, and payment of
taxes to the national and local government in accordance with the laws and
regulations set by the Bureau of Internal Revenue (BIR) and other government
agencies.
❖ PRIVATE BUSINESS ACCOUNTING
- where a person is employed by a particular person or business enterprise to serve
as its accountant, controller or budget officer.
PRIVATE BUSINESS ACCOUNTING SERVICES
1. GENERAL ACCOUNTING – private accountants are tasked with the recording of business
transactions to the books of original entry, the summarization of such
transactions, and the preparation of financial reports. They are also responsible for
cash receipts and disbursements and the operation of the accounting system for
control purposes.
2. COST ACCOUNTING – private accountants also deal with the cost accounting which is
commonly described as accounting for unit and total costs of manufactured
goods.
3. BUDGETING – private accountants prepare the procedure for planning, coordinating, and
controlling the business operations based in both internal and external factors
affecting the business. They also prepare the projection of future revenues, costs,
and expenses of the business.
❖ GOVERNMENT ACCOUNTING
- where a person is employed by the government also as an accountant, an auditor
or a budget officer.
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CHAPTER 1: Introduction to Accounting

BUSINESS
BUSINESS – is an undertaking where one seeks to make profit by selling goods or services in
exchange for money or its equivalent. In any business endeavor, profit is the main
consideration why a person puts in money, man, material and machinery and profit
its made possible when he receives more than the cost of what he puts in.
BUSINESS ORGANIZATION – is an accounting or business entity.
3 FORMS OF BUSINESS ORGANIZATION
1. SOLE / SINGLE PROPRIETORSHIP – is a business put up by one person with the
purpose of obtaining profit. He manages the business usually by himself and
when this is successful, he enjoys all the profit. A sole proprietorship is simple to
put up, and there is no complication in managing it since the owner is also the
manager.
2. PARTNERSHIP – is formed by two or more persons who agree to contribute money,
property or service with the intention of dividing the profit among themselves
according to some proportion or basis. The investors are called PARTNERS.
There is more capital in a partnership than in a sole proprietorship because of the
pooling of cash and properties by the partners. A more efficient management is
possible because of the combined efforts and skills of the partners.
Disadvantages in putting up a Partnership
✓ Unlimited Liability – means that the personal properties of the partners maybe
subject to attachment by the partnership creditors in the
event that partnership is declared insolvent.
✓ Limited life of the partnership
The partnership like a sole proprietorship has a limited life since it can easily be
terminated with the death, withdrawal, insolvency or insanity of anyone of the partners.
3. CORPORATION – a more complex of a business organization. A person who invests in
a corporation is called a STOCKHOLDERS and his right is expressed in the
number of shares he purchased which is evidenced by a certificate of stock. A
corporation can get more capital than a partnership because of the number of
stockholders investing. A skilled professional manager could be hired resulting in
more efficient management than that of a partnership. A corporation has an
indefinite life, it can go on operating regardless of the number of changes transfer
of stock ownership. And the stockholders have limited liability only, their loss
being the amount invested and their personal properties may be subject to
attachment by the corporate creditors.

DISADVANTAGES: It is more difficult to organize because of the legal requirements

involved and that there is double taxation because a corporation pays taxes on the
profit it has earned when this profit is distributed to the stockholders another tax
must be paid by the stockholders.
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CHAPTER 1: Introduction to Accounting

3 TYPES OF BUSINESS OPERATIONS

1. SERVICE BUSINESS – is one which renders service to a client or customer for a fee. It
is the simplest type of business.
Examples: school, airline, travel agency, beauty parlor

Business Client / Customer Profit

Service P 20 Service Income P 20

2. MERCHANDISING BUSINESS – is one which maintains a stock of goods or

merchandise consists of the purchase price and incidental
expenses like freight, insurance of the merchandise along the way
and taxes.
Examples: bookstore, hardware, groceries

Business Client / Customer Profit

Goods P 10 P 20 Sales P 20
Cost of goods sold 10
Gross profit P 10

3. MANUFACTURING BUSINESS – is one which buys raw material, processes it into a

finished product, then sells this at a price higher than its cost. The cost of
the product manufactured consists of the purchase price of the raw
material, the cost of labor and manufacturing expenses.

Business Client / Customer Profit

Raw material P 10
Direct Labor 10 Sales P 50
Manufacturing Expenses 10 P 50 Cost of goods sold 30
Finished Product 30 Gross profit 20