PROPHET’S PEN ACADEMY, INC.

MODULE 1

GRADE 12
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Name: _____________________________ Date:____________

PRE-TEST

Directions: Answer the following questions briefly.

1. Do you agree: “Accounting is vital to the success of a business?” Explain.

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2. Do you think that non-financial information is still useful in the accounting process? Why
or why not? Explain.
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3. Give a concrete example on how you can use accounting in your daily life.
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INTRODUCTION TO ACCOUNTING
Introduction

Accounting is, broadly speaking, a system that helps businesses track events that affect
them. This process involves identifying the events that affect a business, recording these
events, and communicating the summarized results of all events within a particular period to
interested parties.
Almost all companies allot a significant amount of resources to the accounting process
since it aids them in improving their business. For example, the sale of Toyota cars is identified
as an economic event that affects the company. The accountant will record this transaction
and consolidate all records by the end of the month. The consolidated records can be used by
the top management to identify potential problems encountered by the company. This can also
be used to attract potential investors. Clearly, accounting process is very beneficial to a
company.

The Accounting Process

The starting point of the accounting process is the identification of economic events
relevant to a business. Examples of relevant economic events are the sale of Toyota cars (as
mentioned), provision of services by a hospital, payment to suppliers, and purchase of
equipment for the manufacturing of Bench shirts. 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 exchange for the equipment. The cash and equipment have value making the
purchase a relevant economic event. This analysis is also applicable to the other examples
given.

The recording of relevant economic events is the next step in 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.

Finally, after a lapse of a specific period (usually one year), companies summarize all
the recorded economic events into accounting reports. The most popular accounting report are
the financial statements. 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.
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. The enrollment process in your school may involve reservation of slots, filling
out documents, attending school orientations, and payment of necessary fees. These
steps all lead to you being enrolled in your school. Likewise, 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. Art refers to a way of performing something. It entails creativity
and skills to help us attain some objectives. Accounting is the art of recording,
classifying, summarizing, and finalizing financial data. Accounting is a combination of
techniques and its application requires applied skill expertise. This is the reason why
accounting can be considered as an art. (Accountingtheory.com)
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 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
destination.
5. Accounting is an information system. Accounting is recognized and characterized as a
storehouse information of any entity. This discipline of knowledge has been evolved out
to meet the need of financial information required by different interested groups.
(Accountingtheory.com)
Functions of Accounting

The American Accounting Association (AAA) defines accounting as “the process of

identifying, measuring, and communicating economic information to permit informed
judgments and decisions by the users of information.

Meanwhile, the American Institute of Certified Public Accountants (AICPA) defines

accounting as “the art of recording, classifying, and summarizing 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.”

From the foregoing definitions, the main functions of accounting can be summarized as
follows:

1. Keeping systematic record of business transactions

2. Protecting properties of the business

3. Communicating results to various parties in or connected with the business

4. Meeting legal requirements

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 of readers. No
matter how comprehensive the records are, if they are not produced systematically, then they
provide little to no value.

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 ₽1 000 000, any excess and deficiency will be noticed
immediately. Moreover, the accounting system helps in preventing employee fraud and
misappropriation of company resources.

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 operations of a company is
essential for all concerned parties to enable them to take well-informed decisions.

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 the necessary information to make
sound decisions. The government also requires reports from heavily regulated industries such
as the energy and oil industries.

History of Accounting
 It is believed that the history of accounting is thousands of years old and can even be
traced to ancient civilizations. A number of history books suggest that the development of
accounting can be dated back to ancient Mesopotamia. During those times, people followed a
system of writing and counting money. The development of accounting may be related to the
taxation and trading activities of temples.
The reign of Emperor Augustus (63BC-14AD) provided more evidence about the
development of accounting. The Roman government kept detailed financial information of the
deeds of Emperor Augustus regarding the stewardship of Roman resources. This is evidenced
by the Res Gestae Divi Augusti (The Deeds of the Divine Augustus). The roman historians
Suetonius and Cassius Dio recorded that in 23BC, Augustus prepared a rationarium (account)
which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial
fisci (tax officials), and in the hands of the publicani (public contractors); and that it included
the names of the freedmen and slaves from whom a detailed account could be obtained. The
closeness of this information to the executive authority of the emperor is attested by Tacitus’
statement that it was written out by Augustus himself. (Oldroyd 1995)
Many consider the dissemination of the double-entry bookkeeping of Luca Pacioli in the
fourteenth century Italy is the most important event in accounting history. In fact, Luca Pacioli
is acknowledged as the father of modern accounting because of this. The double-entry
bookkeeping system is defined as any bookkeeping system that has a debit and a credit for
each transaction. Luca Pacioli’s Summa de Arithmetica, Geometria, Proportion et Propotionalita
(Review of Arithmetic, Geometry, Ratio, and Proportion) is the first book printed with a treatise
in bookkeeping. The double-entry system is the system is the system being used to this very
day. (Sangster et al. 2007)

The modern profession of the chartered accountant originated in Scotland in the

nineteenth century when Queen Victoria granted a royal charter to the institute of Accountants
in Glasgow. At present times, accounting standards are already available to guide accountants
in their practice of the profession. Some of these standards include the PFRS (Philippine
Financial Reporting Standard) and the PAS (Philippine Accounting Standards).

ACTIVITY

ORAL RECITATION THROUGH PHONE CALL

POST TEST

Directions: As discussed in the “History of Accounting”, accounting is used even in the early
ancient periods. In one-page paper, give at least three examples of how people from
earlier periods made use of the accounting process. How did the accounting
process help such persons in their lives?